U.S. Bankruptcy Court
Where the Chapter 7 trustee has asserted claims regarding the KG Family Trust, the trust was a sham, so its assets were property of the debtor as of the commencement of the bankruptcy and became property of the estate as of the filing.
“This matter came before the Court on the First Amended Complaint filed by the Plaintiff, Donald Lassman, as the Chapter 7 Trustee of the within debtor, Kristen M. Spalt. Pursuant to the Amended Complaint, the Chapter 7 Trustee asserted claims regarding the KG Family Trust (‘KG Trust’) against the Debtor, individually and as trustee of the KG Trust (‘KG Trustee’); her spouse, James G. Spalt; and her children, James E. Spalt, Eric Spalt, Andrew Spalt, George Spalt, Carly Spalt, Edward Spalt, and Caroline Spalt (collectively, ‘Spalt Children’). The Spalt Children filed a counterclaim against the Chapter 7 Trustee, seeking a declaratory judgment that they are the beneficiaries of the KG Trust.
“For the reasons set forth below, the Court finds that the KG Trust failed since no beneficiaries other than the Debtor were identified when it was formed. In the alternative, the Court finds that the KG Trust was a sham and formed for the illegal purpose of hiding assets from the creditors of James G. Spalt and the Debtor. As more fully set forth below, given the failure of the KG Trust and its illegal purpose, the Court holds that the Debtor was the sole and equitable owner of all property of the KG Trust as of the commencement of the bankruptcy and that all assets of the KG Trust became property of estate as of the filing. The Court further finds that the Spalt Children were not beneficiaries of the KG Trust as of the commencement of the bankruptcy.
“With respect to the postpetition transfers of assets, the Chapter 7 Trustee has failed to sustain his burden of proof that the Spalt Children aided and abetted the transfers by the Debtor and James G. Spalt. …
“As more fully set forth below, the assets of the KG Trust were property of the Debtor as of the commencement of the bankruptcy and became property of the estate as of the filing. Although the Debtor purported to create the KG Trust, the KG Trust is unenforceable. First, the KG Trust fails since there were no beneficiaries, other than the Debtor, at the time of its formation. In the alternative, the KG Trust is void as a matter of public policy, since it was formed for the purpose of shielding assets of James G. Spalt and the Debtor from their creditors, while allowing them to retain full control and ownership of the assets. Since the KG Trust failed, any assets belonging to the Debtor purportedly transferred to the KG Trust remained her property. In addition, because they participated in the illegal purpose of the KG Trust, the assets of James G. Spalt and G. Spalt that were transferred to the KG Trust were assets of the Debtor as of the filing of the bankruptcy and became property of the estate.
“As to the count against the Spalt Children, the Chapter 7 Trustee has failed to meet his burden of proof that the Spalt Children knowingly participated in the transfers of the funds in the KG Trust. Consequently, he fails to prevail on his claims against the Spalt Children for aiding and abetting the postpetition transfer of assets of the estate. Since the Court has found that the KG Trust was unenforceable, the Court need not address the Chapter 7 Trustee’s alternative theory that the Spalt Children colluded with the Debtor in her breach of duties as KG Trustee. …
“Since either there was no beneficiary, or the Debtor was the only beneficiary, the KG Trust failed under its terms and under Massachusetts law. …
“In the alternative, the KG Trust is void as a matter of public policy. The Chapter 7 Trustee has demonstrated that the purpose of the KG Trust was to hide assets from the creditors of James G. Spalt and the Debtor. Both the Debtor and James G. Spalt admitted that the KG Trust was formed to avoid their assets being reached by creditors. Coupled with their continued exercise of control and ownership over the assets of the KG Trust, the KG Trust is a sham. …
“For the foregoing reasons, the Court finds that the Debtor was the sole and equitable owner of all property of the KG Trust and that all assets of the KG Trust became property of the estate as of the commencement of the bankruptcy. The Court further finds that the Chapter 7 Trustee has failed to sustain his burden of proof that the Spalt Children are liable to the estate for the postpetition transfers from the KG Trust.”
In re: Spalt, Kristen M. (Lawyers Weekly No. 04-003-25) (23 pages) (Bostwick, J.) (Chapter 7 Case No. 16-10131-JEB; Adversary Proceeding No. 18-01032-JEB) (April 3, 2025).
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