Debtor Claims to Be Business Trust, Gets Stuck in Bankruptcy

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By Daniel Gill

Aug. 10 — A self-styled business trust formed to protect a criminal defendant's property from forfeiture proceedings and foreclosure can't later claim that it is not a business trust to compel dismissal of its bankruptcy case ( Soames Lane Tr. v. Gonzalez (In re Soames Lane Tr.), 2016 BL 256465, B.A.P. 9th Cir., No. BAP No. CC-16-1042-FDKu, unpublished decision 8/8/16 ).

The U.S. Bankruptcy Appellate Panel for the Ninth Circuit Aug. 8 held that a trust which filed for relief under Chapter 11, repeatedly insisting that it was a business trust, could not change its mind and claim it was only a personal trust in order to have its bankruptcy dismissed. The court's opinion is “not for publication,” meaning it cannot be cited in another case as precedent.

Shielding Property

After Grover Henry Nix IV was arrested in 2013 (along with numerous other defendants) for alleged securities laws violations involving cheating thousands of investors of $30 million, Nix's property became the subject of forfeiture proceedings brought by the Department of Justice in the criminal action and a possible foreclosure by the mortgage-holder for the property, the court said.

With the help of his father, the incarcerated Nix (he pleaded guilty in his criminal case) formed the Soames Lane Trust as settlor, with his father (a self-proclaimed expert on business trusts) as trustee. Then Nix transferred his house into the trust, the court said.

On the eve of a foreclosure sale by the mortgagee, the trust filed for Chapter 11 protection, at the time admitting that the filing was made to stop the impending foreclosure, the court said.

Chapter 11 allows “persons” to enjoy protections from creditors while they seek to reorganize their debt or liquidate pursuant to a plan which must be approved by the bankruptcy court. A business trust is a “person” which can be a debtor under the Bankruptcy Code, but an individual or personal trust is ineligible, the court explained.

Changing the Story

Soon after the bankruptcy case was filed, the federal criminal court ruled that the DOJ could not seek restitution from Nix, thus ending the threat of forfeiture, the court said. The trust responded by filing a motion to dismiss its Chapter 11 case. Since forfeiture was no longer a concern and it could cure the loan default, protecting the property in bankruptcy was no longer required.

Before the trust filed its dismissal motion, the Office of the United States Trustee (a branch of the DOJ dedicated to overseeing bankruptcies and bankruptcy trustees) filed its own motion to dismiss the case or convert it to Chapter 7, on the grounds that the bankruptcy was filed in bad faith and that the trust wasn't performing its duties as a Chapter 11 debtor. In Chapter 7, a debtor's assets are liquidated by a trustee, and the proceeds are distributed to creditors.

The trust continued to assert it was a business trust, and the court granted the U.S. Trustee's motion, ordering the case converted to Chapter 7. Rosendo Gonzalez was appointed as the Chapter 7 trustee.

The trust filed another motion to dismiss, this time arguing that it was not a business trust, despite Nix's father's frequent previous arguments that the trust absolutely was a business trust. “He asserted these conclusions [that it was not a business trust] with the same boundless confidence with which he had stated the opposite views a short timer earlier,” the court said.

Judicial Estoppel

Even though the bankruptcy court had previously expressed concern about the debtor's eligibility, under the doctrine of judicial estoppel, the bankruptcy court refused to allow the debtor to claim it was a personal trust not eligible to be in bankruptcy after it previously — and repeatedly — told the court it was a legitimate business trust.

The BAP agreed and affirmed the lower court's refusal to dismiss the bankruptcy and its conversion of the case to Chapter 7. In doing so, the BAP noted that the bankruptcy court maintained subject matter jurisdiction to hear the case regardless of whether the debtor was eligible under Bankruptcy Code Section 109, because Section 109 was not a jurisdictional statute.

The court said the trust should not be allowed “to benefit from its underhanded conduct,” referring to the trust changing its tune to fit its own convenience at the expense of the Chapter 7 trustee and the bankruptcy estate, which had expended time and money attempting to administer the case for the benefit of creditors after it was converted.

Judges Robert J. Faris, Randall L. Dunn and Frank L. Kurtz served on the panel.

Stuart J. Wald, Murrieta, Calif., represented Soames Lane Trust. Rosendo Gonzalez, the Chapter 7 trustee, was represented by Irv Gross, Levene, Neale, Bender, Yoo & Brill LLP, Los Angeles.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bna.com

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