Spendthrift Trusts in Bankruptcy: Nevada Asset Protection Explained by Darren Chaker
Legal researcher Darren Chaker explains how a spendthrift trust operates when a debtor files bankruptcy in federal court, including proceedings in the United States District Court and the Southern District of California. This overview focuses on Nevada spendthrift trusts, fraudulent transfers, and exemptions, and how these asset protection tools interact with the bankruptcy estate.
5 Essential Facts: Spendthrift Trusts in Bankruptcy
How the Bankruptcy Code Defines Property of the Estate
The Bankruptcy Code’s definition of property of the estate is the starting point for analyzing whether a spendthrift trust is reachable by creditors in bankruptcy.
Section 541(a) defines “property of the estate” as “all legal or equitable interest of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1). Where debtor’s interest in property is limited to that of trustee, no other interest in that property (including beneficiary’s equitable interest) becomes part of estate upon debtor’s bankruptcy filing. In re Ames Dept. Stores, Inc. (Bankr. S.D.N.Y. 2002) 274 B.R. 600 aff’d sub nom. The beneficiary of a trust of any kind may claim any property acquired with the trust res. Republic Supply Co. of California v. Richfield Oil Co., 79 F.2d 375, 377 (9th Cir.1935).
Spendthrift trusts are exempt as being part of the estate. Bankr.Code, 11 U.S.C.A. § 541(c)(2). Darren Chaker points out even the court citing to a few minor purchases by appellant did not invalidate the trust since the beneficiary may borrow from the trust does not necessarily invalidate a spendthrift clause. See Danning v. Lederer, 232 F.2d 610, 614 (7th Cir.1956). At worst, a creditor may allege a debtor held bare legal title. However, bare legal title was not the debtor’s but was holding it in trust. See, In re Foos (Bankr. N.D. Ill. 1995) 183 B.R. 149. “If debtor holds bare legal title to property without holding any equitable interest, the estate acquires bare legal title without any equitable interest.” (emphasis added); See also NTA, LLC v. Concourse Holding Co., LLC (In re NTA, LLC), 380 F.3d 523, 530, 2004 U.S. App. LEXIS 17420, *19, 54 U.C.C. Rep. Serv. 2d (Callaghan) 790, Bankr. L. Rep. (CCH) P80,149, 52 Collier Bankr. Cas. 2d (MB) 1334, 43 Bankr. Ct. Dec. 122 (1st Cir. Mass. 2004).
In sum, spendthrift trusts provide a great tool for the wealthy to insulate assets by divesting all interests to the spendthrift trust. Nevada goes a step further by providing the most expansive asset protection in the country. In fact, Nevada was ranked first in the country by Forbes.
Spendthrift Trusts in Bankruptcy Proceedings
A review of bankruptcy law by Darren Chaker tries to define what a bankruptcy proceeding is. Under 11 U.S. Code § 301(a) requires, “A voluntary case under a chapter of this title is commenced by the filing with the bankruptcy court of a petition…” Most courts have ruled that a bankruptcy petition is filed for purposes of § 301 when it is first placed in the actual or constructive possession of the clerk of the bankruptcy court. See Nat’l Westminister Bank v. Markings Assocs., 1992 U.S. Dist. LEXIS 15534, No. Civ. 92-3079, 1992 WL 281158 (D. N.J. Sept. 21, 1992) (holding petition was filed even without filing fee); Wood v. Godfrey, 102 B.R. 769, 771 (B.A.P. 9th Cir. 1989) (holding petition was filed when placed in clerk’s possession, rather than when stamped “filed”). Although this seems like a simple question, the authority to have filed the case may dictate if there is a proceeding.
“Anything that occurs within a case is a proceeding.” Post v. Ewing, 119 B.R. 566 (S.D. Ohio 1989). Any action that “goes beyond the bankruptcy petition” is necessarily defined as a “proceeding.” See In re Marcus Hook Dev. Park Inc., 943 F.2d 261, 264 (3d Cir. 1991). As recognized by the Sixth Circuit, “the term ‘proceeding’ is used to refer to the steps within the ‘case’ and to any subaction within the case that may raise a disputed or litigated matter.” In re Wolverine Radio Co., 930 F.2d 1132, 1141 n.14 (6th Cir. 1991).
The filing of a petition is the only action that can constitute a proceeding. This means that “anything that occurs within a case is a proceeding…including all ‘controversies, adversary proceedings, contested matters, suits, actions or disputes.” In re Combustion, 391 F.3d at 226 n38 (quoting Collier on Bankruptcy, PP 3.01[3], 3.01[4][b]).
Attorney Authority and Bankruptcy Petitions
What is also critical is that the attorney has the authority to file the bankruptcy petition. If he does not then the case may be dismissed and there will be no proceeding. Specifically, In re Stomberg (2013, BC SD TX) 487 BR 775, failing to obtain debtor’s signature on original Schedules and original statement of financial affairs (SOFA), which serves as debtors verification of accuracy of contents as required by Rule 1009 violated Rule 9011(b)(3); further, by forging debtor’s signature on original Schedules and original SOFA because electronically filing document bearing electronic signature that was not actually or validly signed constitutes forgery amounting to Rule 9011 violation.
The Court said, “Further, this Court agrees with the court in Phillips that there are no circumstances that would ever justify an attorney filing a petition, any of the Schedules, or the SOFA without first obtaining the debtor’s signature, “regardless of how urgent the need may appear to be.” See In re Phillips, 317 B.R. at 521 (refusing to accept attorney’s excuse that filing petition without first obtaining the debtor’s signature was necessary to prevent a foreclosure sale of the debtor’s home). Thus, a proceeding relies on the underlying authority of the actual client allowing for the case to have been filed in the first place.
Nevada Spendthrift Trusts and the Corporate Veil
In Nevada, “piercing the corporate veil” is now the subject of a statute, NRS 78.747. Under section 2 of this statute, to establish an “alter ego,” three things must be proven:
(a) The corporation is influenced and governed by the stockholder, director or officer;
(b) There is such unity of interest and ownership that the corporation and the stockholder, director or officer are inseparable from each other; and
(c) Adherence to the corporate fiction of a separate entity would sanction fraud or promote a manifest injustice.
This statute is a codification of the test enunciated in prior case law. See, e.g., Ecklund v. Nevada Wholesale Lumber Co., 93 Nev. 196, 562 P.2d 479 (1977), where it was also held that all three elements must be proven to pierce the corporate veil. Thus, without these elements – the structure remained intact and the money was not part of the estate and the literal truth remains as to the “No” answer since the entities were separate. In re Giampietro, 317 B.R. 841, 845–46 (Bankr.D.Nev.2004) (recognizing that whether the alter ego/corporate veil doctrine applies to LLCs in Nevada is a question of first impression).
Fraudulent Transfers, Discharge Risk, and Spendthrift Trusts
Fraudulent transfers are defined in 11 U.S.C. Section 548 as transfers by the debtor of an interest in property (either voluntarily or involuntarily) within two years before filing bankruptcy, where either the debtor actually did intend to defraud his creditors or, far more commonly, where the debtor did not receive “reasonably equivalent value” for the transferred asset and the debtor was either already insolvent or became insolvent as a result of the transfer. The government did not prove nor did the court articulate such findings to substantiate a fraudulent transfer.
A second category of fraud in the bankruptcy arena is where the debtor transferred the asset with actual intent “to hinder, delay, or defraud” his creditors—and such transfer occurred within one year prior to filing bankruptcy, then under Bankruptcy Code section 727(a)(2)(A), the court may deny the debtor from obtaining a bankruptcy discharge.
Key Takeaways on Spendthrift Trusts in Bankruptcy
- A properly drafted spendthrift trust can limit what becomes property of the bankruptcy estate while still complying with federal and state law across courts such as the United States District Court and California superior court.
- Nevada spendthrift trusts offer some of the strongest domestic asset protection features when evaluated in bankruptcy proceedings involving fraudulent transfers and exemptions.
- Darren Chaker’s analysis spans proceedings in the United States District Court and the Southern District of California, providing a cross‑jurisdictional view of spendthrift trusts in bankruptcy.
