Charles C. Tawil
14-10649
Bankr. D.N.J.Aug 1, 2017Background
- Debtor Charles Tawil filed Chapter 7 on Jan 14, 2014 and later amended Schedule B to disclose a claim against his brother Habib for funds from family/insurance trusts.
- Debtor sought a determination that certain trust interests and counterclaims were not property of the bankruptcy estate under 11 U.S.C. § 541.
- The Chapter 7 Trustee proposed and moved to approve a settlement splitting the Debtor’s interests and any recovery 50/50 between the estate and the Debtor, and allowing the Debtor to pursue claims in his name.
- Non-party Habib Tawil objected, arguing the settlement would violate state law spendthrift provisions and that the counterclaims were barred by res judicata and judicial estoppel.
- No creditor objected; the court conducted briefing and oral argument and reserved ruling while parties negotiated; negotiations failed and the court ruled on the Trustee’s motion.
- The court concluded the settlement was fair and approved it, holding the trustee could share in (and preserve) the Debtor’s contingent trust interests and that the counterclaims are estate property that may be pursued and split as agreed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether claims against trustees are property of the bankruptcy estate | Debtor/Trustee: claims are property of the estate under § 541(a)(1) and separate from trust corpus | Habib: counterclaims belong to the trusts, not Debtor | Held: Claims are debtor property; probate causes of action are separate assets and includable in the estate |
| Whether the settlement violates spendthrift trust rules or § 541(c)(2) | Trustee/Debtor: § 541(c)(2) is permissive; parties may include contingent vested interests in estate by settlement | Habib: settlement illegal because spendthrift provisions prevent estate access and § 541(c)(2) bars inclusion | Held: § 541(c)(2) is permissive; trustee may share in Debtor’s contingent vested remainder interest once it vests or is payable |
| Whether res judicata or judicial estoppel bar the counterclaims | Habib: counterclaims dismissed earlier and prior positions preclude revival | Trustee/Debtor: dismissal was without prejudice; Debtor amended schedules to list claims | Held: Res judicata not applicable (no decision on merits); judicial estoppel inapplicable after amendment |
| Whether the proposed settlement is fair under Martin factors (probability of success, collection difficulty, complexity/cost, creditors’ interests) | Trustee/Debtor: settlement preserves estate value, shifts litigation burden to Debtor, increases creditors’ recovery prospects | Habib: settlement improperly enlarges rights beyond litigation outcome and is unlawful | Held: All Martin factors favor settlement; court approves settlement as fair and in creditors’ best interest |
Key Cases Cited
- Protective Comm’n for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414 (1968) (bankruptcy courts may approve compromises that are fair and equitable)
- In re Nutraquest, Inc., 434 F.3d 639 (3d Cir. 2006) (settlement favored to minimize litigation and expedite estate administration)
- In re RFE Indus., Inc., 283 F.3d 159 (3d Cir. 2002) (articulating Martin factors for settlement review)
- In re Martin, 91 F.3d 389 (3d Cir. 1996) (factors to evaluate proposed bankruptcy settlements)
- In re WT Grant Co., 699 F.2d 599 (2d Cir. 1983) (court’s limited role is to ensure settlement is within range of reasonableness)
- Patterson v. Shumate, 504 U.S. 753 (1992) (treats § 541(c)(2) permissively in ERISA pension context)
- Rains v. Flinn (In re Rains), 428 F.3d 893 (9th Cir. 2005) (recognizing § 541(c)(2) can be permissively waived or included in estate)
- In re Amerson, 839 F.3d 1290 (10th Cir. 2016) (probate causes of action are separate assets not shielded by spendthrift provisions)