In re Quadruple D Trust

• Decision Date: 18 March 2022
• Docket Number: Bankruptcy Case No. 21-16233 TBM
• Parties: IN RE: QUADRUPLE D TRUST, Debtor.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Colorado

639 B.R. 204

IN RE: QUADRUPLE D TRUST, Debtor.

Bankruptcy Case No. 21-16233 TBM

United States Bankruptcy Court, D. Colorado.

Signed March 18, 2022

John Smiley, Denver, CO, Trustee, Pro Se.

Paul Moss, Byron G. Rogers Federal Building, Denver, CO, for U.S. Trustee.

Sean Cloyes, Stephen E. Berken, Denver, CO, for Debtor.

MEMORANDUM OPINION AND ORDER DISMISSING CASE

Thomas B. McNamara, United States Bankruptcy Judge

I. Introduction.

The Debtor, Quadruple D Trust (the "Trust"), recently filed for protection under Chapter 11 of the Bankruptcy Code.¹ The Trust is a spendthrift trust created decades ago under Colorado law through a Trust Agreement. Donald Lopez is both the trustee and settlor of the Trust. He established the Trust for the benefit of his wife, children, and parents. According to the Trust Agreement, "[t]he purpose of this trust [the Trust] is to acquire and hold real estate for the benefit of the beneficiaries [family members]." Per the Trust's Schedule A/B, the Trust owns only $100.00 and an expensive residence in which Mr. Lopez’ wife resides rent-free. The Trust has no employees and has not earned income for many, many years. It has not filed federal income tax returns for more than a decade. The Trust sought bankruptcy relief solely to avoid foreclosure on its residential property by creditor 76 & 88 LLC (the "Secured Creditor").

The Secured Creditor filed a Motion to Dismiss contending that the Trust is not eligible for bankruptcy protection. Both the Trust and the Secured Creditor agree that the Bankruptcy Code (per Sections 101(9), 101(41), 109(a), and (109(d)) limits the eligibility of trusts to file for bankruptcy. Only a "business trust" may do so. Consequently, the eligibility issue boils down to a single question: Is the Trust a "business trust"? The definition of the phrase "business trust" must be derived from the ordinary legal meaning of the term when Congress passed the Bankruptcy Code. Based on such legal meaning and the undisputed facts (introduced by way of a proffer process), the Court concludes that the Trust is not a "business trust." That result is patent because the Trust was not created and maintained for a business purpose and does not have any of the other attributes of a "business trust." Since the Trust is not a "business trust," it is not eligible for bankruptcy protection and the case must be dismissed.

II. Jurisdiction and Venue.

The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334. The dispute over the Trust's bankruptcy eligibility constitutes a core proceeding under 28 U.S.C. §§ 157(b)(2)(A) (matters concerning administration of the estate) and (b)(2)(O) (other proceedings affecting liquidation of assets of the estate). Venue is proper in the Court pursuant to 28 U.S.C. §§ 1408 and 1409. Neither the Trust nor the Secured Creditor has contested the Court's jurisdiction to enter final judgment regarding the Trust's eligibility to seek bankruptcy protection. And, neither party has attacked the propriety of venue in the Court.

III. Procedural Background.

On December 28, 2021, the Trust filed for protection under Chapter 11 of the Bankruptcy Code.² In its Petition, the Trust identified itself as a "small business debtor as defined in 11 U.S.C. § 101(51D)" and elected "to proceed under Subchapter V of Chapter 11."³ Contemporaneously with the bankruptcy filing, the Trust also submitted a Statement of Financial Affairs and Schedules,⁴ neither of which have been amended. On December 29, 2021, the United States Trustee appointed John Smiley as the Subchapter V Trustee (the "Subchapter V Trustee").⁵

Early in the bankruptcy proceedings, on January 14, 2022, the Secured Creditor filed a "Motion to Dismiss" (the "Motion to Dismiss").⁶ The Secured Creditor argued that the Trust's bankruptcy case should be dismissed since the Trust is not a "business trust" and is not eligible for bankruptcy relief. Thereafter, the Trust filed a "Response" (the "Response") in opposition to the Motion to Dismiss.⁷ The Trust contended that it is a "business trust" and is eligible to be a bankruptcy debtor. Neither the United States Trustee nor the Subchapter V Trustee has weighed in on the eligibility issue.

The Court conducted a Preliminary Hearing on the Motion to Dismiss and Response on February 10, 2020 (the "Hearing").⁸ At the Hearing, both the Secured Creditor and the Trust requested that the Court proceed by way of evidentiary proffers of testimony and exhibits pursuant to L.B.R. 2081-3(c). Accordingly, the Secured Creditor proffered testimony from Donald Lopez based primarily on Mr. Lopez's prior testimony at the Section 341(a) hearing. The Court also admitted into evidence Exhibits 1-7 offered by the Secured Creditor. Thereafter, the Trust proffered additional testimony from Mr. Lopez and Frank Hernandez. The Court also admitted into evidence Exhibits B-H offered by the Trust. Neither party requested a further evidentiary hearing. Accordingly, and since there was no conflict in the proffered evidence, the Court determined that no further evidentiary hearing was necessary or warranted. The evidentiary record consists solely of the uncontested proffers. Both the Secured Creditor and the Trust presented fulsome legal arguments based upon the evidence.

Thereafter, the Court took the bankruptcy eligibility issues under advisement. In the interim, the Court has evaluated all the exhibits admitted into evidence, considered the testimonial proffers, and reviewed the applicable law. The disputed bankruptcy eligibility issue is now ripe for decision.

IV. Findings of Fact.

The Court makes the following findings of fact based upon the testimonial proffers and exhibits admitted into evidence.

A. Formation of the Trust.

Donald Lopez, as sole settlor and trustee, created the Trust through an "Agreement," dated September 20, 1990, by and between himself (the "Trust Agreement").⁹ The Trust Agreement is remarkable for its poor draftsmanship. It is replete with many English errors including: misspellings; lack of agreement between nouns and verbs; improper punctuation; sentence fragments; and almost meaningless strings of words. Even the name of the Trust is misspelled as "Quadrupe D."¹⁰ In any event, the Trust Agreement identifies the beneficiaries of the Trust as follows:

The Trust is created as irrevocable trusts for the primary benefit of the family of Donald Lopez Settlor beneficiaries as follows: Dawneen M. McKillop spouse, Donald E. McKillop-Lopez, DeAnna V. McKillop-Lopez Children, Alex G. Lopez and Victoria J. Lopez parents .¹¹

Presumably, Mr. Lopez’ parents died sometime during the last 32 years, as the Trust did not list them as beneficiaries on the Trust's Statement of Financial Affairs.¹² So, the only current beneficiaries of the Trust are: Dawneen McKillop (Mr. Lopez’ wife); Donald Eugene McKillop-Lopez (Mr. Lopez’ son); and Deanna Victoria McKillop-Lopez (Mr. Lopez’ daughter).¹³ The four "D's" of the Trust's name (Quadruple D Trust) match with: Donald (father); Dawneen (mother); Donald (son); and Deanna (daughter).

According to the Trust Agreement, "[t]he Settlor hereby transfers and delivers to the trustee the property described in schedule an attached hereto."¹⁴ But, there is no "schedule" attached to the Trust Agreement. So, the Court has no way of knowing what the original corpus of the Trust was. In any event, the express purpose of the Trust is a key feature of the Trust Agreement for purposes of evaluating bankruptcy eligibility. Under the heading "Residential Real Property," the Trust Agreement states:

The purpose of this trust is to acquire and hold residential real property for the benefit of the beneficiaries. The trustee hereby agree with Settlor that, during the lifetime of the Settlor, Settlor's wife and Settlor's children living from time to time who are under the age of 25, the shall acquire and hold residential real property which is reasonable an appropriate for the residence of the beneficiaries. During Settlor's lifetime. Settlor shall be permitted to reside in such residential property without payment of rent or other sums in consideration therefore except that the occupancy by the Settlor shall be on the conditions that the occupancy by the Settlor shall be on the condition that Settlor shall pay all expenses of his occupancy including, but not limited to, property taxes, other similar fees and assessment and maintenance expense.¹⁵

During the Hearing, the Trust's counsel proffered testimony from Mr. Lopez that the Trust's purpose was broader (i.e., generating income by buying and selling real estate and classic cars). However, such testimony contradicts the text of the Trust Agreement. The Court finds that the Trust Agreement is the best evidence of intent at the time the Trust was formed.¹⁶

In order to effectuate the purpose of the Trust (i.e., "to acquire and hold residential real property for the benefit of the beneficiaries"), the Trust Agreement vests the Trustee with "all those powers enumerated in the Colorado Fiduciaries Powers Act."¹⁷ Then, the Trust Agreement lists a convoluted panoply of "Administrative Powers" of the Trustee, including the power to "sell, lease, exchange, mortgage, encumber or otherwise dispose of any property ...."¹⁸

The Trust purports to be a spendthrift trust. The Trust Agreement provides:

Spendthrift Provision: No beneficiary shall have the right or power to anticipate, sell, assign mortgage, pledge or otherwise dispose of, encumber or alienate any interests in the trust estate: nor shall any part of the test estate or the income arising there from be liable for his debts 9 including alimony and maintenance) or be subject to bankruptcy proceedings, attachment, garnishment, execution, creditors’ bill or other legal or equitable process. This provision shall not restrict the exercise of any right or disclaimer or power of appointment grated hereunder or grated under any rule of law.¹⁹

And, the Trust Agreement seems to be governed by...