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    When Are Spendthrift Trust Interests Property of the Estate? – Part 2

    March 21st, 2011

    By Richard Marshack:

    In a prior post, I began a review of when beneficial interests under spendthrift trusts may be reached as property of the estate in the Ninth Circuit. Today I’ll look more closely at the decisions in In re Spencer1 and In re Coumbe2 primarily to see how we handle the fully revocable inter vivos spendthrift trust. I’ll also review what happens when a trust becomes irrevocable or contingent events occur during the 180-day period of Sec. 541(a)(5)(A).3 I’ve also prepared a more complete flow chart: Spendthrift Trusts in Bankruptcy.

    So far, we’ve seen the difference, for bankruptcy purposes, between a testamentary trust and an inter vivos trust. We also learned, from Neuton v. Danning (In re Neuton),4 that there is a two-step inquiry for determining when an inter vivos trust interest is property of the estate: (1) whether a contingency removes the trust interest from the estate; and if not, then (2) whether the spendthrift provision removes the interest from the estate.5 And we saw that in California, a bankruptcy trustee can reach up to 25% of a spendthrift trust interest under Cal. Prob. Code Sec. 15306.5(a).6 (more…)

    1. 306 B.R. 328 (Bankr. C.D. of Calif., 2004). [↩]
    2. 304 B.R. 378 (9th Cir. BAP, 2003). [↩]
    3. Unless stated otherwise, all section references are to the Bankruptcy Code, 11 U.S.C. Secs. 101-1330. [↩]
    4. 922 F.2d 1379 (9th Cir. 1990). [↩]
    5. Id. at 1383. [↩]
    6. But note that Cal. Prob.Code Sec. 15306.5(c) exempts from payment to the estate or a creditor “any amount that the court determines is necessary for the support of the beneficiary and all persons the beneficiary is required to support.” This provision will further limit the bankruptcy trustee’s claim to 25% of the debtor’s interest in such a trust, assuming it is properly asserted. [↩]

    When Are Spendthrift Trust Interests Property of the Estate?

    March 3rd, 2011

    By Richard Marshack:  

    Spendthrift Trusts that benefit debtors can raise tricky issues for bankruptcy lawyers and trustees, especially in California where spendthrift protection for beneficiaries is limited to 75% of the payments they would receive, leaving 25% available for recovery by a bankruptcy trustee.1 The core question for courts, bankruptcy trustees and practitioners is: when are these trust interests property of the estate?2

    There also are other key questions. When “contingent events” occur post-petition under a trust, do they trigger Section 541(a)(5)(A) and bring a trust interest into the estate during the 180 days following the filing?3 Under California law, what value and exemption questions arise when 25% of a spendthrift trust interest is property of the estate?

    These questions generated a great deal of interest among practitioners while I was speaking last fall on a panel presented jointly by the Orange County Bar Association, Commercial Law & Bankruptcy Section, and the Orange County Bankruptcy Forum.4 So I’m going to review these questions in a series of blog posts. I’ve also prepared two flow charts, the first of which is posted here.

    During the bar program we reviewed three Ninth Circuit cases (more…)

    1. See Cal.Prob.Code Sec. 15306.5(a). But note that California law also allows spendthrift trust payments to be reached, up to a maximum of 25%, to pay claims for spousal or child support, restitution for commission of a felony, and public support. See Cal. Prob. Code Sec. 15305, 15305.5, 15306. [↩]
    2. In this series of posts I am not addressing the self-settled trust where the settlor is also a beneficiary. Spendthrift limitations in these trusts are invalid under California law. See Cal.Prob.Code Sec. 15304(a). [↩]
    3. Unless stated otherwise, all section references are to the Bankruptcy Code, 11 U.S.C. Secs. 101-1330. [↩]
    4. Issues surrounding Trusts and Spendthrift Trusts in bankruptcy are not necessarily settled areas of Ninth Circuit law. My purpose here is to report on some leading cases in the Ninth Circuit and should not be taken or used as a statement of policy or position on any specific case or future case where I might be serving as the Trustee or as an attorney of record. [↩]

    Ahcom, Ltd. and Shaoxing—The Race To Dismember Corporate Principals Begins

    January 24th, 2011

    By Ed Hays:

    The recent Ninth Circuit case of Ahcom, Ltd. v. Hendrik Smeding, et al., (9th Cir. 2010) 623 F.3d 1248, surprised many bankruptcy lawyers with its holding that a chapter 11 trustee of a corporation does not own and cannot bring general alter ego claims under California law against its controlling shareholders. And now, less than three months after Ahcom, the California Court of Appeals for the Second District signals the dangers ahead for these shareholders in Shaoxing County Huayue Import & Export v. Ranga L. Bhaumik, 2011 DJDAR 802.

    In Shaoxing, the California Court of Appeals affirmed a judgment against the sole shareholder of a corporation, based on alter ego, where the plaintiff’s underlying contract claim could no longer be asserted against a corporate debtor in bankruptcy. In my view, the race to the courthouse to pursue the personal assets of shareholders for corporate debts will begin in earnest. (more…)

    Schwarzkopf—The 9th Circuit Allows Bankruptcy Trustee To Reach Assets Held In Two Weathered Trusts

    January 11th, 2011

    By Richard Marshack and Ed Hays

    The recent 9th Circuit Schwarzkopf opinion1 reads a little like a travelogue about a Chapter 7 trustee that sees outrageous harm to creditors and sets out in search of a remedy that will make things right. Our firm includes one panel trustee in the Central District of California, so we sympathize with the trustee and his journey. And it was a bumpy road to recovery since the debtors had set up two trusts to protect assets using different methods for each trust—and all of it occurred many, many years before the petition was filed. So like any good travelogue, there are odd pictures that require explanation, but eventually the bankruptcy trustee makes it safely home to recover the dusty trust assets for the benefit of the estate.

    Richard Marshack has served as a panel trustee in the Central District of California for over 25 years. His writings should not be taken or used as statements of policy or position on any specific case or future case where he serves as the trustee or as counsel of record.  Mr. Marshack also manages an active reorganization and bankruptcy practice–providing representation to debtors, creditors, creditor committees, bankruptcy trustees and troubled asset purchasers and sellers. He provides insolvency and reorganization counseling to businesses and their principal owners when prudent planning requires a strategy to deal with business and personal debt challenges.

    The “odd pictures” in Schwarzkopf were two separate trusts—referred to as the “Apartment Trust” and the “Grove Trust”—which the trustee no doubt found offensive since the facts clearly suggested that each was set up to hide or protect valuable assets from creditors at times when the debtors were just as clearly insolvent. Ultimately, the 9th Circuit upheld a ruling by the District Court that the Apartment Trust was “invalid” and then went further and reversed the District Court (affirming the Bankruptcy Court’s ruling on this issue) in finding that the Grove Trust was the “alter ego” of the debtor. The effect of these rulings was to give ownership of allegedly $4 million in trust assets to the estate.

    Ed Hays specializes in business litigation and bankruptcy. He has over 18 years of experience in complex litigation, business litigation and bankruptcy matters. Over the years, Mr. Hays has represented businesses, creditors and bankruptcy trustees in complex core and non-core bankruptcy proceedings. He has also served in the past as a Judge Pro Tem in the Los Angeles Superior Court. Mr. Hays now manages a busy litigation practice that crosses over frequently between State and Federal Courts. With numerous published cases in both the State and Federal Court systems, he is a tenacious and sought-after litigator.

    The bankruptcy petition was filed in 2003 and the two irrevocable trusts were formed in 1992, with separate asset transfers into the trusts occurring in 1992 and 1997. The trustee sued for fraudulent conveyance and sought to recover the trust assets for the estate despite the heavy veneer of creditor protection attempted with each trust. (more…)

    1. Robert L. Goodrich v. Juan Briones (In Re: Alexis Hill Schwarzkopf), No. 08-56974, (Nov. 23, 2010, 9th Cir); 2010 U.S. App. LEXIS 24046. [↩]

    To Our Blog Subscribers

    January 6th, 2011

    Early this morning, while making some technical improvements to our website and blog, there were two “test” messages posted on our blog by our techies. We hope you will forgive us for allowing these “test messages” to go out to you. Those messages contained only text with no attachments or files. Your subscription and email information remains secured and we will continue to maintain the highest level of care when providing news and information to you in the future.

    One final note–the technical improvements to our website and our blog will soon allow us to offer even more practice information and features for the legal community through our website, so we hope you will stay tuned.

    City of Laguna Woods Elevates Cynthia Conners To Mayor Pro Tem

    January 4th, 2011

    Laguna Woods City Council

    We are pleased to congratulate Cynthia Conners on her election to the position of Mayor Pro Tem, City of Laguna Woods. She is a busy associate attorney at our firm and brings over twenty-seven years of experience to her practice at Marshack Hays LLP. Her election as Mayor Pro Tem by her fellow Council Members after a relatively short time on the City Council is not surprising given her passion for public service and her commitment to community issues. “I enjoy my work as member of the City Council,” said Ms. Conners, “and we have an excellent City Manager and an excellent staff that allow us to focus primarily on policy and oversight.”

    It is not surprising to the partners at the firm or to her co-workers that Ms. Conners maintains an active law practice while also serving her City. “If you look at her background,” offered Richard Marshack, “you’ll see that she has always had a public service component to go with her professional work. And her successful trial experience and professional background will certainly benefit the City of Laguna Woods just as they benefit our clients.” (more…)

    Marshack Hays Expands Practice – Welcomes Martina Slocomb

    December 30th, 2010

    Martina Slocomb joins Marshack Hays LLP

    When Richard Marshack and Ed Hays decided to unite their bankruptcy and litigation experience (over 45 years combined) they had no expectation of rapid growth. Starting and building a law firm usually takes time and patience. But in less than 18 months they’ve gone from a few employees in a small office to seven attorneys, four paralegals and expanded practice areas. “Our business growth has given us the opportunity to add some outstanding lawyers to the firm,” said Mr. Marshack, “and now we offer clients a broader range of service than when we began.”

    Mr. Marshack has twenty-five years of experience as a bankruptcy panel trustee in the Central District of California and has an active bankruptcy and reorganization practice. He counsels businesses that need restructuring, provides represention to asset purchasers and sellers in insolvency situations and counsels creditors and creditor committees in Chapter 11 cases. Mr. Hays is a tenacious trial and litigation attorney with eighteen years of experience in complex litigation matters in State and Federal Courts—matters that often cross over into the bankruptcy courts. (more…)

    Marshack Hays welcomes Charles Liu

    December 17th, 2010

    Mr. Liu specializes in handling bankruptcy and other insolvency related proceedings for a broad range of clients including businesses and individuals. He has successfully represented Chapter 11 debtors, including secured and unsecured creditors, creditors committees, bankruptcy trustees and asset purchasers in a variety of matters including workouts, reorganizations, liquidations, assignments for the benefit of creditors, and business acquisitions.

    Having an acute understanding of the complexities of bankruptcy, Mr. Liu regularly devises strategies to avoid costly litigation. He often negotiates financing arrangements on behalf of his clients, and helps structure financing to avoid insolvency related problems. In addition to his extensive bankruptcy law experience, Mr. Liu has successfully litigated matters involving breach of contract, breach of fiduciary duty, fraud, derivative actions, and class actions.

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