Trust Beneficiary Has Limited Standing To Object in Chapter 11 says Ninth Circuit (IN THE MATTER OF: TOWER PARK PROPERTIES, LLC)

This Opinion interested me because a few weeks earlier I read about this infamous Beverly Hills property battle in the Hollywood Reporter.

For those interested in the juicy Hollywood fight about the property mentioned in this Opinion, see here:

For those interested in the Ninth Circuit Opinion, please see my brief below.

In re: Tower Park Properties LLC, Ninth Circuit. 

To have standing in federal court – you must satisfy three requirements:  (1) statutory standing (i.e. one afforded under the Bankruptcy Code), (2) constitutional standing under Article III, and (3) prudential standing.  In re Thorpe Insulation Co., 677 F.3d 869, 883–84 (9th Cir. 2012).

In this case, a Trust Beneficiary was objecting to the settlement agreement between the debtor, the Trust (as a creditor) and former trustees.   The Ninth Circuit held that the Trust Beneficiary did not have statutory standing under §1109(b), and as such, the Court did not even consider the two other standing requirements.

As a rule, to have standing to be heard in Chapter 11 proceedings, you must be a “party in interest,” which includes, but not exclusive of, the debtor, trustee, creditors (or committee), equity security holder (or its committee), indenture trustee.  Section 1109(b).    The word “party in interest” is not defined.

Ninth Circuit has said that a “party in interest” is one who has a “legally protected interest that could be affected by a bankruptcy proceeding.”  In re Thorpe.   But, an entity “that may suffer collateral damage” but does not have a legally protected interest does not have standing under § 1109(b).  Id.

In this case, the Trust Beneficiary argued that he has a leglly protected intereset because any loss borne by the settlement agreement will create a loss to the Trust, which would be a loss to him.  However, the Court held that the Trust Beneficiaries interest is too remote.

Held:  A Trust Beneficiary does not possess party-in-interest status under § 1109(b), at least where his interests are adequately represented by a party-in-interest trustee.  The Trust Beneficiary’s financial stake in the Trust assets does not make him a party in interest within the meaning of § 1109(b).  Under CA law, “a trust beneficiary has no legal title or ownership interest in the trust assets,” and as such, in civil lawsuits, a trust beneficiary’s “right to sue is ordinarily limited to the enforcement of the trust, according to its terms.” Saks v. Damon Raike & Co., 7 Cal. App. 4th 419, 427 (1992).

So, a trust beneficiary is not the entity positioned to take legal recourse to protect the trust assets, unless the beneficiary is seeking only to enforce the terms of

the trust.   Here, the Trust Beneficiary’s objection to the settlement agreement is not an action to enforce the terms of the Trust.  The true party in interest is the party properly charged with representing the financial interests of the affected entity.

Atascadero Claima trust beneficiary may proceed against a third party who actively participated with a trustee in a breach of trust for their own financial advantage City of Atascadero v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 68 Cal. App. 4th 445, 467 (1998).   This is called an Atascadero Claim.

In this case, the Trust Beneficiary asserted that he is bringing a Atascadero Claim, but the Ninth Circuit said that such a claim is only available when a successor trustee is not willing or available to protect the trust.    Here, the trust’s trustees were initiating the proper legal actions and thus the Trust Beneficiary’s interests were protected.


Opinion here:

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