Pryor v. Collins
8-17-08027
Bankr. E.D.N.Y.Jan 8, 2018Background
- Grantor (Margaret Hanley) created a trust (2009) that conveyed a 100% undivided interest in real property and a 70% interest in Long Island Horticulture, Inc. (the "Trust Corpus").
- Grantor’s spouse died in 2009; the Trust contains Article 5 addressing distribution upon the spouse’s death and a limited power of appointment in Section 5.2; Article 5.4 provides distribution to Grantor’s daughter Grace Marie Collins if the spouse did not exercise the power.
- Debtor Grace Marie Collins filed Chapter 7 in March 2015; Trustee Robert L. Pryor sued trustees (Debtor as co-trustee and Margaret Hanley as co-trustee) in March 2017 seeking (1) declaratory judgment that the Trust Corpus is property of the estate under 11 U.S.C. § 541(a), (2) turnover under § 542(a), (3) avoidance/recovery under §§ 548/550/551, and (4) unjust enrichment and accounting.
- Defendants moved to dismiss under Rule 12(b)(6), attaching the Trust and affidavits; the court considered only the Trust (integral to the complaint) and declined to consider conflicting affidavits at the pleading stage.
- The court found the Trustee plausibly alleged (accepting complaint facts) that Article 5.4 vested a remainder in Debtor upon Grantor’s spouse’s death and therefore the Trust Corpus could be property of the bankruptcy estate, and that turnover under § 542(a) was plausibly pleaded.
- The court sua sponte ordered joinder of Grantor (Margaret Hanley, the grantor) under Rule 19/Bankr. R. 7019 as a required and feasible party because adjudication affects her interests and the beneficiaries’ respective interests are at issue.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Trust Corpus is property of Debtor’s bankruptcy estate under § 541(a) | Article 5.4 vested the remainder in Collins upon Grantor’s spouse’s death because spouse did not exercise the limited power of appointment | Article 2 (distributions during Grantor’s lifetime) still controls while Grantor is alive; Article 5.4 not triggered | Court: Plausible claim stated; accepting pleadings, Article 5.4 could have vested a remainder in Collins and Trust Corpus may be estate property |
| Whether Trustee stated a turnover claim under § 542(a) | Trustees possess the Trust Corpus; it is property of the estate and not of inconsequential value, so turnover is required | Did not specifically rebut § 542(a) elements in the motion to dismiss | Court: Turnover claim plausibly pleaded (possession/control, estate use/sale/lease, not inconsequential) |
| Whether court may consider extrinsic affidavits attached to defendants’ motion | Trustee relies on the Trust text; court should limit to complaint and integral documents | Defendants submitted Trust and affidavits to show different construction | Court: Considered Trust (integral) but rejected affidavits that contradicted complaint at pleading stage |
| Whether Grantor (the settlor) is a required party under Rule 19 | Trustee: action affects beneficiaries’ interests; Grantor’s powers and interests implicated | Defendants did not move for nonjoinder but relied on Grantor-related provisions | Court: Grantor must be joined; joinder is feasible and required to protect her interests and adjudicate beneficiaries’ rights |
Key Cases Cited
- Chartschlaa v. Nationwide Mut. Ins. Co., 538 F.3d 116 (2d Cir.) (discussing breadth of property included in bankruptcy estate)
- Carey v. Brown, 92 U.S. 171 (U.S. 1875) (general rule that trustees and cestuis que trust must be parties in actions concerning trust property)
- Walsh v. Centeio, 692 F.2d 1239 (9th Cir.) (noting beneficiaries are required parties in trustee-accounting and corpus restoration suits)
- In re Colish, 289 B.R. 523 (Bankr. E.D.N.Y.) (contingent remainder interest as property of the estate)
- In re Brizinova, 554 B.R. 64 (Bankr. E.D.N.Y.) (trustee may seek turnover from any entity in possession, custody, or control of estate property)