11th Circuit Revives $100M Trust Theft Class Action Against CSNTA

• The Center for Special Needs Trust Administration filed for bankruptcy after an internal investigation revealed $100 million in misappropriations from special needs trusts.
• Parents of a disabled child, the Chamberlins, claim several companies and individuals facilitated and concealed the misappropriations.
• A recent $120 million judgment entered against co-founder Leo Govoni has been cited as a reason why the appeal is moot.
• The ruling highlights the potential for co-mingling of assets and the importance of tracing funds to ensure compliance with bankruptcy codes.
• This case may set a precedent for similar cases involving misappropriation of trust funds, emphasizing the need for vigilance in navigating complex issues related to special needs trusts.

The broader group of creditors that are not special needs trust beneficiaries should not have an opportunity to have their claim satisfied using this money that was not the debtor's money begin with.

The Center for Special Needs Trust Administration (CSNTA) filed for Chapter 11 bankruptcy in 2024 after an internal investigation revealed that co-founder Leo Govoni had transferred money from trusts under the organization's administration by issuing loans to companies he controlled. This led to the partial or complete draining of accounts belonging to over 1,000 vulnerable and disabled clients. The Chamberlins, parents of a disabled child, claim that several companies and individuals facilitated and concealed $100 million in misappropriations from special needs trusts. They argue that their lawsuit only raises claims for trust beneficiaries' direct injuries, which are not subject to the automatic bankruptcy stay. However, U.S. District Judge William F. Jung ruled in February 2025 that the lawsuit interfered with the court-appointed trustee's administration of the case and would violate the stay if pursued simultaneously.

The automatic bankruptcy stay temporarily protects debtors from attempts to collect debts, but it does not apply to claims for direct injuries. The Chamberlins' attorney, Jonathan Streisfeld, argued that their lawsuit avoids the automatic stay by targeting non-debtors who allegedly facilitated or concealed misappropriations. However, U.S. Circuit Judge Nancy Abudu expressed concern about the broader implications of the plaintiffs' claims, suggesting that allowing them to recover money independently could harm other creditors and violate the bankruptcy code. The recent $120 million judgment entered against Govoni for breach of a loan funded with stolen trust money has also been cited as a reason why the appeal is moot.

This ruling has significant implications for lawyers advising clients with special needs, highlighting the potential for co-mingling of assets and the importance of tracing funds to ensure compliance with bankruptcy codes. The case also underscores the need for careful consideration of the automatic bankruptcy stay and its limitations in cases involving misappropriation of trust funds. As U.S. Circuit Judge Embry Kidd noted, tracing assets is crucial to determining which assets belong to trust beneficiaries and can be recovered independently. This ruling may set a precedent for similar cases involving misappropriation of trust funds, emphasizing the importance of vigilance in navigating complex issues related to special needs trusts.

This ruling has significant implications for lawyers advising clients with special needs, as it highlights the potential for co-mingling of assets and the importance of tracing funds to ensure compliance with bankruptcy codes. Lawyers should watch for similar cases involving misappropriation of trust funds and be prepared to advise clients on navigating these complex issues.

Source: Original reporting via Courthouse News