When a bankruptcy petition is filed under Chapter 7, an estate is created. Unless the property is otherwise exempt, all of the debtor’s property belongs to the estate. The Chapter 7 Trustee is then required to sell the property to pay creditors. In a recent case, a debtor was a sole trustee of a real estate trust and the real estate was owned in the name of the realty trust. But in this case, Massachusetts Bankruptcy Judge Robert Somma held that the property belonged to the debtor’s Chapter 7 estate.
The case involved property in Malden. The trust was created by the debtor and the declaration of trust provided that: “This instrument [the declaration of trust] may be amended at any time by a written instrument signed by the trustees and acknowledged by one or more of them.” It also provided that the trustee could terminate the trust at any time. If he elected to terminate the trust, he was obligated to disburse the trust property to the beneficiaries (included other family members, but not the debtor).
The Chapter 7 Trustee argued that the debtor’s interest in the property was not limited to the language of the trust declaration. He argued that based on Massachusetts law, the reservation to the trustee of the right to amend the trust and to terminate the trust warranted treating the trust assets as the trustee/debtor’s own property.
Judge Somma did not completely agree. The “trustee’s power to terminate the trust is of no avail to the [Chapter 7 Trustee] because the trust specifies that upon termination, the trustee is obligated to transfer the trust assets to the beneficiaries.” However, the fact that the trustee retained an unlimited right to amend the trust, and ultimately, had the power to control the trust assets to the exclusion of the trust beneficiaries, required that the property held in the name of the trust be viewed as the debtor’s, and ultimately, the Chapter 7 estate’s.
