Tiel Trust I FBO Paula T. Douglass
Case Information
UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF COLORADO Bankruptcy Judge Thomas B. McNamara
In re:
Bankruptcy Case No. 23-14888 TBM TIEL TRUST I FBO PAULA T.
DOUGLASS, Chapter 11
Debtor. ______________________________________________________________________
MEMORANDUM OPINION AND ORDER DISMISSING CASE
______________________________________________________________________
I. Introduction.
The Debtor, Tiel Trust I FBO Paula T. Douglass (the “Trust”), recently filed for protection under Chapter 11 of the Bankruptcy Code. [1] The Trust is a spendthrift trust created decades ago by Ira J. Terry (the “Grantor”) under Texas law through a Trust Agreement. The Trust was created for the “primary benefit” of the Grantor’s daughter, Paula T. Douglass (“Ms. Douglass”). So, the Trust is strictly a family affair. According to the Trust Agreement, the main purpose of the Trust was to “distribute” to Ms. Douglass “such amounts of trust income and principal as are necessary . . . to provide for the health, support, and maintenance” of Ms. Douglass to allow her to maintain her “accustomed standard of living.”
The main asset of the Trust is a luxury residence located at 42400 Highway 82, Aspen, Colorado (the “Aspen Home”). According to the Trust, the Aspen Home is worth about $13 million. Ms. Douglass is the only resident of the Aspen Home and enjoys living there rent-free. Some years ago, in connection with the Trust’s previous unsuccessful bankruptcy case, the Trust acknowledged that it was obligated to pay not less than $5,286,070.80 to creditors 42400 Highway 82 Acquisition, LLC and 42400 Highway 82 Acquisition Sub Debt, LLC (together, the “Secured Creditors”). Such debt is secured by liens against the Aspen Home. The debt owed to the Secured Creditors has grown substantially since then because the Trust has not paid anything to the Secured Creditors in many years. The Trust sought bankruptcy relief solely to avoid foreclosure on the Aspen Home by the Secured Creditors. Other than the Aspen Home (and antiques and artwork located therein), the Trust owns little else (two financial accounts with nominal balances and some old railroad tank cars). Besides the Secured Creditors, the Trust has only three creditors: a lawn and garden service; the Pitkin County Public Trustee; and Ms. Douglass’ step-son who claims to be entitled to receive reimbursements for Trust expenses he fronted.
The Secured Creditors filed a Motion to Dismiss raising two arguments. First, the Secured Creditors contend that the Trust is not eligible for bankruptcy protection (per Sections 101(9), 101(41), 109(a), and 109(d)) because the Trust is not a “business trust.” Second, the Secured Creditors argue that the Trust filed this case (its second recent bankruptcy) in bad faith such that dismissal is appropriate under Section 1112(b).
Regarding eligibility, both the Trust and the Secured Creditors agree that the Bankruptcy Code limits the eligibility of trusts to file for bankruptcy. Only a “business trust” may do so. Consequently, the eligibility issue boils down to a single question: Is the Trust a “business trust”? The definition of the phrase “business trust” must be derived from the ordinary legal meaning of the term when Congress passed the Bankruptcy Code. Based on such legal meaning and the undisputed facts (introduced by way of a proffer process), the Court concludes that the Trust is not a “business trust.” That result is patent because the Trust was not created and maintained for a business purpose and does not have any of the other attributes of a “business trust.” Since the Trust is not a “business trust,” it is not eligible for bankruptcy protection and the case must be dismissed. Given the Court’s determination on eligibility, the Court need not consider the bad faith filing argument for dismissal also raised by the Secured Creditors.
II. Jurisdiction and Venue.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334. The dispute over the Trust’s bankruptcy eligibility and alleged bad faith filing constitutes a core proceeding under 28 U.S.C. §§ 157(b)(2)(A) (matters concerning administration of the estate) and (b)(2)(O) (other proceedings affecting liquidation of assets of the estate). Venue is proper in the Court pursuant to 28 U.S.C. §§ 1408 and 1409. Neither the Trust nor the Secured Creditors have contested the Court’s jurisdiction to enter final judgment regarding the Trust’s eligibility to seek bankruptcy protection. And, neither party has attacked the propriety of venue in the Court.
III. Procedural Background.
A. The Trust’s First Bankruptcy Case.
On November 6, 2018, the Trust filed for protection under Chapter 11 of the Bankruptcy Code in the case captioned: In re Tiel Trust FBO Paula T. Douglass , Case No. 18-19697 TBM (Bankr. D. Colo.) (the “First Case”). [2] A few weeks later, the Trust submitted its Statement of Financial Affairs and Schedules. [3] In its Schedule A/B, the Trust identified ownership of the Aspen Home (located at 42400 Highway 82, Aspen, Colorado) as its most significant asset. [4] The Trust listed the value of the Aspen Home as $11,600,000.00. [5] In its initial Schedule D, the Trust noted that it owed the Secured Creditors at least $3,369,385.19. [6] The Trust later amended its Schedule D to increase the amount of the debt owed to one of the two Secured Creditors for a new total of $4,969,385.19. [7] The Trust filed the First Case to stop the Secured Creditors from foreclosing on the Aspen Home. [8]
Early in the First Case, on December 17, 2018, the Secured Creditors filed a “Motion to Dismiss” (the “First Case Motion to Dismiss”). [9] In the First Case Motion to Dismiss, the Secured Creditors contended that the Trust is not eligible for bankruptcy protection (per Sections 101(9), 101(41), 109(a), and 109(d)) because the Trust is not a “business trust.” Second, the Secured Creditors argued that the Trust filed the First Case in bad faith such that dismissal was appropriate under Section 1112(b). [10] The Trust objected to the First Case Motion to Dismiss. [11] However, the First Case Motion to Dismiss was not prosecuted to decision. The Trust filed two proposed Chapter 11 reorganization plans in the First Case. [12] Neither was confirmed. Later, the Trust and the Secured Creditors stipulated to dismissal of the First Case. [13] On March 25, 2020, the Court dismissed the First Case. [14]
B. The Trust’s Second Bankruptcy Case.
On October 24, 2023, the Trust filed for protection under Chapter 11 of the Bankruptcy Code in the case captioned: In re Tiel Trust FBO Paula T. Douglass , Case No. 23-14888 TBM (Bankr. D. Colo.) (the “Second Case”). [15] As it did with the First Case, the Trust filed for bankruptcy protection to stop the Secured Creditors from foreclosing on the Aspen Home. [16] A few weeks later, the Trust submitted its Statement of Financial Affairs, Summary of Assets and Liabilities and Schedules, none of which have been amended. The Trust has not filed a proposed Chapter 11 plan of reorganization.
Docket No. 29 in First Case.
Id . Docket No. 30 in First Case.
Docket No. 82 in First Case.
Docket No. 91 in First Case at 5-6.
Docket No. 43 in First Case.
Id .
Docket No. 52 in First Case. Docket Nos. 90 and 114 in First Case.
Docket No. 149 in First Case.
Docket No. 150 in First Case.
Docket No. 1 in Second Case. The Court will refer to particular documents contained in the CM/ECF docket for the Second Case using the convention: “Docket No. ___ in Second Case.”
Docket No. 49 in Second Case at 10-12; Ex. 3 at 10. Docket Nos. 23-29 in Second Case and Ex 2. The Court will refer to Exhibits presented to the
Court and admitted into evidence using the convention: “Ex. ___.”
1. The Trust’s Assets.
In its Schedule A/B, the Trust identified as its most significant asset ownership of the Aspen Home (located at 42400 Highway 82, Aspen, Colorado). [18] The Trust listed the value of the Aspen Home as $13,000,000.00. [19] In addition to the Aspen Home, the Trust noted the following additional assets:
Asset Type Asserted Current Value Plains Capital Account $ 1,606.61 Union Bank of Switzerland Account $ 2,979.27 Accounts Receivable $ 0.00 Mutual Funds and Stock Unknown Artwork and Antiques in Aspen Home $500,000.00 Rail Road Tank Cars $300,000.00 Notes Receivable $ 0.00 Property Damage Claim Unknown Lender Liability Claim Unknown [20] 2. The Trust’s Liabilities.
In its Schedule D, the Trust reported that the Secured Creditors held the only secured claims against the Trust in the aggregate amount of $9,300,415.93 (albeit that the Trust checked the box: “disputed”). [21] With respect to unsecured claims, the Trust listed only three claims:
Creditor Amount Alpine Lawn & Garden Services LLC $ 2,004.38 Pitkin County Public Trustee $ 2,677.44 [22] S. Preston Douglass Jr. $511,801.00 [23]
S. Preston Douglass Jr. is the step-son of Ms. Douglass and also serves as a co- Trustee of the Trust along with his step-mother.
3. The Motion to Dismiss and Objection.
On December 8, 2023, the Secured Creditors filed their “Motion to Dismiss Bankruptcy Case” (the “Motion to Dismiss”). [24] The Secured Creditors raised two arguments. First, the Secured Creditors contend that the Trust is not eligible for bankruptcy protection (per Sections 101(9), 101(41), 109(a), and 109(d)) because the Trust is not a “business trust.” Second, the Secured Creditors argue that the Trust filed this case (its second recent bankruptcy) in bad faith such that dismissal is appropriate under Section 1112(b). The Secured Creditors elected to proceed pursuant to L.B.R. 2081-3 and provided notice of the objection deadline as well as the date selected for the initial hearing. The Trust filed an “(I) Objection to Motion to Dismiss Chapter 11 Bankruptcy Case, and (II) Request for Evidentiary Hearing” (the “Objection”). [25]
The Court conducted a Hearing on the Motion to Dismiss and Objection as scheduled on January 4, 2024. [26] Counsel for the Secured Creditors appeared in person. Counsel for the Trust appeared by telephone. Consistent with L.B.R. 2081-3, the Secured Creditors proffered testimony of Ms. Douglass, S. Preston Douglass, Jr. (Ms. Douglass’ step-son), and Anne Marie McPhee (foreclosure counsel for the Secured Creditors). The Secured Creditors also proffered Exhibits 1-17. The Trust did not object. So, the Court admitted into evidence the Secured Creditors’ Exhibits 1-17. The Trust failed to comply with L.B.R. 2081-3 since, among other things, the Trust failed to timely submit a list of witnesses and exhibits (as required by L.B.R. 2081-3(d)). Overruling the Secured Creditors’ objection, however, the Court allowed the Trust to present testimonial proffers from Ms. Douglass and S. Preston Douglass, Jr. The Trust proffered no exhibits.
At the conclusion of the evidentiary proffers, the Court asked of counsel for both the Secured Creditors and the Trust whether there were any factual disputes which may require an evidentiary hearing. Counsel for the Secured Creditors responded that there were no factual disputes and the Court could decide the Motion to Dismiss and the Objection based upon the uncontested evidentiary proffers. Counsel for the Trust contended that the Court would “benefit” from further development of evidence at a final hearing. However, counsel for the Trust was unable to identify a single material factual dispute. Accordingly, the Court determined that, in the absence of any material factual conflicts, no final evidentiary hearing was necessary and the Court could decide the issues based upon the evidentiary proffers. Thus, the evidentiary record consists solely of the uncontested proffers. Both the Secured Creditors and the Trust presented fulsome legal arguments based upon the evidence.
Thereafter, the Court took the bankruptcy eligibility and bad faith issues under advisement. In the interim, the Court has evaluated all the exhibits admitted into evidence, considered the testimonial proffers, and reviewed the applicable law. The disputed bankruptcy eligibility and bad faith issues are now ripe for decision.
IV. Findings of Fact.
The Court makes the following findings of fact under Fed. R. Civ. P. 52(a)(1), as incorporated by Fed. R. Bankr. P. 7052 and 9014(c). [27] All such findings of fact are based upon the proffered testimony and exhibits admitted at the Hearing as well as Court records.
A. Formation of the Trust.
On October 3, 1986, Ira J. Terry, as Grantor, executed a Trust Agreement (the “Trust Agreement”) creating the Trust to benefit his family. [28] The original trustee of the Trust was designated as Trust Corporation International.
The Trust Agreement created:
. . . two trusts, equal in value. One such trust shall be held for the primary benefit of the Grantor’s daughter, PAULA T. DOUGLASS, and the other trust shall be held for the primary benefit of the Grantor’s son-in-law, SAM P. DOUGLASS (each such person hereafter called the “Beneficiary” of his or her trust).
Tr. Agr. § 1.1. Sam P. Douglass was Ms. Douglass’ husband. [29] He died in 2014 at which time the trust property contained in the separate trust for the benefit of her husband was “added to” or “merged” into the Trust. [30] So, at this stage, there is only one Trust: the Debtor entity which filed for bankruptcy protection. Ms. Douglass currently is a co-trustee of the Trust. [31] The other co-trustee is her step-son, S. Preston Douglass, Jr. [32]
According to the Trust Agreement, Ms. Douglass is the “primary” beneficiary. The Trust Agreement requires the Trustee to make distributions to Ms. Douglass — that is its main purpose:
The Trustee shall distribute to the Beneficiary [Ms. Douglass] . . . such amounts of trust income and principal as are necessary, when added to the funds reasonably available [to Ms. Douglass] . . . from all other sources known to the Trustee, to provide for the health, support, and maintenance of such distributee, in order to maintain [her], to the extent reasonably possible, in accordance with [her] accustomed standard of living.
Tr. Agr. § 1.1. (The Trust Agreement also refers to “secondary” beneficiaries meaning “the nieces and nephews of PAULA T. DOUGLASS.” However, Ms. Douglass apparently does not have any nieces and nephews. Instead, she has repeatedly confirmed that she is the “sole beneficiary” of the Trust. [33] Accordingly, the Court does not consider provisions in the Trust Agreement pertaining to “secondary” beneficiaries.
The Trust is a classic spendthrift trust. It states: Prior to the actual receipt of such property by any beneficiary, no property (income or principal) distributable under any trust created by this instrument shall be subject to anticipation or assignment by any beneficiary, or to attachment by or to the interference or control of any creditor or assignee of any beneficiary, or be taken or reached by any legal or equitable process in satisfaction of any debt or liability of any beneficiary, and any attempted transfer or encumbrance of any interest in such property by any beneficiary hereunder prior to distribution shall be absolutely and wholly void.
Tr. Agr. § 5.1. Another part of the Trust Agreement reenforces such provision: “no Beneficiary shall have the power pursuant to this section to appoint trust property to himself or herself, his or her creditors, his or her estate, or the creditors of his or her estate.” Tr. Agr. § 1.5. So, the Trust is a spendthrift trust designed as an estate planning vehicle to protect assets for the benefit of Ms. Douglass. Ms. Douglass repeatedly has acknowledged as much. For example, during the Secured Creditors’ proffer, the Secured Creditors noted that Ms. Douglass filed for personal bankruptcy protection in the case captioned: In re Paula Terry Douglass , Case No. 17-34716 (Bankr. S.D. Tex.). In that bankruptcy proceeding, Ms. Douglass took the position that the Trust was a spendthrift trust not available for her creditors. In her Disclosure Statement, she stated: “In 1986, Ira Terry created the Tiel Trust I as a spendthrift trust for the benefit of his . . . daughter Paula Douglass.” See In re Paula Terry Douglass , Case No. 17-34716 (Bankr. S.D. Tex.), Docket No. 133 at 13; Docket No. 46 at 37.
The Trust will terminate at the end of Ms. Douglass’ life. Tr. Agr. § 1.6. Before then, Ms. Douglass has the absolute right to appoint and remove the trustee. (As noted previously, Ms. Douglass and her step-son are the current trustees.) The Trust was created under the Texas Trust Code and is governed by Texas law. Tr. Agr. §§ 4.1 and 5.4. In accordance therewith, the trustee of the Trust has the typical powers of a trustee of a spendthrift trust. In addition to those powers covered in the Texas Trust Code, the trustee may: (1) “retain . . . any property transferred to the Trustee by the Grantor”; (2) “exchange, sell, or lease . . . for cash, property, or credit . . . all or any part of the assets of the trust”; (3) “borrow money from any source . . . and to mortgage, pledge, or in any manner encumber all or any part of the assets of any trust”; (4) “invest and reinvest . . . in any kind of property whatsoever”; (5) “register and carry any securities or other property in the name of the Trustee”; (6) “enter into any transaction on behalf of any trust”; (7) “make . . . any distribution required or permitted to be made to any beneficiary under any trust”; (8) “purchase any of the property . . . in the testamentary estate of the Grantor at its fair market value”; (9) “lend money to the testamentary estate of the Grantor”; (10) “make divisions or distributions in money or in kind . . . whenever required or permitted to divide or distribute all or any part of any trust”; (11) “invest the trust assets in any life insurance policy or policies”); (12) “release . . . any fiduciary power” (13) “select and employ . . . any person, firm or corporation, engaged in rendering investment advisory services or investment management services . . .”; (14) “employ a bank or trust company . . . as custodian or agent”; (15) “invest all or any part of the trust assets in any common fund”; (16) “commence or defend . . . such litigation with respect to such trust or any property of such trust as the Trustee considers advisable”; and (17) “lend cash or property to any beneficiary”. Tr. Agr. §§ 4.1(a)-(q). Notably, the Trust Agreement does not expressly authorize the trustee to file for bankruptcy protection for the Trust.
The Trust proffered the testimony of Ms. Douglass that the Trust was designed to “take property and vindicate it by way of use or sale.” Further, the Trust also proffered S. Preston Douglass’ testimony that his step-grandfather, the Grantor, “engaged in business transactions through the Trust.” (Such self-serving testimony is flatly contradicted by the Trust Agreement which gives the Grantor no rights in the Trust or to operate the Trust.) In any event, the Trust Agreement does not permit Ms. Douglass, as the sole beneficiary of the Trust, to transfer her interests in the Trust. Also, there is no provision in the Trust Agreement for the issuance of shares or transferable certificates of participation.
B. Assets of the Trust .
The Trust initially was funded with $3,000.00. [34] At some point (possibly in the
1980’s), the Trust bought or received the Aspen Home as an asset. Ms. Douglass, as co-trustee and sole beneficiary of the Trust, does not know who put the Aspen Home in the Trust or when. [35] The Trust asserts that the current value of the Aspen Home is $13,000,000.00. [36] In addition, the Trust maintains about $500,000.00 worth of artwork and antiques in the Aspen Home (although some artwork and antiques may belong to Ms. Douglass personally). The Trust has never rented the Aspen Home to generate income. Ms. Douglass lives in the Aspen Home but she does not pay rent to the Trust. The Aspen Home has been marketed for sale continuously since 2017. However, the Trust has not sold the Aspen Home.
In addition to the Aspen Home (and furnishings), the Trust identified only a few other assets with value: (1) a financial account at Plains Capital with $1,606.61; (2) a financial account at Union Bank of Switzerland with $2,979.27; and (3) “Rail Road Tank Cars” with an asserted current value of $300,000.00
With respect to the railroad cars, someone (Ms. Douglass does not know who) purchased railroad cars and placed them into the Trust decades ago. Currently, the Trust owns seven railroad cars which are operable and leased for periods expiring after January 2024: GLNX 21043, GLNX 23141, GNLX 21004, GNLX 23115, GNLX 23116, GNLX 23117, and GNLX 34100. In addition to operable railroad cars, as of August 2023, the Trust also owned seven railroad cars which are inoperable and “need[] to be scrapped.” Since then, two additional railroad cars have joined the “will be scrapped” list. The estimated scrap value of the Trust’s railroad cars depends upon weight and varies between $5,491.00 to $9,063.00 per car. The “estimated scrap value” of all the nine inoperable railroad cars owned by the Trust is $63,341.00. Further, the “estimated scrap value” of all the seven operable railroad cars is $47,464.00. The Court received no evidence why the Trust asserted that the railroad cars were worth $300,000.00 on Schedule A/B.
GNLX Corporation (“GNLX”) is a railroad car leasing company and leases and manages the seven operable railroad cars for the Trust. For the quarter ended March 31, 2023, the Trust received net rentals from GNLX of $10,349.95 (which amount derived from leases of nine railroad cars). The monthly average rentals were $3,449.98 during such period. Since then, one of the railroad car leases has expired and another is about to expire and such railroad cars will be scrapped. So, the expected rental revenue will be less than it was when the Trust filed for bankruptcy. Nevertheless, the meagre railroad car rental and scrappage are the only sources of revenue for the Trust.
C. Operation of the Trust.
As noted previously, Ms. Douglass and her step-son, S. Preston Douglass Jr., are the co-trustees of the Trust. The Trust has no employees. [49] It also has no physical office. The Trust filed one Monthly Operating Report during the pendency of its bankruptcy case. [50] During the one-month reporting period ended November 30, 2023, the Trust earned income of $0.00.
D. Debt Owed to the Secured Creditors.
On July 25, 2008, the Trust borrowed $785,101.73 from Post Oak Bank, N.A.
pursuant to a Promissory Note (“Note 1”). [51] Note 1 matured on July 25, 2013, and has not been repaid in full. On July 21, 2009, the Trust borrowed $2,200,000.00 from Post Oak Bank, N.A. pursuant to a Promissory Note (“Note 2”). [52] Note 2 matured on January 21, 2011, and has not been repaid in full. On September 30, 2015, the Trust borrowed $525,000.00 from Post Oak Bank, N.A. pursuant to a Promissory Note (“Note 3”). [53] Note 3 matured on September 25, 2016, and has not been repaid in full. Ms. Douglass, as the trustee of the Trust, executed Notes 1, 2 and 3 on behalf of the Trust. One of the Secured Creditors, 42400 Highway 82 Acquisition, LLC, is the current holder of Notes 1, 2 and 3. Notes 1, 2 and 3 are secured by deeds of trust on the Aspen Home.
On November 15, 2012, the Trust borrowed $1,225,000.00 from Diane and Charles Ofner pursuant to a Promissory Note (“Note 4”). [54] Note 4 matured on November 15, 2014, and has not been repaid in full. Ms. Douglass, as the trustee of the Trust executed Note 4. One of the Secured Creditors, 42400 Highway 82 Sub Debt, LLC, is the current holder of Note 4. Note 4 is secured by a deed of trust on the Aspen Home.
The Trust has not made any payments to the Secured Creditors since about 2016. [55] However, on February 21, 2020, the Trust and the Secured Creditors entered into a “Settlement and Forbearance Agreement” (the “Forbearance Agreement”). [56] In the Forbearance Agreement, the Trust agreed that the outstanding balance of principal, interest, and costs as of November 6, 2018, the petition date of the First Case, was:
Note 1: $ 727,275.83
Note 2: $2,356,036.56 Note 3: $ 595,227.37
Note 4: $1,607,531.04 [57]
Through the Forbearance Agreement, the Trust agreed to sell the Property and pay the Secured Creditors on Notes 1, 2, 3 and 4 on or before September 15, 2020, failing which the Trust would transfer the Property to the Secured Creditors through a deed in lieu of foreclosure. [58] The Trust executed the deed in lieu of foreclosure and placed it in escrow. [59] The Forbearance Agreement led to the dismissal of the First Case. However, the Trust did not sell the Property and the deed in lieu of foreclosure was not released to the Secured Creditors. [60] So, the Secured Creditors commenced foreclosure proceedings against the Property. Once again, the Trust filed for bankruptcy protection to stop the foreclosure process. Post-bankruptcy, the Trust has indicated that it desires to sell the Property (which has been on the market for sale continuously since 2017).
V. Legal Analysis. [61]
A. Statutory Framework for Bankruptcy Eligibility.
The main issue in this dispute is whether the Trust is eligible to seek bankruptcy protection. In reaching its decision, the Court starts with the applicable statutes.
1. General Eligibility Requirements in All Bankruptcy Cases. Section 109(a) sets forth the general requirements for “who may be a debtor” in all bankruptcy cases and states:
Notwithstanding any other provision of this section, only a person that resides or has a domicile, a place of business, or property in the United States, or a municipality, may be a debtor under this title [the Bankruptcy Code].
11 U.S.C. § 109(a). So, at a minimum, only “a person” or a “municipality” may seek bankruptcy protection. Section 101(41) defines the term “person”:
The term “person” includes individual, partnership, and corporation, but does not include governmental unit . . . .
11 U.S.C. § 101(41). The Trust seemingly acknowledges that it is not an individual or partnership. Instead, the Trust presumably contends that it is a “corporation.” In bankruptcy vernacular, the term “corporation” is somewhat broader than the typical meaning under state law. Section 101(9) provides:
The term “corporation” —
(A) includes —
(i) association having a power or privilege that a private corporation, but not an individual or a partnership possesses;
(ii) partnership association organized under a law that makes only the capital subscribed responsible for the debts of such association;
(iii) joint-stock company;
(iv) unincorporated company or association; (v) business trust; but
(B) does not include limited partnership.
11 U.S.C. § 101(9). The Trust claims that it is a “business trust”; but the Secured
Creditors argue otherwise. A “business trust” qualifies as a “corporation” under the
Bankruptcy Code and is eligible generally to seek bankruptcy protection.
See In re
Sung Soo Rim Irrevocable Intervivos Tr.
,
2. The Trust Bears the Burden to Prove Bankruptcy Eligibility. The Trust bears the burden to prove its eligibility to file for bankruptcy protection.
See First Nat’l Bank of Durango v. Woods (In re Woods)
,
B. The Meaning of the Statutory Term: “Business Trust.” 1. General Guidelines for Statutory Interpretation. The key to this case is the meaning of the term “business trust” as used in Section 101(9) of the Bankruptcy Code. Congress did not expressly define the phrase “business trust” when it enacted the Bankruptcy Code. That is not particularly unusual. After all, the Bankruptcy Code does not contain a definition of every word and phrase used in the legislation. Accordingly, to ascertain the meaning of the phrase “business trust” (and thus, the Trust’s eligibility to file for bankruptcy protection) the Court must engage in a classic federal statutory interpretation exercise.
Since the Bankruptcy Code “standardizes an expansive (and sometimes unruly)
area of law,” it is the Court’s “obligation to interpret the Code clearly and predictably
using well established principles of statutory construction.”
RadLAX Gateway Hotel,
LLC v. Amalgamated Bank
,
Timing-wise, statutory interpretation should focus on the meaning of the statutory
text at the time of original enactment.
Baker Botts L.L.P. v. ASARCO LLC
, 576 U.S.
121, 128 n.2 (2015) (interpreting the word “services” as of 1934 when the term was first
used in the bankruptcy statute). Put another way, “[t]o gain a proper understanding of
the statute at issue, we must put it into its historical context.”
Aulston v. U.S.
, 915 F.2d
584, 585 (10th Cir. 1990). In this case, as explained below, the term “business trust”
was first employed as part of the definition of “corporation” when the Bankruptcy Code
was originally enacted in 1978. Pub. L. 95-598, 92 Stat. 2549 (Nov. 6, 1978). So, the
Court need only look back four decades.
See Field v. Mans,
Typically, the starting place for statutory interpretation is the “plain” or “ordinary”
meaning of the text.
Clark v. Rameker
,
how a reasonable reader, fully competent in the language, would have understood the text at the time it was issued. The endeavor requires aptitude in language, sound judgment, the suppression of personal preferences regarding the outcome, and, with older texts, historical linguistic research. It also requires an ability to comprehend the purpose of the text . . . .
Antonin Scalia and Bryan A. Garner, R EADING L AW : T HE I NTERPRETATION OF L EGAL T EXTS 33 (Thompson/West 2012) [hereinafter, “R EADING L AW at ___”] (emphasis in original). The Court will construe the term “business trust” under the “fair reading” method of statutory interpretation as a matter of federal law. However, the Court diverts for a moment to address the role of state law.
2.
Interpretation of Terminology in the Bankruptcy Code Is a Matter of
Federal Statutory Interpretation and Is Not Governed by Federal
Common Law or State (or Foreign) Law.
Congress enacted the Bankruptcy Code. It is a federal law. Section 101(9)
contains the phrase “business trust.” And, the Court must decide whether the Trust is
eligible to seek protection as a “business trust” under the Bankruptcy Code. So, it may
seem obvious that the Court must apply federal law and standard principles of statutory
interpretation when deciding what the term “business trust” means.
Appling,
138 S. Ct.
at 1759 (engaging in classic statutory interpretation exercise to determine meaning of
three words and phrases in Bankruptcy Code);
Baker Botts
,
However, some bankruptcy courts have elected to employ a different approach
whereby the phrase “business trust” is governed exclusively by state or foreign law. For
example,
In re EHT US1, Inc.
,
There is a split of authority as to whether the law of the jurisdiction in which the trust resides or federal common law governs [the determination of whether a trust is eligible to file for bankruptcy as a “business trust” under Section 101(9)]. That said, the weight of authority falls in favor of applying federal common law. The Court disagrees with this authority.
Id . at 423; see also Katherine M. Fix and Ryan M. Messina, Does Federal Common Law Define a Business Trust’s Eligibility for Chapter 11?, 40 A M . B ANKR . I NST . J. 22 (Oct. 2021) (seeming to endorse EHT case as a “new standard” rejecting “federal common law” under Section 101(9)).
The
ENT
decision is, by its own admission, a real outlier: one of only a handful
of bankruptcy decisions in the last four decades eschewing federal law in deciding
bankruptcy eligibility and instead endorsing state or foreign law.
See also In re Heritage
N. Dunlap Tr.
,
But instead of construing the meaning of the term “business trust,” the
ENT
court
diverted to what it called “first principles” and
Butner v. U.S.
,
Property interests are created and defined by state law. Unless some other federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding.
[S]ome lower federal courts have looked to state law for the definition of “business trust,” but we find those cases unpersuasive: they either do not explain their reasoning or cite to the case of Butner v. U.S. . . . as if that case provided the last word . . . . The connection between Butner and the “business trust” question is by no means plain however — particularly because Butner dealt with substantive property rights, whereas here the question is one of procedure, regarding whether the Trust has standing to file a bankruptcy case . . . . We conclude that Butner does not control, and that the definition of “business trust” properly belongs to federal, rather than state, law.
Brady-Morris v. Schilling (In re Kenneth Allen Knight Tr.)
,
In any event, after the “first principles” and Butner discussion, the ENT court took a wild trip around the world and held:
[T]he Court finds that federal common law should not determine whether a trust is a “business trust” under the Bankruptcy Code. Rather, the law of the jurisdiction in which the trust is organized, in this case the Republic of Singapore, shall govern . . . . [T]he court shall now turn to whether [the Singapore trust] is a business trust under Singapore law.
EHT
,
The Court respectfully disagrees with the
EHT
holding and cases like it. First,
the
EHT
court’s reference to “federal common law” as the alternative to Singapore law
is misplaced. Determining the meaning of a term in the Bankruptcy Code (such as
“business trust”) is an exercise in which bankruptcy judges engage every day. The task
is called statutory interpretation. It is not the creation of federal common law. Federal
common law is “a rule of decision that amounts,
not simply to an interpretation of a
federal statute
or a promulgated administrative rule, but, rather, to the judicial ‘creation’
of a special federal rule of decision.”
Atherton v. F.D.I.C.
,
Deciding whether the Trust is a “business trust” under Section 101(9) does not
require the Court to create a new substantive federal rule of decision or engage in
“judicial lawmaking.” Instead of creating new “federal common law,” the Court is called
upon only to construe a phrase expressly used by Congress in the part of the
Bankruptcy Code which sets forth the procedural requirements for bankruptcy eligibility.
See
,
e.g.
,
Northwest Airlines, Inc. v. Transp. Workers Union
,
A second problem with exclusive reliance on state (or foreign) law is that such
approach simply ignores the obligation of bankruptcy courts to interpret a federal
statute.
RadLAX
,
A third issue with the EHT result is the dearth of legal support for avoiding statutory interpretation of the text of the Bankruptcy Code ( i.e. , the term “business trust”). The EHT bankruptcy court reasoned as follows:
[1] There is no federal law that creates business entities. [2] Thus, in determining whether an entity such as a trust has the capacity to take specific legal action one should look in the first instance to the state law under which the entity exists. [3] This same principle should apply to determining whether a trust . . . is a “business trust” that is eligible to be a debtor under the Bankruptcy Code . . . .
EHT
,
And there are more problems still with relying exclusively on state (or foreign law) to decide bankruptcy eligibility. Such an approach would destroy uniformity. [62] As another bankruptcy court noted:
Whether an entity is eligible for relief under title 11 of the United States Code is purely a matter of federal law. To hold otherwise would result in different results in different states and an entity would be eligible for relief in one state but not another. Clearly, this is not what Congress intended when it enacted the bankruptcy laws in this country in conformity with the mandate of Article I, § 8, Cl. 4 of the Constitution, which provides that “Congress shall have the power . . . to establish . . . uniform laws on the subject of bankruptcies.”
In re Arehart
,
Ultimately, the Court concludes that it must employ standard principles of
statutory interpretation to construe the federal law term “business trust” under the
Bankruptcy Code.
Knight Tr. II
,
3. The Meaning of the Term “Business Trust” Under the Fair Reading Method.
As already noted, Congress did not separately define the phrase “business trust” used in the Bankruptcy Code. So, the Court must look elsewhere for meaning. The Court concludes that there are many useful guideposts for ascertaining the meaning of the term “business trust” in 1978 including: federal case law; dictionaries; legal articles; treatises; reports; and state statutes. All of such sources point in the same direction. However, before examining such sources, a few observations are in order.
In this case, the Court is called upon to interpret a two-word phrase: “business trust.” From a lexicographical point of view, the word “business” (used as an adjective or a noun) means “commercial or mercantile activity customarily engaged in as a means of livelihood.” W EBSTER ’ S T HIRD N EW I NT ’ L D ICTIONARY 302 (G. & C. Merriam Co. 1968). Put another way, “business” means “the activity of buying and selling commodities, products, or services” or “a specific occupation or pursuit.” A MERICAN H ERITAGE D ICTIONARY OF THE E NGLISH L ANGUAGE 252 (Houghton Mifflin Harcourt 5th ed. 2011); see also Henry Campbell Black, B LACK ’ S L AW D ICTIONARY : D EFINITIONS OF THE T ERMS AND P HRASES OF A MERICAN AND E NGLISH J URISPRUDENCE , A NCIENT AND M ODERN (West. Pub. Co. 5th ed. 1979) [hereinafter, “B LACK ’ S L AW 5th Ed. at ___.”] (“business” means “[a]ctivity or enterprise for gain, benefit, advantage or livelihood”). The word “business” is not really technical in nature. Native English-speakers generally understand the word to have the foregoing meanings.
On the other hand, the noun “trust” is far more technical and refers to a specialized sort of legal relationship. For the public at large, a “trust” merely conjures up images of a “trust fund” and the thought that wealthy people use trusts in some mysterious way to hide their wealth from creditors and avoid paying taxes. Maybe that is not so far off the mark. But, it can hardly be doubted that the word “trust” has special legal meaning. See , e.g. , B LACK ’ S L AW 5th Ed. at 179 (trust means “[a] right of property, real or personal, held by one party for the benefit of another”, and “a fiduciary relation with respect to property, subjecting the person by whom the property is held to equitable duties to deal with the property for the benefit of another person . . . .”); R ESTATEMENT (S ECOND ) OF T RUSTS (ALI 1959) (“A trust . . . is a fiduciary relationship with respect to property, subjecting the person by whom the title to the property is held to equitable duties to deal with the property for the benefit of another person, which arises as a result of a manifestation of an intention to create it.”).
While considering the constituent parts of the phrase at issue — “business” and “trust” — might have some relevance, merely stringing the words together is not enough and could lead in the wrong direction. Instead, the entire phrase (“business trust”) must be considered as a single unit in the special context of the Bankruptcy Code. “[S]ometimes context indicates that a technical meaning applies.” R EADING L AW at 73. In their seminal treatise on statutory interpretation, Justice Scalia and Bryan Gardner explained:
Every field of serious endeavor develops its own nomenclature — sometimes referred to as terms of art . Where the text is addressing a scientific or technical subject, a specialized meaning is to be expected. “In terms of art which are above the comprehension of the general bulk of mankind, recourse, for explanation, must be had to those, who are most experienced in that art.” And when the law is the subject, ordinary legal meaning is to be expected, which often differs from common meaning. As Justice Frankfurter eloquently expressed it: “[I]f a word is obviously transplanted from another legal source, whether the common law or other legislation, it brings the old soil with it.” Id . (emphasis in original) (quoting Hugo Grotius, T HE R IGHTS OF W AR AND P EACE (1625; A.C. C AMPBELL trans. 1901); and Felix Frankfurter, Some Reflections on the Reading of Statutes , 47 Colum. L. Rev. 527, 537 (1947)).
Having considered the issue, the Court has reached the conclusion that the term “business trust” does not have a plain or ordinary meaning well understood by the American public writ large. Instead, the phrase is a specialized form of legal terminology which has been transplanted into the Bankruptcy Code. Since it is a technical legal term, its meaning must be derived mainly from legal sources during the relevant time period ( i.e., on or before 1978 when the Bankruptcy Code became law). Fortunately, such legal sources abound and are very consistent in providing the legal meaning of the phrase “business trust.”
a. Use of the Term “Business Trust” in Federal Case Law Before Enactment of the Bankruptcy Code.
There is no precedent from the Supreme Court or the Tenth Circuit construing the phrase “business trust” specifically in the context of Section 101(9) of the Bankruptcy Code. However, the Supreme Court has explained the meaning of the term “business trust” as a general matter on multiple occasions. The history is revealing.
Analysis of the phrase “business trust” in federal case law confirms that the term
initially came in vogue shortly after it started appearing in legal articles and books in the
first third of the twentieth century. The first reported federal judicial decision utilizing the
term “business trust” is
Little Four Oil & Gas Co. v. Lewellyn
,
One, where the trustees merely collect dividends or interest, or rentals, and distribute them among the shareholders — a simple common law trust similar in legal effect and in exemption from certain taxation to a trust under a will where the trustee merely collects income and distributes it among beneficiaries; the other, where a trust is organized or declared for business purposes and the trustees carry on an active business for profit, regarded as a plain unincorporated joint-stock association and liable for taxes at the corporation rate .
Id . at 150 (emphasis added). Regarding the second type of trust, the appellate court declared:
The real test is whether the shareholders or trustees, or both combined, carry on business for profit, and, if they do, they constitute a business trust — in legal effect an association or a joint-stock company — with liability for taxes.
Id. (emphasis added).
Although
Lewellyn
was the first reported federal opinion to use the term
“business trust,” the
Lewellyn
appellate panel relied on an earlier Supreme Court
decision,
Hecht v. Malley
,
a form of business organization, common in that State, consisting essentially of an arrangement whereby property is conveyed to trustees, in accordance with the terms of an instrument of trust, to be held and managed for the benefit of such persons as may from time to time be the holders of transferable certificates issued by the trustees showing the shares into which the beneficial interest in the property is divided.
Hecht
,
As we shall see, these early federal judicial decisions are consistent, to a
remarkable degree, with the definitions in legal dictionaries, legal periodicals, treatises,
law reports, and state statutes. In any event, the Supreme Court issued the seminal
decision on “business trusts” a decade later in the context of a tax dispute:
Morrissey v.
Comm’r of Internal Revenue
,
In what are called “business trusts” the object is not to hold and conserve particular property, with incidental powers, as in the traditional type of trusts, but to provide a medium for the conduct of a business and sharing its gains. Thus a trust may be created as a convenient method by which persons become associated for dealings in real estate, the development of tracts of land, the construction of improvements, and the purchase, management, and sale of properties; or for dealings in securities or other personal property; or for the production, or manufacture, and sale of commodities; or for commerce, or other sorts of business; where those who become beneficially interested, either by joining in the plan at the outset, or by later participation according to the terms of the arrangement, seek to share the advantages of a union of their interests in the common enterprise.
Id . at 357. And, then, the Supreme Court identified the attributes of “business trusts” by reference to corporations:
What, then, are the salient features of a trust — when created and maintained as a medium for the carrying on of a business enterprise and sharing its gains — which may be regarded as making it analogous to a corporate organization? A corporation, as an entity, holds the title to the property embarked in the corporate undertaking. Trustees, as a continuing body with provision for succession, may afford a corresponding advantage during the existence of the trust. Corporate organization furnishes the opportunity for a centralized management through representatives of the members of the corporation. The designation of trustees, who are charged with the conduct of an enterprise, who act “in much the same manner as directors,” may provide a similar scheme, with corresponding effectiveness. Whether the trustees are named in the trust instrument with power to select successors, so as to constitute a self-perpetuating body, or are selected by, or with the advice of, those beneficially interested in the undertaking, centralization of management analogous to that of corporate activities may be achieved. An enterprise carried on by means of a trust may be secure from termination or interruption by the death of owners of beneficial interests and in this respect their interests are distinguished from those of partners and are akin to the interests of members of a corporation. And the trust type of organization facilitates, as does corporate organization, the transfer of beneficial interests without affecting the continuity of the enterprise, and also the introduction of large numbers of participants. The trust method also permits the limitation of personal liability of participants to the property embarked in the undertaking.
Id . at 359.
In the Court’s view, the
Hecht
and
Morrissey
decisions are binding appellate
precedent and virtually dispositive of the meaning of the phrase “business trust” during
the middle of the twentieth century not long before the Bankruptcy Code was enacted.
See Navarro
,
Although the
Hecht
and
Morrissey
decisions were issued to decide tax disputes,
nothing about the opinions limits their operation to that area of the law.
See
Massachusetts or Business Trust,
b.
Legal Dictionary Definitions of the Term “Business Trust”
Before Enactment of the Bankruptcy Code.
According to the Supreme Court, dictionaries (although not dispositive) can help
determine the ordinary meaning of words and phrases contained in the Bankruptcy
Code.
City of Chicago, Illinois v. Fulton
,
A lexicographical review demonstrates that the term “business trust” was not in common legal usage until after approximately the first third of the twentieth century. See Robert C. Brown, Common Law Trusts as Business Enterprises , 3 I NDIANA L. J. 595 (May 1928) (proposing that phrase “‘business trust’ would be more desirable” in reference to business enterprises operating through trusts); Michael L. Weissman, The Common Law of Business Trusts, 38 C HICAGO -K ENT L AW R EV . 12 (April 1961) (“Business trusts gained prominence in the 1920’s . . . .”). For example, the following principal legal dictionaries [65] in use between 1871 and 1934 contain no reference to the phrase “business trust” at all: John Bouvier, B OUVIER ’ S L AW D ICTIONARY (Banks-Baldwin Law Pub. Co. 1934); Benjamin W. Pope, L EGAL D EFINITIONS , A C OLLECTION OF W ORDS AND P HRASES AS A PPLIED AND D EFINED BY THE C OURTS , L EXICOGRAPHERS AND A UTHORS OF B OOKS ON L EGAL S UBJECTS (Callaghan & Co. 1919); James A. Ballentine, L AW D ICTIONARY OF W ORDS , T ERMS , A BBREVIATIONS AND P HRASES W HICH A RE P ECULIAR TO THE L AW AND T HOSE W HICH H AVE A P ECULIAR M EANING IN THE L AW (Bobbs-Merrill Co. Pub. 1916); John Bouvier, B OUVIER ’ S L AW D ICTIONARY AND C ONCISE E NCYCLOPEDIA (West. Pub. 8th ed. 1914); Henry Campbell Black, A D ICTIONARY OF L AW C ONTAINING D EFINITIONS OF THE T ERMS AND P HRASES OF A MERICAN AND E NGLISH J URISPRUDENCE , A NCIENT AND M ODERN (West. Pub. Co. 2d ed. 1910); Henry Campbell Black, A D ICTIONARY OF L AW C ONTAINING D EFINITIONS OF THE T ERMS AND P HRASES OF A MERICAN AND E NGLISH J URISPRUDENCE , A NCIENT AND M ODERN (West. Pub. Co. 1st ed. 1891); John Bouvier, L AW D ICTIONARY A DAPTED TO THE C ONSTITUTION AND L AWS OF THE U NITED S TATES (George W. Childs Pub. 14th ed. 1871).
In 1933, the most prominent American legal lexicographer (Henry Campbell Black) added a first cursory definition of “business trust” to his famous dictionary, stating: “As distinguished from a joint-stock company, a pure ‘business trust’ is one in which the managers are principals, and the shareholders are cestuis que trust.” Henry Campbell Black, A D ICTIONARY OF L AW C ONTAINING D EFINITIONS OF THE T ERMS AND P HRASES OF A MERICAN AND E NGLISH J URISPRUDENCE , A NCIENT AND M ODERN 261 (West. Pub. Co. 3d ed. 1933). The definition was expanded in later editions. Before and after the enactment of the Bankruptcy Code, the publication provided:
Business trust. As distinguished from a joint-stock company, a pure “business trust” is one in which the managers are principals, and the shareholders are cestuis que trust. The essential attribute is that property is placed in the hands of trustees who manage and deal with it for use and benefit of beneficiaries. . . . A “Massachusetts trust” or “common law trust.”
B LACK ’ S L AW 5th Ed. at 180; Henry Campbell Black, A D ICTIONARY OF L AW C ONTAINING D EFINITIONS OF THE T ERMS AND P HRASES OF A MERICAN AND E NGLISH J URISPRUDENCE , A NCIENT AND M ODERN (West. Pub. Co. 4th rev. ed. 1968) (citation omitted). During the same time period, Professor Max Radin defined the phrase “business trust” as follows:
Massachusetts trust. Also known as a business trust. A trust involving the transfer of property to trustees who correspond to the directors of a corporation. Trust certificates are issued to the beneficiaries who correspond to the stockholders in a corporation . . . .
Max Radin, R ADIN L AW D ICTIONARY (Oceana Pub. 1955).
Another key legal dictionary followed with a more comprehensive definition of the phrase “business trust” in 1969:
Business Trust. Otherwise known as a Massachusetts trust or common-law trust. A form of business organization consisting essentially of an arrangement whereby property is conveyed to trustees, in accordance with the terms of an instrument of trust, to be held and managed for the benefit of such persons as may from time to time be the holders of transferable certificates issued by the trustees showing the shares into which the beneficial interest in the property is divided.
William S. Anderson, B ALLENTINE ’ S L AW D ICTIONARY 164 (3d ed. Lawyers Co-op. Pub. 1969). This definition tracks closely with the Supreme Court’s Hecht and Morrissey decisions.
One key commonality to the definitions contained in all law dictionaries is the reference to the “Massachusetts trust.” Henry Campbell Black cross-referenced the “Massachusetts trust” in his definition of “business trust” and then separately defined it: “Massachusetts trust. A business organization wherein property is conveyed to trustees and managed for benefit of holders of certificates like corporate certificates.” B LACK ’ S L AW 5th Ed. at 180.
Invariably, in dictionaries, law journals and case law, a “business trust” is considered synonymous with the “Massachusetts trust.” One legal author noted:
The term “Massachusetts trust,” otherwise known as the, “business” or “common law” trust is used generally to denote an unincorporated organization created for profit under a written instrument or declaration of trust, the management to be conducted by compensated trustees for the benefit of persons whose legal interests are represented by transferable certificates of participation, or shares.
Comment, Massachusetts Trusts, 37 Y ALE L. J. 1103, 1104 (1928) (footnotes omitted). See also Note, State Regulation of Foreign Business Trusts , 41 H ARV . L. R EV . (1927) (indicating that “Massachusetts trust” and “business trust” are synonyms).
When the term “business trust” passed over to standard (non-legal) dictionaries, the non-technical dictionaries gave the same meaning. One of the more prominent and popular United States dictionaries frequently referenced by the Supreme Court as authoritative during the relevant time period defines “business trust” simply as “Massachusetts Trust.” W EBSTER ’ S T HIRD N EW I NT ’ L D ICTIONARY 303 (G. & C. Merriam Co. 1968). And, then, “Massachusetts trust” is defined almost exactly as in the legal dictionaries:
an unincorporated business organization managed like and sometimes treated as a corporation . . . and first popular in Massachusetts in which the business capital is held in trust under a written declaration of trust publicly recorded outlining the powers and duties of the trustees and the rights of the beneficiaries and third persons, which capital or trust property is managed by the trustees for the beneficiaries who are the owners from time to time of transferable certificates resembling corporate stock evidencing an equitable interest in the trust property and the income earned by it.
Id . at 1388.
So, the relevant legal and non-legal dictionaries show that the phrase “business trust” started to be used in the first half of the twentieth century as a synonym to the “Massachusetts trust.” The key attributes match the Morrissey definition.
c. Use of the Term “Business Trust” In Legal Articles Before Enactment of the Bankruptcy Code.
Authors of legal articles first started using the phrase “business trust” as a synonym of “Massachusetts trust” (and sometime “common law trust”) approximately a hundred years ago (about a decade or more before the term first appeared in legal dictionaries and the Morrissey decision). See Comment, The Nature of Massachusetts Business Trusts , 27 Y ALE L. J. 677 (1918) (using “business trusts” in title but otherwise only referring to Massachusetts trusts); Austin W. Scott, The Progress of the Law 1918- 1919 Trusts , 33 H ARV . L. R EV . 688, 704-05 (1920) (opening section entitled “business trusts” noted that “[t]he Massachusetts device of creating a trust for the carrying on of business is rapidly growing in popularity”); Note, Taxation of Business Trusts , 42 Y ALE L. J. 270, 271 (1932) (“[A]ny trust engaged in industrial or commercial enterprises will be called a business trust . . . .”). One author characterized the Massachusetts trust as “what would [later] popularly be known as a business trust.” Edward H. Warren, The Progress of the Law: Corporations , 34 H ARV . L. R EV . (1921).
Around the same time period, legal scholars published a handful of books which utilized the term “business trust” or something similar (“commercial trust”), mainly in reference to Massachusetts trusts. See Sydney R. Wrightington, T HE L AW OF U NINCORPORATED A SSOCIATIONS AND B USINESS T RUSTS (Little, Brown, and Co. 1923) (using “business trusts” only in title without defining term); William C. Dunn, T RUSTS FOR B USINESS P URPOSES (Callaghan and Co. 1922) (not using “business trust” but referring to similar “trusts for business purposes” mainly under Illinois law); John H. Sears, T RUST E STATES AS B USINESS C OMPANIES (Counselors Pub. Co. 1912) (not using phrase “business trust” but referring to similar concept; “This work is to consider to what extent arrangements may be made, whereby persons . . . may transfer legal title in, and control and management of property to another or others for purposes of trade . . . though the profits or income are to belong to the transferors.”).
The working definition of “business trusts” used in academia has always been internally consistent and mirrors the Morrissey decision and legal dictionary definitions. For example, in one early-era article, the author used the terms “commercial trust” and “business trust” interchangeably and then wrote:
The organizers of the business trust have manifested unmistakably the intention to establish . . . an active business under a continuous management, combining therewith the advantages of free transferability of the beneficial interests and a continuity of legal ownership.
Comment, The Doctrine of Merger as Applied to Commercial Trusts , 29 Y ALE L. R EV . 97, 100 (1919). Several decades later (and much closer in time to the enactment of the Bankruptcy Code) Professor Michael L. Weissman defined the term “business trust” in the classic (and by then well-understood) fashion:
A Massachusetts or “business trust” is a commercial enterprise formed by a declaration of trust wherein property is conveyed to trustees to be held and managed by them for the benefit of such persons as may, from time to time, be holders of transferable shares issued by the trustees and evidencing their beneficial interests in the trust estate.
Michael L. Weissman, The Common Law of Business Trusts, 38 C HICAGO -K ENT L AW R EV . 11 (April 1961). So, as used in legal scholarship, the phrase “business trust” has the same meaning as in the Morrissey decision.
d. Use of the Term “Business Trust” In Other Legal Sources Before Enactment of the Bankruptcy Code. One of the words in the phrase “business trust” is “trust.” So, one might suppose that legal treatises about trust law may provide helpful information about the meaning of the term “business trust” circa enactment of the Bankruptcy Code. One of the most authoritative works on trust law is the American Law Institute’s R ESTATEMENT OF T RUSTS , as periodically amended. The version of the R ESTATEMENT OF T RUSTS effective in 1978 defined a “trust” as “a fiduciary relationship with respect to property, subjecting the person by whom the title to the property is held to equitable duties to deal with the property for the benefit of another person, which arises as a result of a manifestation of an intention to create it.” R ESTATEMENT (S ECOND ) OF T RUSTS § 2 (ALI 1959). But, the term “business trust” was not addressed at all except in a Comment excluding “business trusts” from its purview. R ESTATEMENT (S ECOND ) OF T RUSTS (ALI 1959) (§ 1 Comment (b); listing “business trusts” as “matters excluded”). “Business trusts” received the same treatment in earlier and later versions. See R ESTATEMENT (F IRST ) OF T RUSTS (ALI 1935) (§ 1 Comment (b); listing “business trusts” as “matters excluded”); R ESTATEMENT (T HIRD ) OF T RUSTS (ALI 2003) (same).
In the absence of guidance from the American Law Institute, the Court turns to other publications. One of the leading treatises on trust law during the relevant period was George Bogert, T RUSTS AND T RUSTEES (Thompson/West 2d ed. Supp. 1960). In his treatise, Professor Bogert explained that a “business trust” denotes:
an unincorporated organization created for profit under a written instrument or declaration of trust, the management to be conducted by compensated trustees for the benefit of persons whose legal interests are represented by transferable certificates of participation, or shares.
Id
. § 291 at 572 (quoted in
Limouze v. M.M.&P. Maritime Advancement, Training, Ed.
and Safety Program
,
Although perhaps not quite as academic, lawyers often turn to reports or compilations of the law for assistance with understanding legal terminology. Two well- known sources are the A MERICAN L AW R EPORTS and A MERICAN J URISPRUDENCE . The same year Congress enacted the Bankruptcy Code, A MERICAN L AW R EPORTS re- published a definition of the phrase “business trust” which had been used in the publication for decades:
[A] business trust is an unincorporated business organization created by an instrument by which property is to be held and managed by trustees for the benefit and profit of such persons as may be or may become the holders of transferable certificates evidencing the beneficial interests in the trust estate.
Modern Status of the Massachusetts or Business Trust,
88 A.L.R. 3d § 3 at 717
(Lawyers Co-Operative Pub. Co. 1978);
see also Massachusetts or Business Trust,
156
A.L.R. 27 (Lawyers Co-Operative Pub. Co. 1945) (same definition). Such language
hews closely to the
Hecht
definition. In the period before passage of the Bankruptcy
Code, many courts relied on the A MERICAN L AW R EPORTS definition as an authoritative
definition of the term “business trust” when explaining what the phrase means.
See
Corcoran v. Brody,
The main competitor of the A MERICAN L AW R EPORTS , A MERICAN J URISPRUDENCE also defined the phrase “business trust” not long before the Bankruptcy Code became law:
One of the distinctive devices by means of which individuals may combine their resources to operate a business for profit is the so-called business trust, or ‘Massachusetts trust,’ which may be comprehensively defined as an unincorporated business organization created by an instrument by which property is to be held and managed by trustees for the benefit and profit of such persons as may be or may become the holders of transferable certificates evidencing the beneficial interests in the trust estate.
Business Trusts , 13 A M . J UR . 2d § 1 (Supp. 1967). The substance of the A MERICAN J URISPRUDENCE definition of “business trust” tracks almost verbatim the same definition in the A MERICAN L AW R EPORTS .
e. Use of the Term “Business Trust” in State Law Before Enactment of the Bankruptcy Code.
As explained earlier, state law (whether statutory or common law) generally is not dispositive when interpreting a word or term in a federal text. However, as with other sources (such as federal case law, dictionaries, articles, treatises, reports and the like) state law may be relevant to assist in determining the general meaning of words or phrases during the time period when federal legislation is passed and may have a bearing on the purpose for creation of a particular trust.
Although the Court will not engage in a fifty-state analysis of state law provisions, it will suffice to examine a brief sampling of state statutes pertaining to “business trusts” during the relevant era. As already noted, Massachusetts originated the concept of what became known as a “business trust” in the United States. The Massachusetts legislation (which was first enacted in 1909) does not utilize the phrase “business trust.” But Chapter 182 (which is titled: Voluntary Associations and Trusts) defines a “trust” (for purposes of that Chapter) as:
a trust operating under a written instrument or declaration of trust, the beneficial interest under which is divided into transferable certificates of participation or shares . . . .
M ASS . G EN L AW . Chap 182 § 1 (1978).
After Massachusetts spearheaded the “business trust” idea, numerous other states enacted “business trust” statutes in the period before the Bankruptcy Code was enacted. For example, New York weighed in with a new statute in 1937 (which is still in effect):
The term “business trust” means any association operating a business under a written instrument or declaration of trust, the beneficial interest under which is divided into shares represented by certificates.
N.Y. G EN . A SS ’ NS L AW § 2(2) (McKinney 1937).
Closer in time to the passage of the Bankruptcy Code, several State legislatures passed new “business trust” statutes. In 1961, Alabama set forth a definition for the phrase “business trust”:
A business trust is an express trust created by a written declaration of trust whereby property is conveyed to one or more trustees, who hold and manage the same for the benefit and profit of such persons as may be or become holders of transferable certificates evidencing the beneficial interest in the trust estate.
A LA . C ODE § 19-3-60 (1961). The same year, the Kansas legislature passed something very similar:
A “business trust” is an unincorporated business association of the type which at common law was known as a “common- law trust,” “business trust,” or “Massachusetts trust,” created by a trust instrument under which property is held, managed, administered, controlled, invested, reinvested, and operated by trustees for the benefit and profit of such persons as are or may become the holders of transferable certificates evidencing beneficial interests in the trust estate, the holders of which certificates are entitled to the same limitation of personal liability extended to stockholders of private corporations for profit.
K AN . S TAT . § 17-2028 (1961). Two years later, Indiana followed suit with the Indiana Business Trust Act which stated:
A “business trust” is an unincorporated business association which is created by a trust instrument, pursuant to common law or enabling legislation, under which property is held, managed, administered . . ., or operated, . . . by a trustee or trustees for the benefit and profit of such person or persons as are or may become the holders of transferable certificates, issued pursuant to the provisions of the trust instrument . . . evidencing beneficial interests in the trust estate . . . .
I ND . C ODE . A NN . § 23-5-1-2(a) (1963).
The foregoing is only an illustration of a few representative state statutes effective when Congress enacted the Bankruptcy Code. Rather than cite them all, the point is only that the state laws are remarkable in utilizing almost identical definitions of the term “business trust.” And, those definitions hew very closely to the Hecht and Morrissey definitions. There is just no daylight between them. And, of course, Congress (and the legal community) knew that when the Bankruptcy Code became law.
Notwithstanding the cited state statutes which recognize and define business
trusts, there are plenty of states which do not recognize “business trusts” within their
general trust statutes and do not otherwise provide for “business trusts.” Texas is a
prime example. The Trust Agreement is governed by Texas law. Tr. Agr. § 5.4. And,
the Trust Agreement refers to application of the “Texas Trust Code.” Tr. Agr. § 4.1.
But, the Texas Trust Code (both at the time the Trust Agreement was executed (1986)
and now) expressly excludes “a business trust” from its purview. T EX . P ROP . C ODE A NN . § 111.003 (Vernon 1984) (for purposes of the Texas Trust Code, a “trust” “does not
include . . . a business trust.”). And, “[t]here is no effective device creating a business
trust under Texas law.”
In re Action Roofing & Supply Co.,
f.
The Meaning of the Term “Business Trust” as Used in Section
101(9) of the Bankruptcy Code.
Having now fully analyzed the history and meaning of the term “business trust,”
the Court can confidently state the plain legal meaning when the phrase was used by
Congress in 1978 as part of the Bankruptcy Code. “Business trust” is a legal term of art
and has specialized meaning. The definitive and binding definition of the term
“business trust” was articulated by the Supreme Court in
Hecht
,
(1) a trust “created and maintained” for a business purpose; (2) title to property held by trustees;
(3) centralized management;
(4) continuity uninterrupted by death among beneficial owners; (5) transferability of interests; and
(6) limited liability.
Morrissey
,
The Supreme Court did not conjure the definition of “business trust” from thin air. Instead, by the time the Supreme Court announced its Morrissey decision, the phrase “business trust” already had a well-understood legal meaning. Before and after the Morrissey decision, repeatedly, an unbroken line of federal cases, legal dictionary definitions, legal articles, legal treatises, legal reports, state statutes, and other legal sources reaffirmed the same basic attributes for a “business trust.” By 1978, the legal understanding of the phrase “business trust” under the Bankruptcy Code was abundantly clear.
Thus, the
Hecht
and
Morrissey
definitions (which comport with all the legal
sources) must be used to interpret the phrase “business trust” used in the Bankruptcy
Code.
See In re Sung Soo Rim Irrevocable Intervivos Tr.
,
C. Bankruptcy Caselaw Construing the Term “Business Trust.”
In the 45 years since enactment of the Bankruptcy Code, many bankruptcy
courts have had occasion to construe the meaning of the phrase “business trust” in
Section 101(9). In fact, the cases are quite legion. However, unfortunately, very few
courts have construed the meaning of the term “business trust” using standard
principles of statutory interpretation. As a result, a perceived lack of uniformity has
developed. According to one bankruptcy court considering the topic decades ago: “The
decisions are sharply, and perhaps hopelessly divided on the meaning of ‘business
trust.’”
In re Medallion Realty Tr.,
Although the Supreme Court has not directly addressed the interpretation of the
phrase “business trust” in a case under the Bankruptcy Code, three courts of appeals
have spoken on the subject. In
Mosby v. Boatmen’s Bank of St. Louis County
, the
Eighth Circuit Court of Appeals matter-of-factly endorsed a district court opinion
deciding that the “distinguishing characteristics of a business trust” are those listed in
the Supreme Court’s
Morrissey
decision.
Although no court has thus far adopted a clear definition of business trust for purposes of the Bankruptcy Code, courts have looked to see whether the trust at issue has the attributes of a corporation. . . . . Courts have noted a variety of factors in making this determination, but there is no definitive list of characteristics that constitute a business trust.
Shawmut Bank,
[M]ost courts agree that a basic distinction between a business trust and other trusts is that business trusts are created for the purpose of carrying on some kind of business, whereas the purpose of a non-business trust is to protect and preserve the res.
Id
. Although the appellate court did not refer to either the
Hecht
or
Morrissey
cases, the
foregoing observation (which is correct) seems to focus only on the first factor listed in
the
Morrissey
decision.
Morrissey
,
Thus, trusts created with the primary purpose of transacting business or carrying on commercial activity for the benefit of investors qualify as business trusts, while trusts designed merely to preserve the res for beneficiaries generally are not business trusts.
Knight I,
Ultimately, the Court agrees with the Eighth Circuit Court of Appeals’ decision in
Mosby
, which effectively adopts the
Morrissey
factors,
Beyond the foregoing appellate decisions, bankruptcy courts have used a
hodgepodge of different analysis to decide which trusts constitute “business trusts.”
The recent
Catholic School Employees Pension Trust
decision initially identified three
main approaches: “the ‘primary purpose’ test, the multi-factor test, and a six-factor test
derived from a Supreme Court tax case [
Morrissey]
.”
Cath. Sch. Emp. Pension Tr.
, 599
B.R. at 654. The “six factor” test from the Supreme Court’s
Morrissey
decision is fairly
self-evident.
Morrissey
,
In
Murphy v. Bernstein (In re Dille Family Tr.)
,
A fair reading or synthesis of the case law . . . is that the riddle of whether a trust constitutes a valid “business trust” turns on two generally required elements. The first is whether the trust itself was created for the purpose of transacting business for a profit (as opposed to merely preserving a res for beneficiaries). The second is whether the trust in-fact has all the indicia of a corporate entity. If both these items are present, then the trust at issue is more than a gratuitous or ordinary trust and is a business trust. If any of these two characteristics is not present, then the trust is not a “business trust” and is ineligible for bankruptcy relief under Chapter 11 . . . .
Dille Family Tr.
,
Bankruptcy courts seem to have taken it on themselves to issue their own new
definitions of the phrase “business trust” or have avoided tethering themselves to any
definition by relying on long lists of factors.
See
,
e.g.
,
In re Arehart
,
However, since many bankruptcy courts considering the phrase “business trust” seem intent on searching for legislative history, the Court briefly addresses the topic. As already pointed out, the first time Congress used the term “business trusts” in the context of insolvency was when it passed the Bankruptcy Code in 1978. Even though the term “business trust” was not used previously, in 1926 Congress amended the Bankruptcy Act of 1898 (30 Stat. 552) to cover a similar concept. The word “corporation” in Section 1(6) of the Bankruptcy Act was redefined to include:
any business conducted by a trustee or trustees wherein beneficial interest or ownership is evidenced by certificate or other written instrument.
44 Stat. 662 (the “1926 Amendment”).
See also Pope & Cottle Co. v. Fairbanks Realty
Tr.
,
Decades afterward, as Congress began to consider a rewrite of the Bankruptcy Act and adoption of the modern Bankruptcy Code, the Commission on the Bankruptcy Laws of the United States (the “Bankruptcy Commission”) proposed that Congress amend the definition of “corporation” by incorporating the new term “business trust” in place of “any business conducted by a trustee or trustees wherein beneficial interest or ownership is evidenced by certificate or other written instrument.” R EPORT OF THE C OMMISSION ON T HE B ANKRUPTCY L AWS OF THE U NITED S TATES House Doc. 93-137 Part II at 2 (July 1973) (the “Commission Report”). In the Commission Report, the Bankruptcy Commission stated:
The reference at the end of the definition to a “business trust” eliminates the requirement of the present Act that beneficial interest or ownership “be evidenced by certificate or other written instrument.” The requirement gives undue significance to an evidentiary formality.
Id . at 7.
Some Courts have seized on the foregoing as evidencing some sort of legislative
intent.
See Cath. Sch. Emp. Pension Tr.
,
What to draw from all that? Probably not much. It appears that the term “business trust” merely served as a modern-day update and simplification (two words instead of 21) of an unwieldy run-on phrase under the Bankruptcy Act: “any business conducted by a trustee or trustees wherein beneficial interest or ownership is evidenced by certificate or other written instrument.” “Business trust,” which was a term not in common usage when the 1926 Amendment was adopted, seemed to fit the bill. And, by 1978 the legal meaning of the phrase “business trust” must have seemed quite clear to American legislators. As already explained, virtually every definition of the term “business trust” available in 1978 (in federal case law, the Hecht and Morrissey decisions, legal dictionaries, law journal articles, treatises, law reports, and state statutes) confirmed that transferable interests (whether in the form of certificates or shares) were a key attribute of a “business trust.”
But some bankruptcy decisions see it differently.
See Knight Tr. II
, 303 F.3d at
679 (“We join those courts that have concluded that Congress intended to dispense with
the transferable-certificate-of-ownership requirement when it changed the statute in
1978.”);
In re Village Green Realty Tr.
,
Respectfully, the Court disagrees. In enacting the Bankruptcy Code, Congress did not “dispense with” or “eliminate” the requirement of transferable interests. If Congress had done so, Section 101(9)(a)(v)of the Bankruptcy Code would now read:
any business conducted by a trustee or trustees wherein beneficial interest or ownership is evidenced by certificate or other written instrument.
But Congress did not do that. It did not “dispense with” or “eliminate” anything. Instead, it substituted the new term “business trust” in place of the entire passage from the Bankruptcy Act. And, as explained at length previously, when Congress used the term “business trust,” the phrase already had well-understood legal meaning including the requirement that beneficial interests be evidenced by transferable certificates or shares.
Ultimately, the Court should not have to try to guess at what Congress might
have intended or not intended. Oliver Wendell Holmes,
The Theory of Legal
Interpretation
, 12 H ARV . L. R EV . 417, 419 (1899) (the Court should not decide “what the
legislature meant . . . [but] only what the statute means.”);
Conn. Nat’l Bank v. Germain
,
E. Application: the Trust is Not a “Business Trust” and Its Bankruptcy Case Must Be Dismissed.
1. The Trust Was Not Created and Maintained for a Business Purpose an Has No Centralized Management.
The most important factor for determining whether a trust is eligible to file for
bankruptcy protection as a “business trust” under Section 101(9) is whether the trust
was “created and maintained” for a business purpose.
Morrissey
,
The trust instrument serves as key evidence of the purpose of any trust at
formation.
See Shawmut Bank
,
In this case, the Trust Agreement is plain about original intent. The main
purpose of the Trust (explained in the very first paragraph) was to provide for Ms.
Douglass’ “health, support, and maintenance . . . in order to maintain [her], to the extent
reasonably possible, in accordance with [her] accustomed standard of living.” Tr. Agr. §
1.1. The Grantor was Ms. Douglass’ father. So, he was providing for his daughter.
When all the beneficiaries of a trust are family members, such trusts typically are family
trusts, not “business trusts.” Notably, the Trust Agreement does not identify the
beneficiaries’ respective ownership interests in the Trust by percentage, shares, or
certificates. The Trust also is a donative trust.
Dille Family Tr.
,
Other features of the Trust Agreement support the stated purpose: to provide for Ms. Douglass’ “health, support, and maintenance.” For example, the Trust Agreement contains a classic spendthrift clause which states:
Prior to the actual receipt of such property by any beneficiary, no property (income or principal) distributable under any trust created by this instrument shall be subject to anticipation or assignment by any beneficiary, or to attachment by or to the interference or control of any creditor or assignee of any beneficiary, or be taken or reached by any legal or equitable process in satisfaction of any debt or liability of any beneficiary, and any attempted transfer or encumbrance of any interest in such property by any beneficiary hereunder prior to distribution shall be absolutely and wholly void.
Tr. Agr. § 5.1. Another part of the Trust Agreement reenforces such provision: “no Beneficiary shall have the power pursuant to this section to appoint trust property to himself or herself, his or her creditors, his or her estate, or the creditors of his or her estate.” Tr. Agr. § 1.5.
In closing argument, counsel for the Trust started out denying that the Trust was a spendthrift trust. But that position is obviously wrong. The meaning of the term “spendthrift trust” is not a deep mystery. Under the heading “Spendthrift Trusts,” Texas law (which governs the Trust Agreement) states:
A settlor may provide in the terms of the trust that the interest of a beneficiary in the income or in the principal or in both may not be voluntarily or involuntarily transferred before payment or delivery of the interest to the beneficiary by the trustee.
T EX . P ROP . C ODE A NN . § 112.035(a). Stated another way:
Trusts with language prohibiting the voluntary or involuntary alienation of the beneficial interest in the trust are considered “spendthrift trusts.” A spendthrift trust provides direct protection from creditors of a beneficiary by expressly forbidding alienation of the beneficiary’s interest in the trust.
Tex. Com. Bank N.A. v. U.S.
,
Plainly, the Trust is a spendthrift trust designed as an estate planning vehicle to protect assets for the benefit of Ms. Douglass. In her personal bankruptcy case which she filed some years ago in Texas ( In re Paula Terry Douglass , Case No. 17-34716 (Bankr. S.D. Tex.)), Ms. Douglass confirmed her understanding and stated: “In 1986, Ira Terry created the Tiel Trust I as a spendthrift trust for the benefit of his . . . daughter Paula Douglass.” See In re Paula Terry Douglass , Case No. 17-34716 (Bankr. S.D. Tex.), Docket No. 133 at 13. So, she fought to protect the assets of the Trust from being available for her creditors. Business trusts typically do not have spendthrift provisions. A real business cannot conduct operations and then hide behind a spendthrift provision to avoid paying its creditors. In any event, a spendthrift clause in the Trust Agreement is very powerful evidence that the Trust does not have a business purpose.
There is more strong evidence that the Trust was not created as a business trust
for a business purpose. The Trust Agreement is governed by Texas law and refers to
the Texas Trust Code. Tr. Agr. §§ 4.1 and 5.4. This must have been a very conscious
choice by the Grantor because he lived in Louisiana.
[66]
No matter, he chose Texas law.
But, the Texas Trust Code (both at the time the Trust Agreement was executed (1986)
and now) expressly excludes “a business trust” from its purview. T EX . P ROP . C ODE A NN . § 111.003 (for purposes of the Texas Trust Code, a “trust” “does not include . . . a
business trust.”). To put it more starkly, “[t]here is no effective device creating a
business trust under Texas law.”
Action Roofing & Supply Co.,
Even if the Trust had been created for a business purpose, the Court still would need to assess whether the Trust was “maintained” for a business purpose. The Trust’s principal historical activity proves that the Trust was not “maintained” for a business purpose. The evidence shows that the Trust was given or acquired the Aspen Home years ago. That is — by orders of magnitude — the Trust’s principal asset. The Trust has never earned income from the Aspen House. The Trust has neither rented nor sold the Aspen Home. Instead, Ms. Douglass just lives in the Aspen Home rent-free. Allowing Ms. Douglass to live for free in the Aspen Home with her antiques and artwork is not any type of business activity. And, the Trust has no officers, directors, managers, or employees. There is no physical location for the Trust. There is no centralized management. It is just Ms. Douglass operating as the co-trustee and sole beneficiary along with her step-son as the other co-trustee. So, the Trust lacks many of the attributes of a business.
But, there is a hitch highlighted by the Trust. Someone at some time (no one knows who or exactly when) purchased railroad cars and placed them into the Trust. Currently, the Trust owns seven railroad cars which are operable and leased for periods expiring after January 2024. The Trust also owns nine railroad cars which are inoperable and “need[] to be scrapped.” The estimated scrap value of the Trust’s railroad cars depends upon weight and varies between $5,491.00 to $9,063.00 per car. The “estimated scrap value” of all the nine inoperable railroad cars owned by the Trust is $63,341.00. Further, the “estimated scrap value” of all the seven operable railroad cars is $47,464.00.
Although the Trust has not earned any income since the commencement of the bankruptcy case, in the past, the Trust received income for lease of the railroad cars. For example, for the quarter ended March 31, 2023, the Trust received net rentals of $10,349.95 (which amount is derived from leases of nine railroad cars). The monthly average rentals were $3,449.98 during such period. The meagre railroad car rental (along with scrapping inoperable railroad cars) is the only source of revenue for the Trust.
The Trust contends that the receipt of rental income from the lease of the railroad
cars constitutes a business activity.
See
,
e.g.
,
Ikalowych
,
From the foregoing, the Court concludes that the Trust has been involved in
some nominal business activity. So be it. But that is not the right inquiry. Under
Morrissey
,
2. The Trust Lacks Continuity.
In
Morrisey,
the Supreme Court held that another important attribute of a
business trust is continuity uninterrupted by death among beneficial owners.
Morrisey,
3. Interests in the Trust Are Not Transferrable.
Another important attribute of a “business trust” is transferability of interests.
Morrisey,
VI. Conclusion.
Given the foregoing, it is evident that the Trust is not a “business trust” under Section 101(9). It is not a close question. Since the Trust is not a “business trust,” it follows that the Trust is not eligible to be a bankruptcy debtor under Sections 101(9), 101(41), and 109(d). Therefore, the Trust’s bankruptcy case must be dismissed. Given the Court’s conclusion, it is not necessary for the Court to consider the Secured Creditors’ second argument in the Motion to Dismiss: that the Trust’s bankruptcy case should be dismissed under Section 1112(b) because it was filed in bad faith. Accordingly, and for the reasons set forth above, the Court hereby
ORDERS that the Secured Creditors’ Motion to Dismiss is GRANTED; and FURTHER ORDERS that the Trust’s bankruptcy case is dismissed. DATED this 22nd day of January, 2024.
BY THE COURT: Thomas B. McNamara, United States Bankruptcy Judge
Notes
[1] All references to the “Bankruptcy Code” are to the United States Bankruptcy Code, 11 U.S.C. § 101 et seq. Unless otherwise indicated, all references to “Section” are to sections of the Bankruptcy Code.
[2] Docket No. 1 in First Case. The Court will refer to particular documents contained in the CM/ECF docket for the First Case using the convention: “Docket No. ___ in First Case.”
[3] Docket Nos 27-31 in First Case.
[18] Docket No. 23 in Second Case and Ex. 2.
[19] Id .
[20] Id .
[21] Docket No. 24 in Second Case and Ex. 2.
[22] Id. The Trust broke the amount owed to the Pitkin County Public Trustee into three separate claims.
[23] Docket No. 24 in Second Case and Ex. 2.
[24] Docket No. 40 in Second Case.
[25] Docket No. 49 in Second Case.
[26] Docket No. 59 in Second Case.
[27] As required by Fed. R. Civ. P. 52(a)(1), as incorporated by Fed. R. Bankr. P. 7052, this Order
states “findings of fact specially and conclusions of law separately.”
See S.E.C. v. St. Anselm Explor.
Co.
,
[28] Ex. 1.
[29] Ex. 3 at 12-14.
[30] Ex. 1 at Section 1.6(a); Ex. 3 at 12-15.
[31] Ex. 2 at 26-27 and 29; Ex. 3 at 49. Ms. Douglass also was the sole trustee of the Trust at various times in the last 10-15 years. Ex. 4 at 18;
[32] Ex. 4 at 18; Ex. 12.
[33] Ex. 3 at 32; Ex. 11 at 12.
[34] Ex. 1 at 12.
[35] Ex. 3 at 41.
[36] Ex. 2 at 6.
[37] Ex. 3 at 45-47.
[38] Ex. 4 at 22-23.
[39] Ex. 2 at 1-7.
[40] Ex. 3 at 21-22 and 44; Ex. 4 at 11.
[41] Ex. 6 (listing “active cars”). According to the proffered testimony of Ms. Douglass and S. Preston Douglass, Jr., the Trust has nine active and leased railroad cars. However, with respect to GLNX 34112, the lease will expire on January 31, 2024 and the “car will be scrapped.” The lease for railroad car GLNX 34104 already expired (on October 31, 2023) and the “car will be scrapped.” Id . Accordingly, the Court accepts that the Trust owns 7 operable railroad cars.
[42] Ex. 6.
[43] Id .
[44] Id.
[45] Id .
[46] Id.
[47] Ex. 4 at 12.
[48] Ex. 5.
[49] Ex. 3 at 33.
[50] Docket No. 48.
[51] Ex. 7.
[52] Ex. 8.
[53] Ex. 10.
[54] Ex. 9.
[55] Ex. 3 at 62.
[56] Ex. 11.
[57] Id .
[58] Id .
[59] Ex. 12 and 13.
[60] Ex. 17.
[61] The Court relies upon and incorporates verbatim many passages from its recent decision on the same legal topic of trust eligibility for bankruptcy protection: In re Quadruple D Trust ,639 B.R. 204 (Bankr. D. Colo. 2022). For example, Section A “Statutory Framework for Bankruptcy Eligibility,” Section B “The Meaning of the Statutory Term: ‘Business Trust,’” Section C “Bankruptcy Caselaw Construing the Term ‘Business Trust,’” and Section D “Legislative History Concerning the Term ‘Business Trust’” (and most subparts) primarily restate the text of Quadruple D Trust ,639 B.R. 204 in respect of the applicable legal standards. Nothing has changed with respect to the applicable legal standards since the issuance of the Quadruple D Trust decision and there is no need for the Court to “reinvent the wheel” on the topic. Given the wholesale restatement in Sections A, B, C, and D, the Court does not separately quote language from Quadruple D. Trust ,639 B.R. 204 . The Court also notes that both the Trust and the Secured Creditors relied on Quadruple D Trust ,639 B.R. 204 in the Motion to Dismiss, the Objection, and at closing argument during the Hearing. Notwithstanding, of course, all cases are unique. So, in Section E “Application: the Trust is Not a ‘Business Trust’ and Its Bankruptcy Case Must Be Dismissed,” the Court applies the applicable legal standards to the specific facts in this bankruptcy case and determines that the Trust is not a “business trust.”
[62] The
EHT
court asserted that “the precept that applying federal common law to determine whether
a trust is a business trust will promote uniformity has proved to be false.”
EHT
,
[63] To say that state law is not dispositive does not suggest that state law is irrelevant. Instead, to the extent that state law might shed light on the meaning of the term “business trust” as used in 1978, such state law might assist in the interpretive enterprise. And, the Court does examine state statutes later as a source of meaning for the term “business trust.” Furthermore, in this case, Texas law also has some important implications with respect to the purpose for which the Trust was created.
[64]
But see Knight Tr. II
,
[65] See R EADING L AW at 419-23 (listing the “most useful and authoritative” legal dictionaries to “reflect meanings current at a given time”).
[66] Ex. 1 at 12.