Gugino v. Clark's Crystal Springs Ranch, LLC (In re Clark)

• Decision Date: 30 December 2014
• Docket Number: Bankruptcy No. 12–00649–TLM.,Adversary No. 13–06016–TLM.
• Citation: 525 B.R. 107
• Parties: In re Jay P. CLARK, Debtor. Jeremy Gugino, solely in his capacity as Chapter 7 Trustee of the bankruptcy estate of the above-named Debtor, Plaintiff, v. Clark's Crystal Springs Ranch, LLC, an Idaho limited liability company; Clark Farms Family Trust, a trust organized under the laws of the State of Idaho; Does 1–10; and Does 11–20, Defendant.
• Court: U.S. Bankruptcy Court — District of Idaho

525 B.R. 107

In re Jay P. CLARK, Debtor.Jeremy Gugino, solely in his capacity as Chapter 7 Trustee of the bankruptcy estate of the above-named Debtor, Plaintiff,

v.Clark's Crystal Springs Ranch, LLC, an Idaho limited liability company; Clark Farms Family Trust, a trust organized under the laws of the State of Idaho; Does 1–10; and Does 11–20, Defendant.

Bankruptcy No. 12–00649–TLM.

Adversary No. 13–06016–TLM.

United States Bankruptcy Court, D. Idaho.

Signed Dec. 30, 2014.

Matthew Todd Christensen, Angstman, Johnson & Associates, PLLC, Boise, ID, for Plaintiff.

Nolan Roy Sorensen, S & P Legal LLC, Boise, ID, for Defendants.

MEMORANDUM OF DECISION

TERRY L. MYERS, Chief Judge.

Chapter 7 trustee Jeremy Gugino (“Plaintiff”) brought this action against defendants Clark's Crystal Springs Ranch, LLC (the “LLC”) and Clark Farms Family Trust (the “Trust”). Trial was held, and the matter was later taken under advisement on September 12, 2014, when the parties filed their closing briefs. This Decision constitutes the Court's findings of fact and conclusions of law. Fed. R. Bankr.P. 7052.¹

FACTSA. Procedural context

Jay P. Clark (“Debtor”) filed a voluntary petition commencing a chapter 12 case on March 27, 2012. On May 31, 2013, this Court ² converted the case to a chapter 7 liquidation under § 1208(d) which allows for such conversion only “upon a showing that the debtor has committed fraud in connection with the case.” ³

Plaintiff's complaint was filed on June 7, 2013. As chapter 7 trustee, he asserts several causes of action, all designed to recover and bring into the estate the assets of the LLC, generally consisting of $20,000 in funds, a crop insurance check of $354,000, and equipment with unknown present value but a once-asserted auction value of $364,600. To do so, Plaintiff asserts related and, at times, alternative theories and prays for: (1) a declaratory judgment that the LLC and the Trust are “invalid entities” created as “part of a scheme to hinder, defraud or delay creditors,” and that Plaintiff therefore may ignore the separate existence of these entities; (2) a judgment finding that the LLC and the Trust are the “alter egos” of Debtor and that Plaintiff therefore may “disregard the corporate existence” of the LLC and the separateness of the Trust and treat their assets as those of Debtor and this estate; (3) a declaratory judgment that the Trust is a “revocable trust” and that Plaintiff has the authority to revoke the Trust at any time; and (4) a judgment for the “substantive consolidation” of the assets and liabilities of Debtor, the LLC and the Trust.

B. The Trust

Debtor, at one time a lawyer, created the Trust on February 1, 2008.⁴ Ex. 100. Debtor was both the grantor of the Trust and its named trustee. The Trust was purportedly funded by the nominal consideration of $1.00 and property as set out on a “schedule A,” see id. at § 1.02, though no such schedule A was attached to the Trust document. That document indicated, however, that the grantor ⁵ could name the Trust as beneficiary of life insurance policies ⁶ and deposit or devise other property into the Trust.

1. Trust beneficiaries

Debtor and Defendants asserted and repeatedly emphasized that the Trust was created for the benefit of Debtor's children, Caleb and Hannah.⁷ Indeed, the Trust clearly was to be administered for Caleb and Hannah at Debtor's death. The Trust agreement at Article III, § 3.01, entitled “Trusts for Benefit of Grantor's Issue,” provides that “After the death of the Grantor, the successor trustee ⁸ shall hold, manage, and administer the property that is directed to be distributed in accordance with the provisions of this Article IV for the benefit of the deceased Grantor's issue as follows....” It is in such section (and only in that section) that Caleb and Hannah are specifically named, and the Trust makes provisions for distribution to them only if they survive Debtor by more than 30 days.⁹

The 2008 Trust agreement, however, made no provision for Caleb and/or Hannah to receive any distributions or benefits while Debtor was alive. Debtor testified that Caleb and Hannah were quite young (4 and 2 respectively) when he and their mother divorced, and appeared to suggest that it was for this reason he created the trust to provide estate planning and protection for them. As of trial, which occurred only about 6 1/2 years after the Trust's creation, Caleb was on active duty with the U.S. Marine Corps and Hannah was a college student. Other evidence indicates Caleb was 18 years old when the Trust was amended in 2010. See Ex. 101 at 1. He would therefore have been 16 at the Trust's creation, and Hannah would have been 14.

The Trust agreement does contain provisions relating to the health, education, support and maintenance of a “beneficiary.” See, e.g., id. at § 4.09. But other than in regard to the requirement in Article III that “ after the death of the Grantor, the successor Trustee shall hold, manage and administer the property ... for the benefit of the deceased Grantor's issue,” there is no identification in the Trust document of either Caleb or Hannah (or any other party) as a “beneficiary.”

However, the agreement did provide immediate benefits to Debtor as Grantor. It states: “[w]hile both Grantor are living, the Trustee shall distribute to or for the benefit of the Grantor such sums from income and principal as the Grantor may at any time request.” Ex. 100 at § 2.01 (entitled “Withdrawals by Grantor”) (emphasis added). In addition to this mandatory obligation to distribute whatever the Grantor might request, the Trust's trustee (also Debtor) had the discretionary power to “distribute to or for the benefit of the Grantor, such sums from income and principal as the Trustee deem reasonable for the maintenance, support, and health of either or both Grantor.” Id. at § 2.02 (“Distributions by Trustee”) (emphasis added).¹⁰ The Trust agreement also had a spendthrift clause. Id. at § 4.03.¹¹

2. Revocability and amendment

The Trust was characterized as irrevocable and, further, not subject to amendment: “This trust shall be irrevocable and shall not be revoked or terminated by Trustor or any other person, nor shall it be amended or altered by Trustor or any other person.” Ex. 100 at § 1.04.¹² But notwithstanding this absolute prohibition on both revocation and amendment, § 5.01 of the Trust agreement provided:

The Grantor may at any time during their joint lives amend any of the provisions of this Clark Farms Family Trust by an instrument signed by both Grantor and delivered to the trustee....

During the joint lives of the Grantor, the Trust created by this Clark Farms Family Trust may be revoked, in whole or in part, with respect to community property, by an instrument signed by either Grantor and delivered to the Trustee and the other Grantor, and, with respect to separate property, by an instrument signed by the Grantor who contributed the separate property and delivered to the Trustee. Upon revocation, the Trustee shall distribute all or the designated portion of the community property to the Grantor and the separate property to the Grantor who contributed such property.

Upon the death of the Grantor, Trust B shall become irrevocable. The Grantor may amend or revoke Trust A, in whole or in part, by an instrument signed by the Grantor—and delivered to the Trustee; and upon such revocation, the Trustee shall distribute all or the designated portion of Trust A to the Grantor.

See Ex. 100 at § 5.01 (emphasis added).¹³

The trust agreement was amended on May 24, 2010. Ex. 101. This was done by Debtor as the grantor of the Trust, under the power of amendment “reserved to the Grantor under Article 5.01 of the ... Trust.” Id. at 1. This amendment refers to Caleb as one of two beneficiaries, and notes he reached the age of 18 and graduated from high school, thus motivating the amendment. The asserted purpose of the amendment was to “add meaning and clarity to this Trust, and give the Trust and more definite purpose as needed for the beneficiaries.”

The amendment changes § 1.02 of the Trust agreement to reflect that the “Trust property is now known to be all the assets of Clark's Crystal Springs Ranch LLC, an Idaho limited liability company. The Trust is the sole member of this company. The assets of the LLC are primarily farm machinery and vehicles owned by the LLC, all of which have accumulated since the formation of this Trust.” Id.¹⁴ The valueof the LLC assets was asserted to be at least $100,000 and the trustee was required to maintain this “minimum value.”

The 2010 amendment modified § 2.02 of the initial agreement (which, as noted above, provided for distributions solely to the Grantor). This amendment states: “Distributions may be made to the Grantor but only if they do not interfere with regular distributions to the beneficiaries as outlined below and only if they do not reduce the total value of the class of assets as set forth in Section 1.02 above.”

The amendment also modified § 4.09 of the Trust.¹⁵ It states that “[t]he Trust shall continue to make contributions to the beneficiaries as already provided.” (emphasis added). However, the sole “contributions” ( i.e., in context here, “distributions”) to beneficiaries “already provided” for in the original Trust were to be made only upon Debtor's death. Under the original agreement, nothing was distributable to Caleb or Hannah while Debtor was alive, thus there was nothing to “continue[ ].”

The next part of the § 4.09 amendments states: “In addition, so long as the Trust is able to earn income through the operation of the LLC as stated above, the Trust shall also provide the beneficiaries with a cell phone and pay all reasonably cell phone billings, pay for the utilities and rent of a reasonable dwelling, or housing, in the event either beneficiary is not able to find and maintain gainful employment, at no fault of their own, provide a vehicle necessary for...