In re Bradley

• Decision Date: 20 September 2007
• Docket Number: No. 06-50808.,No. 05-51626.,05-51626.,06-50808.
• Citation: 501 F.3d 421
• Parties: In the Matter of: Gary L. BRADLEY, Debtor. Gary L. Bradley, Appellee-Cross-Appellant, v. Ronald E. Ingalls, Trustee; Appellant-Cross-Appellee, v. Thomas Thompson, Trustee of and on Behalf of the Lazarus Exempt Trust, Appellee-Cross-Appellant. In the Matter of: Gary L. Bradley, Debtor. Ronald Ingalls, Appellant, v. Lazarus Investments LP; Castle Realty Management LLC; Thomas Thompson, in his capacity as Trustee of the Lazarus Exempt Trust, Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

501 F.3d 421

In the Matter of: Gary L. BRADLEY, Debtor.

Gary L. Bradley, Appellee-Cross-Appellant, v. Ronald E. Ingalls, Trustee; Appellant-Cross-Appellee, v. Thomas Thompson, Trustee of and on Behalf of the Lazarus Exempt Trust, Appellee-Cross-Appellant.

In the Matter of: Gary L. Bradley, Debtor.

Ronald Ingalls, Appellant, v. Lazarus Investments LP; Castle Realty Management LLC; Thomas Thompson, in his capacity as Trustee of the Lazarus Exempt Trust, Appellees.

No. 05-51626.

No. 06-50808.

United States Court of Appeals, Fifth Circuit.

September 20, 2007.

Raymond W. Battaglia, Douglas Wayne Sanders, Oppenheimer, Blend, Harrison & Tate, San Antonio, TX, Jeffrey Thomas Cullinane, Richie & Gueringer, Austin, TX, for Bradley.

Michael Paul Massad, Jr., Jarrett Lee Hale (argued), Hunton & Williams, Dallas, TX, Frank N. Ikard, Jr., Mary E. Haught, Patrick Charles Hargadon, Bankston & Richardson, Austin, TX, for Ingalls.

Lynne Liberato (argued), Kent Geoffrey Rutter, Katharine D. David, Haynes & Boone, Houston, TX, Eric Jay Taube, Sarah J. Starnes, Hohmann, Taube & Summers, Austin, TX, for Thompson.

Appeals from the United States District Court for the Western District of Texas.

Before SMITH, BENAVIDES and DENNIS, Circuit Judges.

DENNIS, Circuit Judge:

Our main concern in this bankruptcy appeal is whether the burdens and elements of proof were correctly applied in a bankruptcy trustee's action to trace and recover assets that a debtor "self-settled" into a spendthrift trust of which he is the beneficiary. The bankruptcy and district courts held that, although the debtor and his business associates used the trust in a scheme to defraud his creditors, the trust could not be declared a sham because under Texas law the doctrine of sham or illusory trust applies only in marital litigation. Instead, those courts held that the bankruptcy trustee, in order to pursue the remedy of tracing assets from the debtor into the hands of the spendthrift trust trustee and recovering those assets for the bankruptcy estate, had the burden of proving that those assets were identical with the debtor's former property, that they were products of such property, or that they had been commingled with other assets of the spendthrift trust. Those courts further concluded that the bankruptcy trustee carried his burden with respect to certain assets of the debtor but failed with respect to others. Accordingly, they held that only the specific assets in the hands of the spendthrift trust trustee that the bankruptcy trustee successfully traced and proved to be identical with former property of the debtor would be included in the bankruptcy estate. Finally, both courts agreed that Bradley should not be granted a discharge from bankruptcy because of his concealment of the self-settled assets. We affirm the judgments of the bankruptcy and district courts for the reasons hereinafter assigned.

I. BACKGROUND

Gary L. Bradley was a major real estate developer in Austin, Texas who maintained a business partnership with James Gressett for a number of years. Bradley and Gressett had a private, unrecorded agreement with respect to assets and legal entities they owned or controlled. Bradley's share consisted of 80% of the real estate holdings and 20% of the non-real estate investments; Gressett's share consisted of 20% of the real estate holdings and 80% of the non-real estate investments. Bradley consistently avoided holding real estate and other assets in his own name. As a result, his actual interests in various assets and entities were ostensibly owned by Gressett and others.

In the mid-1980's, the FDIC obtained a judgment for over $50 million against Bradley, Gressett, and their large real estate development company, Circle C Development Corp. Gressett filed for Chapter 7 bankruptcy protection in the early 1990's and received a discharge. In 1999, Bradley and Gressett decided to separate their business interests by dividing, transforming, and transferring assets representing Bradley's share into a trust to be formed for the purpose of protecting his assets from creditors. Bradley Beutel, Bradley's cousin and close business associate, was chosen to identify, reconfigure, and transfer assets of values equivalent to Bradley's share into the trust.

On May 2, 2000, Kaye Bradley Hulse, Bradley's sister, created the Lazarus Exempt Trust (the "Trust"), which the bankruptcy court described as a discretionary Crummey trust, designating her brother, Bradley, as the primary beneficiary. Hulse also designated Bradley's son as the secondary beneficiary and Beutel as the trustee. In creating the Trust, Hulse referred to herself as its settlor and funded it with a $1,000 donation. She made no other donations to the Trust, although she did loan substantial amounts of money to Bradley who in turn loaned them to the Trust or to entities owned by the Trust. Prior to trial, all claims against Hulse were dismissed.

Although the bankruptcy court did not find that Hulse created the Trust for fraudulent purposes, it found that "Bradley and Gressett used the creation of the Trust by her for their own purposes, i.e., as the timely and appropriate vehicle to accomplish the final separation of their business affairs." In fact, the bankruptcy court stated:

For those of us looking in, this is an incredibly fraudulent scheme engaged in primarily by Bradley, Gressett and, with the Trust's formation, Beutel as well, to hide the assets Bradley owned, to place them into the Trust when formed, and to preserve them from the clutches of Bradley's creditors, the FDIC and the IRS.

Furthermore, the bankruptcy court found as a fact that "the Trust was merely a sham and/or illusory and that all the Trust assets should be deemed assets of Bradley's Chapter 7 bankruptcy estate." But the court refused to declare the Trust a sham as a matter of law because "such cause of action [i.e., to legally declare a trust to be a sham or illusion,] only exists under Texas law with regard to marital relationships." Nevertheless, the bankruptcy court, for purposes of appeal, in case the reviewing appellate court should determine such a cause of action to exist, also found as additional supporting facts that: The Trust was funded with only $1,000 and the settlor made no further donations to the Trust. The great majority of the assets the Trust acquired in the first two years — over $40 million in value — appeared either to have been owned by Bradley or held for him by Gressett and others prior to the Trust's creation. Beutel, as trustee, never made formal distributions from the Trust, but Bradley obtained cash from the Trust any time he needed it. Bradley was employed by entities owned by the Trust and was paid a salary of about $15,000 per month. Cash was shifted between the Trust and its various entities on an "as needed" basis. Bradley was significantly involved in the management of the Trust's affairs on a daily basis. Gressett, Bradley, and Beutel conducted their business ventures out of the same office, often using a common business name, employees of the Trust-owned entities, and a centralized record-keeping system. The Trust's cash was disbursed to Bradley and others on an "as needed" basis without respect to who produced it, which is precisely how the Bradley-Gressett entities operated before they were placed in the Trust. Finally, there was continual backdating of documents in an effort to breathe legitimacy into the transactions amongst and between the Trust, Bradley, and his associates.

On July 19, 2002, Bradley filed for Chapter 7 bankruptcy. Ronald Ingalls was appointed to serve as bankruptcy trustee. This appeal arises out of three separate but related adversary proceedings, all of which were consolidated to address the issue of whether Bradley self-settled some or all of the Trust assets in an alleged effort to conceal those assets from the bankruptcy estate. A trial was held on April 19 through April 29, 2004.

On October 28, 2004, the bankruptcy court concluded that (1) certain Trust assets were self-settled and thus, are to be turned over to Ingalls as property of the bankruptcy estate, (2) other Trust assets may have been self-settled but Ingalls (a) did not carry his burden of tracing these transfers from Bradley to assets in the Trust and (b) did not timely and diligently pursue his other available remedies with respect to those assets; and (3) Bradley's use of the Trust to conceal the self-settled assets constituted a continuing concealment warranting denial of his discharge from bankruptcy under 11 U.S.C. § 727(a)(2)(A). Ingalls, Bradley, and Beutel, as trustee of the Trust, each filed a timely notice of appeal.

On August 30, 2005, the district court affirmed. Ingalls, Bradley, and Thomas Thompson, who replaced Beutel as trustee of the Trust, each filed a timely notice of appeal.

II. STANDARD OF REVIEW

We review the bankruptcy court's decision under the same standards used by the district court: conclusions of law and mixed law and fact questions are reviewed de novo, while findings of fact are reviewed for clear error. See Plunk v. Yaquinto (In re Plunk), 481 F.3d 302, 305 (5th Cir.2007); EOP-Colonnade of Dallas Ltd. P'ship v. Faulkner (In re Stonebridge Techs., Inc.), 430 F.3d 260, 265 (5th Cir. 2005).

III. DISCUSSION

Under 11 U.S.C. § 541 of the Bankruptcy Code, a bankruptcy estate is created at the commencement of the bankruptcy case. The bankruptcy estate includes, with some exceptions, "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). One exception is the "spendthrift trust" exception. "In general, a spendthrift trust is one in which the right of the beneficiary to future payments of income or capital cannot be voluntarily transferred by the beneficiary or reached by his or her creditors." In the Matter of Shearn Moody, Jr. (In re Moody), 837 F.2d 719, 723 (5th Cir.1988). Pursuant to § 541(c)(2)...