Eligibility of Trusts to File Bankruptcy

Judge Tighe did a great analysis on eligibility of trusts to file bankruptcy.  Her tentative is below In re: The Shahla Dowlati 2005 Living Trust. 

UST moves to dismiss this chapter 11 case because the Shahla Doowlati 2005 Living Trust (the “Trust“) was created for estate planning purposes, and thus is ineligible to be a debtor. Section 109(a) establishes that “only a person that resides or has a domicile, a place of business, or property in the United States, or a municipality, may be a debtor under this title.” Section 101(41) defines “person” to include any “individual, partnership, and corporation.” It does not include governmental units or trusts. See 11 U.S.C. § 101(41).

Rather, trusts and governmental units are expressly encompassed within the broader term, “entity,” defined in § 101(15). By limiting eligibility to “persons,” rather than “entities,” Congress intentionally excluded trusts as a category from filing bankruptcies. See H.R. Rep. No. 595, 95th Cong., 1st Sess. 313 (1977), S. Rep. No. 989, 95th Cong., 2d Sess. 25 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5811, 6270. “Business trusts,” however, are expressly included within the statutory definition of “corporation” set forth in § 101(9)(A)(v). In re Sung Soo Rim Irrevocable Intervivos Trust, 177 B.R. 673, 675 (Bankr. C.D. Cal. 1995). Accordingly, they are “corporations” and thus “persons” eligible to be debtors under the Bankruptcy Code. See 11 U.S.C. § 109(a).

The Bankruptcy Code, however, does not define the term “business trust.” Sung Soo Rim, 177 B.R. at 675. Therefore, courts have looked at both state and federal law to determine whether a trust is a business trust. Id. at 675- 76; see also In re Secured Assets Trust, Case No. 07-04501-B11, 2008 Bankr. LEXIS 4427, *3-5 (Bankr. S.D. Cal. May 12, 2008). The “debtor bears the burden of establishing that it qualifies as a business trust under 11 U.S.C. section 109.” Koch v. Hankins Judgment Creditor Trust, Case No. 06-02112-PHX-CGC, 2006 Bankr. LEXIS 2923, *6 (Bankr. D. Az. Oct. 24, 2006); In re Secured Equip. Trust of Eastern Airlines, Inc., 38 F.3d 86, 89 (2d Cir. 1994); In re Tim Wargo & Sons, Inc., 869 F.2d 1128, 1130 (8th Cir. 1989).

California law defines a “business trust” to include: [E]very business organization consisting essentially of an arrangement whereby property is conveyed to one, or more than one, trustee for purposes other than the mere conservation of assets, collecting and disbursing fixed or periodic income, or the securing of an obligation.

The Shahla Dowlati 2005 Living Trust Chapter 11 Cal. Rev. & Tax. Code § 23038(b)(1). It is a type of profit-oriented, limited liability entity, regulated under the California Business and Professions Code, taxed as a corporation and required to comply with California’s fictitious name statutes. Sung Soo Rim, 177 B.R. 676-77; Secured Assets Trust, 2008 Bankr. LEXIS 4427 at *3. By definition, trusts created under the California Probate Code are entirely distinct from business trusts. See Sung Soo Rim, 177 B.R. at 676-77. The Probate Code expressly excludes from its scope trusts that are “taxed as partnerships or corporations.” Cal. Prob. Code § 82(b)(6). Traditional family trusts, established to protect or preserve property, usually are created in estate planning. Unlike business trusts, these trusts typically are governed by state probate and estate laws and subject to probate court supervision. Sung Soo Rim, 177 B.R. at 677.

Under California law, the Trust does not exhibit any of the attributes of a business trust. There is no evidence that the Trust was taxed as a partnership or corporation under California law, and Debtor testified that it has never filed a tax return. The Trust did not have a bank account. There also is no evidence that the Trust has complied with California’s fictitious name statutes. Rather, UST contends that the primary purpose of the Trust was to conserve the trust property and collect and disburse any income from that property to Debtor for her support and maintenance. Upon Debtor’s death, the Trust acts an estate planning device to distribute the trust res to Debtor’s designated beneficiaries.

Additionally, provisions of the trust agreement incorporate provisions of the California Probate Code. See, e.g., Marquez Dec., Exhibit C at 85 (stating that California Probate Code § 240 shall govern the distribution of trust property if not fixed by the terms of the Trust). Based on above facts, UST asserts that the Trust is a traditional family trust and not a business trust under California law, and is therefore not eligible to be a debtor. For further information visit steinbergerlaw.com, fоr аnу іndіvіduаl оr business, the decision to fіlе fоr bаnkruрtсу isn’t оnе tо bе tаkеn lightly. It’s іmроrtаnt to knоw about thе орtіоnѕ thаt аrе оn the tаblе bеfоrе рrосееdіng, and whаt to еxресt once уоu initiate the рrосеѕѕ оf fіlіng.

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