Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-88-01992/USCOURTS-ca10-88-01992-0/pdf.json

Parties Involved:
Bank of Woodward
Appellant
Mildred V. Fox
Appellee
Guilford Hagmann
Not Party
Gail E. Reiss
Appellee

Document Text:

PUBLISH 

FILED 

United States Cm~rt ~f Appeals 

·reoth C1rcu1t 

. I\ It 2 8 1999 

UNITED STATES COURT OF APPEAL~OBERT L. HOECKER 

TENTH CIRCUIT 

· Clerk 

GAIL ELIN REISS a/k/a GAIL E. REISS, ) 

Debtor, ) 

) 

v. ) 

) 

GUILFORD HAGMANN, Trustee, ) 

) 

Plaintiff, ) 

) 

and ) 

) 

BANK OF WOODWARD, ) 

) 

Creditor-Appellant, ) 

) 

v. ) No. 88-1992 

) 

MILDRED v. FOX, Trustee of the ) 

Gail E. Reiss Trust, ) 

) 

Defendant-Appellee. ) 

Appeal from the United States District Court 

for the Western District of Oklahoma 

(D.C. No. CIV-87-509-P) 

Submitted on the Briefs: 

John o. Sparks, Woodward, Oklahoma, for Appellant. 

Joseph B. Miner of Conner & Little, Oklahoma City, Oklahoma, for 

Defendant-Appellee. 

Before LOGAN, SEYMOUR and BALDOCK, Circuit Judges. 

LOGAN, Circuit Judge. 

Appellate Case: 88-1992 Document: 01019743084 Date Filed: 07/28/1989 Page: 1 
The issu~ in this appeal is whether the bankruptcy court 

abused its discretion in approving a compromise settlement. 1 

Gail Elin Reiss filed a voluntary petition in bankruptcy 

under Chapter 7 of the Bankruptcy Code, 11 u.s.c. § 301. In it 

she listed only nominal assets and one creditor, the Bank of 

Woodward (the Bank), to which she said she owed $91,259.73 plus 

interest on a promissory note. About a year and a half before 

filing for bankruptcy, Reiss transferred to herself as trustee of 

an irrevocable trust (Reiss Trust) land she owned in Kansas, 

apparently worth approximately the amount Reiss owed the Bank on 

the promissory note. The trust was to last approximately ten 

years, terminating September 15, 1992. Under its terms all income 

was to be paid to settler Reiss, with no specific statement as to 

disposition of the principal at the trust's termination, except it 

was to pass to Reiss' then-living descendants by right of 

representation if Reiss should die before the date of termination. 

Under the resulting trust doctrine settler Reiss no doubt would be 

considered the vested remainderman, subject to divestment, and 

entitled to all of the trust property at its termination. See 

Cacy v. Cacy, 619 P.2d 200, 202 (Okla. 1980); G. Bogert, Trusts, 

§ 75 (1987); A. Scott, The Law of Trusts §§ 404, 405, 411, 430 

(1967). Reiss subsequently resigned as trustee, and was succeeded 

as trustee by her relative, Mildred Fox. 

1 After examining the briefs and appellate record, this panel 

has determined unanimously that oral argument would not materially 

assist the determination of this appeal. See Fed. R. App. P. 

34(a); 10th Cir. R. 34.1.9. The cause is therefore ordered submitted without oral argument. 

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Appellate Case: 88-1992 Document: 01019743084 Date Filed: 07/28/1989 Page: 2 
The Bank ~ought to compel the bankruptcy trustee to bring the 

property in the Reiss Trust into the bankruptcy estate for its 

benefit as sole creditor. The Bank argued that the transfer could 

be avoided under the Uniform Fraudulent Conveyances Act of 

Oklahoma, Okla. Stat. tit. 24, §§ 112-23. The Reiss Trust urged 

that the Oklahoma act did not apply to a trust containing only 

Kansas real property. It also questioned whether the Bank's 

attorney, whom the Bank volunteered to pay to pursue the 

litigation, was a disinterested person under 11 u.s.c. § 327 

because he previously had represented Reiss' former husband in his 

own Chapter 7 bankruptcy. Reiss, after first having listed the 

Bank's claim as undisputed, also changed her position and asserted 

that the promissory note underpinning the Bank's claim was 

incurred in violation of the Equal Credit Opportunity Act, 15 

u.s.c. §S 1691-169lf. 

After considering the various contentions among the 

interested parties, the bankruptcy trustee sought court approval 

for a compromise settlement of its claim to reach the Reiss Trust 

property for a total of $10,000 to be paid to the bankruptcy 

estate. The Bank objected and offered to pay the full costs of 

the litigation to recover the Reiss Trust property. The 

bankruptcy court, however, approved the settlement and that 

approval was affirmed by the district court. 

The principal reasons given by the bankruptcy trustee for 

requesting approval of the compromise were the expense, 

complexity, and possible length of the litigation that would be 

required to resolve these conflicting contentions. The bankruptcy 

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Appellate Case: 88-1992 Document: 01019743084 Date Filed: 07/28/1989 Page: 3 
trustee rejec~ed the Bank's offer ~o finance the litigation 

against the Reiss Trust because Reiss' claim that the bank was not 

a bona fide creditor for violation of the Equal Credit Opportunity 

Act also would have to be litigated. The bankruptcy and district 

courts considered the standards set forth in American Employers 

Insurance Co. v. King Resources Co., 556 F.2d 471, 475 (10th Cir. 

1977), as controlling, especially the likelihood of success and 

the expected delay caused by the litigation. Both courts 

apparently believed that the success of the claim against the 

Reiss Trust was not guaranteed and that the defenses raised by 

Reiss and the Reiss Trust posed serious and complex questions. We 

have no quarrel with using American Employers' criteria in the 

usual case, but we disagree with the courts' resolution in the 

context of the instant controversy. 

A bankruptcy court's approval of a compromise may be 

disturbed only when it achieves an unjust result amounting to a 

clear abuse of discretion. See Security Nat'l Bank v. Turner (In 

re Ocobock), 608 F.2d 1358, 1360 (10th Cir. 1979). The bankruptcy 

court's decision to approve the settlement, however, must be an 

informed one based upon an objective evaluation of developed 

facts. See Protective Comm. for Indep. Stockholders of TMT 

Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424, 434 (1968); 

United States v. AWECO, Inc. (In re AWECO, Inc.), 725 F.2d 293, 

299 (5th Cir.), cert. denied, 469 U.S. 880 (1984). We agree with 

the Fifth Circuit that "[a)n approval of a compromise, absent a 

sufficient factual foundation, inherently constitutes an abuse of 

discretion.'' Id. at 299. There is no indication in the record 

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Appellate Case: 88-1992 Document: 01019743084 Date Filed: 07/28/1989 Page: 4 
that the trust~e or the courts did any legal research or made any 

attempt to properly separate the issues and evaluate the facts. 

Chapter 7 bankruptcy is a liquidation proceeding intended to 

distribute debtor's nonexempt assets equitably among her 

creditors, who nearly always will not be fully paid. The debtor 

also receives a fresh start by obtaining a discharge from past 

debts. 2 In his asset-gathering role, the bankruptcy trustee acts 

on behalf of the cr~ditors, seeking to find and bring into the 

estate all of debtor's nonexempt property as well as the assets 

debtor previously conveyed · which the law considers to be 

preferences or in fraud of creditors. 

In the instant case, the bankruptcy trustee should have 

viewed the claim against the Reiss Trust as separate and distinct 

from the dispute between the debtor and the Bank as to whether the 

Bank was a bona fide creditor. Settlement of the claim to bring 

the Reiss Trust property into the estate would not resolve the 

wholly separate issue whether the Bank is a creditor of the 

estate. Had the court properly evaluated the bankruptcy trustee's 

chances of reaching the assets in the Reiss Trust to pay the bona 

fide debts of the bankruptcy estate, it surely would have 

evaluated those .chances of success at nearly one hundred percent. 

The ·claim against the trust, containing only Kansas land, likely 

would be governed by Kansas law •. A Kansas statute provides as 

follows: 

"All gifts and conveyances of goods and chattels, made 

in trust to the use of the person or persons making the 

2 Reiss here received the discharge, which the Bank did not 

contest. 

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Appellate Case: 88-1992 Document: 01019743084 Date Filed: 07/28/1989 Page: 5 
same shali, to the full extent of both the corpus and 

income made in trust to such use, be void and of no 

effect, regardless of motive, as to all past, present or 

future creditors; but otherwise shall be valid and 

effective." 

Kan. Stat. Ann. § 33-101. The cases in that state recognize that 

this rule applies regardless of the length of time elapsing 

between the date of creation of the trust and the date the 

creditors attempt to reach the trust property and regardless of 

the motivation of the settler of the trust. .!! ... 9 ... !.' Herd v • 

Chambers, 158 Kan. 614, 149 P.2d 583, 589 (1944). That there are 

contingent beneficiaries in the event of the trust settler's death 

makes no difference. Id. at 590. If Oklahoma law applies we 

believe the result would be the same. An Oklahoma statute 

provides that "[t]he interest of the truster as a beneficiary of 

any trust shall be freely alienable and subject to the claims of 

his creditors." Okla. Stat. tit. 60, § 175.25G; see also Roberts 

v. South Okla. City Hosp. Trust, 742 P.2d 1077, 1082 (Okla. 1986) 

("An arrangement pretending to be a trust while retaining powers 

in the settler has no real substance and is in reality an 

incompleted trust."). The "American doctrine supported by the 

great weight of federal and state authorities is, that 

irrespective of statute an individual cannot create out of his own 

property for his own benefit a trust for himself and thereby 

defeat his creditors of their lawful demands." Herd, 149 P.2d at 

589. 

Even if there was some uncertainty as to whether the Reiss 

Trust property could be reached, the Bank offered to pay all such 

costs; the bankruptcy estate would incur no expense in pursuing 

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Appellate Case: 88-1992 Document: 01019743084 Date Filed: 07/28/1989 Page: 6 
.... _·,·-

the litigatio~. Like the First Circuit in In re Lloyd, Carr & 

Co., 617 F. 2d 882, 889 (1st Cir. 1980), "we have found no 

precedent for a compromise • • • actively opposed by the major 

creditors and affirmatively approved by none." We do not have to 

go so far as to hold that the bankruptcy court can approve no 

settlement of a case to bring assets into the estate over the 

disapproval of· all creditors, or the single creditor, of the 

estate. At least in a case like that at bar, when there would be 

no cost to the estate and nothing to pay creditors without success 

in the lawsuit, we hold that the bankruptcy court abused its 

discretion in approving a settlement objected to by the sole 

creditor. 

The contention that the Bank's lawyer might have some 

conflict of interest is wholly collateral to the controversy. 

That question should be determined as a matter of legal ethics. 

If the bankruptcy court finds that the lawyer's representation 

would be improper, it could simply require the Bank to pay the 

expenses of a different lawyer as a condition to disapproving the 

proposed settlement. 

The issue of the validity of the Bank's claim, based upon its 

alleged violation of the Fair Credit Reporting Act, would not have 

to be determined unless the pursuit of the Reiss Trust assets were 

successful. If the. trust assets are brought into the estate, the 

bankruptcy trustee then has the funds to litigate that issue if he 

believes it has some merit. As noted above, settlement of the 

claim against the Reiss Trust does not resolve the question 

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Appellate Case: 88-1992 Document: 01019743084 Date Filed: 07/28/1989 Page: 7 
whether the Bank is a bona fide creditor entitled to be paid from 

the bankruptcy estate. 

In sum, we hold that the bankruptcy court did not make an 

informed decision based upon an objective evaluation of the 

situation before it, and, therefore, abused its discretion in 

approving the compromise settlement with the Reiss Trust. 

REVERSED and REMANDED for further proceedings consistent 

herewith. 

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Appellate Case: 88-1992 Document: 01019743084 Date Filed: 07/28/1989 Page: 8