Fall, 1993
25 Loy. U. Chi. L.J. 31
LENGTH: 13905 words
Article: Can Debtors Disclaim Inheritances to the Detriment of Their
Creditors?
Stephen E. Parker *
* Associate, Ogletree, Deakins, Nash, Smoak & Stewart, Atlanta,
Georgia. B.S.B.A., Wa****ngton University St. Louis, 1989; J.D., Emory
Univiersity, 1992.
SUMMARY: ... Debtors are motivated to renounce or disclaim property
to which they become entitled, whether by bequest, devise, or
inheritance, in order to ****eld the property from creditors and avoid
taxes. ... With few exceptions, courts applying state law have held
that a disclaimer is not a fraudulent transfer even if it frustrates
the disclaimant's creditors. ... A more difficult situation arises
when the debtor disclaims prior to filing a petition for bankruptcy,
and the trustee must proceed on a theory of "fraudulent transfer. ...
It is unclear, however, whether a different result is appropriate when
a debtor disclaims during the pre-petition period, that is, prior to
filing a petition for bankruptcy, or whether the result should be the
same because the pre-petition disclaimer is a fraudulent transfer. ...
If a debtor's disclaimer was always considered a fraudulent transfer
under state law, every case would yield a consistent result. ...
Giving effect to the legal fiction of relation back in all bankruptcy
cases provides the debtor with too great an op****tunity to abuse her
right to disclaim property. ... In this situation, the disclaimer is
not a fraudulent transfer, and the property does not become "property
of the estate." ... From these "badges of fraud," the court found
sufficient cir***stantial evidence to establish the disclaimant's
actual intent to defraud the judgment creditor. ...
TEXT: [*31]
I. Introduction
Debtors are motivated to renounce or disclaim n1 property to which
they become entitled, whether by bequest, devise, or inheritance, in
order to ****eld the property from creditors and avoid taxes. n2
Although the Bankruptcy Reform Act of 1978 n3 specifically attempts to
prevent the first of these questionable practices, state common law
has permitted disclaimers for two reasons. First, because a gift n4 is
a two-party [*32] transaction, it requires the donee's acceptance as
the law does not require a party to accept an unwanted gift. n5 For
example, a donee may want to reject a gift of property when the
property is en***bered in an amount greater than its fair market value
n6 or when accepting the gift would impose a significant tax burden on
the recipient. Second, if the law did not allow disclaimers, the
testator's property could end up in the hands of the devisee's
creditors, thus clearly frustrating the testator's intent. n7
Litigation arises in both the bankruptcy and state law contexts where
a devisee disclaims property when he has outstanding debts that he is
otherwise unable to satisfy. The central issue in this litigation is
whether the disclaimer is a fraudulent transfer n8 that creditors can
set aside. Part II of this Article discusses the background of
disclaimer law. Part III examines post-petition disclaimers, which are
prohibited under section 541(a)(5) of the Code. n9 Part IV analyzes
pre-petition disclaimers and concludes that, because they may be
analogized to general powers of appointment, pre-petition disclaimers
are fraudulent transfers under section 548 of the Code. n10
II. Background
The idea that the law should not allow individuals to defraud their
creditors by conveying their property is a long-standing proposition.
[*33] As early as 1571, the Statute of Elizabeth n11 rendered such
transfers void. In an early application of this statute, one court
noted various "badges of fraud," n12 which, if present, would render a
transfer clearly and "utterly void." n13 Section 7 of the Uniform
Fraudulent Conveyance Act codified the essence of the Statute of
Elizabeth by providing that "every conveyance made and every
obligation incurred with actual intent ... to hinder, delay, or
defraud either present or future creditors, is fraudulent as to both
present and future creditors." n14 The language of section 548(a) of
the Code reflects this history. n15
In a bankruptcy case, state disclaimer statutes and the Code compose
the statutory authority that controls the disposition of disclaimed
property. In determining whether to classify a disclaimer as a
fraudulent transfer, courts must resolve whether the disclaimant had
an interest in the property devised to her and whether the disclaimant
transferred that interest through the disclaimer. n16
A. State Law Cases
With few exceptions, n17 courts applying state law have held that a
[*34] disclaimer is not a fraudulent transfer n18 even if it
frustrates the disclaimant's creditors. n19 Reasoning that under state
disclaimer statutes the disclaimer "relates back" n20 to the date of
the testator's death, courts have concluded that no property interest
vested in the disclaimant and that the property then passed to an
alternate taker as if the disclaimant predeceased the testator. n21 As
a result, creditors have not been able to attach property that the law
deems the debtor not to have, and by operation of law, never had.
B. Bankruptcy Cases
One of the Code's primary policies is fairness to all creditors. n22
By filing a petition for bankruptcy, a debtor avails himself of
certain protections set forth in the Code. n23 Thus, courts must be
cautious not to extend to debtors greater protection than that to
which they are statutorily entitled.
A debtor may disclaim a devise during either the post- or pre-petition
periods. A change in the language of section 541(a)(5) has resolved
[*35] some of the conflict concerning the disposition of assets during
the post-petition period. Section 541(a)(5) now defines "property of
the estate" to include property which the debtor "becomes entitled to
acquire" by bequest, devise or inheritance within 180 days after the
filing of a petition. n24 Courts have interpreted this provision to
include disclaimed property, thus giving effect to the specific Code
language and refusing to respect relation-back provisions in state
disclaimer statutes. n25 Although section 541(a)(5) has settled the
law as it pertains to post-petition disclaimers, the law dealing with
pre-petition disclaimers is still in dispute. Section 548 empowers a
trustee to avoid the transfer of any "interest of the debtor in
property" that satisfies the conditions of a fraudulent transfer. n26
The Code, however, does not define "interest," and because there is no
federal law of property, state law must govern the definition. n27
Nonetheless, because bankruptcy proceedings operate under federal law,
allowing section 541 to define the interest of the debtor would be a
better approach and would yield more consistent results. Courts should
therefore not allow pre-petition disclaimants to use the state-created
legal fiction of relation back to deny creditors the op****tunity to
satisfy their claims from the disclaimed property.
III. Post-Petition Disclaimers
In an early bankruptcy case, Justice Story stated that the law
presumes acceptance until a contrary intent is shown, at which time a
rejection becomes effective. n28 According to Justice Story, however,
a debtor who has filed for bankruptcy has "no right to disclaim or
renounce [for] .... it would be a fraud upon his creditors .... As an
honest debtor he must desire, that his creditors should derive as much
benefit from all his 'rights in property,' as is possible." n29
The current language of the Code reflects the theory that debtors
[*36] cannot use post-petition disclaimers to ****eld assets from
creditors. Under section 301, the filing of a bankruptcy petition
creates "property of the estate" as defined in section 541. n30
Section 541(a)(1) provides in part that "property of the estate"
includes "all legal or equitable interests of the debtor in property
as of the commencement of the case." n31 The trustee controls all the
debtor's incidents of owner****p to facilitate an effective liquidation
of the debtor's property. n32
Although the definition of "property" for purposes of a bankruptcy
proceeding is a matter of federal law, n33 "the existence and nature
of the debtor's interest in property ... are determined by
nonbankruptcy law." n34 Nonetheless, post-petition disclaimer cases
n35 indicate that the drafters of the Code may have promulgated a
federal law of property. Section 541(a)(5) provides in part that
"property of the estate" includes "any interest in property ... that
the debtor acquires or becomes entitled to acquire within 180 days" of
the filing of the petition, whether "by bequest, devise, or
inheritance," or "as a beneficiary of a life insurance policy or of a
death benefit plan." n36 This provision differs from the language of
section 70a(2) of the Bankruptcy Act of 1898, which provided that "all
property ... which vests in the bankrupt within six months after
bankruptcy by bequest, devise or inheritance shall vest in the
trustee ...." n37 The vesting requirement gave rise to a result
contrary to the Act's [*37] purpose of fairness to creditors. n38 In
In re Detlefsen, n39 the Eighth Circuit held that property disclaimed
after the filing of the petition did not vest in the debtor by virtue
of the state relation-back provision. n40 In Detlefsen, six and one-
half weeks before the debtor filed a voluntary petition for
bankruptcy, the debtor's mother died, entitling him to personalty that
had been held in trust for his mother. n41 Seven months later, the
debtor attempted to disclaim the personalty, so that the property
would have passed to his children. n42 The Illinois disclaimer
statute then in effect n43 provided that the disclaimer would "relate
back for all purposes to the date of death of the decedent, [or] the
date of death of the donee" n44 and thus would prevent the devise from
vesting in the debtor. n45 The district court found, however, that
"permitting state law to provide definition of the language in =A770a,
<psign> 2 unduly restricts operation of the section and cir***scribes
congressional intent." n46 Thus, the court did not allow the debtor to
disclaim the property and thereby determine its recipient. n47
Finding the district court's reasoning unpersuasive, the appellate
court reversed, holding that state law defines property interests and
that a disclaimant's motive is irrelevant so long as he does not
receive a benefit from the disclaimer. n48 The Eighth Circuit found
that in enacting section 70a(2), Congress did not intend a trustee to
have the power to [*38] accept a devise on the debtor's behalf. n49
The court noted, however, that had it decided the case under the Code,
it might have reached a different result. n50
Courts that have reviewed the issue under the Code have in fact
reached the different result referred to by the Detlefsen court. In In
re Watson, n51 for example, the debtor disclaimed the death proceeds
of her father's life insurance policy two and one-half months after
she filed for bankruptcy, with the knowledge that the property would
pass to other family members. n52 Concluding that the trustee could
set aside the transfer under section 549, n53 the bankruptcy court
applied a four-part test. n54 First, there must be a "transfer," which
section 101(54) defines as "every mode, direct or indirect, voluntary
or involuntary, of disposing of or parting with property or with an
interest in property." n55 Citing In re Peery, n56 the court concluded
that the disclaimer was a voluntary transfer of the right to receive
the proceeds. n57
Second, the Watson court inquired whether the disclaimed proceeds
constituted "property of the estate." n58 The court reasoned that the
language, "becomes entitled to acquire," in section 541(a)(5) clearly
avoids any reference to the word "vest," and thus gives the trustee
the [*39] "power" to acquire property devised to a debtor. n59
Moreover, the court noted that because section 541(a)(5)(C)
"specifically states that the right to receive the proceeds of an
insurance policy is an interest in property," the language of the Code
grants to the estate and the trustee the power to accept the gift on
behalf of the creditors. n60 Therefore, because federal bankruptcy law
controls and section 541(a)(5) supersedes the right to renounce, the
debtor loses her entire interest once she files a bankruptcy petition,
including the power to disclaim. n61 In two other cases, In re Lewis
n62 and In re Cornell, n63 the courts also relied on the explicit
language of section 541 in concluding that a bequest becomes property
of the bankruptcy estate. n64 The Lewis court held that because
"federal law is supreme on this issue [it] ... requires return of the
bequest to the estate." n65 Thus, the language of the Code evidences
congressional intent to secure for the trustee the power to accept the
devise on behalf of the creditors and to preclude the debtor from
exercising the power to disclaim. A more difficult situation arises
when the debtor disclaims prior to filing a petition for bankruptcy,
and the trustee must proceed on a theory of
"fraudulent transfer."
IV. Pre-Petition Disclaimers
Current case law holds that if a debtor files for bankruptcy prior to
disclaiming, the property becomes "property of the estate" by
operation [*40] of section 541(a)(5) and is therefore subject to
claims of creditors. n66 It is unclear, however, whether a different
result is appropriate when a debtor disclaims during the pre-petition
period, that is, prior to filing a petition for bankruptcy, or whether
the result should be the same because the pre-petition disclaimer is a
fraudulent transfer. For example, if a debtor files for bankruptcy on
July 1 and disclaims on July 3, the property is "property of the
estate" under section 541(a)(5). Should the result be different if the
debtor filed the disclaimer on June 29 or September 1 of the preceding
year, or should the result be the same because the pre-petition
disclaimer is a fraudulent transfer?
Section 548 defines "fraudulent transfer" and provides two tests for
determining whether a transfer is fraudulent. n67 Both tests have two
requirements: (1) there must be a "transfer;" and (2) the transfer
must be of "an interest of the debtor in property." n68 Two courts
have held that the act of disclaiming is itself a "transfer" as
defined in section 101(54) of the Code. n69 If the relation-back
provision in a state statute prevents the debtor from acquiring an
"interest in property," however, then the debtor had nothing to
transfer, and the disclaimer cannot have been a fraudulent transfer.
Therefore, to determine if a disclaimer is a fraudulent transfer
depends on whether "an interest in property" is defined by section
541(a)(5) of the Code or state law. n70
A. Analogy of Disclaimers to General Powers of Appointment
If a debtor's disclaimer was always considered a fraudulent transfer
under state law, every case would yield a consistent result.
Currently, however, a majority of states hold that the debtor's
motives are irrelevant and allow individuals to disclaim and defeat
creditors' claims. n71 One potential solution to this problem is for
courts to treat the debtor [*41] disclaimant in the same way that they
treat a debtor who has a general power of appointment. n72 Generally,
creditors have some access to assets subject to a general power of
appointment. n73
Justice Traynor raised the analogy between a disclaimer and a general
power of appointment in In re Kalt's Estate. n74 In discussing the
power associated with a disclaimer, he stated that the power to
determine the ultimate disposition of property "is essentially
analogous to a general power of appointment under a will." n75 Assets
under an unexercised general power of appointment, exercisable inter-
vivos, n76 can be subject to claims of the debtor's creditors. n77 In
some jurisdictions, this is true only to the extent that other
property available to satisfy the debtor's creditors is insufficient.
n78 Under common law, creditors could not reach the appointive
property because of the distinction between a power and owner****p;
until the donee exercised the power of appointment, n79 he or she had
not accepted sufficient control over the assets to constitute
owner****p. n80 To protect creditors, however, states have adopted
statutes that supplant this distinction. n81 Justice Traynor asserted
that a creditor's interest in disclaimed property should receive equal
protection. n82 This analogy seems persuasive; why should we permit
the legal fiction of relation back, a fiction created for a different
purpose, n83 to enable a devisee to ****eld assets from creditors
through use of a disclaimer? Those unconvinced by the analogy
criticize attempts to [*42] limit the debtor's ability to disclaim.
n84 Though they concede that disclaimer constitutes a 'power' to
transfer similar to a general power of appointment, they argue that
the power is limited because the property descends to the disclaimant
or to a person that the disclaimant does not choose. n85 These critics
rely on Estate of Schiffman, n86 in which the court reasoned that it
was the disclaimer statute and the will, rather than the disclaimant,
that determined the ultimate recipient of the property. n87 This
argument is unpersuasive because the disclaimant does choose the
ultimate recipient of the property, he only has to make the choice
from a smaller pool of people. The property will pass either to
himself or to the alternate taker. n88 In situations involving a post-
petition disclaimer, the courts find this "limited power" sufficient
to bring the disclaimed assets within the "property of the estate."
n89 The choice of the ultimate recipient of the property, however, is
not the crucial factor in concluding that the property subject to a
general power of appointment should be included in the debtor's
estate. Instead, the debtor's power to appoint the property to himself
n90 is the key factor, as it should be in the disclaimer context. This
factor gives rise to the different treatment of general and non-
general powers of appointment: non-general powers are never subject to
the claims of creditors because the holder of the power cannot appoint
the property to himself, and the property therefore is not considered
his asset. n91 Both the critics n92 and the Schiffman court have
overlooked the purpose behind this differing treatment. The Code
implicitly provides for the inclusion of general powers of appointment
in "property of the estate" as defined in section [*43] 541(b)(1). n93
Because the Code authorizes the trustee to control the property of the
estate, n94 the trustee may exercise the debtor's power of appointment
in favor of the creditors. In the disclaimer context, the debtor
possesses a 'power' which he can exercise for his own benefit. Thus,
although the debtor's alternate appointees may consist of a group of
one, the disclaiming debtor still chooses, and will choose to deprive
his creditors of the benefits of his inheritance or bequest. The Code
speaks not in terms of "general powers" but merely "powers," and a
disclaimer clearly falls within this category.
B. A Disclaimer as a "Benefit" by Virtue of a Disclaimant's Release
=46rom the Obligation of Child Sup****t
Under both section 541 and state disclaimer statutes, a disclaimant is
not allowed to "benefit" by virtue of her disclaimer. n95 In the
typical disclaimer case, the property p***** to the disclaimant's
children. n96 States impose a statutory obligation to sup****t one's
children financially. n97 Therefore, if the parent can pass property
to her children through the use of a disclaimer and thereby be
relieved of her child sup****t obligation, she has received a benefit.
n98 The majority of states, however, hold a parent liable for child
sup****t, notwithstanding, and without resort to, the child's own
funds. n99 There are two exceptions to the majority position. n100
First, a parent who is [*44] financially unable to meet her obligation
is allowed to use the child's resources to satisfy her sup****t
obligation. n101 Disclaimants who are insolvent or bankrupt are
particularly likely to fall under this exception. A second exception
exists where a trust instrument provides that the trustee should
distribute the income and/or principal of the trust in lieu of a
parent's sup****t obligation. n102 Moreover, courts in at least one
jurisdiction have interpreted a state statute to either partially
abate or wholly eliminate a parent's sup****t obligation when a child
has her own funds. n103 Thus, when property p***** to a debtor's child
instead of to the debtor, the debtor receives a benefit, and the
disclaimer should be invalid. n104 Even if the debtor's sup****t
obligation is not discharged, the debtor has still derived a benefit
because her children will enjoy the property. However, courts have not
applied this reasoning in the bankruptcy context.
C. Pre-1978 Code Pre-Petition Cases
Currently, courts are split on whether state or federal law should
define "interest in property." In the seminal pre-Code case of Hoecker
v. United Bank of Boulder, n105 the debtor, a devisee under his
father's will, disclaimed his interest one week before the state
statutory period n106 expired, causing the property to pass to his
daughter. n107 The debtor was insolvent except for the property and
received no consideration for the disclaimer. n108 He filed for
bankruptcy within one year [*45] of that date. n109 The court reasoned
that the disclaimer would be deemed a "transfer" if it effectively
transferred property from the debtor to his children. n110 However,
the court noted that under state law the debtor did not have any
interest to transfer because the "right to succession by will of
property" exists solely by state statutory enactment, and the state
may therefore limit or place conditions upon the debtor's exercise of
this right. n111 Thus, relying on the relation-back provision, the
court held that there had not been a fraudulent transfer. n112
In contrast to the majority opinion in Hoecker, Judge Holloway's
dissent focused on the word "transfer" within the meaning of
Bankruptcy Act section 67(d)(2), the bankruptcy statute then in
effect. n113 He pointed out that although the majority conceded that
the meaning of the word "transfer" was governed by federal law, it
nonetheless found no fraudulent transfer because the state legislature
clearly intended the disclaimer to relate back and not to operate as a
transfer. n114 Judge Holloway noted, however, that "transfer" in the
bankruptcy context is used in "its most comprehensive sense." n115 He
interpreted the state disclaimer statute as giving the debtor "a
limited power ... to control the passing" of his devise, a power which
seemed to be a "'mode, direct or indirect' of ... parting with [an]
interest in the property and hence a transfer." n116 The dissent
further stated that for cases arising under the Act, Congress intended
to have uniform application of the law in every state. n117 Therefore,
as Judge Holloway demonstrated, we should not disfranchise creditors
on the [*46] basis of a state provision not originally enacted to
yield this result. n118
D. The Conflict Between Federal and State Law in Defining "Interest of
the Debtor in Property"
In his dissent in Hoecker, Judge Holloway noted the conflict between
state and federal law arising from the Code's failure to define
"interest of the debtor in property" as used in section 548. n119 The
absence of a definition in the Code has led courts to consult state
law for a definition. n120 Giving effect to state relation-back
provisions, however, has the effect of cir***venting two of the Code's
foremost goals: fair treatment of creditors and the prevention of
debtor dissipation of the bankruptcy estate. n121
The Supreme Court has repeatedly held that where there is a conflict
between state and federal law, federal law must control. n122 In Perez
v. Campbell, n123 for example, the Court struck down a state statute
that permitted restrictions on driving privileges for those who did
not pay auto-accident judgments, even though the debts had been
discharged in bankruptcy. n124 The Court reasoned that the state's
interest in highway safety was insufficient where the statute
frustrated the Code's "fresh start" policy for discharged debtors.
n125 Similarly, in Board of Trade v. Johnson, n126 the Court held that
a seat on the Chicago Board of Trade constituted "property" for the
purposes of federal law, stating:
Where the bankrupt [sic] law deals with property rights [*47] which
are regulated by the state law, the federal courts in bankruptcy will
follow the state courts; but when the language of Congress indicates a
policy requiring a broader construction of the [Bankruptcy Act] than
the state decisions would give it, federal courts cannot be concluded
by them. n127
Fair treatment of creditors and the maintenance of the debtor's estate
are vital policies which the federal courts should sup****t by ignoring
state relation-back provisions in cases where debtors file disclaimers
during the year prior to filing their bankruptcy petitions.
In Glosband v. Watts Detective Agency Inc., n128 the court looked to
the purpose of the Bankruptcy Act to define the term "property." n129
Specifically, the court examined this term "as invoked in the
definition of a 'transfer' in the context of former 11 U.S.C. =A7107(d)
(2)(a)'s proscription of fraudulent transfers." n130 The court noted
that "property" in this context "'is necessarily a federal question'"
n131 and held that "property" includes "anything of value which but
for the transfer might have been preserved for the trustee to the
ultimate benefit of the [debtor's] creditors." n132 Property that is
subject to the debtor's power to accept or disclaim clearly falls
within this definition. Thus, giving effect to the relation-back
provision yields a narrower definition of the term "interest in
property" than the one that federal courts have given that term as
used in section 548. Furthermore, section 541(a)(1) of the Code is
intended to include in the "estate" all property made available to the
estate pursuant to other Code sections n133 so that all the debtor's
"property" is available to satisfy creditor claims. For example,
section 548 empowers the trustee to demand all property that the
debtor fraudulently transferred. n134 All property that the trustee
recovers pursuant to section 548 becomes [*48] "property of the
estate." n135 Because section 541 specifically sets forth the property
that constitutes the estate, including property recovered under
section 548, section 541 should control in defining the "interest of
the debtor in property" for the purpose of determining which property
the debtor "becomes entitled to acquire ... by bequest, device, or
inheritance." n136
E. Uniformity in Bankruptcy Proceedings
One of the Code's purposes is uniformity in bankruptcy proceedings.
n137 Where bankruptcy courts apply state law in the disclaimer
context, the Code's goal of uniformity is defeated because the
different treatment of disclaimers under state law yields
inconsistent results among the jurisdictions. n138 In a probate
proceeding, personal property of the decedent generally p***** under
the laws of the state in which the decedent was domiciled at death. In
contrast, real property generally p***** under the law of the state in
which the property is located. n139 The disclaimer's effectiveness,
therefore, may depend upon the laws of more than one state.
Currently, four states have statutory provisions that preclude
disclaimers by insolvent beneficiaries, n140 and two states have such
rules by court decision. n141 Thus, if a disclaimer affects both
property located in one of these six states and property located
elsewhere, creditors may be able to reach only part of the property.
More im****tantly, under section 544(b) of the Code, a trustee can set
aside any transfer of an interest in property of the debtor that is
voidable under applicable state law. Therefore, federal proceedings in
which the trustee invokes section 544 will produce divergent results
based on the statutory provisions of the particular jurisdiction. To
avoid this potential inconsistency, courts should define the phrase
"interest of the debtor in [*49] property," as used in section 548, by
reference to section 541. One context in which state disclaimer law
has been wholly pre-empted by federal legislation is section 2518 of
the Internal Revenue Code ("I.R.C."). To avoid gift tax consequences
to the disclaimant, the disclaimant must meet certain I.R.C.
requirements, regardless of the effectiveness of the disclaimer under
state law. n142 In McDonald v. Commissioner, n143 the Eighth Circuit
Court of Appeals explained the application of the gift tax to a
disclaimer by stressing that a disclaimer, "which is an indirect
transfer, would fall within the encompassing language of the gift tax
statute." n144 Given the striking similarity between the relevant
definitions of "transfer" in the I.R.C. and the Bankruptcy Code, n145
courts should interpret the word "transfer" as it applies to
disclaimers in the bankruptcy context in the same way that the Eighth
Circuit construed "transfer" in the tax context. Giving effect to the
legal fiction of relation back in all bankruptcy cases provides the
debtor with too great an op****tunity to abuse her right to disclaim
property. n146 The I.R.C. provides the taxpayer nine months from the
date of transfer to disclaim the gift and avoid taxation. Courts
should interpret the Bankruptcy Code as doing the same with respect to
fraudulent transfers in section 548, except that the time frame for
disclaiming should be one year instead of nine months. Specifically,
if a disclaimer is executed more than one year prior to the date on
which a petition is filed, courts should treat the disclaimant as
predeceased. In this situation, the disclaimer is not a fraudulent
transfer, and the property does not become "property of the estate."
If the debtor disclaims an interest during the year prior to the date
on which the petition is filed, however, the courts should classify
the disclaimer as a fraudulent transfer, just as the transfer would be
subject to gift tax if the taxpayer [*50] executed a disclaimer more
than nine months after the date of transfer. The federal government's
policy of uniformity in the area of federal taxation should also apply
to federal bankruptcy proceedings. Current case law, however, is split
on this issue.
F. State Cases
Although the majority of state cases permit a disclaimer regardless of
motive or the presence of creditors, n147 two cases decided under
state law have held that disclaimers are ineffective where a debtor is
liable to creditors. In Stein v. Brown, n148 a drunk driver who was
sued for wrongful death disclaimed a bequest under his brother's will
of approximately $ 100,000 . Relying on In re Kalt's Estate, n149 the
Ohio Supreme Court held that the "power to vest title in another is
the equivalent of a transfer of that property" and thus set aside the
disclaimer under the state fraudulent conveyances statute. n150
Similarly, in In re Estate of Reed, n151 the Wyoming Supreme Court,
also relying on In re Kalt's Estate, held that a disclaimer executed
on the same day that a court entered a judgment against the
disclaimant could be set aside as a fraudulent transfer. Like the
Stein court, the Reed court focused on the timing of the disclaimer
and on evidence that the disclaimant received no consideration for its
execution. n152 From these "badges of fraud," the court found
sufficient cir***stantial evidence to establish the disclaimant's
actual intent to defraud the judgment creditor. n153 Thus, in an
effort to act equitably, some courts cir***vent the majority position
by identifying how the disclaimant's actions demonstrate "fraudulent
intent" and declare the disclaimer a transfer. n154 Although the
results in Stein and Reed were indeed equitable under the
cir***stances, in the absence of Code policy, they are difficult to
justify in light of state relation-back provisions.
[*51] G. Cases Under the Code
An early Code case, In re Peery, n155 was the first to take a position
contrary to Hoecker and hold that a pre-petition disclaimer could be a
fraudulent transfer. n156 In Peery, the debtor received a devise of
real estate worth $ 168,000 under his grandfather's will. n157
Substantially indebted to the plaintiff bank, the debtor disclaimed
the property six days after the bank filed a collection action and ten
months before he filed a Chapter 7 petition. n158
The Peery court applied a four-part test to determine whether a
disclaimer was a fraudulent transfer. First, the court inquired
whether the devise was "property of the debtor." n159 This question,
the court reasoned, was determined by state law, which defined an
"interest in property" as "the right to control, direct or receive a
testamentary distribution." n160 Second, the court asked whether there
had been a "transfer of property." n161 In looking to section 101(41),
n162 the court reasoned that the disclaimer was a "completely
voluntary transfer" of the right to receive the distribution. n163
Third, the court examined whether the transfer occurred within one
year of the filing for bankruptcy. n164 The debtor argued that the
relation-back provision in the state statute controlled, and that the
one-year period should therefore be measured from the date of the
testator's death instead of from the date on which the debtor
disclaimed. n165 The court disagreed, stating that for bankruptcy
purposes, the state legislature does not regulate the date of
transfer. n166 Thus, the Peery court held that [*52] although
"renunciation may be 'effective' for purposes of state law as of the
date of the testator's death ... the 'transfer' of the debtor's rights
and interests for purposes of the Bankruptcy Code took place on the
date of the renunciation." n167 Finally, to determine whether the
debtor intended to defraud his creditors, the court inquired whether
various "badges" of fraud were present. n168 The court considered,
inter alia, the timing of and absence of consideration for the
disclaimer, the relation****p between the debtor and the transferee,
and the existence of a collection suit against the debtor. n169 From
these various "badges" of fraud, the court concluded that the debtor
intended to defraud his creditors n170 and that the debtor's pre-
petition disclaimer was therefore a fraudulent transfer. n171 In In re
Stevens, n172 the United States District Court for the Southern
District of Texas reached the same result. The court held that the
disclaimer constituted a "transfer" and that the transfer occurred on
the date of the disclaimer, n173 even though Texas law holds that
property devised by will vests immediately in the devisee upon the
date of death. n174 Although this holding apparently put state and
federal bankruptcy law at odds, there was no actual conflict: federal
bankruptcy law determined whether the debtor had transferred that
interest, n175 whereas in both Peery and Stevens, state law merely
determined that the debtor had an "interest in property" that he had
the power to transfer. The majority of states, including Tennessee,
n176 now provide that property does not vest in the devisee upon the
death of the testator but is subject to disclaimer. n177 Therefore,
unless federal policy [*53] prevails in future decisions, the Stevens
case may be the lone exception to the majority rule. n178
In contrast, in In re Atchison, n179 the Seventh Circuit Court of
Appeals held that since the Code does not define "interest of the
debtor in property," its definition must come from applicable state
law. n180 The court further looked to state law, and specifically to
the Illinois relation-back provision, n181 and concluded that the
debtor did not have an interest that could be subject to a transfer.
n182 The Atchison court discounted Peery because in that case, the
court had looked to state law for a definition of interest in
property, but had ignored the relation-back provision and treated it
instead as a statute of limitations. n183 Noting that the Illinois
statute provides that a disclaimer relates back for "all purposes,"
the court held that the "relation-back doctrine favors the right of
beneficiaries to reject a gift over competing interests." n184 This
analysis, however, fails to account for the interests of unsecured
creditors. Only a debtor's assets which are not already subject to a
security interest can satisfy unsecured creditors' claims. If courts
ignore a disclaimer by the debtor during the year prior to the filing
of a petition, as they ignore post-petition disclaimers, n185
unsecured creditors may have access to additional assets to satisfy
their claims. n186 A majority of the states, including Illinois, have
abolished the doctrine of descent cast and now subject all property
passing to a devisee or heir to the recipient's right to disclaim.
n187 The courts therefore must [*54] choose between allowing state law
to control, as in Atchison, or treating the power to disclaim as an
interest in property, n188 and ignoring the legal fiction of relation
back in federal bankruptcy proceedings. n189 A power to disclaim is a
substantial property interest, and when it is used to ****eld property
from creditors, courts should recognize that a fraudulent transfer has
occurred so that the disclaimed property may be recovered for the
estate and used to satisfy the claims of creditors.
V. Conclusion
In enacting section 541(a), Congress intended to capture all interests
of the debtor, including "powers" to satisfy claims of creditors.
Courts have held that disclaimers are voidable as post-petition
transfers because the power to disclaim or accept a devise is included
in "property of the estate" and is exercisable only by the trustee.
n190 Section 548 seems to embody a goal similar to that of section
541(a): the prevention of the dissipation of the debtor's assets. The
only difference between the two provisions is that at the time of a
pre-petition disclaimer there is no property of the estate and no
trustee. It does not make sense to assume that a debtor is entitled to
certain property devised to him, to have that entitlement disclaimed,
and to pretend that there has been no transfer in spite of the
debtor's efforts.
On the other hand, had Congress intended to capture this particular
power under section 548, it could have done so by referring to section
541 in section 548 for the definition of "interest in property." Even
in the absence of such a definition, however, courts should rule in
favor of creditors and should not permit debtors to ****eld their
assets through the use of disclaimers.
FOOTNOTES:
n1. A renunciation is an heir's refusal to accept an estate, either in
whole or in part, which devolves to that heir by intestacy. A
disclaimer is a devisee's refusal to accept an estate, either in whole
or in part, which the devisee becomes entitled to by testate
succession; that is, through a will left by the decedent. See
generally William M. McGovern, Jr. et al., Wills, Trusts and Estates
(1988) (discussing the concepts of renunciation and disclaimer in
greater detail). These terms are used interchangeably throughout this
Article. Although heirs and devisees were treated differently under
the common law doctrine of descent cast, the doctrine has been
supplanted by statute in all but two states. See Adam J. Hirsch, The
Problem of the Insolvent Heir, 74 Cornell L. Rev. 587, 596 n.49
(1989). Under this doctrine, property vested in an heir at the death
of the decedent regardless of the accompanying burdens. See infra
notes 4-6 and accompanying text. If an heir wished to refuse the
property, by disclaimer or otherwise, the act was deemed a post-
inheritance "transfer" and did not relieve the heir of obligations
thrust upon him by the inheritance. In contrast, a devisee was allowed
to disclaim all interests devised to him. This disclaimer was said to
"relate-back" to the date of the testator's death, and the devisee was
deemed to have received nothing. See infra notes 20-21 and
accompanying text.
n2. See, e.g., Estate of Oot, 408 N.Y.S.2d 303, 304 (N.Y. Sur. Ct.
1978). Debtors may also have legitimate reasons to renounce or
disclaim legacies. For example, one sibling may disclaim her
dispro****tionate share so that all siblings take equal shares in the
estate. Where the disclaimant is or has become bankrupt, however, the
usual purpose of disclaiming is to defeat creditors.
n3. Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, 92 Stat. 2549
(codified at 11 U.S.C. =A7=A7101-1330), as amended by Bankruptcy
Amendments and Federal Judge****p Act of 1984, Pub. L. No. 98-353, 98
Stat. 333 (codified as amended in various sections of 11 U.S.C. and 28
U.S.C.); Bankruptcy Judges, United States Trustees and Family Farmer
Bankruptcy Act of 1986, Pub. L. No. 99-554, 100 Stat. 3088 (codified
as amended in various sections of 11 U.S.C. and 28 U.S.C.); Retiree
Benefits Bankruptcy Protection Act of 1988, Pub. L. No. 100-334, 102
Stat. 610 (codified as amended in various sections of 11 U.S.C.)
[hereinafter the Code].
n4. In this example, the gift is in the form of a bequest or devise.
n5. This principle is derived from English common law. See, e.g.,
Townson v. Tickell, 106 Eng. Rep. 575, 576-577 (K.B. 1819) ("The law
certainly is not so absurd as to force a man to take an estate against
his will."); Thompson v. Leach, 86 Eng. Rep. 391, 396 (K.B. 1690)
("Man cannot have an estate put into him in spight of his teeth.").
n6. See Unif. Probate. Code =A72-609, 8 U.L.A. 1 (1983) [hereinafter
U.P.C.] ("A specific devise p***** subject to any mortgage interest
existing at the date of death ...."); Cal. Prob. Code =A76170 (West
1986) ("A specific devise p***** the property devised subject to any
mortgage, deed of trust, or other lien existing at the date of
death ...."). The problem of en***bered property is not at issue in
this context because no creditor would demand acceptance where the
property had no net value or was subject to a superior claim.
n7. In situations where a testator has died having ac***ulated more
liabilities than assets, however, the interests of the devisee, not
the testator, should be weighed against those of the creditors because
the testator has died, and it is the devisee's interests that are
currently at stake.
n8. A "fraudulent transfer" occurs when a debtor transfers property to
a third party within one year of the date on which the debtor files a
petition for bankruptcy. To make a "fraudulent transfer," the debtor
must either intend to "defraud" his creditors or must receive property
of a dispro****tionately lesser value in exchange. See infra notes
67-70 and accompanying text; see also infra part IV.C-G.
n9. See infra notes 36-65 and accompanying text.
n10. .See infra notes 67-93, 105-89 and accompanying text.
n11. Statute of Eliz., 1571, 13 Eliz., ch. 5 (Eng.).
n12. Twyne's Case, 76 Eng. Rep. 809, 811 n.B (K.B. 1601); see also
cases cited infra notes 148, 155.
n13. Twyne's Case, 76 Eng. Rep. at 810 n.B (quoting 13 Eliz., Ch. 5,
=A72).
n14. Unif. Fraudulent Conveyance Act =A77, 7A U.L.A. 509 (1985)
[hereinafter U.F.C.A.]. The current version of this statute is the
Unif. Fraudulent Transfer Act =A74, 7A U.L.A. 652 (1985).
n15. The language in =A7548 of the Code is nearly identical to that
found in =A77 of the U.F.C.A. 11 U.S.C. =A7548(a) provides in part:
The trustee may avoid any transfer of an interest of the debtor in
property ... that was made ... on or within one year before the date
of the filing of the petition, if the debtor voluntarily or
involuntarily - (1) made such transfer or incurred such obligation
with actual intent to hinder, delay, or defraud any entity to which
the debtor was or became, on or after the date that such transfer was
made ... indebted; or (2)(A) received less than a reasonably
equivalent value in exchange for such transfer ... and (B)(i) was
insolvent on the date that such transfer was made ... or became
insolvent as a result of such transfer ....
11 U.S.C. =A7548(a) (1988).
n16. Many courts have not reached the second question because if the
disclaimant had no interest in the property, there is nothing left to
transfer. See Jones v. Atchison (In re Atchison), 925 F.2d 209, 211
(7th Cir. 1991), cert. denied, 112 S. Ct. 178 (1991); see also infra
note 111 and accompanying text.
n17. Courts will set aside a disclaimer if: (1) the disclaimant
previously accepted the gift; (2) the disclaimant and the ultimate
recipient colluded; or (3) the devisee has caused his creditors to
rely on his acceptance. See generally, Note, Right of Creditors of
Testamentary Donee to Set Aside His Renunciation, 37 Mich. L. Rev.
1168 (1939); 93 A.L.R.2d 8 (1964). Historically, most state statutes
required that the disclaimant make the disclaimer within a "reasonable
time." U.P.C. =A72-801 cmt. b. Currently, however, most state statutes
provide specific time limits. For example, both U.P.C. =A72-801(b)(1)
and Internal Revenue Code =A72518 (1992) impose a nine-month time limit
if the disclaimant wants to avoid a transfer tax. See infra notes
142-46 and accompanying text.
n18. General Fin. Corp. v. Hansen (In re Estate of Hansen), 248 N.E.2d
709, 712 (Ill. App. Ct. 1969); McGarry v. Mathis, 282 N.W. 786, 790
(Iowa 1938); Bradford v. Calhoun, 109 S.W. 502, 504 (Tenn. 1908).
n19. .In re Estate of Scrivani, 455 N.Y.S.2d 505, 509 (N.Y. Sup. Ct.
1982) (holding that a devisee "may freely renounce a testate or
intestate disposition for any reason or no reason, even if the
renunciation has the effect, or indeed the object, of frustrating
creditors"); see also Estate of Schiffman, 430 N.Y.S.2d 229, 231 (N.Y.
Sur. Ct. 1980) (holding that an insolvent devisee may renounce an
inheritance even if otherwise unable to satisfy her creditors'
claims).
n20. Courts use the legal fiction of relation back when property
p***** from a decedent to a devisee. This fiction allows the concepts
of "offer and acceptance" to co-exist with the common law "notion of
instantaneous transfer of title to the grantee." Hirsch, supra note 1,
at 592. The law of relation back presumes that a devisee has accepted
until she either actually accepts or disclaims. Id. If the devisee
disclaims, the disclaimer "relates back" and "the devisee's 'inchoate'
title vanishes retroactively." Id.; see also infra note 166 and
accompanying text. The Seventh Circuit has had occasion to discuss the
doctrine of relation back, and has commented that "although there is a
presumption that a beneficiary accepts a testamentary gift, a valid
disclaimer overcomes this presumption and retroactively erases any
interest in the beneficiary disclaiming." Atchison, 925 F.2d at 211.
n21. .See, e.g., U.P.C. =A72-801; Ind. Code Ann. =A732-3-2-2 (Burns 1990);
N.J. Stat. Ann. =A73A: 25-45 (West 1989).
n22. H.R. Rep. No. 595, 95th Cong., 1st Sess. 340 (1978), reprinted in
1978 U.S.C.C.A.N. 5963, 6296-97 (explaining that the purpose of the
automatic stay provision under =A7362 is to protect the interests of all
creditors).
n23. These protections include the automatic stay on creditors imposed
by =A7362 and the discharge of indebtedness granted by =A7727.
n24. 11 U.S.C. =A7541(a)(5) (1988). See infra notes 30, 36-37 for a more
thorough discussion of =A7541 and its predecessor.
n25. .See cases cited infra notes 51, 62, 63.
n26. 11 U.S.C. =A7548 (1988). Section 548 specifies the conditions under
which the Code defines a transfer as fraudulent. See 11 U.S.C. =A7548(a)
(1)-(2) (1988).
n27. The Supreme Court has commented that the Bankruptcy Code "does
not define what constitutes an interest in property. Absent a federal
provision to the contrary, a debtor's interest in property is
determined by applicable state law." Atchison, 925 F.2d at 210 (citing
Butner v. United States, 440 U.S. 48, 55 (1979)). Section 541,
however, is a federal provision that may provide a definition of
"interest in property" in the disclaimer context. See infra notes
56-65, 129-36, 138 and accompanying text.
n28. .Ex parte Fuller, 9 F. Cas. 976, 977 (C.C. Mass. 1842) (No. 5147)
(Justice Story's statement was dicta, as there was no actual
renunciation in the case.).
n29. .Id.
n30. 11 U.S.C. =A7301 (1988).
n31. This provision, which is intended to be construed broadly, is a
major departure from the definition of "property of the estate" under
=A770a of the Bankruptcy Act of 1898, 30 Stat. 544 (1898) [hereinafter
the Act], the predecessor to =A7541 of the Code. Under =A7541, title to
the debtor's property does not vest in the trustee, as it did under
=A770a, but instead is included in the estate as an "interest of the
debtor." In addition, =A770a(5) vested in the trustee all property that
the debtor "could by any means have transferred or which might have
been levied upon" by his creditors. See 11 U.S.C. =A7110(a)(5) (1976).
These requirements have been supplanted by the broad language of =A7541,
thus reducing the need for courts to rely on state law to determine
the kind of property that the debtor can transfer or upon which
creditors can levy. See 4 Collier on Bankruptcy <psign> 541.02 [1-2],
at 541-10-15 & n.1 (Lawrence P. King ed., 15th ed. 1993).
n32. In Chapter 11 and Chapter 13 cases, the court may appoint a
trustee to prevent the debtor from misusing or improperly depleting
the "property of the estate" where the debtor's business continues to
operate. See 11 U.S.C. =A7=A71104, 1302 (1988).
n33. .See infra notes 119-36 and accompanying text.
n34. 4 Collier on Bankruptcy <psign> 541.02 [1], at 541-10.1 (Lawrence
P. King ed., 15th ed. 1993).
n35. .See cases cited infra notes 51, 62-63.
n36. 11 U.S.C. =A7541(a)(5)(A), (C) (1988) (emphasis added).
n37. .See 11 U.S.C. =A7110(a)(8) (1976). The Act is the predecessor to
the Code.
n38. .See, e.g., Caplinger v. Patty, 398 F.2d 471, 475 (8th Cir. 1968)
("Section 60 of the Bankruptcy Act is designed to give all creditors
fair treatment.").
n39. Mickelson v. Detlefsen (In re Detlefsen), 610 F.2d 512 (8th Cir.
1979), rev'g 466 F. Supp. 161 (D. Minn. 1979).
n40. .Detlefsen, 610 F.2d at 518-20.
n41. Mickelson v. Detlefsen (In re Detlefsen), 466 F. Supp. 161, 162
(D. Minn. 1979).
n42. .Id.
n43. Ill. Rev. Stat. ch. 110 1/2, =A72-7(e) (1977).
n44. Id.
n45. .Detlefsen, 466 F. Supp. at 164.
n46. .Id. Accordingly, the district court cited Board of Trade v.
Johnson, 264 U.S. 1, 10 (1923) for the proposition that state law
"remains subordinate to the federal policies that inhere in the
Bankruptcy Act." Detlefsen, 466 F. Supp. at 163. The district court
further quoted from the Supreme Court's holding in Johnson that "'when
the language of Congress indicates a policy requiring a broader
construction of the statute than the state decisions would give it,
federal courts cannot be concluded by them.'" Id. (quoting Johnson,
264 U.S. at 10). Use of disclaimer in the bankruptcy context
frustrates congressional intent because its exercise is so predictable
Id. at 166 n.7.
n47. .Detlefsen, 466 F. Supp. at 166-67. The district court stated,
"[the debtor has] such complete control over the property ... that it
is hard to distinguish him from an owner. It is tempting to make him
be just before he is generous." Id. at 165-66 n.6. See also
Restatement of Property ch. 25, p. 1813 (1940). For a discussion of
general powers of appointment, see infra notes 49-54 and accompanying
text.
n48. .Detlefsen, 610 F.2d at 515, 520; see also supra note 19.
n49. .Detlefsen, 610 F.2d at 520. If the devise had been of realty,
however, under =A770a(7) the power would have vested in the trustee as
it was a "power in the bankrupt to acquire assignable interests" in
real property. Id. Thus, the court reasoned that Congress knew how to
protect creditors, and its failure to provide similar protection in
=A770a(2) gave rise to an inference that it did not intend to override
state law. Id.
n50. .Id. The new language of the Code "almost certainly" would
obviate the problem presented in the case. Id. Although the case was
decided in 1979, one year after the Code was enacted, the relevant
events occurred while the Act was the controlling law.
n51. Geekie v. Watson (In re Watson), 65 B.R. 9 (Bankr. C.D. Ill.
1986).
n52. .Id. at 10.
n53. 11 U.S.C. =A7549(a) provides in part:
(a) Except as provided in subsection (b) or (c) of this section, the
trustee may avoid a transfer of property of the estate - (1) that
occurs after the commencement of the case; and ... (2)(B) that is not
authorized under this title or by the court.
11 U.S.C. =A7549(a) (1988).
n54. .Watson, 65 B.R. at 11. Part three of the test, whether the
transfer occurred after commencement, and part four, whether the court
or the Bankruptcy Code authorized the transfer, were not at issue in
the case. Id.
n55. 11 U.S.C. =A7101(54) (1988).
n56. Nashville City Bank & Trust Co. v. Peery (In re Peery), 40 B.R.
811 (Bankr. M.D. Tenn. 1984). For a more thorough discussion of Peery,
see infra notes 155-71 and accompanying text.
n57. .Watson, 65 B.R. at 12. For further discussion of the meaning of
the word "transfer," see infra notes 69, 113-16, 143-46 and
accompanying text.
n58. .Watson, 65 B.R. at 11.
n59. .Id. at 11-12.
n60. .Id. at 12. It appears that Congress has created a federal law of
property, superseding state law and giving someone other than the
debtor the power to accept property. Congress does, in fact, have such
a power under Article I of the U.S. Constitution. See Detlefsen, 610 F.
2d at 516 n.14 (citing U.S. Const. art. I, =A78, cl. 4).
n61. .Watson, 65 B.R. at 12. The court noted that the Illinois
disclaimer statute and the legal fiction of relation back do not
change the fact that the debtor "became 'entitled to acquire'" the
proceeds within the requisite time frame and cannot be used to "defeat
the express definition of property of the estate contained in the
Bankruptcy Code." Id. See infra notes 165-66 and accompanying text.
n62. Flanigan v. Lewis (In re Lewis), 45 B.R. 27 (Bankr. W.D. Mo.
1984).
n63. Cornelius v. Cornell (In re Cornell), 95 B.R. 219 (Bankr. W.D.
Okla. 1989).
n64. .Lewis, 45 B.R. at 29-30 n.2 (holding that the debtor's
disclaimer in favor of his daughter five months after filing his
petition was an avoidable transfer under =A7549); Cornell, 95 B.R. at
221-22 (holding that under =A7549 a creditor could set aside a debtor's
disclaimer because the debtor's mother died, leaving him property by
will, within 180 days from the date of confirmation of the debtor's
Chapter 12 plan).
n65. .Lewis, 45 B.R. at 29-30 n.2; accord Cornell, 95 B.R. at 222
("Federal Bankruptcy law, and not state probate or succession law,
governs the issue raised herein .... The disclaimer filed by debtors
thereafter, whether or not valid under Oklahoma law, constituted an
unauthorized post-petition transfer of property of the estate which is
avoidable by the trustee under 11 U.S.C. =A7549. "). Section 550
requires the return of the legacy or bequest to the bankruptcy estate
by the alternate taker. 11 U.S.C. =A7550 (1988).
n66. .See supra notes 51-65 and accompanying text.
n67. For the text of =A7548, see supra note 15.
n68. 11 U.S.C. =A7548(a) (1988).
n69. .See Casciato v. Stevens (In re Stevens), 112 B.R. 175, 177
(Bankr. S.D. Tex. 1989); Nashville City Bank & Trust Co. v. Peery (In
re Peery), 40 B.R. 81, 814 (Bankr. M.D. Tenn. 1984). Although a
disclaimer may not technically be a transfer "directly" to the
alternate taker under the will, it is at least a relinquishment of a
right to receive property, and that seems to be "a mode, direct or
indirect" of parting with an interest in property. One commentator
believes it is not a transfer but a denial of a benefit to the debtor.
See, Dean David Gamin, Renunciation of Testamentary Benefit as
Fraudulent Transfer, 37 Case W. Res. L. Rev. 148, 164-65 (1986).
n70. The disclaimer must, of course, also satisfy the other
requirements of a fraudulent transfer. See 11 U.S.C. =A7548 (1988).
n71. .See, e.g., Mickelson v. Detlefsen (In re Detlefsen), 610 F.2d
512, 515, 520 (8th Cir. 1979); see also supra note 48 and accompanying
text. A minority of states prohibit insolvent disclaimers by statute.
See infra notes 140-41.
n72. A power of appointment is an "authority, other than as an
incident of the beneficial owner****p of property, to designate
recipients of beneficial interests in property." Restatement (Second)
of Property, Donative Transfers =A711.1 (1986). A "general power," as
distinguished from a "non-general power," authorizes the recipient or
holder of the power to exercise the power in favor of himself, much in
the same way that a devisee can accept property left to him under a
will. See McGovern, supra note 1, at =A712.1.
n73. See infra notes 77-81.
n74. Kalt v. Youngworth (In re Kalt's Estate), 108 P.2d 401 (Cal.
1940).
n75. .Id. at 403.
n76. The general power of appointment can be exercised while the
holder of the power is alive. In contrast, a testamentary power is
exercisable only through the holder's will.
n77. .Restatement (Second) of Property, Donative Transfers =A713.2
(1986); N.Y. Est. Powers & Trusts Law =A710-7.2 (McKinney 1992).
n78. .See Cal. Civ. Code =A71390.3 (West 1982); Mich. Comp. Laws Ann.
=A7556.123 (West 1988); Minn. Stat. Ann. =A7502.70 (West 1990); Okla.
Stat. tit. 60, =A7299.9 (1981); Wis. Stat. Ann. =A7702.17 (West 1981).
n79. The donee could, for example, accept property left under a will.
n80. .Restatement (Second) of Property, Donative Transfers =A713.2 cmt.
a (1986).
n81. .See supra notes 76-77 and accompanying text.
n82. Kalt's Estate, 108 P.2d at 403.
n83. .See supra note 20.
n84. .See, e.g., Gamin, supra note 69, at 157.
n85. Id.
n86. 430 N.Y.S.2d 229 (N.Y. Sur. Ct. 1980).
n87. .Id. at 231.
n88. Once a will has been admitted to probate, it becomes a matter of
public record. The potential disclaimant can therefore determine who
will be the alternate taker. In the case of intestate succession, the
disclaimant can determine who will be the alternate taker by examining
the state intestacy provisions.
n89. .See supra notes 57, 61-63 and accompanying text.
n90. To be classified as a general power, the donee of the power must
be able to appoint the property to himself, his creditors, his estate,
or the creditors of his estate. See infra note 93.
n91. Section 541(b)(1) removes from the estate only those assets
subject to a non-general power of appointment because the holder of a
non-general power, the debtor in this context, cannot exercise the
power for his own benefit. 11 U.S.C. =A7541(b)(1) (1988).
n92. .See generally Gamin, supra note 69.
n93. Section 541(b)(1) provides that property of the estate does not
include "any power that the debtor may exercise solely for the benefit
of an entity other than the debtor." 11 U.S.C. =A7541(b)(1) (1988).
Therefore, if the debtor can exercise a power in favor of himself, the
power is included within property of the estate. See also 4 Collier on
Bankruptcy <psign> 541.21, at p. 541-106-110 (Lawrence P. King ed.,
15th ed. 1993); Restatement (Second) of Property, Donative Transfers
=A713.6 cmt. c (1986) ("The Bankruptcy estate does include general
powers of the [debtor] that are presently exercisable because they
inherently are exercisable for the benefit of the [debtor].").
n94. 11 U.S.C. =A7363(b)(1) (1988).
n95. 11 U.S.C. =A7541 (1988); U.P.C. =A72-801(d)(1)(iii) (when there is a
benefit to the disclaimant, the disclaimer will be set aside).
n96. .See, e.g., Jones v. Atchison (In re Atchison), 925 F.2d 209, 210
(7th Cir. 1991), cert. denied, 112 S. Ct. 178 (1991); Hoecker v.
United Bank of Boulder, 476 F.2d 838, 841 (10th Cir. 1973); Stevens,
112 B.R. at 176.
n97. .See Homer H. Clark, Jr., The Law of Domestic Relations in the
United States =A76.2 (2d ed. 1988).
n98. .See Detlefsen, 610 F.2d at 520 ("The fact that the bankrupt is
in any case himself kept from benefiting at the expense of his
creditors still serves to prevent the sort of 'fraud upon the [Code]'
with which Congress was concerned ...."); see also supra notes 39-49
and accompanying text.
n99. .See generally Gary D. Spivey, Annotation, Income of Child from
Other Source As Excusing Parent's Compliance with Sup****t Provisions
of Divorce Decree, 39 A.L.R.3d 1292, 1295 (1971).
n100. .See Jeffrey N. Pennell, Custodians, Incompetents, Trustees and
Others: Taxable Powers of Appointment?, Inst. on Est. Plan. <psign>
1602.3(b) (1981).
n101. .See Doelp v. Doelp, 281 A.2d 721, 724 (Pa. Super. Ct. 1971)
(dicta).
n102. .See Nielsen v. Nielsen, 462 P.2d 512, 517 (Idaho 1969).
n103. McElrath v. Citizens & S. Nat'l Bank, 189 S.E.2d 49, 52-53 (Ga.
1972) (interpreting Ga. Code Ann. =A723-2311 (1962) and holding that
trust income payable to a child is to be used first to discharge the
obligation of sup****t). For example, children may have their own funds
where property has been left in trust by a grandparent for the benefit
of a grandchild or the child is an independently wealthy actor.
n104. .See supra note 95. A trustee could use this argument to set
aside a debtor's disclaimer where the trustee otherwise might not be
able to prove collusion. See, e.g., Note, Renunciation of Testamentary
Gift to Defeat the Claims of Devisee's Creditors, 43 Yale L.J. 1030,
1032 (1934) (stating"while in a family affair of this nature it would
be practically impossible to show the existence of actual collusion
among beneficiaries under the will sufficient to estop the
renunciation, it is difficult to believe that a tacit understanding of
some sort did not exist").
n105. 476 F.2d 838 (10th Cir. 1973).
n106. The state statutory relation-back provision then in effect
treated a disclaimant as predeceased if the disclaimer had been made
within six months from the time that the will was admitted to probate.
After that period, the disclaimer was treated as a conveyance. See id.
at 840-41 (discussing Colo. Rev. Stat. =A7153-5-43 (1963) as amended in
1965).
n107. .Id. at 839.
n108. .Id. These facts meet two of the conditions of a fraudulent
transfer under Code =A7548(a)(2). See 11 U.S.C. =A7548(a)(2)(A), (B)(i)
(1988).
n109. .Hoecker, 476 F.2d at 839.
n110. .Id. at 840-41.
n111. .Id. at 841 (citing Demorest v. City Bank Farmers Trust Co., 321
U.S. 36, 48 (1944)).
n112. .Id. at 841.
n113. 11 U.S.C. =A7107(d)(2)(a) (1970), the predecessor to Code =A7548,
provided that "every transfer made ... by a debtor within one year
prior to the filing of a petition ... is fraudulent ... if made or
incurred without fair consideration by a debtor who is or will be
thereby rendered insolvent, without regard to his actual intent."
Because =A7548(a)(2)(A) and =A7548 (a)(2)(B)(i) are similar, Hoecker is
persuasive authority for cases decided under the Code.
n114. In the alternative, the majority opinion's language seems to
indicate that it decided that the state statute did not create an
interest of the debtor in property, and that the debtor therefore had
nothing to transfer. Hoecker, 476 F.2d at 841.
n115. .Id. at 842 (Holloway, J., dissenting).
n116. .Id. (Holloway, J., dissenting) (quoting Colo. Rev. Stat.
=A7153-5-43(2)(a) (1963) as amended in 1965).
n117. .Id. (Holloway, J., dissenting) (citing McKenzie v. Irving Trust
Co., 323 U.S. 365, 369-70 (1945)).
n118. .See supra note 20 and accompanying text.
n119. .Hoecker, 476 F.2d at 842 (Holloway, J., dissenting).
n120. .See Butner v. United States, 440 U.S. 48, 55 (1979) (noting
that "property interests are created and defined by state law"); see
also 4 Collier on Bankruptcy <psign> 541.02[1], at 541-10.1 (Lawrence
P. King ed., 15th ed. 1993) ("The existence and nature of the debtor's
interest in property ... are determined by nonbankruptcy law.") The
Butner court carved out an exception, however, where "some federal
interest [such as that in a bankruptcy proceeding] requires a
different result." 440 U.S. at 55.
n121. .See Local Loan Co. v. Hunt, 292 U.S. 234, 244-45 (1934)
(stating that state law in Hunt would have cir***vented the federal
"fresh-start" policy and holding that "local rules subversive [to
federal bankruptcy policy] cannot be accepted as controlling the
action of a federal court"). Two of the Code's primary goals are
treating creditors with like claims similarly, see In re 222 Liberty
Assocs., 108 B.R. 971, 991 (Bankr. E.D. Pa. 1990), and granting
debtors a "fresh start." See Grogan v. Garner, 498 U.S. 279, 286
(1991).
n122. See infra notes 125-33 and accompanying text. See generally,
David E. Leigh, Note, Renunciation of a Legacy or Devise as a
Fraudulent Transfer under the Bankruptcy Act, 49 Ind. L.J. 290 (1974).
n123. 402 U.S. 637 (1971).
n124. Id. at 656.
n125. Id. at 645-47, 648, 654 (citations omitted).
n126. 264 U.S. 1 (1924).
n127. Id. at 10 (citing Board of Trade v. Weston, 243 F. 332 (7th Cir.
1917)).
n128. 21 B.R. 963 (Bankr. D. Mass. 1981).
n129. Id. at 971.
n130. Id. 11 U.S.C. =A7107(d) (1970) is the predecessor to 11 U.S.C.
=A7548 (1988).
n131. Glosband, 21 B.R. at 971 (quoting McKenzie v. Irving Trust Co.,
323 U.S. 365, 370 (1945)).
n132. Id.
n133. See United States v. Whiting Pools, 462 U.S. 198, 205 (1983)
(holding that =A7542(a) "requires an entity ... holding any property of
the debtor that the trustee can use under =A7363 to turn that property
over to the trustee").
n134. Technically, =A7548 only empowers the trustee to avoid the
debtor's fraudulent transfers, whereas =A7551 automatically preserves
any fraudulently transferred property for the benefit of the estate,
and =A7550 authorizes the trustee to recover the property from the
transferee. 11 U.S.C. =A7=A7550, 551 (1988). Nevertheless, =A7548 gives
the
trustee the power to ultimately recapture property that the debtor
fraudulently transfers.
n135. 11 U.S.C. =A7541(a)(3)-(4) (1988).
n136. 11 U.S.C. =A7541(a)(5)(A) (1988).
n137. See U.S. Const. art. I, =A78, cl. 4.
n138. See Butner, 440 U.S. at 55 ("Uniform treatment of property
interests by both state and federal courts within a State serves to
reduce uncertainty, [and] to discourage forum shopping.").
n139. See generally McGovern, supra note 1.
n140. .Fla. Stat. Ann. =A7732.801(6)(a) (West Supp. 1993); La. Civ. Code
Ann. art. 1021 (West 1982); Mass. Gen. Laws Ann. ch. 191A, =A78(2) (West
Supp. 1993); Minn. Stat. Ann. =A7525.532 (Subdiv. 6) (West Supp. 1993).
n141. Cf. Stein v. Brown, 480 N.E.2d 1121, 1123 & n.1 (Ohio 1985)
(dicta, as the court invalidated the beneficiary's disclaimer based on
its finding of actual intent to defraud creditors); Butcher v. Butcher
(In re Estate of Reed), 566 P.2d 587, 591 (Wyo. 1977) (finding actual
intent to defraud). For a more thorough discussion of Stein and
Butcher, see infra notes 148-50, 151-53.
n142. 26 U.S.C. =A72518 (1988).
n143. 853 F.2d 1494 (8th Cir. 1988), cert. denied, 490 U.S. 1005
(1989).
n144. Id. at 1499 (emphasis added). In discussing the treatment of
similar terms under the I.R.C., the court further stated:
Federal gift tax is imposed "on the transfer of property by gift." 26
U.S.C. =A72501(a)(1). The scope of this tax is broad, applying "whether
the transfer is in trust or otherwise, whether the gift is direct or
indirect, and whether the property is real or personal, tangible or
intangible." 26 U.S.C. =A72511(a). Moreover, in construing the gift tax
provisions, "the terms 'property,' 'transfer,' 'gift,' and
'indirectly' are used in the broadest and most comprehensive sense;
the term 'property' reaching every species of right or interest
protected by law and having an exchangable [sic] value."
Id. (citations omitted).
n145. Compare 11 U.S.C. =A7101(54) (1988) with the definition of
"transfer" in the I.R.C. set forth in McDonald.
n146. .See supra notes 93-104 and accompanying text.
n147. .See supra notes 18-19.
n148. 480 N.E.2d 1121, 1122 (Ohio 1985).
n149. Kalt v. Youngworth (In re Kalt's Estate), 108 P.2d 401 (Cal.
1940); see also supra notes 74-82.
n150. Stein, 480 N.E.2d at 1123. In a bankruptcy case relying on
Stein, the court in McGraw v. Betz (In re Betz), 84 B.R. 470, 472
(Bankr. N.D. Ohio 1987), held that a post-petition disclaimer by a
debtor could be set aside under state law.
n151. Butcher v. Butcher (In re Estate of Reed), 566 P.2d 587, 590-91
(Wyo. 1977).
n152. .Id. at 590.
n153. .Id. at 591. Some state statutes specifically prohibit
disclaimers in cases in which a creditor has already levied against
the disclaimant's inheritance. See, e.g., N.J. Stat. Ann. =A73B:9-9(a)
(West Supp. 1993).
n154. .See, e.g., Reed, 566 P.2d at 590.
n155. Nashville City Bank & Trust Co. v. Peery (In re Peery), 40 B.R.
811 (Bankr. M.D. Tenn. 1984).
n156. .Id. at 812-13, 816.
n157. .Id. at 812.
n158. .Id. at 812-13.
n159. .Id. at 813.
n160. .Peery, 40 B.R. at 813. The court explained that under Tennessee
law, the right to receive real property by testamentary distribution
attaches on the date of the testator's death. Id. Looking to Code
=A7541, the court also noted that the meaning of "property" under the
Code was intended to be "virtually all encompassing." Id. at 813-14 n.
4 (citing United States v. Whiting Pools, 462 U.S. 198, 204 (1982)).
See also case cited supra note 128.
n161. .Peery, 40 B.R. at 814.
n162. The term "transfer" is currently defined by 11 U.S.C. =A7101(54)
(1988). See supra note 55 and accompanying text for a discussion of
the Code's definition of "transfer."
n163. .Peery, 40 B.R. at 814 (citing Schaefer v. Fisher, 242 N.Y.S.
308, 314 (N.Y. Sup. Ct. 1930)).
n164. .Id.
n165. .Id.
n166. .Id. at 815. The court stated:
The Tennessee relation back statute does not erase the fact of a
transfer of the debtor's vested rights at the time of the
renunciation. Instead, relation-back is a legal fiction which defines
the consequences of having property rights vest at death and then
revest in others after a valid renunciation. Although relation-back
may have significant nonbankruptcy effects ... legal fictions created
for other purposes by state law cannot be used to defeat the express
limitations periods created by the Bankruptcy Code.
Id.
n167. .Peery, 40 B.R. at 815.
n168. .Id.
n169. .Id. at 815-816.
n170. .Id. at 816.
n171. .Id.
n172. Casciato v. Stevens (In re Stevens), 112 B.R. 175, 177-78
(Bankr. S.D. Tex. 1989).
n173. .Id. at 177 (citing Peery, 40 B.R. at 814).
n174. .Id. at 177.
n175. .Id.
n176. .See supra note 156 and accompanying text.
n177. .See Gamin, supra note 69, at 153 n.40.
n178. New Hamp****re and Mississippi also may not follow the majority
rule. In those states, if property is inherited, the doctrine of
descent cast may treat the property as vesting in the heir prior to
the heir's execution of a disclaimer, thus giving rise to a transfer.
Hirsch, supra note 1, at 596 n.49.
n179. Jones v. Atchison (In re Atchison), 925 F.2d 209 (7th Cir.
1991), cert. denied, 112 S. Ct. 178 (1991).
n180. .Id. at 210 (citing Butner v. United States, 440 U.S. 48, 55
(1978)).
n181. .Ill. Comp. Stat. ch. 755, =A75/2-7(d) (1993).
n182. .Atchison, 925 F.2d at 211 (citing Hoecker v. United Bank of
Boulder, 476 F.2d 838 (10th Cir. 1973)). Although Hoecker was decided
under the Act, Congress did not make any substantive changes to the
fraudulent transfer section when it enacted the Code in 1978. Compare
11 U.S.C. =A7548(a) (1988) with 11 U.S.C. =A7107(d)(2) (1976).
n183. .Atchison, 925 F.2d at 211.
n184. .Id. The court further observed that permitting the disclaimer
to relate back to the testator's death "does not unfairly prejudice
creditors." Id.
However, the court overlooked the general proposition that state law
should be disregarded where some federal interest, such as the
protection of creditors under the Code, requires a different result.
n185. .See supra notes 51-65 and accompanying text.
n186. The Atchison decision is also troubling because the disclaimed
property passed to the disclaimant's children. See supra notes 95-104
and accompanying text.
n187. .See supra note 1.
n188. Defining an interest in property pursuant to 11 U.S.C. =A7541
protects the creditor because Congress intended this provision to be
read expansively. It includes property over which the debtor has a
general power of appointment. See supra notes 74-79 and accompanying
text.
n189. .See supra notes 155-60, 166 and accompanying text.
n190. In all Chapter 13 cases and some Chapter 11 cases, a debtor-in-
possession may continue to operate a business that, along with the
debtor's personal assets, is included in the bankruptcy estate. It is
presumed that judicial mechanisms will compel the debtor to accept the
devise or inheritance.
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