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Home / Case News / Section 548(e)(1) Does Not Condition Avoidance on a Trust Being Deemed Invalid and Unlawful Under State Law.

Section 548(e)(1) Does Not Condition Avoidance on a Trust Being Deemed Invalid and Unlawful Under State Law.

April 2, 2019, Western District of Texas– Debtor Stephen Jeffery Cyr was an orthopedic surgeon who had a substantial income and enjoyed an extravagant lifestyle. The Debtor and his spouse Leann Marry, also a Defendant in this case, allegedly attempted to shield their income, assets, and lifestyle from creditors, while seeking to discharge the Debtor’s just debts through a Chapter 7 proceeding.  Rodriguez was a Chapter 7 Trustee in the Debtor’s bankruptcy case. The principal device by which the Debtor and his spouse attempted to shield assets and income from Rodrigues was the Bergerud Heritage Trust (the “BHT”). The document that created the BHT named both the Debtor and his spouse as Trustees, and named the Debtor, his spouse, and their children, as beneficiaries. The BHT Trust Document contained language made it a spendthrift trust, the assets of which cannot be reached by creditors. The settlers of the BHT were ostensibly the Defendant’s parents.

In its adversary proceeding, Rodriguez alleged that the Debtor and the Defendant utilized the BHT to assemble and hold considerable assets and generate considerable income. They did so with the objective and intent that the assets and income be shielded from creditors.  The Trustee further alleged that John and Carol Bergerud were “straw settlors” of the BHT and that the real settlers were the Debtor and his spouse. The Trustee also alleged that the Debtor and the Defendant had consulted another bankruptcy counsel a year prior to filing for bankruptcy and planned and signed a proposed, joint Chapter 11 petition. The Trustee next alleged that in a separate lawsuit that was resolved by a written settlement agreement, the Debtor was to be paid $1,000,000.00 and another $600,000.00 in monthly installments. However, these sums were not paid to the Debtor; instead, the funds were paid to the BHT, at the Debtor’s direction and those payments were fraudulent transfers under 11 U.S.C. § 548 (a)(1) and Texas Business & Commerce Code §§ 24.005 and 24.006 having been made to “a self-settled trust or similar device” under 11 U.S.C. § 548(e)(1). The Trustee sought the return of these funds to the Debtor’s estate.

Upon review, the Court held that the Trustee was not entitled to a determination that the trust was a self-settled trust or similar device under 11 U.S.C.S. § 548(e)(1), whose all assets were property of the Debtor’s estate and subject to claims of creditors because he was still required to specifically identify the assets transferred and demonstrate that the elements of § 548(e)(1) were satisfied with respect to them. The Court stated that the plain language of § 548(e)(1) does not look to whether assets transferred to a self-settled trust or similar device are self-settled under state law. Section 548(e)(1) is completely devoid of any reference to non-bankruptcy law. Therefore, the requirements contained in the statute itself, not state law, determine whether the transfer of a particular asset is subject to a trustee’s avoidance power under § 548(e)(1). The Court further granted the Defendant’s motion to dismiss with respect to § 548(a)(1)(A) claims, as the Court found that the Trustee did not properly plead intent to hinder, delay, or defraud present or future creditors. The Court also concluded that the Trustee failed to properly plead insolvency for purposes of a constructively fraudulent transfer claim.