The Train Tracks

0 Flares 0 Flares ×

My three-year old grandson Sam is enamored with trains and train tracks.  He loves to lay out the tracks and run Thomas and Thomas’ friends along the tracks.  Unfortunately for Sam, his 14-month old sister has now learned to walk.  She wants to do whatever Sam is doing, which includes playing with the train tracks.  One day recently Sam threw his body across a stack of train tracks in order to protect them from the clutches of his sister.  His tactic might work if his only goal is to keep her from the tracks; however, if he also has a goal of playing with the train tracks, this tactic will not work.  As I read the case of Chow v. Lee, Adv. Proc. No. 20-4036 (Bankr. E.D. Tex. 2021), I was reminded of Sam and the train tracks.  Let me explain why.


The Impasse

Mr. Lee had a profitable business fixing the LCD monitor (front cover) of iPhones when Apple, without notice to Mr. Lee, according to his testimony, changed the landscape and caused repairs of its phones to move to China, essentially throwing him into bankruptcy because of his business losses.  Mr. Lee’s wife had a good job as director of financial analysis as an employee.  Mr. Lee decided to file a chapter 7 bankruptcy petition to deal with his financial problems; however, his wife did not join him.  Somewhat like the decision to file a joint tax return, married couples have the choice to file an individual or joint bankruptcy. 

Mr. Lee brought into the bankruptcy a pile of business losses.  He and his wife filed a post-petition tax return on which they claimed the losses.  In doing so, they reduced the taxable income on the return to zero, resulting in a refund of about $26,000.  The bankruptcy trustee sought the refund for the estate, arguing that the refund was the result of the business losses which were an asset of the estate.  Mr. Lee agreed that the losses did belong to the estate but pointed out that the refund resulted entirely from his wife’s withholding because following the loss of the business he decided to go to divinity school and during the year at issue he had no income.

The bankruptcy court analyzed the varying interest in the refund and determined that:

the Debtor and his spouse did not have authority to use the net operating losses, which are the Debtor’s pre-bankruptcy tax attributes, in their 2018 Tax Return.  Those attributes belonged to the Debtor’s bankruptcy estate. Although it is not clear how the trustee can use the Debtor’s pre-bankruptcy tax attributes, the Court will require the Debtor and his non-filing spouse to take whatever steps are necessary, if requested by the Chapter 7 trustee in writing with 14 days of entry of this Memorandum Opinion and Order, to return the net operating losses to the estate by amending their 2018 Tax Return.

So now, the trustee, like Sam, has smothered the loss carryforward and can prevent the Lees from obtaining the benefit of this tax attribute, but what will she receive for taking this position?  Mr. Lee has no income in the year at issue and based on my reading of the case is unlikely to have much income in the near future.  Will the trustee assert her right to prevent the use of the loss to shelter a non-debtor’s income from tax or can the parties negotiate an agreement mutually beneficial to each?  Somewhat similar to the position of the trustee, the Lees also have an interest in reaching an agreement since they cannot enjoy the benefit of the loss to reduce their overall taxes without such an agreement.  A good case for a negotiation exercise in law school.  Maybe someday I will talk to Sam about the case, but I don’t think it will do much good yet.

The Family

The tax refund issue was only one part of Mr. Lee’s bankruptcy case.  The other part also reminded me of my family and of many families.  Mr. Lee and his wife have small children.  As his business grew and his wife’s job responsibilities took her away from the home, they looked for a way to take care of their children and other responsibilities around the house.  They convinced Mr. Lee’s parents to sell their business and move to Texas to provide child care.  My daughter has not yet convinced me to do this, but my wife provides significant childcare for our grandchildren as do many grandparents, bringing Mr. Lee’s bankruptcy case closer to home than just the example with Sam.

Initially, the parents lived in Mr. Lee’s house, but as his family grew, space became a premium.  Mr. Lee and his wife assisted his parents, who no longer had outside income, in buying a house nearby and in buying a car to transport them back and forth to the Lees’ house and elsewhere.  The trustee sought to bring the value of the house and the car into the estate as transfers from Mr. Lee that defeated creditors.  The court works through the necessary analysis regarding each of the transfers before determining that these two assets should not be brought back into the estate.  I was a little surprised that in the analysis the court did not explicitly talk about the value of the services provided by Mr. Lee’s parents who not only provided childcare, but seemed like they also provided meal preparation and lawn maintenance, etc.  I suspect this value was in the judge’s mind as she thought about this family situation but she did not need to use it in reaching her conclusion.

The case provides lessons not only about negotiation but also blended families.  I think the judge got it right, but the opinion, like any opinion, tells the story as written by the deciding judge who wants you conclude they got it right.  When you have informal assistance going from one generation to another, with reciprocal services coming back, the formalities of property law, fraudulent transfer and other concepts designed to sort out assets in a bankruptcy case sometimes meet up with real life situations in which a family seeks not to defraud its creditors but to make life work.  I don’t fault the trustee for raising questions about the transfer of property from someone who ends up owing creditors.  Here, it forced the judge to look at the goal of the transfers and the timing of the transfers in deciding they were not done to defeat creditors but to preserve the best interest of the family.  Here, and in other cases, this can be a close question as the court and the trustee try to determine the motive and timing behind transfers of wealth from one family unit to another.

Comment Policy: While we all have years of experience as practitioners and attorneys, and while Keith and Les have taught for many years, we think our work is better when we generate input from others. That is one of the reasons we solicit guest posts (and also because of the time it takes to write what we think are high quality posts). Involvement from others makes our site better. That is why we have kept our site open to comments.

If you want to make a public comment, you must identify yourself (using your first and last name) and register by including your email. If you do not, we will remove your comment. In a comment, if you disagree with or intend to criticize someone (such as the poster, another commenter, a party or counsel in a case), you must do so in a respectful manner. We reserve the right to delete comments. If your comment is obnoxious, mean-spirited or violates our sense of decency we will remove the comment. While you have the right to say what you want, you do not have the right to say what you want on our blog.

Speak Your Mind