MEMORANDUM, OPINION & ORDER
This matter is before the court on defendant Melvin E. Levinson’s and intervenor Muriel B. Levinson’s motions for summary judgment against plaintiff Francine Kling-man and the United States. For the reasons stated herein, the motions are denied.
BACKGROUND
Between approximately 1966 and 1969, defendant Melvin E. Levinson, an attorney, embezzled money from his clients. Levinson was caught, disbarred, convicted, and served time.
See People v. Levinson,
Plaintiff Francine Klingman is one of Levinson’s former clients. In 1967, Kling-man and Levinson entered into a trust agreement which named Levinson as trustee. Three years later, Klingman sued Lev-inson in the Circuit Court of Cook County claiming that Levinson had misappropriated the trust’s assets. The parties ultimately settled the case under terms set forth in an Agreed Order entered on April 11, 1975. In the Agreed Order, Levinson admitted to embezzling the trust’s assets and agreed to pay Klingman approximately $62,000, representing the original amount of the trust corpus, plus interest and attorney fees. Levinson has yet to pay a penny.
In an effort to collect her money, Kling-man filed this supplemental action in 1976 in the Circuit Court of Cook County under Ill.Rev.Stat. ch. 110, § 73. Citations to discover assets were issued and directed to Levinson and to the American National Bank and Trust Company. Those citations are still in force. Responses to the citations revealed that Levinson and his wife, Muriel B. Levinson, were the beneficiaries of an Illinois land trust created in 1960. The trust corpus is their family home in Wilmette.
At this point, Muriel Levinson intervened in the action, claiming that Levinson conveyed his interest in the land trust to her in an assignment dated September 6, 1972. The parties dispute whether the assignment was actually executed in September 1972 and whether the assignment is effective. Under the terms of the land trust, assignments are not effective until accepted by the trustee. Melvin's assignment of his interest in the land trust to Muriel was not filed with the trustee or otherwise made public until January 1977. It is unclear whether the trustee has accepted the assignment. Klingman seeks to have Melvin’s assignment of his interest in the land trust set aside as a fraudulent conveyance under Illinois law.
In the meantime, the Government also has been pursuing Levinson. The IRS assessed income tax deficiencies against Lev-inson for his failure to pay income tax on the funds he had embezzled during 1966 through 1969. Levinson brought a petition in tax court, challenging the deficiencies for the years 1966 through 1968. A settlement was reached in 1978 in which Levin-son agreed to pay $74,815.27. The 1969 deficiency was not challenged and the United States brought suit to reduce the assessment to judgment. In February 1981, that action was settled and Levinson agreed to pay $44,840.23.
Levinson v. United States,
The United States intervened in Kling-man’s action in May 1980 and the case was removed to this court. The Government claims that it has a lien on the debtor’s beneficial interest at the time of the assignment (if the assignment was made in 1977), and that Muriel took Melvin’s interest subject to that lien. In the event the assignment is found to have taken place in 1972, the IRS argues that the assignment is a
On April 22, 1982 — one week before this action was to be tried — Levinson filed a bankruptcy petition. During the course of the bankruptcy proceedings, Levinson’s debt to Klingman was held to be nondis-chargeable.
Klingman v. Levinson,
As a result of the bankruptcy, this case was stayed and then removed to the Bankruptcy Court. Judge Ginsberg remanded the case to this court upon his determination that the bankruptcy court lacked jurisdiction over this dispute.
See Levinson v. United States,
No.
Melvin and Muriel make two basic arguments in support of their summary judgment motions. First, they contend that both Klingman and the United States lack standing to pursue this fraudulent conveyance action because once Melvin filed his bankruptcy petition, the allegedly fraudulently conveyed property became part of the debtor’s estate, and only the trustee has standing to assert this cause of action.
Second, they argue that the United States is collaterally estopped from arguing that Melvin’s assignment of his interest in the land trust to Muriel was a fraudulent conveyance because that issue already has been litigated in the adversary proceeding before Judge Ginsberg.
DISCUSSION
I. Standing.-
The Levinsons’ basic position is that once Melvin filed his petition in bankruptcy, the trustee became vested with the exclusive right to pursue this action because fraudulently conveyed property is “property of the estate” under 11 U.S.C. § 541. They contend that Klingman and the United States are barred from pursuing their fraudulent conveyance claims.
The leading case in support of the Levin-sons’ argument is
In re MortgageAmerica Corp.,
Other courts have rejected that view, holding that a fraudulently conveyed asset does not become property of the estate until it is recovered by the trustee.
See, e.g., In re Colonial Realty Co.,
Under § 541(a)(3), “property of the estate” is defined as “any interest in property that the trustee recovers” under enumerated Bankruptcy Code provisions, including § 550. Section 550 allows the trustee to recover fraudulently transferred property for the benefit of the estate to the extent that a transfer is avoided as fraudulent under either §§ 544 or 548. Under the MortgageAmerica analysis, fraudulently conveyed property becomes property of the estate under § 541(a)(1) because it is property in which the debtor has a “legal or equitable interest.” However, as the court observed in Saunders:
If property that has been fraudulently transferred is included in the § 541(a)(1) definition of property of the estate, then § 541(a)(3) is rendered meaningless with respect to property recovered pursuant to fraudulent transfer actions. We think that the inclusion of property recovered by the trustee pursuant to his avoidance powers in a separate definitional subpar-agraph clearly reflects the congressionalintent that such property is not to be considered property of the estate until it is recovered.
Saunders,
The Court adopts the analysis of Colonial and Saunders and holds that fraudulently transferred property does not become property of the bankruptcy estate until there has been a judicial determination that the property was fraudulently transferred. 1
This holding should not be construed as suggesting that creditors may vie with the bankruptcy trustee for the right to pursue fraudulent conveyance actions. To the contrary, the commencement of bankruptcy gives the trustee the right to pursue fraudulently conveyed assets to the exclusion of all creditors. 11 U.S.C. § 546(a). However, the trustee does not retain this exclusive right in perpetuity. The trustee’s exclusive right to maintain a fraudulent conveyance cause of action expires and creditors may step in (or resume actions) when the trustee no longer has a viable cause of action.
Kathy B. Enterprises, Inc. v. United States,
Here, there is no dispute that the trustee never sought to recover the conveyance challenged by Klingman and the United States. The statute of limitations has long since run on the trustee’s right to bring that action. The court finds that Klingman and the United States have standing to pursue their claims in this action. 3
II. Collateral Estoppel.
Melvin and Muriel Levinson also seek to bar the United States from relitigating the issue of whether Melvin’s assignment to Muriel of his interest in the land trust was a fraudulent conveyance. They argue that the United States already litigated and lost the fraudulent conveyance issue in an ad
In the adversary proceeding before Judge Ginsberg, the United States argued that Melvin’s tax debts for the years 1966 through 1969, 1973, 1975, 1977, and 1978 were nondischargeable because (1) Melvin filed fraudulent returns for each of those years, and (2) Melvin’s assignment of his interest to Muriel of his land trust interest demonstrated a willful intent to defeat or evade the payment of taxes. 4/18/90 Order at 9. Judge Ginsberg agreed that Melvin had filed fraudulent returns for the 1966 through 1969 tax years and held those debts nondischargeable. 4/18/90 Order at 13. However, Judge Ginsberg found that the United States failed to prove by clear and convincing evidence that the returns for the remaining tax years were fraudulent or that Melvin willfully attempted to evade or defeat the payment of his tax debts by assigning his interest in the land trust to Muriel. Id. at 13-14, 25. Accordingly, he held that Melvin’s tax debts for the years 1973, 1975, 1977, and 1978 were discharged. Id. at 25.
Collateral estoppel or issue preclusion bars a party from relitigating the same issues in different causes of action.
Barnett v. Stern,
The first requirement is not satisfied here. The issue before Judge Ginsberg was whether Melvin had “willfully attempted to evade or defeat the payment of his tax debts by transferring the beneficial interest in the land trust to his wife.” 4/18/90 Order at 16. That is not the same issue presented here. It is well established that under Illinois law, a conveyance may be deemed fraudulent and set aside without any showing of intent at all.
4
United States v. Brown,
At the outset, it is important to note that the court does not now have before it the question of whether the conveyance of the beneficial interest in the land trust to the debtor’s wife should be set aside. That question is currently pending before the district court in a separate proceeding in which both the IRS and Kling-man assert the conveyance should be set aside for their respective benefit. The reason this court does not have to reach the question of whether the conveyance can be set aside is that under Illinois law applicable to the transfer in question, a conveyance by an insolvent debtor may be set aside without a showing of actual intent to hinder, delay, or defraud any creditor on the party of the debtor.... Thus even if the transfer of the beneficial interest in the land trust to his wife is voidable under applicable Illinois fraudulent conveyance doctrine, the conclusion does not necessarily follow that the tax debts the debtor owes are nondis-chargeable.
See also Fink v. Graven,
Moreover, as the United States correctly points out, Judge Ginsberg held the United States to a “clear and convincing”
In addition, the United States did not have a full and fair opportunity to litigate the fraudulent conveyance issue before Judge Ginsberg.
See Barnett v. Stern,
It bears noting that neither Melvin nor Muriel Levinson contend that Klingman is collaterally estopped from litigating the fraudulent conveyance action. Nor could they because Klingman was not a party to the adversary proceeding. As a result, a ruling either way on this issue would not make the slightest difference in the issues to be presented at trial.
CONCLUSION
For the foregoing reasons, defendant Melvin E. Levinson’s and intervenor Muriel B. Levinson’s motions for summary judgment are denied.
Notes
. The Levinsons also argue that the cause of action to recover fraudulently conveyed property is also "property of the estate.” Property of the estate includes causes of action belonging to the debtor,
see United States v. Whiting Pools,
. The cases cited by Melvin and Muriel involve conflicts between the bankruptcy trustee and the creditors as to who has the right to set aside the fraudulent conveyance. There is no similar conflict posed here. Thus, this case does not implicate the bankruptcy policies of orderly liquidation and equality among creditors. Under today’s holding, a creditor’s cause of action to set aside a fraudulent conveyance is subject to being taken over and pursued by the trustee once the bankruptcy petition is filed until the trustee’s right to bring suit expires.
Melvin also claims that Klingman and the United States are not entitled to any recovery because they "traded that right away for a non-dischargeable order.” Melvin cites no authority in support of this "trade-off" theory and the Court has found none.
.The trustee’s right to bring an action to recover a fraudulent conveyance is subject to the time limitations of 11 U.S.C. § 546(a), which limits the trustee to the earlier of two years after his appointment or the time the case is closed or dismissed. It appears from the docket that the trustee was appointed in June 1982 and that Melvin’s bankruptcy was closed in October 1988.
. Although Judge Ginsberg held that there was consideration for the transfer, he explicitly refused to consider "if the consideration was sufficient in value terms to support the transfer.” 4/18/90 Order at 22 and n. 16.
. For this reason, Melvin’s attempts to invoke res judicata are also unavailing. By definition, res judicata, or claim preclusion, bars only those grounds for recovery that could have been asserted in the prior litigation.
Levinson v. United States,