Riverside Chapter 7 Trustee Lynda Bui recently had a matter in which a compromise was proposed with a debtor before Judge Houle:
While the facts of the case are specific, the process is common in most cases. Note how the Chapter 7 Trustee Ms. Bui settled the case for an amount over the claims that came into the estate. The claims came in at $41,500 and the settlement was for $60,000.00.
Motion to Approve Compromise Under Rule 9019 EH__
Debtors’ Bankruptcy and the Trust
On April 4, 20xx (“Petition Date”),(“Debtor”) (“Co-Debtor”) (collectively, “Debtors”) filed a voluntary petition for Chapter 7 relief. Lynda T. Bui was duly appointed as the Chapter 7 trustee (“Trustee”) of the bankruptcy estate (“Estate”).
The Co-Debtor is a one-third beneficiary of her mother’s trust, theRevocable Living Trust (“Trust”). The three beneficiaries are Brother, the Co-Debtor, and other brother (“Beneficiary”). The Co-Debtor’s mother died before the Petition Date. The Trust contains a Spendthrift Clause, which provides:
No interest in the principal or income of any trust created under this trust declaration shall be anticipated, assigned or encumbered, or subject to any creditor’s claim or to legal process prior to its actual receipt by the beneficiary.
The Trust held five real properties, including the 1st Property, the 2nd Property, and the 3rd Property.
The Trust also provides that a beneficiary who “seeks to obtain an adjudication in any proceeding in any court that this trust or any of its provisions is void,” will be treated as if he or she “had predeceased the execution of this declaration trust without surviving issue.”
After the mother’s death, a dispute arose between the beneficiaries whichresulted in an action being filed in the San Bernardino County Superior Court under Case No. PROPS0. During the state court action, the 1st and 2nd Properties were sold and the net proceeds were distributed. The state court also issued a Notice of Intended Decision concerning the the 3rd Property, determining that the 3rd Property would be held for the use of the Co- Debtor’s disabled brother, the Beneficiary.
On December 4, 20xx, the Trustee and the Co-Debtor entered into a Settlement Agreement (“Agreement”), whereby the Co-Debtor agreed to transfer $60,000 to the Trustee in exchange for the Trustee abandoning the Estate’s interest in Debtor’s scheduled personal property. In the Motion, the Trustee provided that the Trust consisted of $631,550.06 in total assets ($253,973.06 in cash and $377,577.00 in non-cash assets), and that the Co-Debtor was entitled to one-third, or $210,516.68, of that total. The Trustee also provided that the claims filed against the Debtors’ Estate amounted to $41,548.93.