Kearney v. Unsecured Creditors Comm., 19-2209

• Decision Date: 24 February 2021
• Docket Number: No. 19-2209,19-2209
• Citation: 987 F.3d 1284
• Parties: Victor P. KEARNEY, Appellant, v. UNSECURED CREDITORS COMMITTEE, Kevin Yearout, United States Trustee, and Louis Abruzzo and Benjamin Abruzzo, Trustees of the Mary Pat Abruzzo Kearney Testamentary Trusts B and C, Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

987 F.3d 1284

Victor P. KEARNEY, Appellant,

v.UNSECURED CREDITORS COMMITTEE, Kevin Yearout, United States Trustee, and Louis Abruzzo and Benjamin Abruzzo, Trustees of the Mary Pat Abruzzo Kearney Testamentary Trusts B and C, Appellees.

No. 19-2209

United States Court of Appeals, Tenth Circuit.

FILED February 24, 2021

Stacy R. Obenhaus, Marcus A. Helt, Debbie E. Green, Foley & Lardner LLP, Dallas, Texas, for Appellant.

Thomas D. Walker and Chris W. Pierce, Walker & Associates, P.C., Albuquerque, New Mexico, for Official Committee of Unsecured Creditors; Paul M. Fish and Spencer L. Edelman, Modrall, Sperling, Roehl, Harris & Sisk, P.A., Albuquerque, New Mexico, for Louis Abruzzo and Benjamin Abruzzo, as Trustees of the Mary Pat Abruzzo Kearney Testamentary Trusts B and C; and James Askew, Askew& White, LLC, Albuquerque, New Mexico, for Kevin Yearout.

Before KELLY, SEYMOUR, and MATHESON, Circuit Judges.

SEYMOUR, Circuit Judge.

Victor P. Kearney was the lifetime income beneficiary of two spendthrift trusts when he filed for bankruptcy in 2017. The United States Trustee's office appointed an unsecured creditors committee ("UCC") which proposed a reorganization plan contemplating a one-time trust distribution to pay off Mr. Kearney's debts. After a New Mexico state court modified the trusts to authorize the distribution, the bankruptcy court approved the plan. Mr. Kearney appealed. The Bankruptcy Appellate Panel ("BAP") of the Tenth Circuit concluded that the bankruptcy court did not deny Mr. Kearney due process, made no errors in its findings of fact, and did not abuse its discretion in settling Mr. Kearney's claims. See In re Kearney , No. NM-19-010, 2019 WL 6523171 (10th Cir. BAP Dec. 4, 2019). Mr. Kearney appeals that decision, arguing that using spendthrift trust assets to fund the reorganization plan violated the trusts’ spendthrift provision and the law, and that approving the settlement of Mr. Kearney's claims amounted to an abuse of the bankruptcy court's discretion. Exercising jurisdiction pursuant to 28 U.S.C. § 158(d)(1), we affirm.

I.Factual Background

A. The Trusts under Mary Pat Abruzzo's Last Will and Testament

The facts of this case were set out by the bankruptcy court and the BAP as follows. Alvarado Realty Company ("ARCO"), owned by Benjamin and Pat Abruzzo, developed the Sandia Peak Ski Area and the Sandia Peak Tramway. ARCO is a closely held company that also owns the Santa Fe Ski Area and other real estate investments in New Mexico, Colorado, and Arizona. Mr. and Mrs. Abruzzo died in a plane crash in 1985 and their children—Louis, Benny, Richard, and Mary Pat—took over the management of the company.

Mary Pat married Victor Kearney in 1988, at the age of twenty-two. She passed away in 1997. Mary Pat's last will and testament conveyed her 18.5% ownership interest in ARCO to two spendthrift trusts (the "MPK Trusts" or "Trusts"), of which Mr. Kearney is the income beneficiary during his life. After he dies, Mary Pat's will distributes the Trusts’ corpus to her siblings, Louis, Benny, and Richard, or their surviving issue.¹ Louis and Benny Abruzzo (the "Abruzzos") and Mr. Kearney were appointed as co-trustees ("Trustees").

B. The New Mexico State Court Action

Between 1997 and 2013, the Trusts’ distributions to Mr. Kearney grew by 800% and totaled about $16 million. Wanting more, Mr. Kearney sued the Abruzzos in New Mexico state court in 2013, alleging that ARCO's long-standing policy of distributing only 70% of its income and retaining 30% amounted to an illegal suppression of dividends and the breach by the Abruzzos of their fiduciary duties.² The Abruzzos countersued for breach of fiduciary duty, for modification of the trusts, and for other relief.

The first trial commenced in June 2015. In that proceeding, Mr. Kearney made his case to the jury for over five days and asked for more than $7 million in damages. Once he rested, the Abruzzos moved for a directed verdict. In granting it, the court noted that the "Abruzzos’ efforts on behalf of ARCO [had] been extremely successful" and concluded that their success did "not translate into a starvation or a partiality on behalf of ARCO over and against the interest of either Mr. Kearney or the remainder beneficiaries." Aplt. App., vol. XX at 41 (modifications omitted). The court concluded that a reasonable jury could not award Mr. Kearney "damages of any particular amount, let alon[e] 7-some-odd million dollars." Id. The court also granted the Abruzzos’ motion for litigation costs, awarding them $510,000 in attorneys’ fees and $155,915.60 in taxes and costs.³

Mr. Kearney resigned as trustee on December 6, 2016. On April 7, 2017, the state court imposed a $100,000 sanction against Mr. Kearney to address his "affront to the integrity and processes of the Court ...." Aplt. App., vol. XXIII at 51. The court admonished Mr. Kearney for his lack of "credibility when testifying" and for his repeated violation of the court's confidentiality order and his discovery obligations. See id. at 48-51.

The court then held a bench trial to adjudicate the Abruzzos’ counterclaims. The evidence showed that Mr. Kearney's conduct had resulted in a toxic relationship between him and the Abruzzos that made it "difficult or impossible for Louis Abruzzo or Benjamin Abruzzo to effectively serve as Trustee," "and that modification of the trust is appropriate under 46A-4-412 NMSA." Id . at 229. The court accordingly scheduled an evidentiary hearing on September 5, 2017 to appoint a successor trustee and to establish "directives for further administration of the Trust and its assets in a manner which will effectively protect all beneficiaries equally." Id. Mr. Kearney filed for bankruptcy mere days before that hearing and the bankruptcy court stayed the state court proceeding.

C. The Bankruptcy Proceedings

Since 1997, the MPK Trusts have distributed about $800,000 a year to Mr. Kearney. Yet he managed to accumulate over $7 million in debts by the time he filed for Chapter 11 bankruptcy on September 1, 2017. It is apparent from the evidence in this case that Mr. Kearney's financial problems arise not from illness, accident, or bad luck, but from a pattern of his own bad choices. The UCC was appointed to negotiate with Mr. Kearney over the terms of a reorganization plan. Failing to agree on a joint plan, Mr. Kearney proposed the first of seven plans on June 12, 2018. The UCC's competing plan (the "UCC Plan" or "Plan"), filed on July 12, 2018, calls for the following actions:

First , ARCO is to buy its shares from the Trusts for $12,571,799;Second , the Trustees will then pay $3 million to Mr. Kearney to pay his creditors; and

Third , the Trusts will pay the IRS the $350,890.55 in taxes Mr. Kearney owes from his share of income.

Aplt. App., vol. XX at 44. These proposals have been called the "Three Actions" or the "Three Issues." Under the Plan, the remaining Trust corpus of approximately $8 million will continue to generate income to Mr. Kearney for his lifetime, and Mr. Kearney's legal claims against the Abruzzos, ARCO, and others will be settled.

Mr. Kearney "reacted to the UCC Plan with outrage and threats," accusing many people of breaching their fiduciary duties to him by pursing the UCC Plan. Id. Once again he sued the Abruzzos in state court for breach of fiduciary duties.

On August 30, 2018, the Abruzzos filed a motion for relief from the bankruptcy stay, seeking the bankruptcy court's permission to ask the state court to determine whether the Trusts could be modified to allow the Three Actions. The bankruptcy court granted the motion.⁴ The state court held an evidentiary hearing on October 23, 2018, and a week later ruled that the proposed Trusts’ modifications were proper and consistent with New Mexico laws. See generally , Aplt. App., vol. XXIV at 265-80. The state court modified the Trusts "to allow the Trustees to make a one-time $3,000,000.00 distribution from principal to Mr. Kearney ...." in order to pay off his creditors.⁵ Id. at 278.

Subsequently, the bankruptcy court moved forward with a vote by creditors on the plans: 71% of votes and 96% of the voting dollars voted against Mr. Kearney's plan, while 84% of votes and 97% of the voting dollars voted for the UCC Plan. Aplt. App., vol. XX at 48, n. 13. The bankruptcy court then confirmed the UCC Plan.

D. Appeals

Mr. Kearney appealed to the BAP. He first claimed the bankruptcy court denied him due process by rejecting his seventh amended plan. In re Kearney , 2019 WL 6523171 at *3. The BAP disagreed because Mr. Kearney had not served notice of intent to file that plan until ten days before the hearing, which was less than the required twenty-eight-days. Id. at *4.

The BAP next dismissed Mr. Kearney's claims that the UCC Plan was not proposed in good faith and that it was proposed by means forbidden by law. Id. at *5. It brushed aside the argument that "allowing the state court to consider the Trust Modifications in effect removed the issue of good faith from the Bankruptcy Court's purview" because, as the BAP explained, Mr. Kearney had not alleged that the bankruptcy court's decision was in error. Id. The BAP also rejected Mr. Kearney's argument that the Plan was proposed by means forbidden by law because, after the modifications, "the [UCC Plan] complied with New Mexico law and the applicable provisions of the Bankruptcy Code." Id.

Finally, the BAP dismissed Mr. Kearney's claim that the bankruptcy court erroneously analyzed the first and third of the four factors set forth in In re Kopexa Realty Venture Co., 213 B.R. 1020, 1022 (10th Cir. BAP 1997), and abused its discretion in settling his legal claims. The Kopexa factors include the probable success of the underlying litigation on the merits, the possible difficulty in collection of a judgment, the complexity and expense of the litigation, and the interests of creditors in deference to their reasonable views. Id . As to the first factor, the BAP held the record supported the finding...