Royal v. Jones et al

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF WYOMING
In re
BRIAN FRANCIS SANFORD,
Debtor.
RANDY ROYAL, Chapter 7 Trustee of
the Bankruptcy Estate of Brian Francis
Sanford,
Plaintiff,
v.
THE PROBATE ESTATE OF NORMAN
L. SANFORD, et aI.,
Defendants.
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)
) 	Case No. 04-22223
) 	CHAPTER 7
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)
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)
)
)
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) 	Adv. No. 05-2025
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OPINION ON COMPLAINT
On June 21, 2006, the court held a trial on the Trustee's Second Amended Adversary
Complaint to Set Aside Conveyance of Property as Fraudulent Conveyance and for Turnover.
The chapter 7 trustee, Randy L. Royal, appeared with his counsel Anthony Wendtland. The
defendants, the Probate Estate of Norman L. Sanford (Sanford Estate), its personal
representatives and beneficiaries (collectively Sanfords), appeared through their counsel,
Ronald P. Jurovich. The court has reviewed the generally undisputed facts and the applicable
law, and is prepared to rule.
Jurisdiction
The court has jurisdiction over this adversary proceeding under 28 U.S.C. §§ 157(a)
and 1334(a). This is a core proceeding within the terms of § 157(b)(2)(H).
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF WYOMING
In re
BRIAN FRANCIS SANFORD,
Debtor.
RANDY ROYAL, Chapter 7 Trustee of
the Bankruptcy Estate of Brian Francis
Sanford,
Plaintiff,
v.
THE PROBATE ESTATE OF NORMAN
L. SANFORD, et aI.,
Defendants.
)
)
) 	Case No. 04-22223
) 	CHAPTER 7
)
)
)
)
)
)
)
) 	Adv. No. 05-2025
)
)
)
)
)
OPINION ON COMPLAINT
On June 21, 2006, the court held a trial on the Trustee's Second Amended Adversary
Complaint to Set Aside Conveyance of Property as Fraudulent Conveyance and for Turnover.
The chapter 7 trustee, Randy L. Royal, appeared with his counsel Anthony Wendtland. The
defendants, the Probate Estate of Norman L. Sanford (Sanford Estate), its personal
representatives and beneficiaries (collectively Sanfords), appeared through their counsel,
Ronald P. Jurovich. The court has reviewed the generally undisputed facts and the applicable
law, and is prepared to rule.
Jurisdiction
The court has jurisdiction over this adversary proceeding under 28 U.S.C. §§ 157(a)
and 1334(a). This is a core proceeding within the terms of § 157(b)(2)(H).
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Facts
Norman L. Sanford died on September 9,2003, leaving a Last Will and Testament
(Will) under which the Debtor, Brian Francis Sanford (Debtor), is a named heir and devisee
along with other family members. The Will was filed in the Hot Springs County, Wyoming
District Court (District Court) on September 22,2003.
Probate proceedings of the Will are not complete, and the value ofthe Sanford Estate
is unknown. This court previously abstained in favor of a ruling from the District Court on
various issues of state law, including the value of the Sanford Estate.
On October 6,2003, Dale E. Barlage (Barlage) obtained a Default Judgment against
the Debtor in the Pima County, Arizona Superior Court for $1,200,000.00. Barlage filed the
Default Judgment as a foreign judgment in the District Court on October 27,2003 and began
execution proceedings. The Debtor was aware of the Default Judgment at least by October
or November of2003.
On January 21, 2004, the Debtor executed a Renunciation of his interest in the
Sanford Estate. The Debtor delivered the Renunciation to his brother, Norman Sanford, who
was the personal representative of the Sanford Estate. 	On October 1, 2004, Barlage
requested authority to hold an execution sale of the Debtor's interest in the Sanford Estate.
Norman Sanford filed the Renunciation in the District Court on November 15,2004. The
Debtor contends he did not communicate with Norman Sanford regarding the timing of the
filing.
2
Facts
Norman L. Sanford died on September 9,2003, leaving a Last Will and Testament
(Will) under which the Debtor, Brian Francis Sanford (Debtor), is a named heir and devisee
along with other family members. The Will was filed in the Hot Springs County, Wyoming
District Court (District Court) on September 22,2003.
Probate proceedings of the Will are not complete, and the value ofthe Sanford Estate
is unknown. This court previously abstained in favor of a ruling from the District Court on
various issues of state law, including the value of the Sanford Estate.
On October 6,2003, Dale E. Barlage (Barlage) obtained a Default Judgment against
the Debtor in the Pima County, Arizona Superior Court for $1,200,000.00. Barlage filed the
Default Judgment as a foreign judgment in the District Court on October 27,2003 and began
execution proceedings. The Debtor was aware of the Default Judgment at least by October
or November of2003.
On January 21, 2004, the Debtor executed a Renunciation of his interest in the
Sanford Estate. The Debtor delivered the Renunciation to his brother, Norman Sanford, who
was the personal representative of the Sanford Estate. 	On October 1, 2004, Barlage
requested authority to hold an execution sale of the Debtor's interest in the Sanford Estate.
Norman Sanford filed the Renunciation in the District Court on November 15,2004. The
Debtor contends he did not communicate with Norman Sanford regarding the timing of the
filing.
2
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However, on the same date, the Debtor filed his voluntary chapter 7 petition for relief
in this court. 	The Debtor did not list the Renunciation in his chapter 7 Schedules or the
Statement of Financial Affairs.
Between the date the Debtor signed the Renunciation and November 15, 2004, the
Debtor initiated litigation in Pima County, Arizona, in the District Court and in the United
States District Court for the District of Wyoming, all in an attempt to overturn the Default
Judgment. His efforts were unsuccessful.
Conclusions of Law
The Trustee seeks to avoid the filing of the Renunciation by the Debtor as a fraudulent
conveyance under 11 U.S.c. § 548(a)(l) & (2)1, which state:
The trustee may avoid any transfer of an interest of the debtor in
property ... that was made or incurred on or within one year before the date
of the filing of the petition, if the debtor voluntarily or involuntarily
(A) made such transfer ... 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
(B) received less than a reasonably equivalent value in exchange for
such transfer ... and was insolvent on the date that such transfer was made .
. . or became insolvent as a result of such transfer.
The determinative question in this case is whether the Renunciation was a transfer of
1All references to the Bankruptcy Code are to the law in effect prior to the enactment
of the Bankruptcy Abuse Prevention and Consumer Protection Act.
3
However, on the same date, the Debtor filed his voluntary chapter 7 petition for relief
in this court. 	The Debtor did not list the Renunciation in his chapter 7 Schedules or the
Statement of Financial Affairs.
Between the date the Debtor signed the Renunciation and November 15, 2004, the
Debtor initiated litigation in Pima County, Arizona, in the District Court and in the United
States District Court for the District of Wyoming, all in an attempt to overturn the Default
Judgment. His efforts were unsuccessful.
Conclusions of Law
The Trustee seeks to avoid the filing of the Renunciation by the Debtor as a fraudulent
conveyance under 11 U.S.c. § 548(a)(l) & (2)1, which state:
The trustee may avoid any transfer of an interest of the debtor in
property ... that was made or incurred on or within one year before the date
of the filing of the petition, if the debtor voluntarily or involuntarily
(A) made such transfer ... 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
(B) received less than a reasonably equivalent value in exchange for
such transfer ... and was insolvent on the date that such transfer was made .
. . or became insolvent as a result of such transfer.
The determinative question in this case is whether the Renunciation was a transfer of
1All references to the Bankruptcy Code are to the law in effect prior to the enactment
of the Bankruptcy Abuse Prevention and Consumer Protection Act.
3
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an interest in property.2 	In the absence of controlling federal law, a debtor's interest in
property is determined by applicable state law (in this case Wyoming law). 	Barnhill v.
Johnson, 503 V.S. 393, 112 S. Ct. 1386, 1389 (1992). 	What constitutes a transfer is a
question of federal bankruptcy law. Id.
The filing of a disclaimer of a testamentary gift is treated under most states' probate
laws by application of the relation back doctrine. A valid disclaimer effectively causes the
interest disclaimed to be distributed as if the beneficiary did not survive the testator. 	The
testamentary gift passes to other devisees under the will or trust.
Several Circuit courts have addressed the issue. 	All have ruled that a disclaimer
operates as if the person disclaiming never possessed the property. The rulings are based on
the relation back doctrine and the policy that one cannot be compelled to accept a gift. The
relation back doctrine treats the property as though the disclaimant never owned an interest
in the property disclaimed, and therefore, there can be no transfer. In re Bright, 241 B.R.
664, 672 (9th Cir. BAP 1999) (based on Washington law); Simpson v. Penner (In re
Simpson), 36 F.3d 450,453 (5th Cir. 1994) (applying Texas law); Jones v. Atchison (In re
Atchison), 925 F.2d 209,211-212 (7th Cir. 1991) (applying Illinois law).
Some bankruptcy courts find the relation back argument circuitous, focusing instead
on whether the relation back doctrine is in itself the functional equivalent of a transfer under
2The parties to this case did not advise the court whether the Debtor filed the
Renunciation prior to or after he filed the bankruptcy petition, both of which occurred on
November 15, 2004. The court assumes the filing of the Renunciation occurred prior to the
bankruptcy filing because otherwise, the testamentary gift would be property of the estate
under 11 V.S.c. § 541(a)(5).
4
an interest in property.2 	In the absence of controlling federal law, a debtor's interest in
property is determined by applicable state law (in this case Wyoming law). 	Barnhill v.
Johnson, 503 V.S. 393, 112 S. Ct. 1386, 1389 (1992). 	What constitutes a transfer is a
question of federal bankruptcy law. Id.
The filing of a disclaimer of a testamentary gift is treated under most states' probate
laws by application of the relation back doctrine. A valid disclaimer effectively causes the
interest disclaimed to be distributed as if the beneficiary did not survive the testator. 	The
testamentary gift passes to other devisees under the will or trust.
Several Circuit courts have addressed the issue. 	All have ruled that a disclaimer
operates as if the person disclaiming never possessed the property. The rulings are based on
the relation back doctrine and the policy that one cannot be compelled to accept a gift. The
relation back doctrine treats the property as though the disclaimant never owned an interest
in the property disclaimed, and therefore, there can be no transfer. In re Bright, 241 B.R.
664, 672 (9th Cir. BAP 1999) (based on Washington law); Simpson v. Penner (In re
Simpson), 36 F.3d 450,453 (5th Cir. 1994) (applying Texas law); Jones v. Atchison (In re
Atchison), 925 F.2d 209,211-212 (7th Cir. 1991) (applying Illinois law).
Some bankruptcy courts find the relation back argument circuitous, focusing instead
on whether the relation back doctrine is in itself the functional equivalent of a transfer under
2The parties to this case did not advise the court whether the Debtor filed the
Renunciation prior to or after he filed the bankruptcy petition, both of which occurred on
November 15, 2004. The court assumes the filing of the Renunciation occurred prior to the
bankruptcy filing because otherwise, the testamentary gift would be property of the estate
under 11 V.S.c. § 541(a)(5).
4
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federal law. Those courts conclude the beneficiary owned an interest in property that was
effectively divested upon the filing of the disclaimer. 	In re Kloubec, 247 B.R. 246, 256
(Bankr. N.D. Iowa 2000), aff'd 268 B.R. 173 (N.D. Iowa 2001); In re Brajkovic, 151 B.R.
402,405 (Bankr. W.D. Tex. 1993) (disclaimer functions as a mode of parting with property
under § 101(54».
For purposes of this case, the law in the Tenth Circuit is controlling. 	In the case of
Hoecker v. United Bank of Boulder, 476 F.2d 838 (lOth Cir. 1973), the Circuit Court of
Appeals for the Tenth Circuit discussed the issue in the context of Colorado probate law and
federal bankruptcy law. That court ruled that the property gifted under the will did not vest
in the debtor, but rather the valid disclaimer operated to pass the property directly from the
testator to the other beneficiaries. Id. at 841. The court concluded there was no transfer of
an interest in property because the effect of the relation back provision was that the debtor
never owned the interest. Judge William Holloway, in his dissent, concluded the disclaimer
was a transfer under 11 U .S.C. § 1(30) of the Bankruptcy Act.
Under Wyoming's Probate Code, "[a]ny person may disclaim any interest in property
which without a disclaimer he would receive by gift, bequest, devise, inheritance, beneficiary
designation, the exercise of a power of appointment or would pass by right of survivorship."
Wyo. Stat. Ann. § 2-1-401(a) (LexisNexis 2006). 	The disclaimer is an "irrevocable and
unqualified refusal by a person to accept an interest in property." Wyo. Stat. Ann. § 2-1-
402(a)(ii). Wyoming law also contains a relation back provision to the time of death of the
5
federal law. Those courts conclude the beneficiary owned an interest in property that was
effectively divested upon the filing of the disclaimer. 	In re Kloubec, 247 B.R. 246, 256
(Bankr. N.D. Iowa 2000), aff'd 268 B.R. 173 (N.D. Iowa 2001); In re Brajkovic, 151 B.R.
402,405 (Bankr. W.D. Tex. 1993) (disclaimer functions as a mode of parting with property
under § 101(54».
For purposes of this case, the law in the Tenth Circuit is controlling. 	In the case of
Hoecker v. United Bank of Boulder, 476 F.2d 838 (lOth Cir. 1973), the Circuit Court of
Appeals for the Tenth Circuit discussed the issue in the context of Colorado probate law and
federal bankruptcy law. That court ruled that the property gifted under the will did not vest
in the debtor, but rather the valid disclaimer operated to pass the property directly from the
testator to the other beneficiaries. Id. at 841. The court concluded there was no transfer of
an interest in property because the effect of the relation back provision was that the debtor
never owned the interest. Judge William Holloway, in his dissent, concluded the disclaimer
was a transfer under 11 U .S.C. § 1(30) of the Bankruptcy Act.
Under Wyoming's Probate Code, "[a]ny person may disclaim any interest in property
which without a disclaimer he would receive by gift, bequest, devise, inheritance, beneficiary
designation, the exercise of a power of appointment or would pass by right of survivorship."
Wyo. Stat. Ann. § 2-1-401(a) (LexisNexis 2006). 	The disclaimer is an "irrevocable and
unqualified refusal by a person to accept an interest in property." Wyo. Stat. Ann. § 2-1-
402(a)(ii). Wyoming law also contains a relation back provision to the time of death of the
5
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decedent, and the recipient of the gift never gains possession of the disclaimed property.
Norman v. Schulte (In re Schulte), 107 B.R. 763, 764 (Bankr. D. Wyo. 1989). 	Under
Wyoming Statutes Annotated § 2-1-404 (a)(ii), the "interest disclaimed passes under the
residuary clause of transferor's will if he died prior to the disclaimer," and "[i]f the
disclaimant is a residuary beneficiary under the will the interest disclaimed passes as though
the disclaimant did not survive the transferor."
Wyoming law is similar to that of Colorado. Although some of the traditional badges
of fraud are evident in this case, the court is constrained from ruling in favor of the Trustee
by the ruling in Hoecker. 	IT IS, THEREFORE, ORDERED that the defendants shall have
judgment as a matter of law on the Trustee's complaint. 	The court will issue a separate
Judgment.
DATED this ~ day of October, 2006.
Service to:
Anthony Wendtland
Ronald Jurovich
By the Court
6
decedent, and the recipient of the gift never gains possession of the disclaimed property.
Norman v. Schulte (In re Schulte), 107 B.R. 763, 764 (Bankr. D. Wyo. 1989). 	Under
Wyoming Statutes Annotated § 2-1-404 (a)(ii), the "interest disclaimed passes under the
residuary clause of transferor's will if he died prior to the disclaimer," and "[i]f the
disclaimant is a residuary beneficiary under the will the interest disclaimed passes as though
the disclaimant did not survive the transferor."
Wyoming law is similar to that of Colorado. Although some of the traditional badges
of fraud are evident in this case, the court is constrained from ruling in favor of the Trustee
by the ruling in Hoecker. 	IT IS, THEREFORE, ORDERED that the defendants shall have
judgment as a matter of law on the Trustee's complaint. 	The court will issue a separate
Judgment.
DATED this ~ day of October, 2006.
Service to:
Anthony Wendtland
Ronald Jurovich
By the Court
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