The Dead (And Their Estates) Cannot Hold Property Under Recent Ninth Circuit Bankruptcy Appeal Panel Decision | Greenberg Glusker LLP
I recently had the pleasure of working with my colleagues Benny Roshan and Jillian beurk on appeal to the Ninth Circuit Bankruptcy Appellate Panel (BAP), which tested the ever-changing intersection between bankruptcy law and inheritance law.
A re Rens, __ BR __, # AP 19-90067-LA, 2021 WL 5049829 (BAP 9th Cir. October 29, 2021) is a case involving Robert Duane Rens, an 83-year-old retiree who has filed for Chapter 7 bankruptcy. Mr. Rens filed for bankruptcy, his sources of income included distributions of net income from his family trust established by his deceased parents.
The trust, which became the focal point of Mr. Rens’ bankruptcy, held a half stake in a land lease for a commercial and industrial park. Under the trust, the beneficiaries received regular rent distributions, and in 2035 the property would be distributed directly to the beneficiaries at the time on a 50/50 basis. Under the terms of the trust, if Mr. Rens died before 2035, his issue would acquire the right to Mr. Rens’ share and would receive the net income and eventually the capital. The Chapter 7 trustee has initiated litigation to determine the extent of the interest of the bankruptcy estate in the trust. The bankruptcy court ultimately ruled that not only did Mr. Rens derive 25% of his income from the trust, but his bankruptcy estate would also continue to receive 25% of the income and 25% of the trust capital after his death. See Davis v. Sparhawk, Opponent No. 19-90067-LA (Bankr. SD Cal. May 7, 2020). The trustee of the trust appealed. Mr Rens’ children, who had never been informed of the bankruptcy court proceedings, intervened in the appeal after learning of the bankruptcy court ruling. Greenberg Glusker represented the Ren’s children as interveners in the appeal and sought to overturn the bankruptcy court decision.
The call is an avant-garde interpretation of Carmack vs. Reynolds, 2 cal. 5th 844, 849 (2017). In Carmack, the California Supreme Court determined that a bankruptcy estate could reach 25% of future distributions under a spendthrift trust. What Carmack did not address, however, is what happens after the death of the bankrupt debtor. The bankruptcy court of Information interpreted the trust provisions and concluded that the bankruptcy estate continued to hold this 25% post mortem fiduciary interest. Greenberg Glusker argued on behalf of the interveners that this was an incorrect application of California probate law and would essentially create a form of ‘zombie’ fiduciary interests held by the living elders, which creditors could inevitably seize.
In a published notice, the BAP accepted and overturned the bankruptcy court’s decision, holding that the interest of a bankruptcy estate in a trust is limited to the rights held by an individual at the time the bankruptcy is filed. At the time he began his bankruptcy, Mr. Rens only had a contingent interest in the trust. His interest depended on the distributions made under the trust, the acquisition of the property in 2035 and, of course, whether he was alive to make those distributions. As such, the bankruptcy assets could not attain any interest after Mr Rens’ death.
An appeal to the Ninth Circuit has been filed, so stay tuned for updates.
* In his opinion, the BAP wrongly identifies the interveners as âintervening respondentsâ when they should be identified as âintervening appellantsâ because of the alignment of the interveners with the appellant’s positions.