Gaughan v. Edward Dittlof Revocable Trust (In Re Costas)
61 Collier Bankr. Cas. 2d 52, 555 F.3d 790, 9 Cal. Daily Op. Serv. 1518 (2009)
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Rule of Law:
A pre-petition disclaimer of an inheritance that is valid under a state's 'relation-back' doctrine is not a 'transfer of an interest of the debtor in property' subject to avoidance by a bankruptcy trustee under § 548 of the Bankruptcy Code. Federal bankruptcy courts should defer to state law definitions of property interests in this context.
Facts:
- On October 18, 2001, Edward P. Dittlof created a revocable trust under Arizona law, naming his daughter, Rachelle Costas, as one of the beneficiaries.
- The trust provided that upon Dittlof's death, the property would be distributed to his children.
- Dittlof died on February 25, 2002, which entitled Costas to an interest in the trust worth at least $34,800.
- On November 7, 2002, Costas executed a valid disclaimer under Arizona law, relinquishing her right to the trust property.
- On December 3, 2002, less than a month after executing the disclaimer, Costas filed for Chapter 7 bankruptcy.
Procedural Posture:
- Maureen Gaughan, the Chapter 7 Trustee, initiated an action in the U.S. Bankruptcy Court to avoid Rachelle Costas's disclaimer of trust property as a fraudulent conveyance under 11 U.S.C. § 548.
- The Bankruptcy Court ruled in favor of Costas, finding that the disclaimer was not an avoidable transfer.
- The Trustee, as appellant, appealed the decision to the U.S. Bankruptcy Appellate Panel (BAP) for the Ninth Circuit.
- The BAP affirmed the Bankruptcy Court's ruling, adhering to its prior precedent and distinguishing the Supreme Court's decision in Drye v. United States.
- The Trustee, as appellant, then appealed the BAP's decision to the U.S. Court of Appeals for the Ninth Circuit.
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Issue:
Does a debtor's pre-petition disclaimer of an inheritance, which is valid under a state 'relation-back' law, constitute a 'transfer of an interest of the debtor in property' that a trustee can avoid as a fraudulent conveyance under 11 U.S.C. § 548?
Opinions:
Majority - Mills, District Judge
No. A debtor's valid pre-petition disclaimer under a state's relation-back statute does not constitute a 'transfer of an interest of the debtor in property' for the purposes of § 548 of the Bankruptcy Code. The court's reasoning began with the principle from Butner v. United States that, absent a controlling federal interest, state law defines property rights in bankruptcy. Under Arizona's statute, a disclaimer 'relates back' to the date of the decedent's death, meaning the disclaimant is treated as if they never held any interest in the property. Therefore, Costas never possessed a property interest that she could 'transfer'. The court distinguished the Supreme Court's decision in Drye v. United States, which found a disclaimer was a 'right to property' for federal tax lien purposes. The court reasoned Drye was inapplicable because it involved a pre-existing federal tax lien and the unique, overriding federal interest in tax collection, which contrasts with bankruptcy's policy of respecting state-law property rights to ensure uniformity and prevent windfalls for creditors.
Analysis:
This decision reinforces the principle established in Butner v. United States, affirming that state law is paramount in defining property interests within a bankruptcy estate unless a specific federal law dictates otherwise. By distinguishing the Supreme Court's tax lien case, Drye, the court prevents the expansion of federal avoidance powers into areas traditionally governed by state probate and property law. This ruling provides clarity and a safe harbor for debtors who make valid pre-petition disclaimers, ensuring that such actions are not undone by the 'happenstance of bankruptcy' and preventing creditors from receiving a windfall they would not be entitled to under state law.
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