Bankr. E.D.N.C.: Sanderson v. Gross Family Trust- Avoidance of "Estate Planning" Transfer

Summary:

This adversary proceeding arose out of the collapse of Wireless Systems Solutions, LLC, a company almost entirely owned and controlled by Susan and Laslo Gross. In 2019, Wireless entered into a Teaming Agreement with SmartSky Networks, which carried potential damages of up to $10 million for breach. By early 2020, the relationship with SmartSky was unraveling, and Wireless faced mounting liabilities. At the same time, Mrs. Gross created the Susan L. Gross Family Trust, naming her husband as trustee and their children as beneficiaries. On March 6, 2020, Wireless transferred $1 million into that Trust. Within weeks, the Trust used much of those funds to buy real estate in Watauga County, while Wireless’s finances spiraled further downward.

The Chapter 7 Trustee sought to claw back the transfer under 11 U.S.C. § 544(b) and North Carolina’s Uniform Voidable Transactions Act. The court found that the transfer bore numerous badges of fraud: it was made to an insider, for no consideration, while Wireless faced mounting debts and litigation with SmartSky, and under the complete control of the same insiders who ran the company. The supposed justification—“estate planning”—was dismissed as a post hoc gloss on what was in reality an asset-protection scheme. The court concluded that the transfer was both an actual fraudulent transfer (§ 39-23.4(a)(1)) and a constructively fraudulent transfer (§ 39-23.4(a)(2)) and entered judgment for the Trustee, avoiding the transfer.

Commentary:

This case is a reminder that calling something “estate planning” does not immunize insider transfers when creditors are already circling. The Grosses’ attempt to move $1 million out of their closely held company into a family trust—right as litigation with their only major customer loomed—was almost a textbook case of fraudulent transfer. Judge Callaway was especially critical of Mrs. Gross’s shifting testimony, noting her “selective memory issues” and tendency to shape her story to the moment.

The defendants implicitly invoked the idea that they were acting on professional advice when setting up the trust. Here, the “advice of counsel” defense, as discussed by the Fourth Circuit in Sugar v. Burnett (2024), is instructive. The Fourth Circuit emphasized that reliance on counsel can negate fraudulent intent only where the debtor (1) fully discloses material facts, (2) seeks advice in good faith, and (3) reasonably relies on that advice. In the Grosses’ case, those elements were lacking: Mrs. Gross downplayed or denied critical facts about Wireless’s deteriorating relationship with SmartSky, their timing showed asset-protection motives rather than good-faith estate planning, and no reasonable person could believe that siphoning $1 million from an operating business on the brink of litigation would be immune from avoidance simply because it passed through a lawyer’s hands.

The lesson for debtors and their counsel is clear: a debtor cannot launder fraudulent intent through an estate planning lawyer. Estate planning advice may provide a veneer of legitimacy, but without candor, good faith, and reasonableness, it will not withstand scrutiny.

For practitioners, two points stand out:

1. Badges of fraud add up. Insider transfers, lack of consideration, and impending liabilities will overwhelm “estate planning” rationales.

2. Advice of counsel is not a shield without transparency. Following Sugar v. Burnett, courts in the Fourth Circuit will demand evidence that the debtor disclosed the whole picture to their attorneys,  both in bankruptcy and otherwise, and reasonably relied on the advice given.

In short, when “estate planning” collides with creditor exposure, it is almost always the creditors who will win.

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