Patterson v. Spears ( 2000 )

F I L E D
United States Court of Appeals
Tenth Circuit
UNITED STATES COURT OF APPEALS
JAN 31 2000
FOR THE TENTH CIRCUIT
PATRICK FISHER
Clerk
In re:
LOLA FAYE DENTON,
Debtor. No. 99-6059
(D.C. No. CIV-98-725-C)
(W.D. Okla.)
THELMA PATTERSON,
Appellant,
v.
KENNETH L. SPEARS, Trustee,
Appellee.
ORDER AND JUDGMENT *
Before BALDOCK , PORFILIO , and BRORBY , Circuit Judges.
After examining the briefs and appellate record, this panel has determined
unanimously that oral argument would not materially assist the determination of
*
This order and judgment is not binding precedent, except under the
doctrines of law of the case, res judicata, and collateral estoppel. The court
generally disfavors the citation of orders and judgments; nevertheless, an order
and judgment may be cited under the terms and conditions of 10th Cir. R. 36.3.
this appeal. See Fed. R. App. P. 34(a)(2); 10th Cir. R. 34.1(G). The case is
therefore ordered submitted without oral argument.
This appeal arises out of an adversary proceeding commenced by Appellee
Kenneth Spears, the trustee for the bankruptcy estate of debtor Lola Faye Denton,
to recover certain property for the debtor’s estate. Among others, Spears sued
Appellant Thelma Patterson, who is Denton’s mother. The matter was tried to the
bankruptcy court along with another adversary proceeding commenced by one of
Denton’s creditors. On appeal, Patterson challenges the propriety of two
bankruptcy court rulings that the district court affirmed. First, she contends the
bankruptcy court erred in ruling that an irrevocable spendthrift trust created by
Denton for her own benefit could be revoked only with the written consent of all
interested parties, so the alleged oral revocation of the trust was of no effect.
Patterson, who was the trustee of the spendthrift trust, claims that she had
contributed virtually all of the corpus of the trust and that the trust was revoked,
and the corpus distributed, long before Denton filed bankruptcy. Second,
Patterson contends the bankruptcy court erred in piercing the corporate veil of
Native Elm Mobilehome Park, Inc. (“Native Elm”) and making the corporation’s
assets part of the debtor’s estate. She claims that she owned and controlled
Native Elm and that its assets belong to her.
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We review the bankruptcy court’s legal determinations de novo, and its
factual findings for clear error. See Phillips v. White (In re White) , 25 F.3d 931,
933 (10th Cir. 1994). Both parties agree that all the issues raised on appeal are
governed by Oklahoma law. Before we turn to these issues, we note that our
review of this appeal was hindered by Patterson’s failure to comply with
10th Cir. R. 28.2(C)(2), which requires her to refer to the specific places in the
record where each issue was raised and ruled on, and by her failure to provide us
the complete record pertaining to the rulings and issues on appeal.
The bankruptcy court found that in 1984, Denton, as the named settlor,
created for her own benefit an irrevocable spendthrift trust. Patterson does not
challenge these findings on appeal. She argues, however, that the trust was
revoked by oral consent of all the interested parties in the early 1990s. The
bankruptcy court determined that the trust had not been revoked, because
Oklahoma’s Trust Act requires the “written consent of all living persons having
vested or contingent interest” in the trust to revoke an irrevocable spendthrift
trust that was “created by the trustor for his own benefit.” Okla. Stat. tit. 60,
§ 175.41. Patterson does not dispute that there was no written consent; she
argues only that the interested parties’ alleged oral consent was legally sufficient
to revoke the trust.
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Based upon the plain language of the statute, we conclude the bankruptcy
court correctly concluded that written consent was necessary to revoke the
trust. See, e.g., Morrison v. Ardmore Indus. Dev. Corp. , 444 P.2d 816, 820
(Okla. 1968). Patterson’s reliance on Wade v. McKeown , 145 P.2d 951(Okla. 1943), to support her argument that no writing is required, is misplaced.
The facts of Wade , which involved a trust created before the enactment of the
Trust Act, are quite different from the facts here, and the Wade decision did not
address the statutory requirements for revocation. Because there was no evidence
that the interested parties agreed in writing to revoke the trust, the bankruptcy
court correctly concluded that the trust was still in effect.
We turn, then, to the bankruptcy court’s rulings regarding Native Elm. The
bankruptcy court initially ruled that Denton had an interest in Native Elm and that
the corporation was her instrumentality. Based on this determination, the
bankruptcy court concluded it was appropriate to pierce the corporate veil and
treat the corporation’s assets as assets of Denton’s bankruptcy estate. Patterson
attacked the instrumentality finding on appeal to the district court and also argued
that Oklahoma law required an additional showing that Denton used Native Elm
to perpetrate a fraud before the court could pierce Native Elm’s corporate veil.
The district court affirmed the bankruptcy court’s instrumentality finding, but
agreed with Patterson that the instrumentality finding, alone, was not sufficient to
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pierce the corporate veil under Oklahoma law. Therefore, the district court
remanded the matter for the bankruptcy court to determine whether Denton also
used Native Elm as part of a design or scheme to perpetrate a fraud.
On remand, the bankruptcy court found that Denton did use Native Elm
as part of a design or scheme to defraud her creditors. Patterson appealed this
determination to the district court and also argued that the bankruptcy court
erroneously effected what is known as a “reverse pierce” of the corporation, by
allowing the assets of Native Elm to be used to satisfy the debts of Denton. 1
Based on this court’s opinion in Cascade Energy & Metals Corp. v. Banks ,
896 F.2d 1557, 1576-78 (10th Cir. 1990), Patterson argued that allowing a
reverse pierce of Native Elm would prejudice the rights of an innocent third
1
In a case involving a standard pierce, a creditor of the corporation is
attempting to pierce the veil of a corporate entity to reach the assets of the
controlling insider. By contrast, in a case involving a reverse pierce, “either
a corporate insider or a person with a claim against a corporate insider is
attempting to have the insider and the corporate entity treated as a single person
for some purpose.” Gregory S. Crespi, The Reverse Pierce Doctrine: Applying
Appropriate Standards, 16 J. Corp. L. 33, 36 (1991). An “outsider” reverse pierce
may occur when “a third party claimant . . . files an action against the corporate
insider and attempts to pierce the corporation to subject corporate assets to this
claim [or when] a third party claimant . . . attempts to assert that claim against the
corporation in an action between the corporation and the third party.” Id. at 37.
An “insider” reverse pierce may occur when “a dominant shareholder or other
controlling insider . . . attempts to have the corporate entity disregarded to avail
the insider of corporate claims against third parties or to bring corporate assets
under the shelter of protection from third party claims that are available only for
assets owned by the insider.” Id. In the present case, Spears is attempting to
pierce the corporate veil to use corporate assets to satisfy the personal debts of
Denton, thereby effecting an outsider reverse pierce.
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person, namely herself, and that the court should not apply the reverse pierce
doctrine in the absence of a clear statement by the Oklahoma Supreme Court
that the Oklahoma courts have adopted the doctrine.
The district court addressed Patterson’s objections to the reverse pierce
doctrine on the merits, even though it does not appear that Patterson had raised
those objections in the bankruptcy court. 2
The district court noted that this court
criticized the reverse pierce doctrine in Cascade Energy , but the court concluded
the doctrine should be applied here because there was substantial evidence that
Native Elm and Denton “were indistinct in operation, and recognition of the
corporate entity would allow Denton to avoid legal obligations and defraud her
creditors,” Appellant’s App., Vol. I, at 94 (citing NLRB v. Greater Kan. City
Roofing , 2 F.3d 1047, 1052 (10th Cir. 1993)). The district court also rejected
Patterson’s challenges to the bankruptcy court’s determination that Denton used
Native Elm as part of a design or scheme to defraud her creditors, and affirmed
the bankruptcy court’s decision.
On appeal, Patterson challenges the bankruptcy court’s determinations that
Native Elm was an instrumentality of Denton and that Denton used Native Elm as
part of a design or scheme to defraud her creditors. Patterson also argues that we
2
Patterson failed to include in her appendix the briefs she filed in the
bankruptcy and district courts. Based on the bankruptcy court’s decision,
however, it does not appear that Patterson presented this argument to that court.
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should not uphold the bankruptcy court’s use of a reverse pierce to make Native
Elm’s assets part of the debtor’s estate. Although the record does not reflect that
Patterson challenged the use of a reverse pierce in the bankruptcy court, we will
exercise our discretion to consider the matter on appeal because it involves a
question of law, the matter is dispositive, the district court did not deem it
waived, and Spears has not suggested that we should deem the matter waived
or that the district court should have done so. See, e.g. , Ross v. United States
Marshal , 168 F.3d 1190, 1195 n.5 (10th Cir. 1999) (exercising discretion to hear
issue not raised in trial court because it presented a matter of law, the resolution
of which was certain).
In Cascade Energy , this court considered a claim under Utah law involving
an outsider reverse pierce, see infra n.1. The district court had concluded that
several corporations were instrumentalities of the primary shareholder and were
used by him for personal purposes. The district court also had determined that
“[i]t would be inequitable and a fraud on the opposing parties” not to hold all the
corporate entities jointly and severally liable for any judgment against the
shareholder or any one of the corporations. 896 F.2d at 1574. On appeal, we
agreed with the district court’s factual findings that the shareholder “wielded
almost total control over the entities,” and “freely transferred cash from any entity
that had it to any entity that needed it, whenever he wanted to do so.” Id. at 1576.
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Nonetheless, we recognized that a reverse pierce of the corporate veil presents
many problems that a standard pierce does not. For instance, use of a reverse
pierce “bypasses normal judgment-collection procedures, whereby judgment
creditors attach the judgment debtor’s shares in the corporation and not the
corporation’s assets. Moreover, to the extent that the corporation has other
non-culpable shareholders, they obviously will be prejudiced if the corporation’s
assets can be attached directly.” Id. at 1577. Accordingly, we stated that
[a]bsent a clear statement by the Supreme Court of Utah that it has
adopted the [outsider] reverse piercing theory urged upon us here, we
are inclined to conclude that more traditional theories of conversion,
fraudulent conveyance of assets, respondeat superior and agency law
are adequate to deal with situations where one seeks to recover from
a corporation for the wrongful conduct committed by a controlling
stockholder without the necessity to invent a new theory of liability.
Id.More recently, we considered whether the district court properly permitted
an outsider reverse pierce under Kansas law, in Floyd v. IRS , 151 F.3d 1295,
1298-99 (10th Cir. 1998). At issue in the suit was the priority of claims held by
three different creditors in certain corporate assets. The IRS had a claim for
unpaid personal income taxes against the controlling shareholder of the
corporations, while the other creditors had judgments against both the controlling
shareholder and his corporations. The district court applied the reverse pierce
doctrine to grant the IRS priority to the corporate assets over the other creditors.
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In considering whether the district court properly permitted a reverse
pierce, we rejected the IRS’ reliance on Kansas cases involving standard pierces,
concluding those precedents were not applicable to a reverse pierce. Id. at 1298.
We also noted that the reverse pierce doctrine gives rise to problems beyond those
identified in Cascade Energy , including that innocent creditors of the corporation
may be prejudiced if the corporation’s assets are used to satisfy the personal debts
of an insider. Id. at 1299. Accordingly, we followed “ Cascade ’s federal law
conclusion that, in the absence of a clear statement of Kansas law by the Kansas
courts, we will not assume that such a potentially problematic doctrine already
has application in that state.” Id. at 1300. Because the IRS had cited no authority
“suggesting that Kansas does or would recognize an outside reverse-piercing
claim,” id. at 1299, and our own research had revealed none, we reversed the
district court’s ruling.
Likewise, Spears has cited no authority here suggesting that Oklahoma
does or would allow an outsider reverse pierce of the corporate veil, and our own
review of Oklahoma law reveals no such authority. Spears’ reliance on our
analysis in NLRB v. Greater Kansas City Roofing , 2 F.3d at 1052, is misplaced,
because that case concerned a standard pierce of the corporate veil under federal
common law. In the absence of a clear statement by the Oklahoma courts, we will
not assume that Oklahoma would allow an outsider reverse pierce like that here.
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Therefore, we conclude the district court erred in affirming the bankruptcy court’s
reverse pierce of Native Elm’s corporate veil. Because this ruling disposes of
Spears’ claim to Native Elm’s assets, we need not decide whether the bankruptcy
court’s underlying instrumentality and fraud determinations were correct.
The judgment of the United States District Court for the Western District
of Oklahoma is AFFIRMED in part and REVERSED in part, and the matter is
REMANDED for further proceedings consistent with this order and judgment.
Entered for the Court
Wade Brorby
Circuit Judge
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