987 F.3d 1284
10th Cir.2021Background
- Mary Pat Abruzzo’s will created two spendthrift trusts holding 18.5% of ARCO; Victor Kearney was lifetime income beneficiary and a co-trustee.
- From 1997–2013 distributions to Kearney increased substantially; Kearney sued the Abruzzo family alleging suppressed dividends and fiduciary breaches, lost at trial, and was sanctioned and ordered to pay costs.
- Kearney accumulated over $7 million in debts and filed Chapter 11 in 2017; a UCC (Unsecured Creditors’ Committee) proposed a competing reorganization plan (the UCC Plan).
- The UCC Plan’s core “Three Actions”: ARCO to redeem Trust shares for $12.57M; Trustees to pay $3M principal to Kearney to satisfy creditors; Trusts to pay certain tax liabilities. Remaining corpus would continue to fund Kearney’s lifetime income.
- The bankruptcy court lifted the stay so the New Mexico state court could rule on trust modification; the state court modified the trusts to permit a one-time $3M principal distribution contingent on UCC Plan confirmation; the bankruptcy court then confirmed the UCC Plan. Kearney appealed; the BAP and Tenth Circuit affirmed.
Issues
| Issue | Plaintiff's Argument (Kearney) | Defendant's Argument (UCC/Abruzzos) | Held |
|---|---|---|---|
| Whether the UCC Plan used means forbidden by law by piercing spendthrift protections | Plan unlawfully uses trust assets to pay Kearney’s creditors; spendthrift clause bars such distribution | State court has exclusive jurisdiction and expressly modified trusts to permit one-time $3M distribution; plan contingent on that modification | Held: No. State-court modification authorized bypass of spendthrift protection; bankruptcy court’s finding not clearly erroneous |
| Whether the UCC Plan was proposed in good faith under 11 U.S.C. §1129(a)(3) | Plan is collusive and not in good faith to circumvent trust protections | Plan reasonably reorders affairs, gives Kearney a fresh start, and aligns with Code purposes | Held: Plan was proposed in good faith; bankruptcy court’s factual finding affirmed |
| Whether the bankruptcy court abused discretion by approving settlements of Kearney’s claims (are claims property of estate?) | Several claims relate to the trusts and are not estate property so cannot be settled by the Plan | Kearney effectively treated those claims as estate assets in his schedules, plans, and Rule 2004 filings; §541 incorporates causes of action into estate absent timely exclusion | Held: Claims were property of the estate; settlement approval not an abuse of discretion |
| Whether the bankruptcy court erred in weighing Kopexa factors (probability of success; expense/complexity; consideration) | Court failed to independently evaluate merits; contingency counsel removes expense concern; consideration for releases inadequate | Record shows prior losses, sanctions, credibility and discovery abuses by Kearney, likely high litigation costs, and sufficient consideration (ARCO borrowing, stock redemption, releases) | Held: Court reasonably applied Kopexa factors; findings are supported by record and not clearly erroneous |
Key Cases Cited
- In re Amerson, 839 F.3d 1290 (10th Cir. 2016) (treats BAP as subordinate; addresses inclusion of spendthrift interests in estate)
- In re Paige, 685 F.3d 1160 (10th Cir. 2012) (standard of review for confirmation of settlements: legal conclusions de novo, factual findings for clear error)
- Grogan v. Garner, 498 U.S. 279 (U.S. 1991) (central purpose of Bankruptcy Code: fresh start for debtors)
- In re Harline, 950 F.2d 669 (10th Cir. 1991) (discusses §541(c)(2) and spendthrift trust interests in bankruptcy)
- In re Kopexa Realty Venture Co., 213 B.R. 1020 (10th Cir. BAP 1997) (factors for evaluating settlements in bankruptcy)
- Sender v. Simon, 84 F.3d 1299 (10th Cir. 1996) (§541(a)(1) includes debtor’s causes of action in estate)
- In re Ford, 492 F.3d 1148 (10th Cir. 2007) (clear-error standard explained)