Spendthrift Trust Corpus Not Part of Bankruptcy Estate, Testamentary Spendthrift Trust Income Disbursements Made More Than 180 Days After Date of Petition Not Part of Bankruptcy Estate — By Dan Lake

Massillon v. Riley (In re Massillon), No. MB 10-024, 2011 Bankr. LEXIS 83 (B.A.P. 1st Cir. Jan. 11, 2011)

In an unpublished decision, the United States Bankruptcy Appellate Panel for the First Circuit reversed a Bankruptcy Court decision, which ordered that post-petition disbursements of trust income become part of the debtor’s estate.  At issue was whether a debtor’s interests in a testamentary spendthrift trust created under New York law could become property of the bankruptcy estate.  The BAP held that income disbursements from a testamentary spendthrift trust received by the debtor within 180 days after the date of petition became part of the estate, while exempting a spendthrift trust’s corpus and all other post-petition testamentary spendthrift trust income disbursements.

The BAP first determined that the corpus of the spendthrift trust was not part of the debtor’s estate.  Under Section 541(c)(2) of the Bankruptcy Code, the inalienability of a debtor’s interest in a spendthrift trust is fully enforceable in a bankruptcy proceeding.  Accordingly, if the BAP found that the trust at issue was a spendthrift trust, the panel would exclude the debtor’s interest in the corpus from the estate.  Under New York law, all express trusts are spendthrift, unless the settlor provides otherwise.  Because the settlor of the trust did not expressly provide otherwise, the BAP agreed with the Bankruptcy Court’s determination of a spendthrift trust and excluded the corpus from the debtor’s estate.

The second issue was whether distributions of income from the testamentary spendthrift trust would become property of the debtor’s estate.  Section 541(a)(5)(A) of the Bankruptcy Code provides that any interest that the debtor acquires by bequest, devise, or inheritance within 180 days after the date of filing becomes part of the estate.  Therefore, the BAP held that any distributions of income by a testamentary spendthrift trust within 180 days after filing became property of the debtor’s estate. 

The BAP also held that distributions of testamentary spendthrift trust income after the 180 day period are not part of the bankruptcy estate.  A New York statute, N.Y. C.P.L.R. 5205(d)(1), provides that a creditor can receive only ten percent of a judgment debtor’s trust income distributions to satisfy a money judgment.  The bankruptcy court found this statute to be an exemption statute because it restricts creditors but not a debtor’s ability to alienate.  The trustee argued that the debtor could not take advantage of the state exemption, as the debtor had already applied for federal exemptions.  The bankruptcy court agreed with the trustee and held that future trust income distributions would be part of the estate because the debtor could not stack exemptions.  The bankruptcy court failed to address Section 541(a)(5)(A), however, because the court held that the debtor’s right to trust distributions became fixed pre-petition and that all future distributions were therefore part of the estate under Section 541(a)(1).  On appeal, the BAP noted that courts in three cases had applied N.Y. C.P.L.R. 5205(d)(1) in a bankruptcy context.  These cases held that ten percent of all future disbursements of trust income became part of the debtor’s estate.  However, none of the case law considered the New York statute in light of Section 541(a)(5)(A).  Congress only enacted one provision that brought a post-petition entitlement into a debtor’s estate, and holding that future trust distributions are part of the estate under Section 541(a)(1) would make Section 541(a)(5)(A) superfluous.  The BAP did not address the exemption stacking argument because the debtor did not claim an exemption under N.Y. C.P.L.R. 5205(d)(1).

BAP Vacates Order Granting Debtor’s Vague and Ambiguous Claims Objection — By Dan Lake

Banco Popular De Puerto Rico v. Torres (In re Torres), No. PR 10-036, 2011 Bankr. LEXIS 130 (B.A.P. 1st Cir. Jan. 19, 2011)

In an unpublished decision, the United States Bankruptcy Appellate Panel for the First Circuit vacated an order by the Bankruptcy Court sustaining a debtor’s objection to a secured creditor’s proof of claim.  The debtor claimed that because she was current with her mortgage payments to the secured creditor at the time of filing, the court should disallow the creditor’s claim for late fees and legal fees.  The BAP held that the debtor’s objection was too vague to overcome the prima facie evidence of the claim’s validity and amount established by the creditor’s written statement, which substantially conformed to an Official Form.

Under Section 502(a) of the Bankruptcy Code, when a creditor submits a proof of claim, the court must allow the claim unless a party in interest objects.  If a party in interest objects, the court must nevertheless allow the claim unless an exception listed in Section 502(b) of the Bankruptcy Code applies.  Courts are split as to whether the Section 502(b) exceptions constitute an exhaustive list.  Under Fed. R. Bankr. P. 3001, a proof of claim supported by a written statement that substantially conforms to the correct Official Form is considered “prima facie evidence of the validity and amount of the claim.”  A court must analyze a proof of claim on a case-by-case basis, evaluating the detail provided by the claimant, the content of the written statement, and the objector’s identity.  Official Form 10, the proof of claim form, instructs a claimant to attach certain supporting documents and to explain any absence of these supporting documents.  If the claim includes any interest, the claimant must also attach an itemized statement of all interest charges.  The BAP held that the creditor’s proof of claim was prima facie valid because it substantially conformed to Official Form 10 and contained the mortgage note evidencing the creditor’s secured claim.

If the debtor offers substantial evidence rebutting the proof of claim, the creditor then has the burden to prove its claim by a preponderance of the evidence.  To sustain an objection to a proof of claim, the court must find that a Section 502(b) exception applies, or that the creditor’s written statement or supporting documentation is insufficient.  The BAP held that the debtor’s objection lacked substantial evidence and was also too ambiguous and vague.  In arguing that the court should disallow the claim for late fees and legal fees, the debtor failed to assert that she did not actually owe late fees, but merely stated that her payments were current at the petition date.  The only charge to which the debtor specifically objected was to legal fees related to the claim preparation.  However, the creditor’s statement indicated that all charges were pre-petition.  The BAP held that a lack of arrears in mortgage payments by a debtor does not provide grounds for a court to disallow a claim by a creditor for fees related to the mortgage.  The BAP also noted that when a creditor submits a claim after the court confirmation of the debtor’s plan, but before the deadline to file a proof of claim, the charges in the claim are still deemed pre-petition. 

The BAP also considered the standard of review to apply in the case at hand.  The creditor’s response to the objection was untimely, coming more than thirty days after the debtor served the objection on the creditor.  However, the Bankruptcy Court considered the creditor’s late response in its order sustaining the objection.  An appellate court reviews an order by a bankruptcy court disallowing a claim due to procedural default under an abuse of discretion standard, but reviews an order based on a legal issue under a de novo standard.  Because the Bankruptcy Court apparently considered the creditor’s response while interpreting and applying the Bankruptcy Code, the BAP reviewed the order de novo.



Please be advised that in the event of a shutdown of the federal government due to a lack of funding, the U.S. Bankruptcy Court and the U.S. District Court will remain open and fully operational.  The General Services Administration (GSA) has assured us that the federal buildings will be open and security will be in place at the entrances as usual.  The U.S. Marshal Service has also assured us that the Contract Security Officers (CSOs) will be on duty in all court locations as usual. Also, the Office of the U.S. Trustee has advised us that Chapter 7, 11 and 13  Section 341 meetings will be held as scheduled.

Hearings and trials scheduled in the bankruptcy court will proceed as planned, unless you are notified otherwise in a particular case or matter.

Members in the News

Choate, Hall & Stewart LLP in Boston has added Kevin Simard, formerly a partner at Riemer & Braunstein, as a partner in the law firm’s Finance & Restructuring Group. Simard will continue to focus his practice on representing major financial institutions in all aspects of secured lending

Members in the News

The BBJ reported that McCarter & English LLP has added Thomas Curran as a partner in the Bankruptcy & Restructuring practice in Boston. Curran handles all aspects of insolvency law with a particular focus on creditor rights. He joins McCarter from the Hinckley, Allen & Snyder LLP’s Boston office, where he was a partner in the Bankruptcy, Creditors’ Rights & Workouts practice group.

Failure to Acquire Property Insurance on Collateral is Sufficient to Reduce 21-Day Notice Period Before a Conversion Hearing — By Dan Lake

Aja v. Fitzgerald (In re Aja), 441 B.R. 173 (B.A.P. 1st Cir. 2011)

The United States Bankruptcy Appellate Panel for the First Circuit (BAP) denied an appeal by a debtor challenging the Bankruptcy Court’s denial of her request for reconsideration of an order converting her case from chapter 11 to chapter 7. The Bankruptcy Court set a date for the conversion motion hearing, but advanced the hearing date after the Trustee alleged that the debtor failed to acquire property insurance on her collateral property. The debtor failed to attend the hearing, and the Bankruptcy Court issued an order converting her case to chapter 7. The debtor moved the Bankruptcy Court to reconsider its order and on March 19, 2010, the Bankruptcy Court denied the relief sought by the motion to reconsider. On April 1, 2010, the debtor filed an appeal of the court’s denial of her request for reconsideration but did not appeal the denial of the conversion motion itself. By the time the BAP heard the appeal, the debtor’s estate was administratively insolvent.

As an initial matter, the BAP determined that the debtor’s appeal fell outside the scope of Fed. R. Civ. P. 59(e), made applicable to bankruptcy appeals by Fed. R. Bankr. P. 9023, because the debtor failed to bring the appeal within 14 days. However, Fed. R. Civ. P. 59(e) was amended on March 26, 2009, which amendment took effect December 1, 2009, to provide for a 28 day appeal period. The debtor brought her appeal within that 28 day period. However, because the BAP ruled that Fed. R. Civ. P. 59(e) was inapplicable, it applied the relatively stricter standard for relief set forth under Fed. R. Civ. P. 60(b), made applicable by Fed. R. Bankr. P. 9024.

The BAP addressed the issue of whether the debtor received sufficient notice of the conversion motion hearing. A bankruptcy court may convert a case after appropriate notice and a hearing, and Fed. R. Bankr. P. 2002(a)(4) provides that a court must provide the debtor with 21 days notice before a hearing on a motion to convert. However, Fed. R. Bankr. P. 9006(c)(1) gives a court the power to reduce the notice period for cause. Lack of property insurance on collateral gives cause for conversion, and the Bankruptcy Court found that the debtor had provided no evidence of insurance. The BAP agreed with the Bankruptcy Court, finding that the notice period of less than 21 days was sufficient under the circumstances.

The BAP also determined that even if the Bankruptcy Court had erred in denying reconsideration, such error was harmless because the debtor failed to appeal the conversion order itself, the debtor’s estate was administratively insolvent and the debtor failed to demonstrate an ability to reorganize under chapter 11. The BAP dismissed the appeal as moot, ruling alternatively that the debtor’s appeal was substantively without merit.

Debtor’s Lack of Equity in Estate Provides No Standing to Appeal Order for Relief From Stay After Bankruptcy Court Converts Case to Chapter 7 — By Dan Lake

Aja v. Emigrant Funding Corp. (In re Aja), No. MB 10-019, 2011 Bankr. LEXIS 131 (B.A.P. 1st Cir. Jan. 19, 2011)

The United States Bankruptcy Appellate Panel for the First Circuit (BAP) dismissed an appeal by a pro se debtor challenging the Bankruptcy Court’s grant of a creditor’s motion for in rem relief from stay. The BAP ruled that the debtor lacked standing to appeal because the Bankruptcy Court had converted her case from chapter 11 to chapter 7. The BAP also rejected the debtor’s arguments as to the merits considered by the Bankruptcy Court in granting relief from stay.

The BAP first addressed the issue of whether the debtor had standing to appeal the Bankruptcy Court’s order. Persuasive authority provides that when a court converts a bankruptcy case to chapter 7, the trustee, not the debtor, represents the estate. Although there are exceptions where an appeal would provide a distribution to the debtor or would affect the debtor’s discharge, the BAP found those exceptions to be inapplicable because the debtor had no equity in the property that was subject to the motion for relief from stay.

Although the BAP dismissed the appeal for lack of standing, the panel also discussed the substantive merits of the case. Under Section 362(d)(1) of the Bankruptcy Code, relief from the automatic stay shall be granted for cause, including lack of adequate protection. Section 362(d)(2) permits a Bankruptcy Court to grant relief from the automatic stay when the debtor lacks equity in the collateral and the property is not necessary to the debtor’s reorganization. The BAP upheld the Bankruptcy Court’s finding that the debtor had no ability to reorganize, based on her failure to propose a viable reorganization plan in the case at hand and in each of the three prior bankruptcy cases filed by the limited liability company of which the debtor was the managing partner. Further, the BAP found that the debtor had no equity in the property. Accordingly, the BAP upheld the Bankruptcy Court’s grant of relief from the automatic stay.

No Spousal Equality in Bankruptcy, SJC Finds

Kirk and Janice Hundley, husband and wife, were equal in everything — home life, responsibilities. Everything except their tax refund when it came to bankruptcy court, according to the state Supreme Judicial Court. For more from The Boston Globe, click here.

Borders Chapter 11

Borders, the 40-year-old chain that helped define the age of the book superstore, filed for bankruptcy protection on Wednesday.  For more from the NY Times, click here.

Volunteer Opportunity – Reminder (Help Needed on 1/18)


As part of the Bankruptcy Section’s continuing commitment to providing assistance to the Court with pro se filers, BBA Bankruptcy Section volunteers staff a “clinic” and provide advice to pro se debtors who have asked the Court’s permission to enter into a reaffirmation agreement with a creditor. The Pro Bono Committee coordinates the process; and, as there is no appearance by counsel, conflicts are not seen as an issue.

We invite you to Volunteer! The clinic is held each month for one hour just prior to the Court’s scheduled hearings. The up-coming dates are:

January 18, 2011
February 15, 2011
March 8, 2011
April 5, 2011

Contact: Elaine M. Benkoski, Co-chair of the Pro Bono Committee.