Hughes v. Tower Park Properties, LLC (In Re Tower Park Properties, LLC)
803 F.3d 450
| 9th Cir. | 2015Background
- Mark Hughes created the Mark Hughes Family Trust (Trust); his son Alexander Hughes is the sole, non-contingent beneficiary. The Trust owns two LLCs (HIP and MH II) that were major secured creditors of debtor Tower Park Properties, LLC (Tower Park).
- MH II sold Tower Grove to Tower Park in a seller-financed transaction; Tower Park later defaulted and filed Chapter 11. HIP and MH II held roughly $57–80 million in claims related to financing the property.
- Tower Park, HIP, MH II, and two former trustees negotiated a Settlement Agreement in January 2013 resolving multiple bankruptcy disputes; the agreement discounted Tower Park’s debt and included releases favorable to trustees.
- Alexander Hughes (beneficiary) objected in bankruptcy, alleging trustee self‑dealing and that the settlement was a bad-faith modification; the probate court suspended the original trustees and appointed Fiduciary Trust International of California (FTIC) as trustee ad litem to review the Settlement.
- Bankruptcy court approved the Settlement and (though calling standing a close question) found Hughes had standing. The district court reversed as to Hughes, holding he lacked party‑in‑interest standing under 11 U.S.C. §1109(b). The Ninth Circuit affirmed.
Issues
| Issue | Hughes’ Argument | Tower Park / Trustee ad litem Argument | Held |
|---|---|---|---|
| Whether a trust beneficiary has party‑in‑interest standing under §1109(b) to object to a Chapter 11 settlement affecting trust‑held corporate creditors | Hughes: His future pecuniary interest as sole beneficiary means the Settlement harming trust assets harms him directly, so he is a party in interest | Tower Park: Beneficiary’s interest is derivative and too remote; the trustee (or trustee ad litem) is the proper party in interest to represent the trust’s legal rights | Held: No — a beneficiary lacks §1109(b) party‑in‑interest status where the trustee (here FTIC) adequately represents trust interests; beneficiary’s stake is too remote (affirmed) |
| Whether a beneficiary’s potential direct claim against a third party (Atascadero theory) converts the beneficiary into a party in interest in bankruptcy | Hughes: Under Atascadero, beneficiaries may sue third parties who actively participated in trustee breaches; that direct right should support party‑in‑interest status | Tower Park: Even if Atascadero permits a direct claim, the trustee ad litem is available and bankruptcy is not the appropriate forum; beneficiary’s claims belong in state probate or other fora | Held: No — Atascadero does not help because a beneficiary cannot proceed while a willing successor trustee is available; even a direct claim would not make bankruptcy the appropriate forum |
Key Cases Cited
- In re Thorpe Insulation Co., 677 F.3d 869 (9th Cir. 2012) (party‑in‑interest requires a legally protected interest; established Ninth Circuit bankruptcy‑standing framework)
- In re Refco Inc., 505 F.3d 109 (2d Cir. 2007) (investors lacked party‑in‑interest status where only the intermediary corporation could assert claims; internal disputes belong outside bankruptcy)
- In re C.P. Hall Co., 750 F.3d 659 (7th Cir. 2014) (collateral economic effects on noncreditor third parties do not confer §1109(b) standing)
- Toibb v. Radloff, 501 U.S. 157 (1991) (Chapter 11’s purpose is efficient reorganization; peripheral litigation that would delay reorganization is disfavored)