In re: Leslie Klein
25-1002
| 9th Cir. BAP | Jun 5, 2025Background
- Leslie Klein (Debtor) and his former wife Erika formed a family trust in 1975 that owned real property (June Property), later amended to make Debtor sole trustee and beneficiary after Erika’s death.
- The trust included a spendthrift provision aiming to shield assets from creditors, but allowed Debtor full control and benefit of all assets as sole trustee.
- Upon Erika’s death in 2012, Debtor became sole trustee and later remarried Barbara, providing her a purported lifetime right to reside at the June Property.
- In 2023, Debtor filed for Chapter 11 bankruptcy, listing $32 million in liabilities and claiming an interest in the June Property, which he scheduled as partly owned by him and partly by subtrusts.
- Creditors and the Chapter 11 trustee challenged the protection of the trust assets from the bankruptcy estate, and the bankruptcy court granted summary judgment to the Trustee, holding that the assets were property of the estate and that Barbara’s life estate could be avoided.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Were Debtor's children necessary parties? | Children, as beneficiaries of Credit Trust, must join. | Lack of current interest/authority in property. | Not necessary parties; no current substantial interest. |
| Was failure to properly name trust trustees fatal? | Action was invalid for suing trusts, not trustees. | Issue waived; Debtor acted as trustee in litigation. | No jurisdictional defect; issue waived. |
| Was the June Property estate property? | Some subtrusts funded by Erika, not Debtor, so exempt. | Debtor’s control = self-settled, assets reachable. | Property belongs to estate due to self-settlement. |
| Can Trustee avoid Barbara’s life estate? | Trustee had notice due to Barbara's occupancy. | Unrecorded interest, trustee is BFP under §544(a)(3). | Trustee may avoid unrecorded life estate interest. |
Key Cases Cited
- In re Cutter, 398 B.R. 6 (9th Cir. BAP 2008) (self-settled trust with debtor-beneficiary/control is property of estate)
- In re Moses, 167 F.3d 470 (9th Cir. 1999) (California law voids spendthrift protections in self-settled trusts)