Trustee Blog

Spendthrift Trust and Bankruptcy Trustees

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Chapter 7 Bankruptcy Trustee Lynda Bui recently had a case in front of Judge Houle, as noted in previous posts. In this post, Judge Houle discusses “spendthrift clauses” and the trustee’s rights:

California Law

Section 15306.5 of the California Probate Code provides that, notwithstanding a spendthrift clause, a creditor may obtain an “order directing the trustee to satisfy all or part of the judgment out of the payment to which the beneficiary is entitled under the trust instrument,” so long as the payment does not “exceed 25% of the payment that otherwise would be made to . . . the beneficiary.”

Discussion Trustee’s Motion

First, the Trustee states that “[t]here is a high probability of success in litigation to recover the Co-Debtor’s 1/3 interest in the Trust” because the Co- Debtor’s interest is property of the Estate. (Tr.’s Mot. Approve Compr. 6-7.) The Spendthrift Clause protects 75 percent of the Co-Debtor’s interest in the Trust, which would allow the Trustee to recover the remaining 25 percent of the Co-Debtor’s interest for the Estate under California law. (Id. at 7; see also Cal. Prob. Code § 15306.5 (permitting recovery of 25 percent of “judgment out of the payment to which the beneficiary is entitled under the trust instrument.”).) Thus, because the Co- Debtor’s interest is $210,216.68, the most the Estate could recover through litigation

is $52,629.17. (Id.) Even if litigation is successful, the Estate could recover less than the Agreement amount for creditors.

Second, as to the difficulties to be encountered in the matter of collection, the Trustee believes that “Collection may be problematic and expensive” because the Trustee may need to seek state court orders allocating the Co-Debtor’s 1/3 interest in the Trust to the Trustee. (Tr.’s Mot. 7.)

Third, as to the complexity, expense, inconvenience, and delay of litigation, the Trustee cites the general expenses of litigation to argue that “the Agreement is the most expedient and cost effective method for resolving the matter.” (Tr.’s Mot. Approve Compr. 7-8.)

Finally, as to the interest of creditors, the Trustee states that “[t]he Agreement avoids costly and risky litigation and results in certainty and substantial benefit to the Estate.” (Tr.’s Mot. 8.) In particular, the Estate would receive $60,000 under the Agreement, which is significant given that the claims filed in the case amount to $41,548.93. (Id.) In addition, litigation entails inherent risk and would, at best, only result in a recovery of $52,629.17. (Id. 7, 8.)

In addition to the A&C Properties factors, the Trustee also cites two other principles to support the Agreement. First, the Trustee notes that “the law favors compromise.” (Tr.’s Mot. 8 (citing Ports O’Call Inv. Co. v. Blair (In re Blair), 538 F.2d 849, 851 (9th Cir. 1976)).) The Trustee adds that compromises in bankruptcy have become “a normal part of the process of reorganization.” (Tr.’s Mot. 8 (citing Protective Comm. for Indep. Stockholders of TMT Trailer Ferry Inc. v. Anderson, 390 U.S. 414, 424 (1968)).)

As to the second principle, the Trustee states that the bankruptcy court should approve a compromise unless it “fall[s] below the lowest point in the range of reasonableness.” (Tr.’s Mot. 8 (citing Cosoff v. Rodman (In re W.T. Grant Co.), 699 F.2d 599, 608 (2d Cir. 1983)).) The Trustee argues that, in the instant case, the Agreement “appears in the reasonable business judgment of the Trustee to be in the best interests of the Estate.” (Tr.’s Mot. 9.) The Trustee also notes that the Court is obligated to defer to the Trustee’s judgment. (See id. (citing In re Morrison, 69 B.R. 586, 592 (Bankr. E.D. Pa. 1987) (“The objecting creditors may not substitute their judgment for that of the Trustee.”)).)

In her Reply, the Trustee first argues that the Beneficiary is without standing to oppose the Agreement because “[h]e is not a creditor of the Estate nor is he a party to the Bankruptcy Case.” (Tr.’s Reply Opp’n 2, ¶ 1). Here, since the settlement payment comes from the Debtors (not the Trust) and does not disturb the parties’ rights under the Trust, it does not appear Beneficiary has standing to oppose the Agreement.

Tentative Ruling

For the foregoing reasons, the Settlement Agreement and the evidence presented by the Trustee satisfy the four factors set forth by the Ninth Circuit in A&C Properties.

Accordingly, the Trustee’s Motion for Order Approving Compromise of Controversy is GRANTED.


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