Opinion
NOT FOR PUBLICATION
ORDER ON MOTION TO DISMISS
PETER W. BOWIE, Chief Judge United States Bankruptcy Court.
This chapter 11 case was filed as a related case to SAIF, Inc., No. 07-04500, by the same counsel. The cover sheet of the petition asserted that Secured Assets Trust (hereinafter SAT) is a "business trust". The petition was signed by Thomas Sterling as trustee.
Debtor's schedules revealed that debtor owed no taxes, has no unsecured creditors, does have a bank account, and has secured creditors of almost $16 million. Debtor also listed as an asset accounts receivable owned by SAIF in the same amount owed the secured creditors.
In mid-October, 2007, the United States Trustee filed a motion to dismiss or appoint a Chapter 11 trustee. In the two- page motion, the trustee raised as an additional argument, the issue of whether the debtor is eligible to be a debtor, by saying "this entity may not be a 'business trust' that is eligible to be a debtor." The United States Trustee amplified on the argument in its reply papers. At the hearing on the motion, without ruling on the eligibility issue, the Court ordered the appointment of a Chapter 11 trustee.
Now the issue has been raised, again, this time by the Official Committee of Unsecured Creditors for SAIF. It is recognized that 11 U.S.C. § 109 limits eligibility to a "person", as that term is defined in § 101, which includes corporations. In turn, § 101(9) defines "corporation" to include a "business trust", but does not go on to define what constitutes a "business trust".
The most useful case discussing what constitutes a "business trust" for purposes of the Bankruptcy code is In re Sung Soo Rim Irrevocable Intervivos Trust, 177 B.R. 673 (Bankr. CD. CA 1995) . There, the court undertook a multi-step analysis, beginning with whether relevant state law recognizes such an entity. Because the court concluded that state law could not dictate access to the federal bankruptcy courts, whether an entity fit the state's definition of a "business trust" could not be conclusive. But it can be, in effect, "a rebuttable presumption which must be tested against the fundamental federal purpose of the restrictions on eligibility to file a bankruptcy petition." 177 B.R. at 676.
California defines a "business trust" to include:
[E]very business organization consisting essentially of an arrangement whereby property is conveyed to one, or more than one, trustee for purposes other than the mere conservation of assets, collecting and disbursing of fixed or periodic income, or the securing of an obligation.
Revenue & Taxation Code § 23038(b)(1). Under California law there are a number of attributes of a qualified "business trust", including compliance with applicable fictitious name statutes, taxation by the state as a corporation, the creators of the trust share in the profits, and management is vested in one or more trustees.
The trust in Sung Soo Rim was easily identified as a probate trust, not a "business trust" under California law. The trust in this case - if, indeed, it even is a trust - is different in multiple ways. First, it appears from concessions made at oral argument that there are no traditional documents creating the entity of the trust, much less ones incorporating the California Probate Code. On the other hand, the uncontroverted evidence is that SAT has not filed any tax returns or paid any taxes. It has not complied with any applicable fictitious name statutes. It appears its sole purpose is to borrow funds which it "loans" to SAIF, Inc., which SAIF then loans to used auto dealers, primarily. As those loans are repaid to SAIF distributions are made to SAT to make payments to its lenders.
Based on the record developed to date, the Court finds and concludes that SAT does not qualify as a "business trust" under applicable California law. As already noted, however, that does not end the inquiry. Rather, the Court looks to what Congress contemplated when it decided only a "person" could be a debtor, and excluded a "trust" from the definition of "person" while at the same time including "business trust" within the meaning of "corporation", which in turn is included in the definition of "person".
Federal tax law also recognizes "business trust" as an entity with certain attributes. They include:
(1) creation and maintenance for a business purpose or function;
(2) title to property held by trustee;
(3) centralized management;
(4) continuity of business existence uninterrupted by death among beneficial owners;
(5) transferability of interests; and
(6) limited liability.
177 B.R. at 677. Assessing SAT against those attributes also leads to the conclusion that SAT is not a "business trust" as that term is used in the Bankruptcy Code. Among other factors, the evidence is uncontroverted that the sole beneficiary has no control over management of SAT. Further, it appears that the beneficiary's interest in SAT is not transferable, nor has it been shown that SAT would continue to exist if something happened to her.
The Chapter 11 trustee's argument, in essence, is that for a number of years SAT has, in fact, been doing business and is therefore a de facto business trust. Perhaps in the lower case sense, SAT may be a business trust - that is, a trust that is doing business. But as the Sung Soo Rim court explained: "The mere fact that the trust happens to engage in business does not make it a "business trust". 177 B.R. at 678.
The difficulty in grappling with the concept of a "business trust" is that there are many shadings. The trust in Sung Soo Rim was a classic example of a probate-type trust. On the other hand, one court has noted: "The less restrictive view is that a trust can be classified as a business trust if it merely conducts business." In re Parade Realty, Inc. Employees Retirement Pension Trust, 134 B.R. 7 (Bankr. D. HI 1991). That court cited to In re Medallion Realty Trust, 103 B.R. 8 (Bankr. D. MA 1989(for the proposition, but Medallion found the debtor to be a partnership, not a business trust. Medallion did include a useful discussion of the genesis of "Business trust", and it concluded "the test should be simpler - whether the trust was created to transact business for the benefit of investors." 103 B.R. at 11. While the Medallion court stated:
I conclude, therefore, that Congress intended to permit bankruptcy relief for all trusts which are created for the purpose of transacting business and whose beneficiaries make a contribution in money or money's worth to the enterprise, without regard to whether the trust has characteristics of a corporation such as separate certificates of ownership.
(Id. At 11-12), the Medallion court also concluded that the entity before it was a partnership because the so-called beneficiaries controlled the entity's operations and the so-called trustee carried out their directions and "[t]his so-called 'trust' is a creature of the beneficiaries and a mere conduit for their income." Id.
This Court does not have to choose between the "less restrictive" or other views of a "business trust" because SAT is not an investment entity. Rather, the Trustee's declaration makes clear that people loan money to SAT and receive a promissory note fixing a rate of return and a maturity date. The form of the transaction is clearly not an investment in SAT for some equity participation, much less sharing in any up-side profit. Moreover, it does not appear that SAT receives any up-side profit notwithstanding the money SAIF purports to make off its loans (of SAT's borrowed funds). As already noted, SAT does not pay taxes.
Conclusion
For all the foregoing reasons, the Court finds and concludes that Secured Assets Trust (SAT) is not a "business trust" within the meaning of California law, federal tax law, or the Bankruptcy Code. Therefore, it is not a "person" for purposes of eligibility to file a bankruptcy petition. Therefore, the motion of the OCC of SAIF, Inc. to dismiss this Chapter 11 case shall be, and hereby is, granted.
Counsel for the OCC shall prepare and lodge a separate form of judgment consistent with the foregoing within fifteen (15) days of the date of entry of this Order.
IT IS SO ORDERED.