Reiss v. Hagmann, 88-1992

• Decision Date: 28 July 1989
• Docket Number: No. 88-1992,88-1992
• Citation: 881 F.2d 890
• Parties: Bankr. L. Rep. P 73,173 Gail Elin REISS a/k/a Gail E. Reiss, Debtor, v. Guilford HAGMANN, Trustee, Plaintiff. BANK OF WOODWARD, Creditor-Appellant, v. Mildred V. FOX, Trustee of the Gail E. Reiss Trust, Defendant-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 890

881 F.2d 890

Bankr. L. Rep. P 73,173

Gail Elin REISS a/k/a Gail E. Reiss, Debtor, v. Guilford HAGMANN, Trustee, Plaintiff.

BANK OF WOODWARD, Creditor-Appellant, v. Mildred V. FOX, Trustee of the Gail E. Reiss Trust,

Defendant-Appellee.

No. 88-1992.

United States Court of Appeals Tenth Circuit.

July 28, 1989.

John O. Sparks, Woodward, Okl., for creditor-appellant.

Joseph B. Miner of Conner & Little, Oklahoma City, Okl., for defendant-appellee.

Before LOGAN, SEYMOUR and BALDOCK, Circuit Judges.

LOGAN, Circuit Judge.

The issue in this appeal is whether the bankruptcy court abused its discretion in approving a compromise settlement. ¹

Gail Elin Reiss filed a voluntary petition in bankruptcy under Chapter 7 of the Bankruptcy Code, 11 U.S.C. Sec. 701 et seq. In it she listed only nominal assets and one creditor, the Bank of Woodward (the Bank), to which she said she owed $91,259.73 plus interest on a promissory note. About a year and a half before filing for bankruptcy, Reiss transferred to herself as trustee of an irrevocable trust (Reiss Trust) land she owned in Kansas, apparently worth approximately the amount Reiss owed the Bank on the promissory note. The trust was to last approximately ten years, terminating September 15, 1992. Under its terms all income was to be paid to settlor Reiss, with no specific statement as to disposition of the principal at the trust's termination, except it was to pass to Reiss' then-living descendants by right of representation if Reiss should die before the date of termination. Under the resulting trust doctrine settlor Reiss no doubt would be considered the vested remainderman, subject to divestment, and entitled to all of the trust property at its termination. See Cacy v. Cacy, 619 P.2d 200, 202 (Okla.1980); G. Bogert, Trusts, Sec. 75 (1987); A. Scott, The Law of Trusts Secs. 404, 405, 411, 430 (1967). Reiss subsequently resigned as trustee, and was succeeded as trustee by her relative, Mildred Fox.

The Bank sought to compel the bankruptcy trustee to bring the property in the Reiss Trust into the bankruptcy estate for its benefit as sole creditor. The Bank argued that the transfer could be avoided under the Uniform Fraudulent Conveyances Act of Oklahoma, Okla.Stat. tit. 24, Secs. 112-223. The Reiss Trust urged that the Oklahoma act did not apply to a trust containing only Kansas real property. It also questioned whether the Bank's attorney, whom the Bank volunteered to pay to pursue the litigation, was a disinterested person under 11 U.S.C. Sec. 327 because he previously had represented Reiss' former husband in his own Chapter 7 bankruptcy. Reiss, after first having listed the Bank's claim as undisputed, also changed her position and asserted that the promissory note underpinning the Bank's claim was incurred in violation of the Equal Credit Opportunity Act, 15 U.S.C. Secs. 1691-1691f.

After considering the various contentions among the interested parties, the bankruptcy trustee sought court approval for a compromise settlement of its claim to reach the Reiss Trust property for a total of $10,000 to be paid to the bankruptcy estate. The Bank objected and offered to pay the full costs of the litigation to recover the Reiss Trust property. The bankruptcy court, however, approved the settlement and that approval was affirmed by the district court.

The principal reasons given by the bankruptcy trustee for requesting approval of the compromise were the expense, complexity, and possible length of the litigation that would be required to resolve these conflicting contentions. The bankruptcy trustee rejected the Bank's offer to finance the litigation against the Reiss Trust because Reiss' claim that the bank was not a bona fide creditor for violation of the Equal Credit Opportunity Act also would have to be litigated. The bankruptcy and district courts considered the standards set forth in American Employers Insurance Co. v. King Resources Co., 556 F.2d 471, 475 (10th Cir.1977), as controlling, especially the likelihood of success and the expected delay caused by the litigation. Both courts apparently believed that the success of the claim against the Reiss Trust was not guaranteed and that the defenses raised by Reiss and the Reiss Trust posed serious and complex questions. We have no quarrel with using American Employers' criteria in the usual case, but we disagree with the courts' resolution in the context of the instant controversy.

A bankruptcy court's approval of a compromise may be disturbed only when it achieves an unjust result amounting to a clear abuse of discretion. See Security Nat'l Bank v. Turner (In re Ocobock), 608 F.2d 1358, 1360 (10th Cir.1979). The bankruptcy court's decision to approve the settlement, however, must be an informed one based upon an objective evaluation of developed facts. See Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424, 434, 88 S.Ct. 1157, 1163, 1168, 20 L.Ed.2d 1 (1968); United States v. AWECO, Inc. (In re AWECO, Inc.), 725 F.2d 293, 299 (5th Cir.), cert. denied, 469 U.S. 880, 105 S.Ct. 244, 83 L.Ed.2d 182 (1984). We agree with the Fifth Circuit that "[a]n approval of a compromise, absent a sufficient factual foundation, inherently constitutes an abuse of discretion." Id. at 299. There is no indication in the record that the trustee or the courts did any legal research or made any attempt to properly separate the issues and evaluate the facts.

Chapter 7 bankruptcy is a liquidation proceeding intended to distribute debtor's nonexempt assets equitably among her creditors, who nearly always will not be fully paid. The debtor also receives a fresh start by obtaining a discharge from past debts. ² In his asset-gathering role, the bankruptcy trustee acts on behalf of the creditors, seeking to find and bring into the estate all of debtor's nonexempt property as well as the assets debtor previously conveyed which the law considers to be preferences or in fraud of creditors.

In the instant case, the bankruptcy trustee should have viewed the claim against the Reiss Trust as separate and distinct from the dispute between the debtor and the Bank as to...