In re Two Rivers Irrevocable Trust (23-30147)

Petitioners filed an involuntary Chapter 7 petition against Debtor which, in turn, filed an answer controverting the petition. 11 U.S.C. §303(a), (b). Petitioners hold judgment liens against Debtor’s real property, some 334 acres of land (the “property”). For the past twenty years, a motorbike racing facility known as Durham Town has been operated on the property by Mike McCommons. About ten years ago, Mike’s son, Steven, suffered a serious and permanent injury. Mike formed Debtor, an irrevocable trust, to make long-term plans for Steven, who is the sole beneficiary of the trust. Mike, and one of his corporations then conveyed the 334 acre property to Debtor. Mike continued to operate the motorbike racing and other related business on the property. Those businesses paid rent not to Debtor which owns the property, but to other entities owned by Mike.

Petitioner Coleman Rogers suffered a catastrophic injury while racing at Durham Town and he, along with his parents, the other petitioners, now hold judgment liens against Debtor’s property. Petitioners filed this involuntary Chapter 7 case against Debtor in order to collect on their judgments. Debtor asserted three defenses.

First, the Court held that Debtor is not a “business trust” and therefore cannot be a debtor under 11 U.S.C. §§101(9), 101(41) and 109(b). Debtor, an irrevocable trust, was created to preserve property for the benefit of Mike’s son and includes a spendthrift clause. Until 2020, Debtor received no rent, had no bank account, had no business expenses, and filed no tax returns. Debtor simply existed. A business trust, on the other hand, is created and maintained for business purposes and its interests are transferable.

Second, the Court held that Debtor was not generally paying its debits as they become due. Debtor has few debts. The 2021 and 2022 property taxes have not been paid, two secured loans against the property are in default, and Petitioners’ and another creditor’s judgments are not being paid. Debtor’s legal fees in this case are being paid by Mike’s brother.

Finally, the Court held that the involuntary petition was filed in bad faith and was an abuse of the bankruptcy process because a bankruptcy case would serve no purpose that creditors of Debtor could not achieve under state law.  The unpaid property taxes are first priority liens under state law. The secured mortgage debts can be foreclosed upon. Petitioners’ judgment liens can be collected under state law. If a bankruptcy trustee were appointed in this case, the trustee would immediately abandon the property under §554(a) as burdensome to the estate or of inconsequential value.

The Court dismissed the involuntary petition.


Monday, July 17, 2023