Arizona Bankruptcy Attorney Blog

We tell clients this repeatedly.

Why mention this? It's simple: If a creditor (like a bank, for instance) has direct access to your bank account (as banks often do), then you can consider your checking balance dumped into the rancor pit as your creditor laughs their trademarked Jabba the Hutt laugh above you.

You know...

The pit? The one with a Rancor in it? From Star Wars?

Okay, let's put it this way then: If you owe money to a bank where you also store money in a savings or checking account, there's all kinds of technicalities that allow them to siphon the money out of your account without your knowledge or approval. If you owe money and have not made payments they will seize the opportunity, it's a proven fact. It is what they do.

If you're already filing a Bankruptcy then you may have glossed over some of the information you've been given because there's a lot relating to a bankruptcy that's occasionally hard to digest. This isn't one of those things you can sit around to consider; this is an immediate call to action that should have you setting up a bank account elsewhere ASAP.

You can't afford to wait for someone to remind you that you might want to keep your money, so take care of it before the bank makes it a moot point.

If you're still looking into your options to resolve your financial issues and Bankruptcy is on the list, you MUST keep this in mind. DO NOT bank where you owe money if you are filing a Bankruptcy in Arizona (or anywhere else for that matter), because the bank will swim around in your funds like Scrooge McDuck in his money bin, take photos of themselves with YOUR money and leave a bunch of zeroes lying around in your account.

In order to file a Bankruptcy, you'll have to stop paying your creditors and that includes credit cards. Often people will hesitate because they've worked so diligently to protect their credit score and bank accounts to date that doing things like not paying sounds ludicrous or dishonest. If you have misdirected feelings about protecting an unsecured creditor (this counts for ANY unsecured creditor) you need to stop paying them anyway prior to filing because failing to do so means that creditor will be sued by the trustee, which is a bigger hassle for everyone involved. Even the creditor that you were trying to protect.

If there's just one thing you take to heart from this, let it be that you won't be banking where you owe money when you file Bankruptcy. You need a bank account just on general principle, but you need a bank you can rely upon to store money instead of taking it.

It just depends on how much you care about keeping your money.

I know that a lot of bankruptcy lawyers read my blogs, and some of them read my blogs so they can find bankruptcy topics and bankruptcy analysis for their own blogs.

How do I know? Well, mostly because they told me!

But there's a very, very smart bankruptcy lawyer named Jay Fleischman who is a nationally known marketing and practice management expert, and he's bringing a road show to Phoenix, along with Cathy Moran, another well-known name in the consumer bankruptcy field.

You'll notice that part of the seminar is about improving service to consumer debtor bankruptcy clients, and I'm all over that!

So I've already signed up.

And if you practice consumer bankruptcy law in Arizona, and you want to hear from the best how to make your practice run more smoothly, and how to harvest more client happiness (I want all my clients to be happy all the time, although that's an impossible goal; but if I pick up one idea I can apply to my practice as a bankruptcy lawyer in Arizona, that's worth it to me!), you'll sign up also.

Here's the information about the seminar, and I'm as serious as I can be: be there or be square, if you're a consumer bankruptcy attorney in Arizona!

Truth in Advertising spoiler: Jay is a friend of mine. Mind you, he's so smart I'd tell bankruptcy lawyers about this anyway. But he's a great guy, and generous with his knowledge.

Moody's is in the business of predicting the future. It has algorithms and analysts who look at numbers and assign credit ratings to very big entities and deals (including the United States, most famously).

Warren Buffett is the media darling of billionaires, and he also is in the predicting the future business, because predicting the future, or causing the future, is the way you become a billionaire with a "b".

The reason I like this video is the following: it may provide comfort to smart business guys who beat themselves up because their business folded.

I routinely talk to gentlemen who tell me they've contemplated suicide while they were contemplating bankruptcy.

The guys who come into my office, obviously, have made one choice. Other folks opt for early-check out, which is probably the wrong choice.

Suicide is forever. Bankruptcy keeps you from buying a new house on credit for two years, or maybe three, depending on who you talk to.

So bankruptcy is a far more flexible remedy than suicide.

But back to our story.

If both Warren Buffett and Moody's failed to notice the gigantic real estate bubble in the United States, how should a poor little millionaire investor?

So if you were a poor little millionaire investor, don't beat yourself up.

An awful lot of doctors, lawyers, cpas, and business owners believed that real estate investing was the way to go, and all of them were and are very smart people.

So don't let one little error in judgment make you believe you're a loser.

Just file your bankruptcy, and get on with your life.

As soon as you get your debts behind you, you'll feel better.

When you're a newspaper publisher and revenues drop like a rock during a depression, you'd naturally expect your bank to work with you, especially if you'd had a long and productive working relationship with that bank.

Wrong, Insolvency Breath!

Robert Chandler, Publisher of the Bend Bulletin, had some cranky things to say when Bank of America talked about how much it had tried to help the newspaper.

One phrase in the article that I particularly liked was ""They tried to work with us all right--by doubling our interest rate."

See, banks don't like defaults. And big banks really don't like defaults, because once they charge off a loan (an internal bank accounting activity), they have to reserve against that bad loan, and they can't loan as much money.

And if a bank loans less money, it makes less interest on that un-loaned money.

And it makes less profit.

And since banks are for-profit institutions, they tend to be real hard drivers in a negotiation, and sometimes seem irrationally aggressive.

Here's why.

Banks don't care.

They don't have emotions.

They don't care if people will lose jobs when a business closes; that's not their problem, mon.

So if you're on the wrong side of a default with a bank, the bank is not going to be warm and fuzzy.

Practice Pointer: a bank starts warm and fuzzy during a negotiation, in order to get more collateral and additional personal guarantees, and a payment plan that starts small and ramps up to an unpayable amount (they've got your records, right? they know what you can pay!) And that means that when the unavoidable default arrives, the bank is holding all the aces.

Just a thought.

p.s. if you hear the words, "We're from the bank and we're here to help you," you will probably not have a very good day.

Here in Arizona, we live according to the Rule of the 9th Circuit; and I just read a nice article that discusses a 9th Circuit Case which analyzes whether a disclaimer of an inheritance is a fraudulent transfer.

The article was written By John T. Brooks, partner, and Samantha E. Weissbluth, senior counsel and Aubrey Refuerzo, summer associate, Foley & Lardner LLP, Chicago.

I think they did a great job!

And here's the text of the case they discussed in their article:

2009 U.S. App. LEXIS 2260,*;555 F.3d 790;
Bankr. L. Rep. (CCH) P81,413;61 Collier Bankr. Cas. 2d (MB) 52

In re: JOHN M. COSTAS and RACHELLE M. COSTAS, Debtors. MAUREEN GAUGHAN, CHAPTER 7 TRUSTEE, Appellant, v. THE EDWARD DITTLOF REVOCABLE TRUST, and RACHELLE M. COSTAS, Appellees.

No. 06-16520

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

555 F.3d 790; 2009 U.S. App. LEXIS 2260; Bankr. L. Rep. (CCH) P81,413; 61 Collier Bankr. Cas. 2d (MB) 52

May 15, 2008, Argued and Submitted, San Francisco, California

February 6, 2009, Filed

PRIOR HISTORY: [*1]

Appeal from the Ninth Circuit Bankruptcy Appellate Panel. BAP No. AZ-05-1440. Montali, Smith, and Ahart, Bankruptcy Judges, Presiding.
Gaughan v. Edward Dittlof Revocable Trust (In re Costas), 346 B.R. 198, 2006 Bankr. LEXIS 1514 (B.A.P. 9th Cir., 2006)

COUNSEL: Paul Sala, Allen & Sala, P.L.C., Phoenix, Arizona, for the appellant.

Mark A. Bregman, Bregman & Burt, Scottsdale, Arizona, for the appellees.

JUDGES: Before: Andrew J. Kleinfeld, N. Randy Smith, Circuit Judges, and Richard Mills, District Judge. * Opinion by Judge Mills.
*

The Honorable Richard Mills, United States District Judge for the Central District of Illinois, sitting by designation.

OPINION BY: Richard Mills

OPINION

MILLS, District Judge:

The Bankruptcy Code's federal fraudulent conveyance provision allows a trustee to avoid "any transfer . . . of an interest of the debtor in property" within a two year reach back period where the transfer was actually or constructively fraudulent. 11 U.S.C. § 548(a)(1). The question in this case is whether an Arizona disclaimer qualifies as a "transfer . . . of an interest of the debtor in property." Because we answer this question in the negative, the Bankruptcy Appellate Panel's refusal to avoid the disclaimer under § 548 is affirmed.

I. FACTS

On October 18, 2001, Edward P. Dittlof ("Dittlof") created the Edward Dittlof Revocable Trust ("Trust") [*2] under Arizona law. The Trust provided that upon Dittlof's death, the Trust property would be distributed to several of Dittlof's children, including Rachelle Costas ("Costas"). Should a beneficiary die prior to distribution, the beneficiary's children would take the share.

Dittlof died on February 25, 2002, leaving Costas an interest worth at least $ 34,800. Costas, however, refused to accept it and, on November 7, 2002, executed a disclaimer under Arizona law to relinquish her claims to the Trust property.

Shortly thereafter, on December 3, 2002, Costas filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code ("the Code"). Maureen Gaughan, the Chapter 7 trustee ("Trustee"), sought to avoid Costas' disclaimer of the Trust property under 11 U.S.C. § 548. Although a previous BAP panel decision had rejected application of § 548 to similar state law disclaimers, Wood v. Bright (In re Bright), 241 B.R. 664 (9th Cir. BAP 1999), the Trustee argued that the ruling had been undermined by the Supreme Court's decision in Drye v. United States, 528 U.S. 49, 120 S. Ct. 474, 145 L. Ed. 2d 466 (1999). The Bankruptcy court, however, found Drye distinguishable. The Trustee appealed and, in a thorough opinion, the BAP [*3] also distinguished Drye and adhered to its prior decision in Bright. Gaughan v. Edward Dittlof Revocable Trust (In re Costas), 346 B.R. 198 (9th Cir. 2006). The Trustee now appeals from this decision.

II. STANDARD OF REVIEW

"On appeal this court reviews decisions of the BAP de novo, and thus reviews the bankruptcy court's decision under the same standards used by the BAP." Sigma Micro Corp. v. Healthcentral.com (In re Healthcentral.com), 504 F.3d 775, 783 (9th Cir. 2007) (citation and internal quotations omitted). Therefore, factual findings are reviewed for clear error and legal conclusions de novo. Id.

III. ANALYSIS

The federal fraudulent conveyance provision of the Code provides that "[t]he trustee may avoid any transfer . . . of an interest of the debtor in property . . . that was made . . . within two years before the date of the filing of the petition . . ." where the transfer involved actual or constructive fraud. 11 U.S.C. § 548(a)(1). n1 The parties dispute whether a disclaimer executed under Arizona law qualifies as a "transfer . . . of an interest of the debtor in property."

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The Code also contains a provision allowing the trustee to "borrow" a state's fraudulent conveyance provision. 11 U.S.C. § 544(b). [*4] Most courts, however, have held that state fraudulent transfer rules do not reach disclaimers that relate back. See, e.g., Essen v. Gilmore, 259 Neb. 55, 607 N.W.2d 829 (2000) ("[I]t is the majority view that a renunciation under the applicable state probate code is not treated as a fraudulent transfer of assets under the [Uniform Fraudulent Transfers Act], and creditors of the person making a renunciation cannot claim any rights to the renounced property in the absence of an express statutory provision to the contrary."); Sara L. Johnson, Annotation, Creditor's right to prevent debtor's renunciation of benefit under will or debtor's election to take under will, 39 A.L.R.4th 633 (1985); see also In re Popkin & Stern, 223 F.3d 764, 768-69 (8th Cir. 2000) (analyzing Missouri law under § 544(b) and concluding that a disclaimer could not be avoided as a fraudulent transfer).
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A. "Property" and Arizona Disclaimer Law

We begin with the two relevant and disputed terms from § 548: "transfer" and "property" (or, more broadly, "an interest . . . in property"). The Code defines "transfer" expansively, reaching "each mode, direct or indirect, absolute or conditional, voluntary or involuntary of disposing [*5] of or parting with -- (i) property; or (ii) an interest in property." 11 U.S.C. § 101(54). Whether a particular action constitutes a "transfer" is a matter of federal law. Walker v. First Security Bank of Idaho, N.A. (In re Walker), 77 F.3d 322, 323 (9th Cir. 1996) (quoting Barnhill v. Johnson, 503 U.S. 393, 397, 112 S. Ct. 1386, 118 L. Ed. 2d 39 (1992)). However, as the definition makes clear, a "transfer" cannot occur without "property" or "an interest in property." See § 101(54). Thus, the key issue in the case is elucidating the meaning of "an interest . . . in property." See Frierdich v. Mottaz, 294 F.3d 864, 867 (7th Cir. 2002) ("Although the definition of transfer is obviously federal, its references to 'property' and 'interests in property' require an analysis of whether a property interest was created under state law.")

The Code does not define "property" or "an interest . . . in property." Rather, "Congress has generally left the determination of property rights in the assets of a bankrupt's estate to state law," Butner v. United States, 440 U.S. 48, 54, 99 S. Ct. 914, 59 L. Ed. 2d 136 (1979), meaning that "[i]n the absence of any controlling federal law, 'property' and 'interests in property' are creatures of state law." Barnhill, 503 U.S. at 398 [*6] (citations omitted). Therefore, to understand the definition and scope of "property," we turn to Arizona law.

Like other states, Arizona allows beneficiaries to renounce their interests in trusts through use of a disclaimer. See Az. Rev. Stat. § 14-2801 (2004) (repealed). n2 A "disclaimer" n3 has been defined as "the refusal to accept an interest in or power over property." Uniform Disclaimer of Property Interests Act § 2(3) (1999). At all relevant times, Arizona law required disclaimers to be filed with the court and a representative or fiduciary of the decedent "not later than nine months" after the effective date of the instrument. Az. Rev. Stat. § 14-2801(B), (C) (testamentary and non-testamentary, respectively). The disclaimer itself also had to "describe the property or interest disclaimed, declare the disclaimer and its extent and be signed by the disclaimant." § 14-2801(F). Where the beneficiary had previously made "[a]n assignment, conveyance, encumbrance, pledge or transfer of the property or interest or a contract" or accepted certain benefits or interests in the property, the right to disclaim was barred. § 14-2801(J), (M). The Trustee concedes the validity of Costas' disclaimer [*7] under Arizona law. Costas, 346 B.R. at 200.

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Effective 2005, Arizona repealed § 14-2801 in favor of a statute based on the Uniform Disclaimer of Property Interest Act (1999) (now incorporated into the Uniform Probate Code as Section 11). Although the Uniform Act dropped the phrase "relation back", it did not discard its application. See Uniform Probate Code § 2-1106, cmt. ("This Act continues the effect of the relation back doctrine, not by using the specific words, but by directly stating what the relation back doctrine has been interpreted to mean.").3

Statutes also frequently refer to a "disclaimer" as a "renunciation." See, e.g., Mapes v. United States, 15 F.3d 138, 140 (9th Cir. 1994), abrogated by Drye v. United States, 528 U.S. 49, 120 S. Ct. 474, 145 L. Ed. 2d 466 (1999) (construing "renunciation" under a prior version of § 14-2801).
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A properly executed disclaimer carries a significant advantage for an insolvent debtor: it shields the disclaimed interest from the disclaimant's creditors. Arizona achieved this protection through § 14-2801(G), which provides that "[a] disclaimer relates back for all purposes to the date of death of the decedent." This relation-back rule, a common feature in many states, is a legal [*8] fiction that retroactively eliminates any property interest that a disclaimant previously held in the disclaimed property. As the Supreme Court has explained, "an effective disclaimer . . . relate[s] back to the moment of the original transfer of the interest being disclaimed, having the effect of canceling the transfer to the disclaimant ab initio and substituting a single transfer from the original donor to the beneficiary of the disclaimer." United States v. Irvine, 511 U.S. 224, 239, 114 S. Ct. 1473, 128 L. Ed. 2d 168 (1994). "An important consequence of treating a disclaimer as an ab initio defeasance is that the disclaimant's creditors are barred from reaching the disclaimed property." Id. at 239-240.

In short, Arizona's relation-back rule says that a disclaimant neither transfers nor possesses an interest in disclaimed property and thus creditors cannot reach the disclaimed interest.

B. State Law Deference

To summarize, section 548 only applies to interests in "property," as defined by state law, and Arizona law says that Costas had no property interest in the disclaimed property. The remaining question, and the problematic one, is how to translate this state law rule back into the bankruptcy context.

Ordinarily, [*9] bankruptcy courts look to Butner to answer this question. There, the Supreme Court addressed a circuit split over the ownership of rents. Butner, 440 U.S. at 51-54. Some circuits followed state law in determining who received post-petition rents, whereas other circuits fashioned a federal rule of equity to allow mortgagees to receive the rents. Id. Ultimately, the Court rejected the federal equity rule, explaining that "Congress has generally left the determination of property rights in the assets of a bankrupt's estate to state law." Id. at 54. Thus, "[u]nless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding." Id. at 55.

Applying the principle of Butner to similar disclaimers, several appellate courts have found § 548 inapplicable. Simpson v. Penner (In re Simpson), 36 F.3d 450 (5th Cir. 1994) (Texas law); Jones v. Atchison (In re Atchison), 925 F.2d 209 (7th Cir. 1991) (Illinois law); Hoecker v. United Bank of Boulder, 476 F.2d 838 (10th Cir. 1973) (concluding that Colorado disclaimer rules preclude use of the fraudulent conveyance provision [*10] contained in § 67(d)(2) of the Bankruptcy Act); see also In re Bright, 241 B.R. 664 (9th Cir. BAP 1999) (Washington law). For example, the Seventh Circuit took a broad view of Butner, explaining that "[a]ll applicable state law must be construed to determine whether a debtor possesses a property interest," including the relation back rule. Atchison, 925 F.2d at 212. The contrary view, the court found, "fail[ed] to give full application to the relation back doctrine under applicable state laws." Id. at 211. Based on this deferential approach to state law, the Atchison court concluded that a disclaimer was not a "transfer of an interest in property" subject to avoidance under § 548(a). Id. at 212.

Though most courts have found that Butner principles preclude avoidance of disclaimers under § 548, this line of authority has been thrown into doubt by Drye v. United States, 528 U.S. 49, 120 S. Ct. 474, 145 L. Ed. 2d 466 (1999). n4 In Drye, a tax debtor inherited his mother's estate after the IRS had obtained a tax lien on all his "property and rights to property." Id. at 52-53. Relying on Arkansas' relation-back disclaimer rule, Drye disclaimed his inheritance and argued that he had no property to which the IRS lien could attach. [*11] Id. at 53. The Supreme Court, however, rejected Drye's theory and held that the tax lien attached to disclaimed property despite state law relation-back rules. Id. at 52. After discussing the breadth of federal tax lien law, the Court described its analysis: "We look initially to state law to determine what rights the taxpayer has in the property the Government seeks to reach, then to federal law to determine whether the taxpayer's state-delineated rights qualify as 'property' or 'rights to property' within the compass of the federal tax lien legislation." Id. at 58. Although Drye asserted that he had nothing but the right to reject a gift, the Supreme Court disagreed, reasoning that a rejected gift returns to the donor, whereas a disclaimer channels the property to another person. Id. Finding this power to channel a sufficient state law interest to constitute "property" under the federal tax lien provisions, the Court held that the lien attached despite Drye's refusal to take the property. Id. at 61.

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We are the first circuit court to address Drye's impact on § 548 avoidance. Lower courts have split on the issue, compare In re Faulk, 281 B.R. 15 (Bankr. W.D. Okla. 2002); In re Nistler, 259 B.R. 723 (Bankr. D. Or. 2001); [*12] In re Kolb, 267 B.R. 861, 866-67 (N.D. Cal. 2001), rev'd on other grounds, 326 F.3d 1030 (9th Cir. 2003) with In re Schmidt, 362 B.R. 318, 322-23 (W.D. Tex. 2007) (suggesting that Simpson may be invalid after Drye); In re Kloubec, 247 B.R. 246 (Bankr. N.D. Iowa 2000), aff'd on other grounds, 268 B.R. 173 (N.D. Iowa 2001), as have commentators, compare David B. Young, The Intersection of Bankruptcy and Probate, 49 S. Tex. L. Rev. 351, 384-88 (2007) (concluding that "[t]ax decisions do not alter the rule that a prepetition disclaimer that is unassailable under state law should not become avoidable once a bankruptcy petition has been filed"); Kevin A. White, A Clash of Expectations: Debtors' Disclaimers of Property in Advance of Bankruptcy, 60 Wash. & Lee L. Rev. 1049, 1085 (2003) (concluding that Drye does not extend to the bankruptcy context), with Jon Finelli, Comment, In re Costas: The Misapplication of Section 548(a) to Disclaimer Law, 14 Am. Bankr. Inst. L. Rev. 567, (2006) (criticizing the BAP's decision in this case); David A. Lander, Does the Supreme Court Decision in Drye Mean that a Disclaimer of Inheritance Is a Fraudulent Conveyance, Norton Bankr. L. Adviser, No. 12 (Dec. 2002) [*13] (suggesting that, after Drye, courts should reassess the majority rule because "state law disclaimers are not the types of state law property rights to which the bankruptcy courts must defer in applying or not applying § 548).
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The Trustee urges us to extend Drye to the bankruptcy context and recognize the "right to channel" as an "interest . . . in property" for purposes of the Code. The Trustee's argument is that Drye recognizes a "right to channel" interest that constitutes "property" not just for tax lien cases, but as a matter of federal law. Further, the Trustee suggests that Drye accords with bankruptcy policy by increasing the size of the debtor's estate. In contrast, Costas requests that we adhere to the more deferential approach of Butner and treat the disclaimer as Arizona would.

The Trustee's argument has some force: if the "right to channel" has been recognized as a "property" interest for one federal statute, why not for the other? Nevertheless, we believe that Drye is distinguishable, both factually and legally, and that its adoption in the bankruptcy context would, in any event, be inappropriate.

First, Drye is distinguishable based on timing issues. Although Drye, like [*14] this case, involved a collision between federal law and state relation back doctrines, the impact between the two occurred at a different time. In Drye, the tax lien was already in place prior to the execution of the disclaimer. Id. at 52-53. Thus, before the taxpayer attempted to execute his disclaimer, the federal government already had an interest in the subject property. Application of the state law fiction would have stripped the government of this interest. Id.

In contrast, the disclaimer here occurred pre-petition, meaning that the retroactive divestment of property interests occurred prior to the bankruptcy estate gaining any interests in the right to disclaim. Therefore, the state law did not operate to defeat any pre-existing interests. Rather, the situation in Drye is more analogous to a post-petition disclaimer, where a debtor invokes the disclaimer protections of state law only after the creation of the bankruptcy estate. In cases of post-petition disclaimers, courts have generally included disclaimed property in the estate, reasoning that the right to disclaim itself belongs to the estate as of the time of filing. See 11 U.S.C. § 541(a)(5)(A); In re Scott, 385 B.R. 709 (Bankr. D. Neb. 2008). [*15] This context mirrors Drye because in both situations full deference to the state's disclaimer rules would strip parties of pre-existing interests. Thus, Drye accords well with the post-petition situation, but not with pre-petition disclaimers where no prior interests exist.

Second, Drye is distinguishable based on its legal context. Indisputably, Drye is, first and foremost, a tax lien case. The Court's language repeatedly stressed this limitation, see Drye, 528 U.S. at 52 ("This case concerns the respective provinces of state and federal law in determining what is property for purposes of federal tax lien legislation."); id. ("the disclaimer did not defeat the federal tax liens) (internal quotations omitted); (explaining the issue as "whether [Drye's] interest in his mother's estate constituted 'property' or 'rights to property' under § 6321"), and the cases cited were tax cases, id. at 59 (collecting tax cases to demonstrate that neither state exemption nor disclaimer rules interfere with tax collection). Indeed, the Court itself even distinguished the case from the closely analogous gift tax regime. Id. at 57 ("The absence of any recognition of disclaimers in §§ 6321, 6322, 6331(a), and [*16] 6334(a) and (c), the relevant tax collection provisions, contrasts with § 2518(a) of the Code, which renders qualifying state-law disclaimers 'with respect to any interest in property' effective for federal wealth-transfer tax purposes and those purposes only."); see also id. at 57 n.3.

Admittedly, similarities exist between the tax lien statute and the Code, as both broadly rely on state law to define "property." Nevertheless, tax lien rules do not translate directly into bankruptcy rules. See, e.g., Musolino v. Sinnreich (In re Sinnreich), 391 F.3d 1295, 1297-99 (11th Cir. 2004) (refusing to apply United States v. Craft, 535 U.S. 274, 122 S. Ct. 1414, 152 L. Ed. 2d 437 (2002), an extension of Drye, in the bankruptcy context). In the tax lien context, collection is the primary focus. United States v. Kimbell Foods, Inc., 440 U.S. 715, 734, 99 S. Ct. 1448, 59 L. Ed. 2d 711 (1979). This vital function often "justifies the extraordinary priority accorded federal tax liens . . . ." Id. Indeed, the Supreme Court has repeatedly construed tax lien provisions to permit the government to reach property beyond the grasp of other creditors. See, e.g., Craft, 535 U.S. at 276 (finding that federal tax lien attached to interest in entireties property under Michigan [*17] law); United States v. Security Trust & Sav. Bank of San Diego, 340 U.S. 47, 51, 71 S. Ct. 111, 95 L. Ed. 53, 1950-2 C.B. 151 (1950) ("[W]e hold that tax liens of the United States are superior to the inchoate attachment lien of [a state law creditor] . . . ." ).

This purpose contrasts sharply with the policy of bankruptcy law, which largely respects substantive state law rights, n5 neither granting a creditor new rights in the debtor's property nor taking any away. Raleigh v. Ill. Dep't of Rev., 530 U.S. 15, 20, 120 S. Ct. 1951, 147 L. Ed. 2d 13 (2000) ("Creditors' entitlements in bankruptcy arise in the first instance from the underlying substantive law creating the debtor's obligation, subject to any qualifying or contrary provisions of the Bankruptcy Code. The 'basic federal rule' in bankruptcy is that state law governs the substance of claims . . . .") (internal citations omitted). Indeed, the Court in Butner expressly invoked this goal of achieving "[u]niform treatment of property interests by both state and federal courts within a State . . . ." Butner, 440 U.S. at 55. By replicating state law rights, the Court hoped to (1) reduce uncertainty, (2) discourage forum shopping, and (3) "prevent a party from receiving 'a windfall merely by reason of the happenstance [*18] of bankruptcy.'" Id. (quoting Lewis v. Mfrs. Nat. Bank, 364 U.S. 603, 81 S. Ct. 347, 5 L. Ed. 2d 323 (1961)). Extending the rule in Drye to the bankruptcy context, however, would undermine all of these goals. Uncertainty would increase because disclaimers, though generally valid, would lose effect in bankruptcy. Second, forum shopping would increase because creditors of disclaimants would have an incentive to push for bankruptcy in order to gain an interest in otherwise protected property. Finally, many creditors, including those in this case, would receive a windfall: although the disclaimed property was absolutely protected under state law, they would receive a share of the property solely because Costas filed for bankruptcy within two years of her disclaimer. Thus, based on the concerns set out in Butner, little justification exists for permitting creditors to reach property that, but for the fortuity of a bankruptcy filing, would remain beyond their grasp.

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For a thorough exploration of the implications of this policy on bankruptcy law, see Thomas H. Jackson, The Logic and Limits of Bankruptcy Law (1986).
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Further, the inappropriateness of extending Drye is reinforced by comparing the Code's treatment of exemptions [*19] to the treatment under the federal tax lien statute. In Drye, the Court stressed the breadth of "property" under § 6331 of the Internal Revenue Code by noting that the tax lien statute recognized only a narrow range of exemptions, none of which mentioned disclaimers. Drye, 528 U.S. at 56-57. On this ground, the Court distinguished the gift tax statute, which explicitly incorporates an exception for disclaimers. Id. n6 While the Code lacks an express exemption for disclaimers like § 2518(a), its exemptions are nonetheless quite broad, allowing a debtor to take advantage of all available state law exemptions. 11 U.S.C. § 522; see also Owen v. Owen, 500 U.S. 305, 308, 111 S. Ct. 1833, 114 L. Ed. 2d 350 (1991). Again, this highlights the key difference between "property" for purposes of tax collection and for bankruptcy: the former largely trumps state law, the other tries to incorporate it.

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The estate tax employs the same exception for qualified disclaimers. See 26 U.S.C. § 2046.
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For these reasons, we find that Drye is distinguishable and we refuse to extend its logic to the bankruptcy context. Instead, we apply the principles of Butner and hold that a disclaimer, properly executed under Arizona law, is not a "transfer . [*20] . . of an interest of the debtor in property" for purposes of § 548.

C. The Existence of a "Federal Interest"

Having determined that Butner controls, we briefly consider the Trustee's arguments that the federal interest exception identified in Butner applies to override the normal rule of state law deference. n7 Butner, 440 U.S. at 55 (explaining that state law controls "[u]nless some federal interest requires a different result"). The Trustee identifies two such "federal interests." First, she proposes an interest in bankruptcy estate augmentation. However, as discussed in greater depth above, recognizing such a generic interest in expanding the debtor's property would, at least in this case, interfere with Butner's three goals of avoiding uncertainty, forum shopping, and windfall recoveries. As such, this interest is insufficient.

- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -7

Although Butner, rather than Drye, provides the proper rule for application in the first instance, it should be noted that Drye may still hold relevance in the bankruptcy context. As the Court explained in Butner, deference to a state's definition of "property" may be disregarded when a contrary federal interest exists. Where such an interest is identified, [*21] Butner drops out of the equation; therefore, the logic of Drye would likely control.

This also highlights the conceptual differences between Drye and Butner. In the bankruptcy context, a federal interest will not always exist; in contrast, tax collection is an omnipresent federal interest in the tax lien context.
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -

Second, the Trustee points out that § 548 is a federal rule of avoidance and, as such, constitutes an interest sufficient to override the normal state definitions of "property." While we agree that Congress certainly could have trumped state law with a specific federal law provision, the use of the general term "property" in § 548 belies any intent to do so. Congress premised § 548's application on the existence of "property" or "an interest . . . in property." Nothing suggests that these terms merit a special gloss simply because they appear in a federal avoidance provision. As such, we decline to depart from the normal interpretive rules of Butner.

IV. CONCLUSION

Applying Butner's deferential approach to state law, rather than the rule of Drye, we hold that a disclaimer, properly executed under Arizona law, does not qualify as the "transfer . . . of an interest of the debtor [*22] in property" for purposes of § 548. Therefore, the Bankruptcy Appellate Panel is affirmed.

I like to blog, and I was curious about WordPress as a platform.

It intimidated me at first, but after I played with it a little, I decided that I sort of like it!

Take a look at my Bankruptcy Crossroads Blog, and let me know what you think!

Many people can't make up their minds whether they should file a bankruptcy, but they can't make payments on their credit cards and pay for their mortgages, so they stop making payments on the credit cards (because, after all, the roof over your head is important when the weather starts hitting 117 degrees!).

Or they get fired, can't pay their credit cards, but won't qualify for relief under Chapter 7 of the Bankruptcy Code and the Means Test, because the Means Test is a six-month rolling look-back.

In both cases, people are curious about the date when they'll get sued by credit card companies and banks.

The answer is: it depends.

Some people go years without being sued, and some are sued three months after they stop making payments.

The reason is that internal lender policies determine when a credit card company will sue you, and those internal policies are subject to change over time.

Some companies are very quick on the trigger, and some are pretty relaxed and easy-going.

Frankly, it always surprises me when credit card companies sue, because that virtually guarantees that the defendant is going to file a bankruptcy.

And since the credit card company has to pay a hefty filing fee for the privilege of suing in an Arizona Court, it seems counterproductive to me for a credit card company to be quick on the trigger.

But some are, and some are not, and some are fast in one case, and slow in another.

Bear in mind that the statute of limitations is pretty substantial for unsecured credit card debt in Arizona, so that the plan of out-waiting a creditor is generally not a smart idea.

And when a credit card goes stale, the bank will generally sell the debt to somebody further down the food chain for pennies on the dollar, and they retail the bundle of debt further down the food chain, and eventually suits are filed by somebody.

And if they aren't filed quickly, they frequently get filed just prior to the lapse of the statute of limitations, because by then high interest rates and penalties, and fees on the fees on the fees, have transformed the ten thousand dollar debt into a seventy-five thousand dollar debt, and it makes more sense to sue on that amount, in any case.

But don't wait until you're sued to talk to me; and certainly don't wait until you're being garnished!

When should you talk to me?

On the first day you even consider taking money out of your retirement funds to pay your unsecured debt.

Seriously.

Uh. Yes. Heck yes. Heck yes with exclamation points.

I know that hope springs eternal in the human breast, but it's a bad idea to leave any debt, of any sort, off of your bankruptcy petition and schedules. If a creditor doesn't get actual notice by the drop dead date, that creditor may well not be affected by your Bankruptcy Discharge Order.

And if all of your other debts have been discharged, there's more available to that creditor when he sues you and garnishes you and liens your house. And that doesn't count the debtor's exam, which is less fun than a root canal!

And "charged off" doesn't mean you won't be sued on that debt; it's just an internal accounting phrase used by banks, and it has some bearing on how much money a bank can loan. It has no bearing on whether the bank can, or will, sue you.

A recent caller told Sean that he had been contemplating suicide because of his financial problems.

The only reason I mention this issue is that it crops up from time to time.

Ladies and Gentlemen, this is only money. And debt. And stuff.

I admit that a bankruptcy is a pain in the behind, but so is a root canal. And that didn't kill you, did it?

So relax out there, as best you can.

I'll do the best I can to make this process bearable.

You won't like it while it's happening, kinda like a knee replacement.

But then the pain goes away, and you know you made the right decision.

You won't believe this.

I know a lot of poor, starving lawyers who are going to go back to school to learn this job!

Aside from total bonehead maneuvers, like not listing a creditor or a substantial asset, the worst mistake you can make in your bankruptcy case is simply not filing it.

The reason is the same reason that Napoleon told his officers that they could ask him for troops, or ammunition, or horses, or anything they liked, but time.

Here's why time is your greatest enemy, or your best friend, depending on the situation and the choices you make: if you are paying minimum payments (let's make them $800 per month) and negatively amortizing (the debt is going up, not down, every month), you will never pay off your debt. Never.

And you will arrive at retirement (twenty-five years later) exhausted, broke, and sad. And you will buy titles from Amazon like "How To Cook Catfood Casserole; It's Not Really That Bad!"

If you take eight hundred dollars a month, and put half of it in a tax-sheltered retirement fund of your choice, and you do that for the same twenty-five years, you will retire with more than a million dollars, and spend your retirement laughing and singing, with two Margaritas, one for each hand.

Now, don't trust me. You don't know me, and I'm just a bankruptcy lawyer in Phoenix.

Instead, go find any old free, online retirement calculator on the Internet.

And plug in half the amount you are currently paying for your credit card debt, or any other unsecured debt you may have.

And move time forward by twenty-five years and see how much dough you have, with which you can...well, party!

And play with the time calculation; see how much you have left if you only save for ten years. Or five.

You'll discover that, as Napoleon suggested, time is valuable.

Because if you save longer, you'll have more left at the end, for your retirement.

Which means, in addition, you won't be knocking on the doors of your children and saying, "Remember me? Put a pillow on the couch! I'm heeeeere!"

Eventually, I'll succeed in educating debtors that their Chapter 7 Cases are not over when they receive their discharges.

What happens after a debtor gets the Bankruptcy Discharge Order that is the brass ring on the Bankruptcy Merry-Go-Round?

Well, the case is still open, so the Bankruptcy Trustee who was appointed in that case can finish administering it, and in a case with assets, it may be open for administrative purposes for five years.

But that's not today's topic.

Today's topic is the dreaded Random Audit, which can occur in either a Chapter 7 or a Chapter 13 Bankruptcy Case in Arizona.

And I've talked about that in my other blog, and my other other blog, so I won't beat it to death here.

All I'll say is this: if you are a debtor, and you get a letter from somebody claiming to be an auditor in your bankruptcy case, you probably ought not ignore it.

Unless you want to get the Rafael Ventura treatment!

The real rate of inflation scares me; I know that the official inflation rate is a silly fiction. And so does every houswife or husband who goes shopping, because some items in the grocery store have jumped 27% over the past six months.

But I've also pointed out that the price of gold and the value of the dollar are sort of teeter-totter twins. One goes up, and the other goes down, and vice-versa.

That's why it scares me silly when MSN Money discusses predictions that gold is going to go from $1,500 an ounce to $5,000 an ounce.

And maybe Anthony Mirhaydari at MSN Money is right, and maybe he's wrong.

But I'm scared nonetheless; because inflation so high that it makes gold soar to $5,000 an ounce tells me that we can use hundred dollar bills to buy a cup of coffee at Starbucks. As long as it's ordinary java, with nothing fancy.

And bankruptcy cases? Yeah, there would be more bankruptcy cases, all right.

I get to help people a lot, and that makes me happy.

I can help them because people bring me simple and complex debt issues, and I can generally find some way to skin that cat.

And a lot of the folks who have vacillated about whether they should or should not file bankruptcy in Arizona eventually reach the correct decision and come in to see me, and they usually leave happier than when they came in.

And every now and then I talk to somebody who has a real problem.

You remember that old saw: "if money will fix it, it's not a problem."

Because money will fix a lot of problems, but not the death of a spouse or a child. Or cancer.

Or old age and poverty.

I wish I could fix those, too.

Generally, people understand that banks are smart, or at least have good lobbyists.

And it makes me sad when people believe what they want to believe: that they can keep collateral without paying for it.

Now, there are a very few cases where, for instance, the second mortgage is completely underwater, and there's no equity in the house above the first mortgage amount, where a second mortgage won't immediately start a trustee's sale, because even if they scrape the debtors off title, the second mortgage will still be taking subject to the first mortgage.

And sometimes, the second mortgage might even be willing to sell a lien release to a debtor.

But if the second mortgage is completely or partially secured, and the debtor isn't making payments, the second mortgage holder will eventually get around to filing a trustee's sale, and 90 days thereafter (in Arizona), the debtors will no longer have an interest in the property.

Lately I've talked a lot about reaffirmations, the most confusing area of the law at this point; apparently every single Arizona Bankruptcy Judge has a slightly different procedural approach. I'll detail them all, every single one, soon. At least a couple have forms that they want a debtor to sign, in connection with reaffirmations, before they'll set a reaffirmation hearing, and I'll post those forms soon.

Remember, the Holy Grail of Reaffirmations is not a reaffirmation agreement signed by a Bankruptcy Judge: it's an In re Mustafi Order! The optimal result is that the Bankruptcy Judge deny the reaffirmation request, or vacate the reaffirmation hearing, and enter an order pursuant to In re Mustafi.

One of the Judges even enters a Mustafi-PLUS order, but that's another article for another day.