499 B.R. 655
Bankr. W.D. Mo.2013Background
- Debtor Nathan and his wife Kathleen are co-trustees of two revocable trusts (Kathleen Trust and Nathan Trust) created in 2005; Debtor filed Chapter 11 on July 27, 2007 and case later converted to Chapter 7.
- A Chapter 7 Trustee sued seeking declaratory relief, turnover under § 542, and an accounting, asserting the Trustee succeeded to Debtor’s rights/powers in the Trusts and those rights are property of the bankruptcy estate.
- Trustee alleged Debtor’s trustee powers, beneficiary interests, and possible settlor/revocation rights should be exercised by the Trustee; Defendants moved to dismiss.
- Central legal questions: (1) whether the bankruptcy court can enter declaratory/final judgment and adjudicate turnover post-Stern; (2) whether Debtor’s co‑trustee powers, beneficiary interests, or revocation/settlor status are property of the estate; (3) validity/enforceability of the Trusts’ spendthrift clauses under Missouri law; (4) whether equitable doctrines (alter‑ego, equitable override) can reach trust assets.
- Court concluded it has authority to enter final orders in this core, turnover/declaratory proceeding under Eighth Circuit precedent, denied abstention, held co‑trustee powers (subject to co‑trustee limitation) are estate property, but Debtor’s discretionary beneficiary interests are not estate property; Debtor is not a settlor and cannot revoke the Kathleen Trust; spendthrift provisions are valid and enforceable under the Missouri Uniform Trust Code (MUTC).
Issues
| Issue | Trustee's Argument | Debtor's Argument | Held |
|---|---|---|---|
| Court power to enter final declaratory/turnover judgment post‑Stern | Bankruptcy court can enter final judgment in turnover/declaratory matters that "stem from" administration of the estate | Stern undermines bankruptcy courts’ ability to enter final judgments in core matters | Court: Follows Eighth Circuit (Sears Roebuck); bankruptcy court may enter final judgment here; no abstention |
| Are Debtor’s trustee powers property of the estate? | Trustee: Debtor’s co‑trustee powers (manage, distribute, revoke) are estate property and subject to turnover | Debtor: Powers are limited or solely for others; some powers excluded by § 541(b)(1) | Held: Co‑trustee powers are estate property but limited by MUTC (must act by majority; cannot act unilaterally) |
| Are Debtor’s beneficiary interests property of the estate? | Trustee: Beneficiary interest should be estate property or trust pierced | Debtor: Beneficiary interest is discretionary and thus not property under MUTC §456.5‑504 | Held: Beneficiary interests are discretionary and not property of the estate |
| Is Debtor a settlor / does he have power to revoke Kathleen Trust? | Trustee: Debtor contributed property so is a settlor and can revoke or withdraw (or via divorce) | Debtor: Kathleen reserved sole revocation/withdrawal; statutory definition of settlor excludes him | Held: Debtor is not a settlor; he lacks immediate power to revoke or withdraw; divorce contingency is not a presently exercisable withdrawal power |
| Are the Trusts’ spendthrift provisions enforceable? | Trustee: Spendthrift protection should be invalidated due to Debtor’s control/dominion (citing pre‑MUTC cases) | Debtor: MUTC validates spendthrift clauses; co‑trustee structure limits unilateral control | Held: Spendthrift provisions valid under MUTC; prior contrary cases effectively abrogated by MUTC; no equitable override |
| Can equitable doctrines (alter‑ego, equitable override) or §456.1‑105 be used to reach trust assets? | Trustee: Court can use equitable powers or alter‑ego reverse‑piercing to access assets | Defendants: No statutory or equitable basis; complaint fails to plead required elements | Held: Court will not exercise equitable power to supplant MUTC; alter‑ego claim dismissed for failure to plead elements and amendment would be futile |
Key Cases Cited
- Sears, Roebuck & Co. v. O’Brien, 178 F.3d 962 (8th Cir. 1999) (bankruptcy court may issue declaratory judgments concerning administration of a bankruptcy estate)
- Stern v. Marshall, 131 S. Ct. 2594 (U.S. 2011) (limited Supreme Court decision on constitutional limits of bankruptcy courts’ authority to enter final judgment)
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (U.S. 2007) (plausibility standard for Rule 12(b)(6) motions)
- In re Markmueller, 51 F.3d 775 (8th Cir. 1995) (pre‑MUTC case invalidating spendthrift protection where settlor/trustee retained broad control)
- In re Dean, 107 F.3d 579 (8th Cir. 1997) (determining nature and extent of property of the estate is a core bankruptcy function)
- In re Ozark Restaurant Equipment Co., 816 F.2d 1222 (8th Cir. 1987) (alter‑ego doctrine and limits on trustee standing to pursue such claims)