Scott v. King
839 F.3d 1290
| 10th Cir. | 2016Background
- Frances Scott and husband filed Chapter 7; Scott later amended schedules to list a Florida probate contest challenging her father’s 2012 will (a pour‑over will funding trusts that include spendthrift provisions).
- The trustee (King) learned of the probate contest after reopening the Chapter 7, substituted into the Florida litigation, and mediated a settlement for $100,000 to Scott and $100,000 to her half‑sister, plus $6,000 to the trustee.
- Scott had omitted the probate contest from initial Chapter 7 schedules and meetings, later disclosed it only after reopening; she valued it as unknown/$0 and never invoked 11 U.S.C. § 541(c)(2) in the bankruptcy court.
- The bankruptcy court approved the trustee’s settlement, finding the trustee made a reasonable business judgment, that the estate would otherwise incur high litigation costs with uncertain success, and that the debtors acted in bad faith by concealing assets.
- The Bankruptcy Appellate Panel affirmed; Scott appealed to the Tenth Circuit arguing the spendthrift trust interest was excluded from the bankruptcy estate under § 541(c)(2), so the bankruptcy court lacked jurisdiction to approve the settlement.
Issues
| Issue | Plaintiff's Argument (Scott) | Defendant's Argument (Trustee/King) | Held |
|---|---|---|---|
| Whether a beneficiary’s interest in a spendthrift trust is excluded from the bankruptcy estate under 11 U.S.C. § 541(c)(2) so the bankruptcy court lacked jurisdiction to administer or settle it | Scott: The spendthrift trust interest is excluded from the estate under § 541(c)(2), so the trustee lacked authority to settle it | King: § 541(c)(2) is permissive; a debtor may include or exclude such interests and Scott effectively included the interest by listing the probate contest and never invoking § 541(c)(2) | Court: § 541(c)(2) is permissive; Scott’s conduct and disclosures resulted in the interest being treated as estate property; affirmed |
| Whether the probate contest (cause of action challenging the will) is excluded by § 541(c)(2) | Scott: The contest relates to the trust and should be excluded along with the trust interest | King: The probate contest is a separate cause of action (property of the estate) and not shielded by the spendthrift provision | Court: Cause of action is estate property and not protected by the spendthrift clause; properly administered by trustee |
| Whether trustee’s settlement approval was an abuse of discretion | Scott: Settlement undervalued her potential interest and trustee lacked authority over excluded trust interest | King: Settlement was reasonable given weak merits, expense, and arm’s‑length mediation; Kopexa factors support approval | Court: Bankruptcy court did not abuse discretion; trustee made reasonable business judgment |
| Whether debtors’ concealment affects relief/valuation | Scott: (implicit) she should retain rights to contest or higher value | King: Debtors’ nondisclosure and bad faith forfeited higher valuation rights; equitable considerations support approval | Court: Debtors’ concealment and bad faith justified limiting their ability to challenge the settlement value |
Key Cases Cited
- Mathai v. Warren (In re Warren), 512 F.3d 1241 (10th Cir. 2008) (standard of review: de novo for law, clear error for facts; BAP treated as subordinate appellate tribunal)
- Gladwell v. Harline (In re Harline), 950 F.2d 669 (10th Cir. 1991) (beneficial interests in ordinary spendthrift trusts may qualify for § 541(c)(2) exemption)
- Rains v. Flinn (In re Rains), 428 F.3d 893 (9th Cir. 2005) (interprets § 541(c)(2) language as permissive rather than mandatory)
- Patterson v. Shumate, 504 U.S. 753 (1992) (uses language suggesting exclusion under § 541(c)(2) is discretionary: “may be excluded”)
- Tenn. Student Assistance Corp. v. Hood, 541 U.S. 440 (2004) (bankruptcy court has exclusive in rem jurisdiction over debtor’s property and estate property)
- Moratzka v. Morris (In re Senior Cottages of Am., LLC), 482 F.3d 997 (8th Cir. 2007) (causes of action are property of the bankruptcy estate)
- Sender v. Buchanan (In re Hedged-Invs. Assocs., Inc.), 84 F.3d 1281 (10th Cir. 1996) (causes of action included in estate property)