639 B.R. 204
Bankr. D. Colo.2022Background
- Quadruple D Trust (settlor and trustee: Donald Lopez) is a Colorado spendthrift family trust formed in 1990 to “acquire and hold residential real property” for family beneficiaries (wife and children).
- Trust’s only scheduled assets are $100 in bank accounts and a large Lone Tree, Colorado residence worth roughly $1.08M in which settlor’s wife (a beneficiary) has lived rent-free for ~20 years.
- The Trust has no employees, has produced no income in recent years, has not filed federal income tax returns for over a decade, and made minimal (if any) business-like distributions or transactions.
- 76 & 88 LLC (Secured Creditor) had a judgment and foreclosure action against the Real Property and moved to dismiss the Chapter 11 petition, arguing the Trust is not a §101(9) “business trust” and thus not an eligible debtor under §109(a).
- The court took uncontested proffers and trust documents as the evidentiary record, applied federal statutory interpretation to §101(9), concluded the Trust is not a business trust, and dismissed the Chapter 11 case with prejudice.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Trust is a “business trust” under 11 U.S.C. §101(9)/§109(a) | Trust: qualifies as a corporate-type entity (a business trust) and may be a Chapter 11 debtor; proffered business activity (buy/sell real estate, classic cars) | Secured Creditor: trust is a family/spendthrift trust created to hold residence, has no business operations, no transferable interests, no income or corporate attributes | Court: Not a business trust (applies Morrissey/Hecht attributes: purpose, transferability, centralized management, continuity); case dismissed with prejudice |
| Whether Trust qualifies as a Subchapter V small business debtor under §1182 | Trust: elected Subchapter V as a small business debtor | U.S. Trustee/Subchapter V Trustee: objected to Subchapter V designation; court questioned eligibility | Court: Expressed doubts about Subchapter V eligibility but did not decide because dismissal on general §109(a) grounds rendered it unnecessary |
Key Cases Cited
- Morrissey v. Comm’r of Internal Revenue, 296 U.S. 344 (U.S. 1935) (articulates classic attributes of a "business/Massachusetts trust" including business purpose, centralized management, transferability, continuity, limited liability)
- Hecht v. Malley, 265 U.S. 144 (U.S. 1924) (describes Massachusetts trust structure and transferable certificate model)
- Mosby v. Boatmen’s Bank of St. Louis County, 791 F.2d 628 (8th Cir. 1986) (applies Morrissey factors to bankruptcy eligibility)
- Shawmut Bank Co. v. First Fidelity Bank, 38 F.3d 86 (2d Cir. 1994) (observes lack of a single controlling definition and emphasizes purpose-based inquiry)
- Brady-Morris v. Schilling (In re Kenneth Allen Knight Tr.), 303 F.3d 671 (6th Cir. 2002) (endorses a primary-purpose test for business trusts)
- RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639 (U.S. 2012) (reiterates statutory interpretation principles applied by the court)