573 B.R. 881
Bankr. D. Kan.2017Background
- John Q. Hammons created the Revocable Trust of John Q. Hammons (the "Hammons Trust") in 1989 (restated in 2000). The Trust held virtually all of Hammons’s business assets and, at petition, controlled billions in assets through subsidiaries and guaranteed their debts.
- The Trust’s instrument vested broad commercial powers in the trustee and successor trustees (buy/sell/operate businesses, borrow, pledge assets, centralized cash management); successor trustees took control after Hammons’s death in 2013.
- J.D. Holdings sued in Delaware (2012) for breach of a 2005 right‑of‑first‑refusal (ROFR) covering certain hotels (the "JQH Subject Hotels") and obtained a limited status‑quo order restricting actions outside the ordinary course regarding those hotels and requiring 5 business days’ notice before such actions.
- On June 26, 2016 the Hammons Trust and 71 related entities (including the Special Purpose Debtors holding the JQH Subject Hotels) filed Chapter 11 petitions; petitions were not preceded by notice to J.D. Holdings or the Delaware court.
- J.D. Holdings moved to dismiss or enjoin the bankruptcies, arguing (1) the Hammons Trust is not a "business trust" and thus not an eligible "person"/debtor under the Bankruptcy Code, and (2) the Delaware status‑quo order altered governance/authority so Special Purpose Debtors lacked state‑law authority to file.
- The Bankruptcy Court found no genuine disputes of material fact and resolved cross‑motions for partial summary judgment: it held the Hammons Trust is a business trust and the status‑quo order did not divest the Special Purpose Debtors of authority to file bankruptcy.
Issues
| Issue | J.D. Holdings' Argument | Debtors' Argument | Held |
|---|---|---|---|
| Whether the Hammons Trust qualifies as a "business trust" (and thus a "person" eligible to be a debtor under 11 U.S.C. § 109) | The Trust is an "ordinary"/estate‑planning trust lacking corporate attributes (transferable interests, pooled capital), so it is not a business trust and cannot be a debtor. | The Trust was created and operated primarily to transact business and generate profit (extensive commercial holdings, centralized cash mgmt, employees, borrowing, guarantees); the Trustee had broad commercial powers—so it is a business trust. | The Court held the Hammons Trust is a business trust and therefore an eligible debtor. |
| Whether the Delaware status‑quo order stripped Special Purpose Debtors of authority to file bankruptcy | The status‑quo order (and state court injunction/equitable ownership statements) effectively changed governance/authority and restricted debtors from filing bankruptcy; filings thus lack state‑law authorization. | The status‑quo order only limited actions outside the ordinary course re: subject hotels and required notice; it did not alter corporate governance or assign title/authority; state order cannot preclude federal bankruptcy jurisdiction. | The Court held the status‑quo order did not alter authority to file and the Special Purpose Debtors were authorized to commence bankruptcy. |
| Proper standard for determining "business trust" | (implicit) Apply formalistic requirements (transferable certificates, pooled capital) from older authority. | Apply a federal, fact‑specific, totality‑of‑circumstances test (focus on primary purpose to transact business and actual operations). | The Court adopted a fact‑specific test (following Kenneth Allen Knight) and declined to impose rigid transferable‑certificate requirement. |
| Disposition of cross‑motions and dismissal requests | J.D. Holdings sought dismissal/summary judgment on above grounds. | Debtors sought partial summary judgment denying dismissal. | Court granted Debtors’ partial summary judgment, denied J.D. Holdings’ summary judgment and denied dismissal on these issues. |
Key Cases Cited
- Brady‑Morris v. Schilling (In re Kenneth Allen Knight Trust), 303 F.3d 671 (6th Cir.) (adopts a fact‑specific test: trusts created primarily to transact business qualify as business trusts)
- Shawmut Bank Conn. v. First Fid. Bank (In re Secured Equip. Tr. of E. Air Lines, Inc.), 38 F.3d 86 (2d Cir.) (older Second Circuit approach emphasizing purpose and that business‑like activity alone may be insufficient)
- First Nat’l Bank of Durango v. Woods (In re Woods), 743 F.3d 689 (10th Cir.) (directive to begin statutory interpretation with the statute’s language; cited for interpretive approach)