In re Two Rivers Irrevocable Tr.

653 B.R. 284

IN RE: TWO RIVERS IRREVOCABLE TRUST, Debtor.

Case No. 23-30147-JPS

United States Bankruptcy Court, M.D. Georgia, Athens Division

Signed July 17, 2023

For Petitioning Creditors: John T. McGoldrick, Jr., Martin Snow, LLP, P.O. Box 1606, 240 Third Street, Macon, GA 31202-1606, James M. Sherman, Stanley, Esrey & Buckley, LLP, 1230 Peachtree Street NE, Suite 2400, Atlanta, GA 30309.

For Debtor/Defendant: Courtney Davis, Morgan & Morgan Attorneys at Law, P.C., 1090 C Founders Blvd, Athens, GA 30606.

BEFORE James P. Smith, United States Bankruptcy Judge

MEMORANDUM OPINION

James P. Smith, United States Bankruptcy Judge

On June 22, 2023, the Court orally announced its findings of fact and conclusions of law in this case. The Court now memorializes its opinion.

PROCEDURAL POSTURE

Petitioners Cecilia and Barry Rogers and their son Coleman Rogers filed an involuntary petition against Two Rivers Irrevocable Trust (the "Two Rivers Trust"). (Docket No. 1). Two Rivers Trust filed an answer (Docket No. 6) asserting three defenses. First, Two Rivers Trust asserted that it is not a "business trust" and therefore, cannot be a debtor under 11 U.S.C. §§ 101(9), 101(41) and 109(b).¹ Second, Two Rivers Trust denied that it was generally not paying its debts as they come due. Finally, Two Rivers Trust asserted that the Petitioners have adequate remedies under state law and therefore, the petition was filed in bad faith by attempting to use the bankruptcy process for improper purposes. The matter came on for hearing beginning May 31, 2023, and was continued to and concluded on June 12, 2023.

After considering the evidence, the briefs, the legal arguments of counsel, and the law, the Court, pursuant to Federal Rule of Bankruptcy Procedure 52(a)(1), publishes its findings of fact and conclusions of law.

FINDINGS OF FACT

Two Rivers Trust owns approximately 334 acres of land in Greene County, Georgia. Mike McCommons is the sole trustee of the Two Rivers Trust.

Two Rivers Trust was formed January 13, 2012. On that date, Two Rivers Holding Co., Inc.² transferred by quit claim deed seven tracts of land to Two Rivers Trust. McCommons, also on January 13, 2012, transferred by quit claim deed three tracts to Two Rivers Trust. In total, approximately 334 acres were transferred by quit claim deed on January 13, 2012.

McCommons testified that his son, Steven McCommons, suffered a serious and permanent brain injury in a motorcycle accident. McCommons formed Two Rivers Trust on advice to make long-term plans for Steven. Steven McCommons is the sole beneficiary of Two Rivers Trust.

A motorbike racing facility, known as Durham Town, operates on Two Rivers Trust's property. Durham Town includes additional property leased from family members related to McCommons. Durham Town is comprised of (1) approximately 150 miles of dirt bike trails, (2) a racing course, (3) a drag strip, (4) a restaurant, (5) a pro shop which leases and sells motorcycle racing equipment, (6) cabins, campers, trailers, and recreational vehicles for overnight rental, and (7) hunting land.

Durham Town has been in operation for approximately twenty years. Evidence at the hearing in the form of tax returns, profit and loss statements and testimony established that McCommons had operated Durham Town through numerous entities which he owned, including Georgia Trails and Rentals, Inc., Two Rivers Holding Co. Inc., Durham Town Pro Shop, Bevlyn's Kitchen, Inc., Durham Town Off Road Park, Inc., Durham Town Plantation Sportsman's Resort, LLC, and D.T. Farms. Allegedly, one or more of these entities has been leasing from Two Rivers Trust the land on which part of Durham Town is operated. McCommons testified that there were no written leases and that all the leases, including those with his family members on non-Two Rivers Trust property, were "handshake deals." One would assume that one or more of these entities would have been paying rent to Two Rivers Trust for the use of Two Rivers Trust's land and buildings. However, Two Rivers Trust did not have a bank account until June 2020. The documents introduced at trial show that rent was paid to Georgia Trails and Rentals, Inc. and to Two Rivers Holding Co., Inc., even though those entities had no ownership interest in the real property upon which Durham Town operated.

Kimberly Crowley, who did the bookkeeping for the Durham Town entities from 2012 to 2021, testified that she wrote checks to various entities, at various times and in various amounts as directed by McCommons. She testified that Durham Town shut down in 2021. It then reopened, but all fees generated by Durham Town were then paid to various entities created by Tim McCommons, Mike McCommons's brother. Mike McCommons testified that after the Petitioners obtained their judgments, entities owned by Tim McCommons took over the operation of Durham Town, although there was no evidence of any formal transfer of the business from Mike McCommons's entities to Tim McCommons's entities.

Petitioners hold judgments for various amounts against Georgia Trails and Rentals, Inc., Durham Town Plantation Sportsman's Resort, LLC, Two Rivers Holding Company, Inc., Joseph Lassen, McCommons and the Two Rivers Trust recovered in the Superior Court of Greene County, Georgia, Civil Action No. 16-CV-204. The judgments arise from damages incurred by Coleman Rogers. Coleman Rogers was racing at Durham Town when he hit a culvert pipe and catastrophically damaged his right leg. Cecilia and Barry Rogers hold judgment against Two Rivers Trust in the principal amount of $154,198.60. Coleman Rogers holds judgment against Two Rivers Trust in the principal amount of $2,982,000. The judgments have been recorded in Greene County, thus imposing judgment liens on the property of Two Rivers Trust.

CONCLUSIONS OF LAW

1. Whether the Trust is a "Business Trust" under the Bankruptcy Code

The first issue is whether a trust can be a debtor under Chapter 7. "The burden of establishing eligibility in bankruptcy lies with the party filing the bankruptcy petition." Montgomery v. Ryan (In re Montgomery), 37 F.3d 413, 415 (8th Cir. 1994).

Section 303(a) provides that an involuntary case can be commenced only against a "person, except a farmer, family farmer, or a corporation that is not a moneyed, business, or commercial corporation, that may be a debtor under the chapter under which such case is commenced." 11 U.S.C. § 303(a). "Corporation" is defined under § 101(9)(A)(v) to include a "business trust."³ "Business trust" is not defined in the Bankruptcy Code. While an abundance of case law from around the country develops the definition of "business trust," neither the Supreme Court of the United States nor the United States Court of Appeals for the Eleventh Circuit have defined the term in the context of the Bankruptcy Code. However, "the one overriding principle that emerges from the cases is that the determination of whether a trust is a business trust is fact-specific and focuses on the purpose and operations of the trust." See Catholic Sch. Emples. Pension Trust v. Abreu (In re Catholic Sch. Emples. Pension Trust), 599 B.R. 634, 662 (B.A.P. 1st Cir. 2019) (quoting In re Jin Suk Kim Trust, 464 B.R. 697, 704 (Bankr. D. Md. 2011)).

Thus, while there is no binding precedent, this Court looks to a recent case in which the United States Bankruptcy Court for the District of Colorado establishes the legal meaning of "business trust." See In re Quadruple D Trust, 639 B.R. 204 (Bankr. D. Colo. 2022).

In Quadruple D Trust, Judge McNamara held that interpreting terminology in the Bankruptcy Code was a matter of federal statutory interpretation and is not governed by federal common law or state law. Id. at 219. The court determined "that the term 'business trust' does not have a plain or ordinary meaning well understood by the American public writ large." Id. at 220.

To distill the definition of "business trust," the court looked at pre-Bankruptcy Code case law and found the cases of Hecht v. Malley, 265 U.S. 144, 44 S. Ct. 462, 68 L.Ed. 949 (1924), and Morrissey v. Comm'r of Internal Revenue, 296 U.S. 344, 56 S. Ct. 289, 80 L.Ed. 263 (1935), were binding precedent. Quadruple D Trust, 639 B.R. at 221-23. Beyond pre-Bankruptcy Code case law, the court considered: (1) pre-Bankruptcy Code legal dictionary definitions; (2) usage in pre-Bankruptcy Code articles and other sources; (3) definition under state law; and (4) usage in bankruptcy cases. Id. at 224-36. The court concluded the Supreme Court cases of Hecht and Morrissey were controlling. Id. at 231. Relying on Morrissey, the court held:

the "salient features" of a business trust are;

(1) a trust "created and maintained" for a business purpose;

(2) title to property held by trustees;

(3) centralized management;

(4) continuity uninterrupted by death among beneficial owners;

(5) transferability of interests; and

(6) limited liability.

Id. at 230 (citing Morrissey, 296 U.S. at 357-359, 56 S. Ct. 289).

Applying these factors to the facts at hand, the Court finds Two Rivers Trust is not a "business trust" as used in the Bankruptcy Code. The Court notes that feature one, whether the trust was created and maintained for a business purpose, is dispositive as to whether Two Rivers Trust is a business trust. Because factor one is dispositive, the Court, in its analysis, addresses only factors one, four, and five.

1. Created for a Business Purpose

First, the Court must determine whether Two Rivers Trust was created for a business purpose. Here, it was not.

Whether a trust is created and maintained for a business purpose is "the most important factor for determining whether a trust is eligible to file for bankruptcy protection as a 'business trust.' " Id. at 236 (citing Morrissey, 296 U.S. at 359, 56 S.Ct. 289). A court should first inquire into the intention or purpose of the trust at the time of its creation, then if the court finds the trust was created for business purposes, the court should determine...