The Dead (and Their Bankruptcy Estate) Cannot Hold Property Under Recent Ninth Circuit Bankruptcy Appellate Panel Decision

Greenberg Glusker LLP

Greenberg Glusker LLP

I recently had the pleasure of working with my colleagues Benny Roshan and Jillian Berk on an appeal before the Ninth Circuit Bankruptcy Appellate Panel (B.A.P), which tested the ever-evolving intersection between bankruptcy law and probate law. 

In re Rens, __ B.R. __ , No. AP 19-90067-LA, 2021 WL 5049829 (B.A.P. 9th Cir. Oct. 29, 2021) is a case about Robert Duane Rens – an 83 year old retiree who filed a chapter 7 bankruptcy. When Mr. Rens filed for bankruptcy, his income sources included distributions of net income from his family trust established by his deceased parents. 

The trust, which became the central focus of Mr. Rens’ bankruptcy, held a one-half interest in a business and industrial park ground lease. Under the trust, beneficiaries received regular distributions from rent, and in 2035 the property would be distributed outright to the then-beneficiaries in equal shares. Under the trust terms, if Mr. Rens dies any time before 2035, his issue become entitled to Mr. Rens’ share and would receive the net income and eventually the principal. The chapter 7 trustee commenced litigation to determine the extent of the bankruptcy estate’s interest in the trust. The bankruptcy court ultimately ruled not only that Mr. Rens turnover 25% of his income from the trust, but that his bankruptcy estate would also continue to collect 25% of the income and 25% of the trust principal after his death. See Davis v. Sparhawk, Adversary No. 19-90067-LA (Bankr. S.D. Cal. May 7, 2020). The trustee of the trust appealed.  Mr. Rens’ children, who had never been notified of the bankruptcy court’s proceedings, intervened in the appeal upon learning of the bankruptcy court’s ruling. Greenberg Glusker represented the Rens’ children as intervenors in the appeal and sought to reverse the bankruptcy court’s decision.

The appeal is a cutting-edge interpretation of Carmack v. Reynolds, 2 Cal. 5th 844, 849 (2017). In Carmack, the California Supreme Court determined that a bankruptcy estate could reach 25% of future distributions under a spendthrift trust. What Carmack did not address, however, is what happens after the bankrupt debtor dies. The bankruptcy court in Rens interpreted the trust provisions and found that the bankruptcy estate continued to hold that 25% trust interest post-mortem. Greenberg Glusker argued on behalf of the intervenors that this was an incorrect application of California probate law and would essentially create a form of “zombie” trust interests held by the formerly living, which creditors could inevitably seize upon. 

In a published opinion, the B.A.P. agreed and reversed the bankruptcy court’s ruling, holding that a bankruptcy estate’s interest in a trust is limited to whatever rights are held by an individual at the time the bankruptcy is filed. At the time he commenced his bankruptcy, Mr. Rens held only a contingent interest in the trust. His interest was contingent upon distributions being made under the trust, contingent upon the property vesting in 2035, and, of course, contingent upon him being alive to realize those distributions. As such, the bankruptcy estate could not reach any interests after the passing of Mr. Rens.

An appeal to the Ninth Circuit has been filed, so please stay tuned for updates.

*In its opinion, the B.A.P. incorrectly identifies intervenors as “intervening appellees” when they should be identified as “intervening appellants” due to the intervenors’ alignment with the positions of the appellant.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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