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Litton Loan Servicing, L.P. v. Dennis Schubert

Summarizing by Amir Shachmurove

In re Earl Blasingame

Case Type:
Case Status:
18-5549/5623 (6th Circuit, Apr 03,2019) Published
In this consolidated appeal, the Court of Appeals affirmed the Bankruptcy Court decisions to dismiss two claims brought by a creditor derivatively on behalf of the Chapter 7 Trustee: a claim seeking to avoid transfers to a self-settled trust where the Trustee previously sold the cause of action to the creditor, and a claim seeking to declare the debtor's life estate was a legal interest rather than an equitable interest.
Procedural context:
The Bankruptcy Court dismissed two separate adversary actions brought by the creditor on behalf of the Chapter 7 Trustee, one because the Trustee sold the claim to the creditor, the other because it determined on the merits that the debtors owned an equitable interest instead of a legal interest in real property. The creditor appealed to the Bankruptcy Appellate Panel, which affirmed both rulings. The creditor appealed to the Sixth Circuit, which affirmed the Bankruptcy Court rulings in both cases in a consolidated appeal.
The debtors filed Chapter 7 in 2008, claiming they owned less than $6,000 in assets and had income of less than $900/month, but owed debts of $7.7 million. The creditor, Church Joint Venture, alleged that the debtors made over $300,000 a year and had over $18 million in assets through various trusts and corporations. The Trustee initially authorized the creditor to bring a derivative action, which it did, including allegations that an investment trust was self-settled and should be disregarded. As the case progressed, the Trustee decided to sell the cause of action to Church. Once that occurred, the bankruptcy court dismissed the case since it would no longer impact the estate. The creditor filed a new suit in district court claiming the trusts were alter-egos of the debtors. The district court dismissed, and that case is on appeal, Docket No. 18-6142. The creditor filed a second adversary with the bankruptcy court on behalf of the Trustee claiming that the investment trust was self-settled. The Bankruptcy Court dismissed on the grounds that the Trustee previously sold the cause of action to the creditor, so it could not now assert it on behalf of the Trustee. The creditor filed a third adversary asking the Bankruptcy Court to declare the debtors life estate in a residential trust to be a legal interest rather than an equitable interest. The Bankruptcy Court ruled the debtors' life estate was an equitable interest and dismissed that case also. The creditor appealed both rulings.
Griffin, Kethledge and Thapar; Opinion by Thapar

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