Shurley Shurley v. Texas Commerce Bank, 115 F. 3d 333 (5th Cir 1997) Bankr. L. Rep. P 77,423, 11 Tex.Bankr.Ct.Rep. 259 In The Matter of Billy R. SHURLEY and Jane Bryant Shurley, Debtors. Billy R. SHURLEY and Jane Bryant Shurley, Appellants, v. TEXAS COMMERCE BANK–AUSTIN, N.A. and Texas Commerce Bank–San Angelo, N.A., Appellees. In The Matter of Billy R. SHURLEY and Jane Bryant Shurley, Debtors. Billy R. SHURLEY and Jane Bryant Shurley, Appellants, v. TEXAS COMMERCE BANK–SAN ANGELO, N.A., Texas Commerce Bank–Austin, N.A. and Dennis Elam, Trustee, Appellees. In The Matter of Billy R. SHURLEY and Jane Bryant Shurley, Debtors. William H. ARMSTRONG, II, Appellant, v. TEXAS COMMERCE BANK–SAN ANGELO, N.A., Dennis Elam, Trustee, and Texas Commerce Bank–Austin, Appellees. Nos. 96-50137, 96-50138. United States Court of Appeals, Fifth Circuit. June 20, 1997. John P. Higgins, Michael Lee Rush, Higgins & Rush, Dallas, TX, for Shurley Appellants. Eric Jay Taube, Hohmann, Werner & Taube, Austin, TX, Mitchell Dodd Savrick, Hohmann, Werner & Taube, Austin, TX, for Texas Commerce Bank–Austin. Stanley M. Johanson, University Of Texas Law, Austin, TX, Henry H. McCreight, Jr., Houston, TX, for Texas Commerce Bank–San Angelo in No. 96-50137. Michael A. Wren, McGinnis, Lochridge & Kilgore, Austin, TX, Shannon H. Ratliff, Austin, TX, Scott Davis Moore, Joseph & Moore, Austin, TX, for William H. Armstrong. John Lloyd Hopwood, Houston, TX, Stanley M. Johanson, Austin, TX, Henry H. McCreight, Jr., Houston, TX, for Texas Commerce Bank–San Angelo in No. 96-50138. Michael G. Kelly, The McMahon Law Firm, Odessa, TX, for Trustee. James Alfred Carter, W. Truett Smith, Smith, Carter, Rose, Finley & Griffis, San Angelo, TX, for amicus curiae. Appeals from the United States District Court for the Western District of Texas. Before REAVLEY, JOLLY and BENAVIDES, Circuit Judges. REAVLEY, Circuit Judge: 1 The question here is to what extent the assets of a spendthrift trust settled by a bankruptcy debtor and others are included in the debtor’s bankruptcy estate. The bankruptcy and district courts held that the entirety of the debtor’s interest in the trust is property of the bankruptcy estate. We limit the estate to the property contributed to the trust by the debtor. BACKGROUND 2 In 1965 M.D. Bryant, Ethel Bryant, Anne Bryant Ridge, and Jane Bryant Shurley created a trust under Texas law. M.D. and Ethel Bryant were husband and wife. Anne Bryant Ridge and Jane Bryant Shurley are their daughters. The trust is known as the “M.D. Bryant Family Trust” or the “Bryant Family Trust.” 3 The parents and daughters contributed real property to the trust. The property consisted of ranches owned by the family, including one owned by Shurley. Shurley contributed approximately 11,000 acres of raw land from the south of a west Texas ranch (her contribution herein the “Marfa ranch”).1 The trust agreement states that the property contributed by the parents “represents two-thirds (2/3) of the total value of all of said real property to be contributed and that the value of that portion of said real property to be contributed by [the two daughters] each represents (1/6) of the total value of all of said real property to be contributed.” 4 The trust agreement provided that additional property could be added to the trust at a later date. According to Shurley the vast bulk of the corpus of the trust came through pourover provisions in the parents’ wills, which were executed at the same time the trust agreement was executed. She claims that the Marfa ranch represents only two percent of the value of the total assets of the trust. The parents died in 1967 and 1971. 5 Under the trust agreement, while the parents were alive, two-thirds of the income generated by the trust was distributed to the parents and one-sixth of the income was distributed to each of the daughters. Upon the death of one parent, the income was distributed equally among the living parent and the daughters. Upon the death of the second parent, the two daughters each received half of the income if both were living at the time. The agreement has provisions for the children and other descendants of the daughters to receive income from the trust and distribution of its assets upon final termination of the trust. 6 In 1992, Shurley and her husband filed for bankruptcy under Chapter 7 of the Bankruptcy Code. Since Shurley’s parents were deceased at the time, she and her sister each had a one-half interest in the income from the trust. The Marfa ranch was still held by the trust. Two bank creditors and the bankruptcy trustee brought an adversary action, seeking a declaratory judgment that Shurley’s interest in the trust was property of the bankruptcy estate. After a trial, the bankruptcy court entered a judgment declaring that Shurley’s “entire interest in the [trust], being an undivided 50 percent interest in the principal assets and income of the [trust], is property of the Chapter 7 bankruptcy estate.” In its memorandum opinion it enjoined the trustee of the trust “from disbursing any beneficial interest previously held by Mrs. Shurley to anyone other than” the bankruptcy trustee.2 Shurley and the trustee of the trust3 appealed to the district court, which affirmed. This appeal followed. DISCUSSION 7 We review the bankruptcy court’s factual findings under the clearly erroneous standard, and we review its legal conclusions de novo.4 8 Under section 541 of the Bankruptcy Code5 a bankruptcy estate is created at the commencement of the bankruptcy case. Section 541(a)(1) states that “[e]xcept as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case” is included in the estate. Subsection (c)(2) states the exclusion relevant here: “A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title.” 9 Section 541(c)(2) excludes “spendthrift trusts” from the bankruptcy estate if such a trust protects the beneficiary from creditors under applicable state law.6 “In general, a spendthrift trust is one in which the right of the beneficiary to future payments of income or capital cannot be voluntarily transferred by the beneficiary or reached by his or her creditors.”7 10 The Bryant Family Trust agreement vests in the trustee authority over the trust assets. Among other powers vested in the trustee, the agreement provides: 11 The trustee (and his successors) shall have full power and authority: to manage, handle, invest, reinvest, sell for cash or credit, or for part cash and part credit, convey, exchange, hold, dispose of, lease for any period of time, whether or not longer than the life of the trust, improve, repair, maintain, work, develop, operate, use, mortgage, or pledge all or any part of the funds…. The trustee shall have full power to determine the manner in which expenses are to be borne and in which receipts are to be credited as between principal and income, and also to determine what shall constitute income or net income and what shall constitute corpus and principal…. [B]eneficiaries shall have no right or power to transfer, assign, convey, sell or encumber said trust estate and interest therein, legal or equitable, during the existence of these trusts. 12 The agreement expressly provides that trust assets cannot be reached by creditors of the beneficiaries.8 13 By vesting control of the trust in the trustee, denying the beneficiaries control over the trust, and denying creditors of the beneficiaries access to trust assets, the trust agreement qualifies as a spendthrift trust under Texas law. For two reasons, however, the bankruptcy court concluded that the trust assets are not beyond the reach of creditors under state law. The first reason, which we reject in part, is that spendthrift trust protection under state law does not extend to a trust settled by the beneficiary herself. The second reason, which we reject, is that Shurley exercised sufficient control over the trust to make the assets subject to her creditors. 14 A. The Self-Settlor Rule and its Consequences 15 The bankruptcy court’s principal reason for holding that Shurley’s interest in the trust is property of the bankruptcy estate is that she was one of the original settlors of the trust. We have recognized that a beneficiary’s interest in a spendthrift trust is not subject to claims of creditors under Texas law “[u]nless the settlor creates the trust and makes himself beneficiary.”9 The rationale for this “self-settlor” rule is obvious enough: a debtor should not be able to escape claims of his creditors by himself setting up a spendthrift trust and naming himself as beneficiary. Such a maneuver allows the debtor, in the words of appellees, to “have his cake and eat it too.” As one Texas court has explained:Public policy does not countenance devices by which one frees his own property from liability for his debts or restricts his power of alienation of it; and it is accordingly universally recognized that one cannot settle upon himself a spendthrift or other protective trust, or purchase such a trust from another, which will be effective to protect either the income or the corpus against the claims of his creditors, or to free it from his own power of alienation. The rule applies in respect of both present and future creditors and irrespective of any fraudulent intent in the settlement or purchase of a trust.10 16 The novel issue presented here is whether the entirety of a beneficiary’s interest in a spendthrift trust is subject to creditors’ claims where the trust is only partially self-funded by the beneficiary. There is no compelling Texas authority on this issue, but we conclude that on these facts Texas courts would surely hold that the partially self-funded spendthrift trust is only partially subject to creditors’ claims. 17 Allowing creditors to reach only the self-settled portion of the trust is consistent with the other long-standing rule of Texas law that a settlor should be allowed to create a spendthrift trust that shields trust assets from the beneficiary’s creditors. “Spendthrift trusts have long been held valid by Texas courts.”11 The bankruptcy court’s ruling ignores the wishes of Shurley’s parents, the primary settlors of the trust, and the state’s policy of respecting their expectations. “Spendthrift trusts are not sustained out of consideration for the beneficiary. Their justification is found in the right of the donor to control his bounty and secure its application according to his pleasure.”12 Allowing creditors to reach only that portion of the trust contributed by Shurley would further the policy of allowing her parents to create a spendthrift trust for the benefit of Shurley that is protected from her creditors, while giving effect to the exception for self-settled trusts. At least one court from another jurisdiction agrees with this this approach,13 and we believe that Texas courts would do the same. Accordingly we hold that the property which Shurley herself contributed to the trust–the Marfa ranch–is not protected from creditors under state law and is therefore property of the bankruptcy estate, but that all other assets of the trust are not property of the estate.14 18 We so hold despite Shurley’s “power of appointment” granted by the trust agreement. Under the agreement each sister has a right to allocate assets of the trust to specified beneficiaries. The agreement states that the sisters “shall each have a special power of appointment over an adjusted one-half (1/2) of the trust assets, to appoint such adjusted one-half (1/2) of the assets of said trust to and among their children and lineal descendants…. Neither [daughter] can appoint assets to herself, her creditors, her estate, or the creditors of her estate.” If a daughter does not exercise her power of appointment, the trust agreement provides that her interest shall be distributed in equal shares “to her children and lineal descendants, and to the lineal descendants of a deceased child, per stirpes.” Shurley represents on appeal that she has not exercised her special power of appointment because she is content with the trust’s distribution provisions for her descendants. 19 This power of appointment does not alter our conclusion that the Marfa ranch is property of the bankruptcy estate. The Bankruptcy Code expressly excludes such a power of appointment from the bankruptcy estate, since section 541(b)(1) provides that property of the estate does not include “any power that the debtor may exercise solely for the benefit of an entity other than the debtor.” However, while the power of appointment to others does not become property of the estate under § 541(b)(1), the property which became part of the bankruptcy estate under the Code upon the commencement of the bankruptcy case now belongs to that estate and is controlled by the bankruptcy trustee. Regardless of how Shurley might indicate that trust assets should be divided upon her death, the Marfa ranch now belongs to the bankruptcy estate, and her designation of beneficiaries is irrelevant. The bankruptcy estate will be divided among creditors according to the Code, regardless of Shirley’s appointment of assets under the trust agreement. 20 The exercise of the power of appointment under the trust agreement is analogous to a will, and has no more effect on the property of the bankruptcy estate and creditor priorities than a garden-variety will of the debtor. With an ordinary will, the heirs only receive the stipulated items of the property that were owned by the testator. Stated more simply, a testator can only give away that which was hers. Here, the Marfa ranch no longer belongs to Shurley; it is property of the bankruptcy estate. 21 Shurley argues that she only has a life estate in the Marfa ranch and other trust assets in the form of an equitable interest in the income from the trust assets during her life, and that creditors therefore cannot reach the corpus of the trust even if it is self-settled. She is correct that absent distributions of corpus at the discretion of the trustee or a premature termination of the trust (discussed below), the trust agreement only provides her with an income interest in the trust assets, with the remainder going to other beneficiaries. Shurley cites authority that even when a settlor creates a trust for herself, creditors can only reach trust assets to the extent of the settlor’s interest.15 22 The issue here–whether the creditors can reach only Shurley’s income from the Marfa ranch or the ranch itself–does not turn on whether the Shurley’s interest in the trust is “equitable,” since the Bankruptcy Code defines property of the bankruptcy estate to include “all legal or equitable interests of the debtor in property.”16 Resolution of this question turns on whether creditors can reach the trust corpus under state law, regardless of how the interest is characterized. 23 We conclude that under Texas law creditors can reach not only Shurley’s income from the Marfa ranch but the ranch itself, in light of Bank of Dallas v. Republic National Bank of Dallas.17 In Bank of Dallas, the debtor settled a trust with spendthrift language for the benefit of herself and her children. The debtor was to receive the net income of the trust during her lifetime, with the remainder going to her children or other beneficiaries named in her will. The trust agreement further provided that “[w]henever the trustee determines that the income of the Settlor from all sources known to the trustee is not sufficient for her reasonable support, comfort, and health and for reasonable support and education of Settlor’s descendants, the trustee may in its discretion pay to, or use for the benefit of, Settlor or one or more of Settlor’s descendants so much of the principal as the trustee determined to be required for those purposes.” 24 The court held that “where a settlor creates a trust for his own benefit, and inserts a spendthrift clause, it is void as far as then existing or future creditors are concerned, and they can reach his interest under the trust by garnishment.”18 It further held that income from the trust was subject to creditor claims, and that “the interest of [the debtor] in the trust is such that the corpus may be reached by her creditors.”19 25 The court considered the Restatement (Second) of Trusts § 156 (1959), which provides: 26 (1) Where a person creates for his own benefit a trust with a provision restraining the voluntary or involuntary transfer of his interest, his transferee or creditors can reach his interest. 27 (2) Where a person creates for his own benefit a trust for support or a discretionary trust, his transferee or creditors can reach the maximum amount which the trustee under the terms of the trust could pay to him or apply for his benefit. 28 The court also looked to comment e of this section, which states that “[w]here by the terms of the trust a trustee is to pay the settlor or apply for his benefit as much of the income or principal as the trustee may in his discretion determine, his transferee or creditors can reach the maximum amount which the trustee could pay to him or apply for his benefit.” Applying these rules the court held that the creditor could reach the corpus of the trust, even though the debtor only had a life interest in the trust. 29 By this reasoning the creditors are able to reach the self-settled asset of the trust in our case, namely the Marfa ranch. The trust agreement states that “[i]f the trustee determines that the net income of said trust is insufficient to maintain and support any of the beneficiaries of said trust or their children and lineal descendants in their accustomed manner of living, taking into account, however, such beneficiary’s income from all other sources, the trustee may use so much of the corpus of said trust as the trustee sees fit to make up such deficiency.” This language is even broader than the language of the trust agreement in Bank of Dallas, since in our case the trustee can make grants of trust corpus to support the beneficiaries’ or their descendants’ “accustomed manner of living,” while in Bank of Dallas the trustee was limited to making such distributions to support the beneficiary’s “reasonable support, comfort, and health” and the reasonable support and education her descendants. If anything, the former term grants even more discretion to the trustee than the latter. Accordingly we conclude that the creditors in our case can reach the corpus of the trust under Texas law as to that property–the Marfa ranch–contributed by Shurley to the trust, and that the ranch is therefore property of the estate. 30 The court in Bank of Dallas also quoted comment c to § 156, which states that “[i]f the settlor reserves for his own benefit not only a life interest but also a general power to appoint the remainder by deed or will or by deed only or by will alone, the creditors can reach the principal of the trust as well as the income.” In Bank of Dallas the debtor apparently had a general power to appoint the remaining trust assets by will, while in our case Shurley and her sister have a special power of appointment, meaning that the trust document limits the choice of recipients of appointed assets to the sisters’ descendants. We do not see this factual distinction as significant. Comment c was only one of three comments to § 156 (comments c, d, and e) quoted by the court in Bank of Dallas, and § 156 itself, as we read it, states than any self-settled support or discretionary trust is subject to creditor claims up to “the maximum amount which the trustee under the terms of the trust could pay to” the beneficiary. We cannot fathom why the court would have reached a different result if the debtor had had a special rather than a general power of appointment. Before even mentioning the Restatement, the court stated without qualification that, under Texas law, “where a settlor creates a trust for his own benefit, and inserts a spendthrift clause, it is void as far as then existing or future creditors are concerned, and they can reach his interest under the trust by garnishment.”20 31 A similar result was reached in State v. Nashville Trust Co.21 The debtor was the beneficiary of a spendthrift trust holding real estate. The debtor built a mansion on the property. The court held that the debtor had self-settled the trust to the extent of the improvements he had made, and that the property was therefore subject to the creditor’s claim to the extent of the debtor’s improvements. The debtor argued that even if he “can be held to have contributed to the trust property, enhanced its value, and to that extent created a spendthrift trust for his own benefit, only his interest in such enhancement, i.e. his life estate in such enhancement, may be subjected and that the remainder interest of his children … may not be subjected for any debt of his.”22 The court rejected this argument, reasoning that the debtor’s children “could only be donees or volunteers and could take no benefits under such transfer as against his creditors. So we think the chancellor did not err against defendants in decreeing that the [creditor] had a right to subject the land for the amount by which its value had been enhanced by reason of the improvements.”23 The court held that the creditor was entitled to a lien on the trust property for the value of the debtor’s improvements, and that the creditor was “entitled to a sale of the land, if necessary, to enforce the lien.”24 32 Shurley argues that creditors cannot reach the corpus of the trust because of our decisions in In re Goff, 706 F.2d 574 (5th Cir.1983) (Goff I), and In re Goff, 812 F.2d 931 (5th Cir.1987) (Goff II ). In Goff I we held that the debtor’s Keogh plan, a pension trust under the ERISA statute,25 was not a spendthrift trust excluded from the bankruptcy estate under Bankruptcy Code § 541(c)(2) because it was self-funded. We stated that “[t]he general rule is well established that if a settlor creates a trust for his own benefit and inserts a ‘spendthrift’ clause, restraining alienation or assignment, it is void as far as creditors are concerned and they can reach the settlor’s interest in the trust.”26 33 In Goff II, a creditor claimed that its recorded judgment against the debtor gave it a statutory lien against the property held in the pension trust, and that it therefore had a secured bankruptcy claim. The bankruptcy trustee argued that the claim was unsecured. We held that the claim was unsecured, because under Texas law a judgment lien only attaches to real property in which the debtor has legal title, and the debtor only had equitable title to the real property in the trust. We stated that “[t]he trust remains valid; only the spendthrift clause is void, allowing creditors to reach the property held in trust by garnishment.”27 Goff II did not, as appellants argue, hold that creditors cannot reach the corpus of a self-funded trust with an invalid spendthrift clause. It held only that a judgment lien against the debtor did not create a secured claim against the assets of the trust. We have cited Goff II for the proposition that “[a] creditor can reach the trust assets” of a trust funded by the debtor-beneficiary.28 As with the Bryant Family Trust, the trust in question (1) contained a spendthrift clause, (2) provided the debtor with a life interest in the income, with the remainder going to other beneficiaries, and (3) provided that the trustee could invade the corpus of the trust for the debtor’s support, maintenance and welfare. 34 Shurley points out that when she made the original contribution of the Marfa ranch to the trust, it was subject to a note and lien. She argues that this lien should affect our analysis, but we disagree. There is no dispute that Shurley was the owner of the ranch when she conveyed it to the trust, even if it was encumbered with a lien. The note and lien may have affected the value of the property at the time the trust was funded, but they did not affect ownership of the property. When determining the property of the estate, the Bankruptcy Code looks to the debtor’s property “as of the commencement of the case.”29 It makes no more sense to look to the value of the ranch at the time of the creation of the trust than in does to look to the value of any other property of the debtor on the date of acquisition. If the debtor owns stock, bonds, real estate or other property, the original value or cost basis of those assets is irrelevant to the bankruptcy matter of defining the estate. Accordingly a lien on the ranch at the time of the trust’s creation does not alter our conclusion that the ranch is property of the bankruptcy estate. The ranch might have appreciated or depreciated in value for any number of reasons since 1965, including the balance on the note, but it is still property of the bankruptcy estate. 35 Shurley argues that there was no proof by appellees that she had any equity in the ranch at the time of creation of the trust, reasoning that she could not be a self-settlor if the property she contributed was worthless. Assuming that Shurley is legally correct–that a settlor’s contribution to a trust of real property in which she had no equity at the time of the trust’s creation does not fall within the self-settlor rule–the bankruptcy court found that she had equity in the property at the time of the creation of the trust in 1965.30 This fact finding is not clearly erroneous. Shurley purchased the ranch from her parents in 1950 for $131,366.64 and assumed a $50,000 balance on the note.31 The balance on the note was only $23,000 when the property was conveyed to the trust.32 Moreover, in the trust agreement itself, Shurley as a signatory represented that “the value of that portion of said real property to be contributed by [Shurley and her sister] each represents (1/6) of the total value of all of said real property to be contributed.” This declaration is an admission by Shurley that the property she contributed had some value, exceeding the balance on the note, since the trust assumed the note. B. Beneficiary Control 36 The bankruptcy court concluded that “[e]ither substantial control or self-settlement may operate to invalidate protective trust provisions.”33 It found that Shurley exercised too much control over the trust to qualify as the beneficiary of a spendthrift trust. We find none of the reasons given persuasive.34 37 First, the court found that “Mrs. Shurley, in conjunction with her father during his life, had the power to revoke, alter, or amend the Trust document, or distribute the Trust assets back to the settlors.”35 We disagree. The agreement provides that “M.D. Bryant (the father) with the concurrence of either Settlor Anne Bryant Ridge or Settlor Jane Bryant Shurley, shall have the right at any time during his lifetime to revoke, alter and amend said trust and distribute the assets of said trust to the Settlors in the same proportion as the original contributions by each of said Settlor, taking into account any adjustment under paragraph (b).” The power to revoke or amend the trust was vested in the father, not the daughters. Shurley had no authority to alter the trust. She only had the authority to prevent her father from doing so, and only if she and her sister vetoed the change. At most therefore she and her sister in combination had the power to ensure the perpetuation of the trust. Further, this power lapsed upon the death of the father in 1967. We find no authority that such a limited power rendered the trust subject of creditor claims against the beneficiaries. 38 Second, the bankruptcy court noted that the agreement provided that Shurley had the right to petition three “special trustees” for the partial or complete termination of the trust. The agreement provides for the appointment of certain named special trustees, including a state judge, after the death of the parents. It states that “[u]pon application made by either daughter … or both, showing that termination would best serve the intended purpose of the trust, such Special Trustees shall in their sole and absolute discretion have the power and authority by unanimous consent to terminate in whole or in part and from time to time the trust or trusts established hereunder.” Again, this provision does not vest in Shurley the power to terminate or alter the trust. It only authorizes her to request such a change from special trustees, who have “in their sole and absolute discretion” the authority to alter the trust. Even absent such a provision, Shurley, like all Texas trust beneficiaries, had a statutory right to seek judicial modification or termination of the trust if “compliance with the terms of the trust would defeat or substantially impair the accomplishment of the purposes of the trust.”36 No court has ever held that such a statutory right renders a spendthrift trust subject to creditor claims. 39 Third, the bankruptcy court noted Shurley’s special power of appointment. This provision merely gave the daughters the authority to allocate trust assets to their descendants. It grants no authority to the daughters to allocate assets to themselves. As explained above, the Bankruptcy Code expressly excludes such a power of appointment from the bankruptcy estate. Section 541(b)(1) of the Code provides that property of the estate does not include “any power that the debtor may exercise solely for the benefit of an entity other than the debtor.” 40 Aside from the terms of the trust agreement, the bankruptcy court found that Shurley had exercised de facto control over the trust. The court found: 41 Outside the Trust document, the Shurleys also manipulated Trust assets and governed the initial Trustee, Bryant Williams. The Shurleys were regularly able to obtain unrestricted corpus distributions and loans. While the Trust provides for such distributions, the liberality and circumstances under which they were requested and granted suggested a domination by M.D. Bryant, Mrs. Shurley and Mrs. Watkins of Mr. Williams. Only recently had any corpus distribution request been denied, and only recently had the successor Trustee, Mr. Armstrong, started to make only “loans,” to the exclusion of corpus distributions. Indeed, in the early days of the Trust, the initial Trustee, on behalf of the Trust, executed promissory notes as a comaker for the Shurleys. Part of the malleability of Bryant Williams may have arisen either from his fear of being replaced for failing to abide by the wishes of Mrs. Shurley and Mrs. Watkins, or from his close relationship with the family. While M.D. Bryant, the Shurleys and the Watkines may not have held all of the puppet strings to Mr. Williams, they held enough of them to exert the control necessary to defeat the Trust’s protective attributes.37 42 Shurley strongly denies that the evidence at trial supported these findings, arguing for example that there is no evidence that the first trustee ever made a single distribution of trust corpus or a single loan to Shurley or any other beneficiary. Appellees argue that in addition to the above-quoted findings, Shurley, among other things, “used the Trust income to induce extensions of credit to herself and her husband,” and “engaged in ‘trustee shopping’ to help further her control of the trust assets.”Even if these findings are taken as undisputed, they do not establish control by the daughters over the trust assets sufficient to make the trust subject to their creditors. The fact that the trustees liberally bestowed trust assets on the daughters, by itself, does not establish de facto control by the daughters over the affairs of the estate. The daughters were after all two of the principal beneficiaries of the trust, and distributions of the wealth of the the trust to the daughters is entirely consistent with its apparent purpose. The agreement provides that the trustee was not limited to distributing income generated from the corpus of the trust. As discussed above, it expressly authorized the trustee to make distributions from the trust corpus “[i]f the trustee determines that the net income of said trust is insufficient to maintain and support any of the beneficiaries of said trust or their children and lineal descendants in their accustomed manner of living….” It also expressly authorized the trustee to “loan money to … and otherwise deal with any and all persons” including “the beneficiaries of this trust.” 43 As one Texas decision has explained in denying a creditor’s claim against assets held by a spendthrift trust: 44 the purpose of such a trust is not defeated by the fact that the trustee is authorized in his discretion to apply a part of the corpus of the fund to the use of the beneficiary in accordance with the terms of the trust. Neither is the purpose of such trust defeated by the fact that the trustee is authorized or even required to turn the entire trust fund or property over to the beneficiary absolutely at some fixed time in the future.38 45 Appellees did not establish that loans or grants from the trust to the daughters, on their face consistent with the purpose and language of the trust, amounted to de facto control of the trust by the daughters. Further, the fact that the beneficiary of a spendthrift trust may have behaved as a spendthrift only shows the prescience of the settlors, and should not defeat the protective features of the trust. Appellees’ focus on the behavior of Shurley as beneficiary is misplaced, since as explained above, spendthrift trusts are not shielded from creditors “out of consideration for the beneficiary. Their justification is found in the right of the donor to control his bounty and secure its application according to his pleasure.”39 C. Whether the Trust Is an Annuity 46 By separate appeal Shurley argues that the bankruptcy court erred in denying her summary judgment motion urging that her interest in the trust is an “annuity” exempt from creditors under Texas law. 47 Under Texas law and Bankruptcy Code § 522, Texas debtors may elect either state or federal exemptions from creditors.40 Shurley’s claims that her interest in the trust is an annuity exempt from creditors under Tex. Ins. Code Ann. art. 21.22 (Vernon Supp.1997), which provides an exemption for “all money or benefits of any kind, including policy proceeds and cash values, to be paid or rendered to the insured or any beneficiary under any policy of insurance or annuity contract issued by a life, health or accident insurance company, including mutual and fraternal insurance, or under any plan or program of annuities and benefits in use by an employer or individual.” The emphasized language was added by a 1993 amendment to the statute, after Shurley filed for bankruptcy. 48 This argument fails for two reasons. First, her interest in the trust was not issued by an insurance company or employer, so the only conceivable claim of exemption is that her interest is part of a “plan or program of annuities and benefits in use by an … individual.” The reference to an individual was added to the statute after the bankruptcy filing. In determining exemptions we must apply the law in effect at the time the debtor entered bankruptcy.41 Although Texas exemption laws are liberally construed,42 the exemption Shurley claims simply did not exist at the commencement of her bankruptcy case. We cannot agree with Shurley that the 1993 amendment merely “clarified” legislative intent insofar as it added a reference to non-employer annuities that are not issued by insurance companies.43 The statute plainly did not apply to such annuities prior to the amendment. 49 Second, we do not believe that Shurley’s trust interest can be characterized as an annuity in any event. One Texas court has described an annuity as a “a form of investment which pays periodically during the life of the annuitant or during a term fixed by contract rather than on the occurrence of a future contingency.”44 We have cited this same definition with approval.45 While all annuities do not make payments in fixed, predetermined amounts,46 we do not believe that the term extends to a trust where future payments are highly contingent on the future circumstances of the beneficiaries. The trust agreement provides that the trustee “may” make distributions of trust corpus if he determines that such distributions are needed to “maintain and support any of the beneficiaries or their children or lineal descendants in their accustomed manner of living.” Any such good faith determination by the trustee is “final and binding on all interested parties.” Such distributions were in fact made. By design, such distributions are tied to contingencies unknown at the time of the creation of the trust, and are not consistent with the concept that an annuity makes payments without regard to “the occurrence of a future contingency.”47 In addition, under terms of the trust agreement discussed above, payments to Shurley were contingent on (1) the death of her parents, since her interest increased on the death of one parent and increased again on the death of the second parent, (2) whether the father, with the consent of either sister, chose to terminate the trust, and (3) whether the special trustees terminated the trust. 50 Further, Shurley’s argument simply proves too much, since if her interest in the trust is an annuity, then all beneficiaries of self-settled trusts could make the same argument, as long as the trust agreement called for periodic payments to the settlor for life or a fixed term. We cannot accept that the Texas legislature intended this result, which would reject the universally recognized rule, and one codified by Texas statute, that a settlor cannot create his own spendthrift trust and shield its assets from creditors. If the legislature had intended this result, it would have repealed Tex. Prop.Code Ann. § 112.035(d), which provides that “[i]f the settlor is also a beneficiary of the trust, a provision restraining the voluntary or involuntary transfer of his beneficial interest does not prevent his creditors from satisfying claims from his interest in the trust estate.” CONCLUSION 51 In summary, we conclude that the Marfa ranch and income generated therefrom is property of the estate.48 The judgment is reversed and the case is remanded for further proceedings consistent with this opinion. 52 REVERSED and REMANDED. 1 The briefs indicate that the “Marfa Ranch” also refers to a larger tract of land out of which came the acreage Shurley contributed to the trust. In this opinion the “Marfa ranch” means only that acreage owned by Shurley and conveyed to the trust in 1965, together with any mineral interests she may have owned and conveyed to the trust 2 In re Shurley, 171 B.R. 769, 789 (Bankr.W.D.Tex.1994) 3 For convenience, appellants Shurley and the trustee of the trust are sometimes collectively referred to as Shurley 4 In re Herby’s Foods, Inc., 2 F.3d 128, 130-31 (5th Cir.1993) 5 11 U.S.C. § 541 6 Patterson v. Shumate, 504 U.S. 753, 762, 112 S.Ct. 2242, 2248, 119 L.Ed.2d 519 (1992) (noting legislative history that § 541(c)(2) “continues over the exclusion from property of the estate of the debtor’s interest in a spendthrift trust to the extent the trust is protected from creditors under applicable State law.”); In re Moody, 837 F.2d 719, 722-23 (5th Cir.1988) (“A beneficiary’s interest in a spendthrift trust is excluded from his bankruptcy estate by 11 U.S.C. § 541(c)(2), if state law and the trust so provide.”) 7 Id. at 723 8 The agreement states: “The interest of the beneficiaries in the trust estate and the increase and proceeds thereof, both legal and equitable, so long as the same are held in trust, shall not be subject in any manner to any indebtedness, judgment, judicial process, creditors’ bills, attachment, garnishment, execution, receivership, charge, levy, seizure or encumbrance, of or against said beneficiaries; nor shall the interest of the beneficiaries in said trust be in any manner reduced or affected by any transfer, assignment, conveyance, sale, encumbrance, act, omission or mishap, voluntary or involuntary, anticipatory or otherwise of said beneficiaries….” 9 Id. at 723. See also Daniels v. Pecan Valley Ranch, Inc., 831 S.W.2d 372, 378 (Tex.App.–San Antonio 1992, writ denied) (“In Texas, a settlor cannot create a spendthrift trust for his own benefit and have the trust insulated from the rights of creditors.”); Tex. Prop.Code Ann. § 112.035(d) (“If the settlor is also a beneficiary of the trust, a provision restraining the voluntary or involuntary transfer of his beneficial interest does not prevent his creditors from satisfying claims from his interest in the trust estate.”) 10 Glass v. Carpenter, 330 S.W.2d 530, 533 (Tex.Civ.App.–San Antonio 1959, writ ref’d n.r.e.) 11 Moody, 837 F.2d at 723 12 Hines v. Sands, 312 S.W.2d 275, 279 (Tex.Civ.App.–Fort Worth 1958, no writ) 13 In re Johannes Trust, 191 Mich.App. 514, 479 N.W.2d 25, 29 (1991) (“[The self-settlor’s] creditors can reach the assets of the trust and compel payment in the maximum amount that would be in the trustee’s discretion with respect to that portion of the assets that came from [the self-settlor], but not with respect to any portion of the trust that came from other individuals, particularly petitioner.”) 14 We note that the Marfa ranch was still held by the trust when Shurley commenced her bankruptcy case. If the ranch had been sold, prior to the bankruptcy filing, this case would be more complicated. We would still hold that some portion of Shurley’s interest in the trust was self-settled and therefore property of the estate, but would have to engage in a further analysis of (1) how to value the self-settled portion of the trust, through tracing of assets or some other method of calculating Shurley’s proportionate contribution to the trust relative to the other settlors’ contributions, and (2) who should have the burden of proof on this issue 15 E.g., Fordyce v. Fordyce, 80 Misc.2d 909, 365 N.Y.S.2d 323, 328 (N.Y.Sup.Ct.1974) (“Even in the case of a self-settled trust, creditors can only reach the interest the settlor retained for himself.”) 16 11 U.S.C. § 541(a)(1) 17 540 S.W.2d 499 (Tex.Civ.App.–Waco 1976, writ ref’d n.r.e.) 18 Id. at 501 19 Id. at 501-02 20 Bank of Dallas, 540 S.W.2d at 501 21 28 Tenn.App. 388, 190 S.W.2d 785 (1944) 22 Id. 190 S.W.2d at 791 23 Id. at 792 24 Id. at 799 25 29 U.S.C. §§ 1001 et seq 26 Goff I, 706 F.2d at 587. The principal holding of the case–that a qualified ERISA pension plan is not excluded from the bankruptcy estate because the federal ERISA statute is not “applicable nonbankruptcy law” under Bankruptcy Code § 541(c)(2)–was expressly overruled in Patterson, 504 U.S. at 757 n. 1, 112 S.Ct. at 2246 n. 1 (citing Goff I ) 27 Goff II, 812 F.2d at 933 28 In re Latham, 823 F.2d 108, 111 (5th Cir.1987) 29 11 U.S.C. § 541(a)(1) 30 Shurley, 171 B.R. at 778-79 n. 5 31 Shurley paid only $200 down for the ranch, and executed 25 separate promissory notes to her parents, which were annually forgiven by the parents 32 The note was subsequently paid off by the trust 33 Shurley, 171 B.R. at 782 34 We assume without deciding that the court was legally correct in concluding that “substantial control” can render a spendthrift or other protective trust subject to creditor claims. We note however that we do not believe that appellees have cited any Texas authority for this proposition 35 Id. at 783 36 Tex. Prop.Code Ann. § 112.054 (Vernon 1995) 37 Shurley, 171 B.R. at 783 38 Adams v. Williams, 112 Tex. 469, 248 S.W. 673, 679 (1923) 39 Hines v. Sands 312 S.W.2d 275, 279 (Tex.Civ.App.–Fort Worth 1958, no writ) 40 In re Walden, 12 F.3d 445, 448 (5th Cir.1994) 41 Walden, 12 F.3d at 449 n. 7. In so holding, Walden was interpreting the same state statute at issue here, Insurance Code art. 21.22 42 Id. at 448 43 We assume without deciding that Shurley is correct that an annuity under the current statute can be issued by an entity other than an insurance company. But see art. 21.22(6) (“For purposes of regulation under this code, an annuity contract issued by a life, health, or accident insurance company, including a mutual company or fraternal company, or under any plan or program of annuities or benefits in use by an employer or individual, shall be considered a policy or contract on insurance.”). Texas, like all states, comprehensively regulates insurers and insurance policies 44 Steves & Sons, Inc. v. House of Doors, Inc., 749 S.W.2d 172, 175 (Tex.App.–San Antonio 1988, writ denied) (quoting In re Howerton, 21 B.R. 621 (Bankr.N.D.Tex.1982)) 45 In re Young, 806 F.2d 1303, 1306 (5th Cir.1987) (quoting Howerton ) 46 With a variable annuity, “payments to the purchaser vary with investment performance.” NationsBank of North Carolina, N.A. v. Variable Annuity Life Ins. Co., 513 U.S. 251, 254, 115 S.Ct. 810, 812, 130 L.Ed.2d 740 (1995) 47 Steves & Sons, 749 S.W.2d at 175 48 Income from the ranch belongs to the estate because the Bankruptcy Code defines property of the estate to include “[p]roceeds, product, offspring, rents, or profits of or from property of the estate.” 11 U.S.C. § 541(a)(6)
IN RE: Jane McLean BROWN
IN RE: Jane McLean BROWN, Debtor. Deborah Menotte, Plaintiff-Appellant, v. Jane McLean Brown, Defendant-Appellee.
— August 28, 2002 Before EDMONDSON, Chief Judge, and BLACK and COX, Circuit Judges.
Morris Gary Miller,Adorno & Zeder, P.A., West Palm Beach, FL, for Plaintiff-Appellant.David Lloyd Merrill, Cohen, Conway, Copeland, Copeland, Paiva & Merrill, P.A., Fort Pierce, FL, for Plaintiff-Appellee.
This case involves a Chapter 7 bankruptcy debtor seeking to exclude her interest in a trust from the bankruptcy estate. The trust, which was created by the debtor prior to insolvency, was established to provide income to the debtor for her lifetime with the remainder ultimately being given to several charities. Based on the presence of a spendthrift clause prohibiting assignment or alienation, the debtor contends her interest in the trust is exempt from her bankruptcy estate. Alternatively, the debtor contends her interest is exempt because the trust qualifies as a support trust. Having created the trust for her own benefit, however, the debtor cannot shield her interest in the trust from her creditors. This interest, consisting of a yearly income stream from the trust assets, is not exempt from the debtor’s bankruptcy estate. The corpus of the trust, however, is not likewise subject to the claims of the debtor’s creditors.
A. Establishment of the Trust
Appellee Jane McLean Brown (Appellee), the debtor in the bankruptcy case giving rise to this appeal, suffers from chronic alcoholism. In 1993, her mother died, leaving her an inheritance of approximately $250,000. In order to protect the inheritance from her own improvidence, Appellee decided to place the money into an irrevocable trust which would pay her a monthly income for life. On August 11, 1993, Appellee executed the trust agreement, entitled Irrevocable Charitable Remainder Unitrust Agreement (ICRUA).
Under the ICRUA, Appellee is entitled to receive an annual amount equal to 7% of the net worth of the trust, valued as of the first day of each taxable year. The payments are due in monthly installments. Appellee, who is unemployed, lives off of the monthly payments flowing from the ICRUA. Appellee is the only beneficiary currently entitled to receive income payments under the trust.
As a trust beneficiary, Appellee’s only rights are to receive the 7% income payments. Although Appellee also serves as trustee, her powers are generally limited to directing investment decisions. She does not have the discretion to invade the trust corpus or to alter the amount of payments made to the trust beneficiaries. Furthermore, Appellee is prohibited from assigning or otherwise alienating her interest in the trust by virtue of a “spendthrift” clause contained into the ICRUA:
To the extent permitted by law, no beneficiary shall have any power to dispose of or to charge by way of anticipation any interest given to her, and all sums payable to any beneficiary shall be free and clear of her debts, contracts, dispositions and anticipations, and shall not be taken or reached by any legal or equitable process in satisfaction thereof.
See Article IV of the ICRUA.
Upon Appellee’s death, the 7% yearly trust income payments will be made to her daughter for life.1 At the daughter’s death, the corpus of the trust will pass to four charities listed in the ICRUA. Although the ICRUA expressly reserves Appellee’s right to designate substitute or additional charitable beneficiaries by testamentary instruction, the right of redesignation is limited to substituting or adding other charities meeting certain Internal Revenue Code qualifications.2
B. Chapter 7 Bankruptcy
On February 4, 1999, Appellee filed a voluntary petition for Chapter 7 bankruptcy. Appellant Deborah Menotte (Appellant) was appointed as the Chapter 7 trustee. In her bankruptcy petition, Appellee listed secured and unsecured claims totaling $110,023.53. Although Appellee acknowledged her interest in the ICRUA, no value for the interest was included as part of her asset calculation.3 Rather, Appellee claimed her interest in the trust was exempt from the bankruptcy estate. Appellant objected, arguing self-funded trusts are not insulated from the claims of creditors.
On July 26, 2000, the bankruptcy court overruled Appellant’s objection to the claimed exemption. Based on the presence of the spendthrift clause, the bankruptcy court concluded Appellee’s interest in the trust could not be attached by her creditors. As an additional ground for exemption, the bankruptcy court indicated the trust also qualified as a support trust, which is a type of trust established to provide for a beneficiary’s needs. The bankruptcy court rejected Appellee’s alternative argument that her interest in the trust constituted an exempt annuity.
On November 8, 2001, Appellant filed an appeal to the United States District Court for the Southern District of Florida. On appeal, Appellant argued the bankruptcy court erred in finding the ICRUA was exempt from the bankruptcy estate as either a spendthrift trust or a support trust. The district court affirmed in part, finding the ICRUA was exempt from the bankruptcy estate based on its spendthrift provision. Although it did not need to reach the bankruptcy court’s other ground for exemption, the district court indicated the trust likely would not qualify as a support trust because the ICRUA provided for payment of a fixed sum to Appellee each year regardless of the amount needed for her support. Having not been raised on appeal, the issue of whether the trust qualified as an exempt annuity was not addressed by the district court.4 This appeal followed.
II. STANDARD OF REVIEW
In bankruptcy appeals, legal determinations of the bankruptcy court and the district court are subject to de novo review. Bush v. JLJ, Inc. (In re JLJ, Inc.), 988 F.2d 1112, 1116 (11th Cir.1993).
An estate in bankruptcy consists of all interests in property possessed by the debtor at the time of her bankruptcy filing. 11 U.S.C. § 541(a)(1) (1994). Where there is a restriction on transfer of the debtor’s interests under applicable non-bankruptcy law, however, such restriction remains effective even in bankruptcy. 11 U.S.C. § 541(c)(2). As a result, spendthrift and support trusts are excluded from a debtor’s bankruptcy estate to the extent they are protected from creditors under applicable state law.5 The state law applicable in this case is the law of the State of Florida. We will examine in turn whether the ICRUA qualifies as either a spendthrift trust or a support trust under Florida law.
A. The ICRUA as a Spendthrift Trust
In Florida, trusts containing valid spendthrift provisions are protected from the reach of creditors, so long as the beneficiaries cannot exercise dominion over the trust assets. See generally Waterbury v. Munn, 159 Fla. 754, 32 So.2d 603, 605 (Fla.1947) (en banc) (recognizing the validity of spendthrift trusts); Croom v. Ocala Plumbing & Elec. Co., 62 Fla. 460, 57 So. 243, 244-45 (Fla.1911) (holding creditors could reach trust property, despite presence of spendthrift clause, where the beneficiaries possessed absolute control over the property). Where a trust is self-funded by a beneficiary, however, there is an issue as to whether the trust’s spendthrift provision is valid as against creditors of the settlor-beneficiary. We conclude it is not, and the beneficiary’s interest is subject to alienation by her creditors.
1. Validity of the ICRUA’s Spendthrift Provision as Against Appellee’s Creditors
Spendthrift trusts are defined under Florida law as “those trusts that are created with a view of providing a fund for the maintenance of another, and at the same time securing it against his own improvidence or incapacity for self-protection.” Croom, 57 So. at 244 (emphasis added); see also Waterbury, 32 So.2d at 605 (“A spendthrift trust is one that is created with the view of providing a fund for the maintenance of another, and at the same time securing it against his own improvidence or incapacity for self protection.”).
As impliedly recognized by the definition of spendthrift trusts set forth in Croom, Florida law will not protect assets contained within a spendthrift trust to the extent the settlor creates the trust for her own benefit, rather than for the benefit of another.6 See In re Witlin, 640 F.2d 661, 663 (5th Cir. Unit B 1981) (holding, under Florida law on spendthrift trusts, debtor’s interest in his Keogh plan was not exempt from his bankruptcy estate where the debtor was both the beneficiary and the settlor of the plan); 7 In re Wheat, 149 B.R. 1003, 1004-05 (Bankr.S.D.Fla.1992) (holding, under Florida law on spendthrift trusts, debtor’s deferred compensation plan was not exempt from his bankruptcy estate where it was self-funded); In re Williams, 118 B.R. 812, 815 (Bankr.N.D.Fla.1990) (holding, under Florida law on spendthrift trusts, debtor’s interests in his employer’s thrift plan was not exempt from his bankruptcy estate where it was self-settled); John G. Grimsley, Florida Law of Trusts § 15-5(b) (4th ed. 1993) (“A settlor cannot create for himself a spendthrift trust to avoid creditors.”); 55A Fla. Jur.2d Trusts § 78 (2000) ( “The trustee and the sole beneficiary cannot be one in the same under spendthrift trust law. A settlor cannot create a spendthrift trust for his or her own benefit.”).
This limitation comports with the common law of trusts.8 See, e.g., Restatement (Second) of Trusts § 156(1) (1959) (“Where a person creates for his own benefit a trust with a provision restraining the voluntary or involuntary transfer of his interest, his transferee or creditors can reach his interest.”); George Gleason Bogert & George Taylor Bogert, Trusts & Trustees § 223 (rev.2d ed. 1992) (“If a settlor creates a trust for his own benefit and inserts a spendthrift clause, it is void as far as then existing or future creditors are concerned, and they can reach his interest under the trust.”); Erwin N. Griswold, Spendthrift Trusts § 474 (1936) (“A spendthrift trust created by a person for his own benefit is invalid against creditors.”); II Austin Wakeman Scott, The Law of Trusts § 114 (3d ed. 1967) (“It is to be noticed that the beneficial interest reserved to the settlor is for some purposes treated differently from a beneficial interest created in a third person. Thus, although a beneficial interest created in a third person may be inalienable by him and not subject to the claims of his creditors, a beneficial interest reserved to the settlor himself can be alienated by him or reached by his creditors even though it is otherwise provided by the terms of the trust.”). Self-settled trusts may be reached by creditors, even if the settlor was solvent at the time of the trust’s creation and no fraud was intended. See Scott, supra, at § 156 (“It is immaterial that in creating the trust the settlor did not intend to defraud his creditors. It is immaterial that he was solvent at the time of the creation of the trust. It is against public policy to permit a man to tie up his own property in such a way that he can still enjoy it but can prevent his creditors from reaching it.”).
In this case, Appellee is a beneficiary of a self-settled spendthrift trust. In 1993, Appellee inherited $250,000 from her mother. To protect the inheritance from her own squandering, Appellee established a charitable trust under which she retained the right to receive a 7% income for life. Appellee purportedly was not insolvent at the time the trust was established; nor is there evidence Appellee intended to defraud her creditors. Nevertheless, Appellee is both the settlor and a beneficiary of the trust. Consequently, the spendthrift clause contained in the trust is ineffective as against Appellee’s creditors.9
2. Interest Reachable by Appellee’s Creditors
When a settlor creates a trust for her own benefit and inserts a spendthrift clause, the entire spendthrift clause is void as to her creditors. See Bogert § 223 (“The entire spendthrift clause, both as to voluntary and involuntary alienation, is void. The creditors can reach the settlor-beneficiary’s interest.”). In the absence of a valid spendthrift provision, a beneficiary’s interest in a trust is a property right which is liable for the beneficiary’s debts to the same extent as her legal interests. See generally Grimsley § 8-3 (“Where the beneficiary’s equitable interest is vested in him without restraint on alienation, the interest is transferable by him and subject to claims of his creditors.”); Bogert § 193 (“If the trust is active the creditor of the beneficiary can subject the latter’s interest in the trust to the satisfaction of the debt, either in law or equity, unless a statute or a valid spendthrift provision prevents this result.”).
As with any other property right, a trust beneficiary’s right to receive income for life is an interest which may be alienated or subject to attachment by her creditors. See generally Blair v. Comm’r of Internal Revenue, 300 U.S. 5, 13-14, 57 S.Ct. 330, 333-34, 81 L.Ed. 465 (1937) (holding that in absence of a valid restraint on alienation, the interest of a trust beneficiary to income for life was present property which could be assigned to others); Bradshaw v. Am. Advent Christian Home & Orphanage, 145 Fla. 270, 199 So. 329, 332-33 (Fla.1940) (holding that in absence of a restraint on alienation, income stream granted to orphanage as trust beneficiary was subject to the claims of the orphanages’ creditors).
Where the only interest a settlor has retained for herself under a trust is the right to income for life, it is solely this interest which her creditors can reach.10 See II Scott § 156 (“Where the only interest which the settlor has created for himself under the trust is a right to the income for life or for some other period, it is this interest alone which his creditors can reach, unless the creation of the trust was a disposition in fraud of his creditors.”); see also In re Goff, 812 F.2d 931, 933 (5th Cir.1987) (indicating creditors of settlors-beneficiaries were limited to attaching whatever interest the settlors retained under the trust and, therefore, could not obtain a lien on real property conveyed into the trust because settlors’ interest was equitable rather than legal); Bogert § 223 (“If the settlor creates a trust for the settlor for life, with a restraint on voluntary or involuntary alienation of his interest, and with a remainder interest in others at his death, his creditors can reach his life interest but not the remainder, unless he has also reserved a general power of appointment.”); Griswold § 475 (indicating creditors could reach a settlor’s life interest, but not the remainder if vested in another).11 As illustrated in the Restatement (Second) of Trusts:
A transfers property to B in trust to pay the income to A for life and to pay the principal on A’s death to C. By the terms of the trust it is provided that A’s interest under the trust cannot be transferred or reached by his creditors. A can transfer his interest; his creditors can reach his interest.
Restatement (Second) of Trusts § 156 cmt. a, illus. 1.
This result makes sense. Although the spendthrift provision of a trust is void as against a settlor-beneficiary’s creditors, the trust itself remains valid. See, e.g., In re Goff, 812 F.2d at 933 (holding spendthrift provision was void as against creditors based on self-settlement, but trust itself was valid); Liberty Nat. Bank v. Hicks, 173 F.2d 631, 634-35 (D.C.Cir.1948) (holding settlor-beneficiary was bound by terms of trust, even though its spendthrift provision was ineffective as against his creditors); see also 76 Am.Jur.2d Trusts § 128 (1992) (“[W]here there is a provision in the terms of the trust imposing restraint on the transfer by a beneficiary of his interest and the provision is illegal, the provision fails, but the whole trust does not fail, since provisions like this can ordinarily be separated from other provisions without defeating the purpose of the settlor in creating the trust.”). Thus, although a settlor-beneficiary’s creditors are not bound by a trust’s spendthrift clause, the assets subject to attachment are circumscribed by the trust agreement.
By establishing an irrevocable trust in favor of another, a settlor, in effect, gives her assets to the third party as a gift. Once conveyed, the assets no longer belong to the settlor and are no more subject to the claims of her creditors than if the settlor had directly transferred title to the third party. Where the settlor retains a right to income payments, however, there is a limited interest created in favor of the settlor. It is this limited interest, and not the entire trust assets, which may be attached by the settlor’s creditors:
Life interest in settlor with remainder over to a named or designated person. The settlor may reserve to himself only the income from the property transferred during his life and may by the transfer give a vested remainder after his death to some named person or persons. This situation arises in the following typical case: A conveys property to T on trust to pay the income to A during A’s life, with restraints against anticipation, assignment, and the rights of creditors, and with a further provision that on the death of A the property shall be conveyed to B. Such a conveyance creates in B a present vested remainder, and if the transfer is not a fraudulent conveyance, the interest of B can not, of course, be reached for A’s debts. The remainder may be to a class, as to the children of the settlor. It may likewise be contingent until the death of the settlor. In any of these cases, if the settlor has reserved no power over the remainder, and the transfer is not fraudulent, the conveyance of the remainder constitutes a present gift and is just as much beyond the reach of creditors as any other completed gift.
Griswold § 475.
In this case, Appellee transferred assets of $250,000 into a charitable trust. The transfer was irrevocable, and the charities listed in the trust became vested in the corpus of the trust, subject only to divestment through redesignation of other charitable remaindermen. Appellee retained no rights to the trust principle. In establishing the ICRUA, however, Appellee granted herself an interest in the trust in the form of a right to receive 7% income from the trust for life. As a result, Appellee’s income stream is subject to the reach of her creditors.12 The corpus of the trust, having irrevocably been conveyed to the trust for the benefit of others, is not likewise subject to the claims of her creditors.
B. The ICRUA as a Support Trust
In addition to claiming the ICRUA’s spendthrift provision is effective against her creditors, Appellee asserts the trust is exempt from her bankruptcy estate as a support trust. “A support trust is one where the trustee is directed to pay to the beneficiary only so much income or principal, or both, as is necessary for the beneficiary’s support and education.” In re McLoughlin, 507 F.2d 177, 185 (5th Cir.1975). Support trusts, by their nature, are non-transferrable. Id.; see also Bogert § 229 (“If a trustee is directed to pay or apply trust income or principal for the benefit of a named person, but only to the extent necessary to support him, and only when the disbursements will accomplish support, the nature of the interest of the beneficiary makes it not transferable and not subject to the claims of creditors.”).
As an initial matter, the structure of the ICRUA is not in the form of a support trust. Nowhere in the ICRUA is there a mention of payments by the trustee for the support of Appellee. Although the monthly income payments are used by Appellee for her own support, the ICRUA does not limit disbursements to that effect. Rather, the trustee is merely obligated to pay 7% of the value of the trust to Appellee each year. The trustee may not pay Appellee more than the 7% income if her needs exceed that amount; likewise, the trustee may not limit payments to less than the 7% income. Appellee is entitled to the income payments regardless of need and may dispose of the funds as she chooses. The ICRUA, therefore, does not constitute a support trust.
Even if the ICRUA qualified as a support trust, Appellee’s interest in the trust would not be shielded from her creditors. As with the ICRUA’s spendthrift provision, a support trust created by a settlor for her own benefit is ineffective as against her creditors. See Restatement (Second) of Trusts § 156(2) (“Where a person creates for his own benefit a trust for support or a discretionary trust, his transferee or creditors can reach the maximum amount which the trustee under the terms of the trust could pay to him or apply for his benefit.”); II Scott § 156.1 (“The policy which prevents a person from creating a spendthrift trust for his own benefit also prevents his creating a trust under which his creditors are precluded from reaching the income or principal which is to be applied for his support.”).
When establishing the ICRUA, Appellee made an irrevocable charitable gift of the trust corpus. By including the right to receive income payments for life, Appellee retained a portion of the assets for herself. Whatever interest Appellee retained is her own property, subject to the claims of her creditors. Accordingly, Appellee’s right to an income stream is not exempt from her bankruptcy estate and may be reached by her creditors. The corpus of the trust, however, may not be reached by Appellee’s creditors.
AFFIRMED IN PART and REVERSED IN PART.
1. The income payments to Appellee’s daughter will be due under the ICRUA as long as the daughter survives Appellee, unless Appellee revokes and terminates the interest of the daughter through testamentary instruction. If the daughter’s interest is revoked and terminated, the ICRUA will treat the daughter as having predeceased Appellee.
4. On appeal to this Court, Appellee argues the ICRUA is exempt from her bankruptcy estate as an annuity. This issue, however, was not raised before the district court; nor was it raised by Appellant as an issue on appeal to this Court. Whether the ICRUA qualifies as an exempt annuity, therefore, is not properly before the Court. See generally Depree v. Thomas, 946 F.2d 784, 793 (11th Cir.1991) (“We have long held that an issue not raised in the district court and raised for the first time in an appeal will not be considered by this court.”).
5. See Lichstrahl v. Bankers Trust (In re Lichstrahl), 750 F.2d 1488, 1490 (11th Cir.1985) (stating the term “applicable nonbankruptcy law” in 11 U.S.C. § 541(c)(2) refers to state spendthrift trust law), abrogated on other grounds by Patterson v. Shumate, 504 U.S. 753, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992); see also Rep. of the Comm’n on the Bankr.Laws of the U.S., H.R. Doc. No. 93-137, at 193 (1973) (discussing recommendations to change the bankruptcy laws to include spendthrift trusts within a debtor’s bankruptcy estate).
6. This principle is not unique to Florida law. See, e.g., John Hancock Mut. Life Ins. Co. v. Watson (In re Kincaid), 917 F.2d 1162, 1166-67 (9th Cir.1990) (stating Oregon and Massachusetts laws hold a “settlor cannot create a spendthrift trust for his own benefit”); Herrin v. Jordan (In re Jordan), 914 F.2d 197, 199-200 (9th Cir.1990) (applying Washington law and holding trust funded by beneficiary’s personal injury settlement was not excludable from his bankruptcy estate as a valid spendthrift trust); Dzikowski v. Edmonds (In re Cameron), 223 B.R. 20, 24 (Bankr.S.D.Fla.1998) (“It is axiomatic that under New York Law, self-settled trusts are void against both present and future creditors and a debtor may not avoid his creditors, or future creditors, by placing his property in trust for his own benefit.”); In re Spenlinhauer, 182 B.R. 361, 364-65 (Bankr.D.Me.1995) (applying Maine law and holding settlor-beneficiary’s interest in trust was not protected from creditors), aff’d, 101 F.3d 106 (1st Cir.1996); Jensen v. Hall (In re Hall), 22 B.R. 942, 944 (Bankr.M.D.Fla.1982) (applying Ohio law and holding creditors could reach settlor-beneficiary’s interest in spendthrift trust); Speed v. Speed, 263 Ga. 166, 430 S.E.2d 348, 349 (Ga.1993) (applying Georgia law, and holding spendthrift provision in trust created by quadriplegic husband from his insurance benefits was not enforceable where the husband was both settlor and beneficiary); Bank of Dallas v. Republic Nat’l Bank of Dallas, 540 S.W.2d 499, 501-02 (Tex.App.1976) (applying Texas law, and holding settlor who created spendthrift trust and made herself a beneficiary thereof could not protect her interest in the trust from her creditors).
7. In Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir.1981) (en banc), this Court adopted as binding precedent all decisions of the former Fifth Circuit handed down prior to close of business on September 30, 1981.
8. Sources setting forth the common law of trusts frequently are cited by Florida courts for guidance regarding construction of spendthrift and other trusts. See, e.g., Bacardi v. White, 463 So.2d 218, 222 (Fla.1985) (citing Restatement (Second) of Trusts regarding spendthrift trusts); Waterbury, 32 So.2d at 605 (citing Bogert’s Trusts & Trustees and Griswold’s Spendthrift Trusts regarding spendthrift trusts); Gilbert v. Gilbert, 447 So.2d 299, 301 (Fla.App.1984) (citing Scott’s The Law of Trusts regarding spendthrift trusts).
9. The fact that Appellee cannot exercise dominion over the trust assets is irrelevant to this analysis. The issue of self-settlement is separate from the issue of control, and either can serve as an independent ground for invalidating a spendthrift provision. See, e.g., In re Spenlinhauer, 182 B.R. at 363 (declining to address beneficiaries’ control over trust where the trust was self-settled and, therefore, the spendthrift provision was ineffective on that basis alone); In re Wheat, 149 B.R. at 1004 (“However, the Debtor’s degree of control is irrelevant in this case since one cannot create a spendthrift trust for oneself in Florida.”); Walro v. Striegel (In re Walro), 131 B.R. 697, 701 (Bankr.S.D.Ind.1991) (holding self-settlement prevented agreement from qualifying as a spendthrift trust, although beneficiary did not have any control over assets).Although some cases appear to intertwine the issues of self-settlement and control, those cases are distinguishable because their facts supported invalidity of the spendthrift trusts at issue under both grounds. See, e.g., Fehlhaber v. Fehlhaber, 850 F.2d 1453, 1455 (11th Cir.1988) (citing In re Witlin and other cases for the proposition that a settlor who creates a trust for his own benefit cannot protect his interest under the trust from his creditors, but also stating a settlor who exercises dominion over the trust cannot protect the trust from creditors); Lawrence v. Chapter 7 Trustee (In re Lawrence), 251 B.R. 630, 641-42 (Bankr.S.D.Fla.2000) (invalidating spendthrift provision where trust was self-settled and the beneficiary exercised control over the trust), aff’d, 279 F.3d 1294 (11th Cir.2002); In re Cattafi, 237 B.R. 853, 855-56 (Bankr.M.D.Fla.1999) (same). In those cases, there was no need to address the issues as separate grounds for invalidation.
10. Some limited exceptions to this general rule exist which do not apply in this case. For example, creditors of a settlor-beneficiary who has reserved only a right to income may reach both the income and the corpus of a trust if the trustee has discretion to invade the corpus for the benefit of the settlor. See, e.g., Miller v. Ohio Dept. of Human Servs., 105 Ohio App.3d 539, 664 N.E.2d 619, 621 (Ohio App.1995) (holding entire amount of trust was available to Medicaid even though settlor was given only income for life, where the trustee in his discretion could expend the principal on her behalf). Likewise, creditors may reach the corpus of a trust where the beneficiary is given not only an income stream for life, but also the ability to designate remaindermen. See, e.g., Bank of Dallas, 540 S.W.2d at 502 (holding income as well as corpus of an irrevocable spendthrift trust created by the settlor for her and her children’s benefit was subject to garnishment by creditors where the settlor received all the income from the corpus and held a general power of appointment exercisable at death); Restatement (Second) of Trusts § 156 cmt. c (“If the settlor reserves for his own benefit not only a life interest but also a general power to appoint the remainder by deed or will or by deed alone or by will alone, his creditors can reach the principal of the trust as well as the income.”). In this case, the trustee of the ICRUA does not have discretion to invade the corpus of the trust for Appellee’s benefit. Additionally, Appellee does not have a general power of appointment regarding remaindermen; rather, her right to redesignation is strictly limited to substituting other Internal Revenue Code qualified charities.
11. See also Greenwich Trust Co. v. Tyson, 129 Conn. 211, 27 A.2d 166, 173-74 (Conn.1942) (“While we have found few cases dealing with a situation where the settlor of the trust, after reserving to himself the income for life, creates vested indefeasible interests, to take effect at his death, we have found none which subjects such interests to the demands of the settlor’s creditors, and on principle there is no question that the creditors cannot reach those interests. Over them the settlor has no dominion, and his creditors have no more right to reach them than they would any interests in property formerly owned by him which has passed into the ownership of another.”); Henderson v. Sunseri, 234 Ala. 289, 174 So. 767, 770 (Ala.1937) (holding settlor’s creditors could only reach the income stream reserved to the settlor, and not the remainder which was vested in the settlor’s children); Dillon v. Spilo, 275 N.Y. 275, 9 N.E.2d 864, 866 (N.Y.App.1937) (holding settlor’s reserved life estate was subject to reach by her creditors, but not the remainder of the trust); Egbert v. De Solms, 218 Pa. 207, 67 A. 212, 212-13 (Pa.1907) (holding settlors’ creditors could reach income from trust which was reserved for settlors’ benefit, but could not reach the remainder of the trust which was vested in the settlors’ children).
12. Likewise, her interest vests in her bankruptcy trustee. See II Scott § 147.1 (“Where a beneficiary of a trust becomes bankrupt, his interest under the trust vests in the trustee in bankruptcy, unless either by the terms of the trust or by statute there is a restraint on the alienation of his interest. If his interest is assignable by him or if his creditors can reach it, it vests in the trustee in bankruptcy.”).
BLACK, Circuit Judge:
|Battley v. Mortensen, Adv. D.Alaska, No. A09-90036-DMD, May 26, 2011.UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF ALASKAIn re: Case No. A09-00565-DMD THOMAS WILLIAM MORTENSEN,Debtor.Chapter 7|
KENNETH BATTLEY, Plaintiff,
ERIC J. MORTENSEN, ROBIN MARIE MULLINS, MARY MARGARET MORTENSEN-BELOUD, in their capacities as trustees of the Mortensen Seldovia Trust, and THOMAS W. MORTENSEN, in his individual capacity,
Adv. No. A09-90036-DMD
HON. DONALD MacDONALD IV, United States Bankruptcy Judge
Kenneth Battley, chapter 7 trustee, has brought this adversary proceeding to set aside a transfer of real property as a fraudulent conveyance. It is a core proceeding under 28 U.S.C. sec. 157(b)(2)(H). Jurisdiction arises under 28 U.S.C. sec. 1334(b) and the district court’s order of reference. Trial was held on March 21 – 23, 2012. I find for the plaintiff.
Thomas Mortensen, the debtor and one of the defendants herein, is a self- employed project manager. He has a master’s degree in geology but has not worked in that field for 20 years. He manages the environmental aspects of construction projects. Mortensen has contracted with major oil companies for work in the past.
In 1994, Mortensen and his former wife purchased 1.25 acres of remote, unimproved real property located near Seldovia, Alaska.FN1 They paid $50,000.00 cash for the purchase. The parties divorced in 1998. Mortensen received his former wife’s interest in the property. Subsequently, improvements were made to the property. A small shed was placed on the parcel in 2000 and some other small structures were built on it from 2001 through 2004. There is power to the property along with a well and septic system. The debtor transferred the property to a self-settled trust on February 1, 2005. The transfer of this property is the focal point of the current dispute.
FN1 Mortensen testified that he accesses the property by taking a boat from Homer to Seldovia, then driving about 7 miles down an old logging road out of Seldovia and, finally, switching to a narrower footpath or ATV trail to reach the parcel.
Mortensen’s divorce was a contested proceeding. In 1998, when the court divided the parties’ assets and liabilities, Mortensen argued that the Seldovia property had been purchased with an inheritance and was to remain his sole and separate property. The court rejected his argument. It found that Mortensen wasn’t credible on the issue,FN2 and that the property was joint marital property.FN3 Nonetheless, Mortensen received the Seldovia property. He also received $61,581.00 from his wife’s SBS account, another $24,000.00 in cash from the refinance of the couple’s home and other miscellaneous personal property. In total, Mortensen received assets of $164,402.00 in the divorce.FN4
FN2 Pl.’s Ex. 13 at 8, para. 36.
FN3 Id. at 12, para. 66.
FN4 Id. at 13, para. 17.
Mortensen was not liable for any debt arising out of the marital estate. His ex- wife received the family home. She assumed an encumbrance against the home and was obligated to remove Mortensen’s name from a $78,000 obligation encumbering the home.FN5
FN5 Id. at 14, para. 84.A.
There was no credit card debt described in the courts findings and conclusions and no credit card debt was to be assumed by either party to the divorce.FN6
FN6 Pl.’s Ex. 13.
In June of 2004, Mortensen filed a motion to impose child support against his ex-wife.FN7 Despite a joint custody arrangement, he asked for an increase in child support due to a decrease in his income. After the superior court granted his uncontested request, Mortensen’s former spouse filed a Rule 60(b) motion. He filed an opposition to the motion on July 30, 2004. In his opposition, Mortensen stated:
FN7 Exhibit 12.
The property settlement and other expenses of the divorce drove me deeply into debt. After the divorce my debt continued to increase due to the ongoing legal expenses and the time required from profitable work in order to respond to two more years of repeated motions from the defendant. The defendant continued with motion practice for two years after the divorce ended. The defendant did not cease the motion practice until Judge Shortell told her in 2000 that he would consider awarding me attorney’s fees if she persisted in filing frivolous motions. Saddled with debt and with increasing competition in my shrinking business market I have not recovered from the financial carnage of the divorce.FN8
FN8 Pl.’s Ex. 9 at 15.
Mortensen’s income fluctuated substantially from year to year after the divorce. His 1999 income tax return was not placed into evidence. At a hearing held in state court on December 22, 2004, Mortensen revealed his annual income from 2000 through 2004. His net income in 2000 was $32,822.00.FN9 He also cashed out an annuity for $102,023.18 that year. In 2001, Mortensen had net income of $16,985.00.FN10 In 2002, his annual income dipped to $3,236.00.FN11 2003 yielded income of $13,185.00.FN12 Mortensen’s 2004 income was about the same” as 2003.FN13 Prior to the divorce, Mortensen had averaged $50,000.00 to $60,000.00 a year in net income.FN14
FN9 Pl.’s Ex. 4 at 24:22.
FN10 Id. at 24:20.
FN11 Id. at 24:16.
FN12 Id. at 21:25 – 22:6.
FN13 Pl.’s Ex. 4 at 24:25.
FN14 The superior court found that Mortensen earned $54,000.00 in 1994, $57,000.00 in 1995, $46,500.00 in 1996, and $62,690.00 in 1997. His estimated income for 1998 was between $53,360.00 and $69,000.00. Exhibit 13, page 5, paragraph 13.
Mortensen didn’t reveal his interest in establishing an asset protection trust at the hearing in December of 2004. Mortensen had heard about Alaska’s asset protection trust scheme in casual conversation. He researched the topic and, using a template he had found, drafted a document called the “Mortensen Seldovia Trust (An Alaska Asset Preservation Trust).” Mortensen then had the trust document reviewed by an attorney. He said only minor changes were suggested by the attorney.
The express purpose of the trust was “to maximize the protection of the trust estate or estates from creditors’ claims of the Grantor or any beneficiary and to minimize all wealth transfer taxes.”FN15 The trust beneficiaries were Mortensen and his descendants. Mortensen had three children at the time the trust was created.
FN15 Def.’s Ex. A at Mortenson 0006.
Mortensen designated two individuals, his brother and a personal friend, to serve as trustees. His mother was named as a “trust protector,” and had the power to remove and appoint successor trustees and designate a successor trust protector. She could not designate herself as a trustee, however. The trustees and Mortensen’s mother are named defendants in this adversary proceeding.
The trust was registered on February 1, 2005.FN16
FN16 Def.’s Ex. B.
As required by AS 34.40.110(j), Mortensen also submitted an affidavit which stated that: 1) he was the owner of the property being placed into the trust, 2) he was financially solvent, 3) he had no intent to defraud creditors by creating the trust, 4) no court actions or administrative proceedings were pending or threatened against him, 5) he was not required to pay child support and was not in default on any child support obligation, 6) he was not contemplating filing for bankruptcy relief, and 7) the trust property was not derived from unlawful activities.FN17
FN17 Def.’s Ex. C.
On February 1, 2005, Mortensen quitclaimed the Seldovia property to the trust, as contemplated in the trust document.FN18 Per the trust, this realty was “considered by the Grantor and the Grantor’s children to be a special family place that should not be sold and should remain in the family.”FN19 To facilitate this purpose, the trustees of the trust were requested, but not directed, to maintain and improve the Seldovia property “in the trust for the benefit, use and enjoyment of the Grantor’s descendants and beneficiaries.”FN20
FN18 Def.’s Ex. D. The quitclaim deed was recorded in the Seldovia Recording District on February 3, 2005. Id.
FN19 Def.’s Ex. A at Mortensen 0009.
The Seldovia property was worth roughly $60,000.00 when it was transferred to the trust in 2005. Mortensen’s mother sent him checks totaling $100,000.00 after the transfer. Mortensen claims this was part of the deal in his creation of the trust; his mother was paying him to transfer the property to the trust because she wanted to preserve it for her grandchildren. This desire is corroborated by notes his mother included with the two $50,000.00 checks she sent to him. The first check, No. 1013, was dated February 22, 2005, and referenced the Seldovia Trust, which had been registered just three weeks earlier.FN21 A short, handwritten note from Mortensen’s mother, bearing the same date stated:
FN21 Def.’s Ex. E at Mortensen 0079.
Enclosed is my check #1013 in the amount of fifty thousand dollars, as we have discussed, to pay you for the Seldovia property that you have put into the trust for my three special “Grands”!
In the next few weeks there will be a second check mailed to you in the amount of fifty thousand dollars, making a total of $100,000.00.
What a lot of fun memories have been made there!FN22
FN22 Id. at Mortensen 0080.
Mortensen’s mother wrote him a second check on April 8, 2005.FN23 This check also referenced the Seldovia Trust. It was accompanied by a typewritten note which said, “Here we go with the second and final check for the Seldovia property in the amount of fifty thousand dollars, totaling in all $100,000.00, as we have been talking about.”FN24
FN23 Id. at Mortensen 0087.
FN24 Id. Mortensen 0088.
Mortensen says he used the money his mother sent him to pay some existing debts and also put about $80,000.00 of the funds into the trust’s brokerage account as “seed money” to get the trust going and to pay trust-related expenses, such as income and property taxes. There was no promissory note for the money he lent to the trust. Mortensen said these funds were invested, some profits were made, and he was repaid “pretty much” all of the loan within about a year’s time.
Mortensen says the Seldovia property is recreational property. It was used primarily by him and his three children, but other family members also used it. Before the trust was created, Mortensen had lived on the property the majority of the time, and he says he could have exempted it from creditors’ claims as an Alaska homestead if he had retained it rather than placing it in the trust. In support of this contention, he has provided copies of his 2004 Alaska voter registration application,FN25 his 2003 fishing certificate,FN26 his 2004 Alaska PFD application (filed in 2005),FN27 a January, 2005, jury summons,FN28 and his Alaska driver’s license,FN29 which all indicate that he resided in Seldovia when the trust was created.
FN25 Def.’s Ex. I.
FN26 Def.’s Ex. J.
FN27 Def.’s Ex. K.
FN28 Def.’s Ex. L.
FN29 Def.’s Ex. M.
Mortensen’s financial condition has deteriorated since the establishment of the trust. His income has been sporadic.FN30 He used the cash he received from his mother and his credit cards to make speculative investments in the stock market and to pay living expenses. His credit card debt ballooned after the trust was created. In 2005, total credit card debt ranged from $50,000.00 to $85,000.00.FN31 When he filed his petition in August of 2009, Mortensen had over $250,000.00 in credit card debt. The $100,000.00 he received from his mother has been lost.
FN30 Mortensen had total income of $63,197.00 in 2005; $24,430,00 in 2006; $50,040.00 in 2007; $24,887 in 2008; and $6,142.00 in 2009.
FN31 Mortensen’s statements and other evidence regarding the amount of his credit card debt at the time of the creation of the trust have been inconsistent.
Mortensen claims that he was always able to make at least the minimum monthly payment on his credit card debts until he became ill in April of 2009. He needed immediate surgery and was hospitalized for almost two weeks. His illness required a long period of convalescence. Mortensen says he tried to return to work but was on pain medication which made him “fuzzy.” He lost several work contracts while he was recovering. He first considered filing bankruptcy in early August, 2009.
Mortensen filed his chapter 7 petition on August 18, 2009. He owned no real property at the time of filing, but his Schedule B itemized personal property with a value of $26,421.00. He scheduled no secured or priority claims. General unsecured claims totaled $259,450.01, consisting of $8,140.84 in medical debt and $251,309.16 in credit card debt on 12 separate credit cards. His interest in the Seldovia Trust was not scheduled, but Mortensen disclosed the creation of the trust on his statement of financial affairs. His monthly income was listed as $4,221.00, consisting of $321.00 in child support and the balance as income from the operation of his business as a geologist and permits consultant. Mortensen indicates that he expected his income to decrease due to his ongoing health issues and the increasingly unfavorable market conditions for his profession. His itemized monthly expenses totaled $5,792.00, which exceeded his income by more than $1,500.00. Expenses included $1,350.00 for rent, $600.00 for “income and FICA tax obligations, not withheld,” and $1,650.00 for expenses from the operation of his business.
The trustee alleges that Mortensen failed to establish a valid asset protection trust under Alaska’s governing statutes because Mortensen was insolvent when the trust was created on February 1, 2005. Under A.S. 34.40.110(j)(2), the settlor of an Alaskan asset protection trust must file an affidavit stating that “the transfer of the assets to the trust will not render the settlor insolvent.”FN32 “Insolvent” is not defined in Alaska’s asset protection trust statute or in any cases arising thereafter. The trustee applies the Bankruptcy Code’s definition of insolvency found in 11 U.S.C. sec. 101(32), which provides that the term “insolvent” means:
(A) with reference to an entity other than a partnership and a municipality, financial condition such that the sum of such entity’s debts is greater than all of such entity’s property, at a fair evaluation, exclusive of –
(i) property transferred, concealed, or removed with intent to hinder, delay, or defraud such entity’s creditors; and
(ii) property that may be exempted from property of the estate under section 522 of this title;FN33
FN32 AS 34.40.110(j)(2).
FN33 11 U.S.C. sec. 101(32)(A).
While there is no indication that Alaska would adopt a similar definition in the trust statute, other states have adopted a similar approach.FN34 I conclude that insolvency is established for purposes of Alaska’s asset protection trust law if the debtor’s liabilities exceed its assets, excluding the value of fraudulent conveyances and exemptions. Here, the applicable exemptions will be determined under state rather than federal law, because this court is applying Alaska law to determine if the trust was correctly established. The federal exemption statutes have no role in making that determination.
FN34 See 37 AM.JUR. 2D Fraudulent Conveyances and Transfers secs. 20, 21 (1964).
The trustee contends that the $100,000.00 received from Mortensen’s mother was a gift and cannot be considered as an asset in making a determination of solvency. I respectfully disagree. Mortensen and his mother had an oral agreement for the creation of a trust for the benefit of Ms. Mortensen-Belound’s grandchildren. Mortensen was to place the Seldovia property in trust and in return, his mother promised to pay him $100,000.00. Mortensen performed his end of the bargain. Based on his mother’s promise, he transferred the Seldovia property to an irrevocable trust on February 1, 2005.FN35 His partial performance took the agreement outside the statute of frauds.FN36 As noted in sec. 90(1) of the Restatement (Second) of Contracts:
(1) A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires.FN37
FN35 Article 13 of the trust states that it is an irrevocable trust. See Def.’s Ex. A at Mortensen 0043.
FN36 Martin v. Mears, 602 P.2d 421, 428-429 (Alaska 1979).
FN37 Restatement (Second) of Contracts sec. 90 (1981).
Ms. Mortensen-Belound’s promise of payment should reasonably have been expected to induce action on the part of Mortensen and it did induce such action. The promise was binding on Ms. Mortensen-Belound and the proper remedy for a breach would have been payment of $100,000.00. Justice could have been avoided only by enforcement of the promise because Mortensen’s creation of the trust was irrevocable. Justice would not require limitation of a remedy for breach because the damages are clearly liquidated. It is proper to include the $100,000.00 in Mortensen’s balance sheet to determine solvency as a contract right existing as of February 1, 2005.
Mortensen prepared a balance sheet on March 8, 2010, which reconstructs his financial status as of February 1, 2005.FN38 This balance sheet shows that Mortensen had $153,020.00 in assets as of February 1, 2005. Some of those assets may have been exempt. He had a brokerage account designated as “ML SEP” for $3,606.00. This may be a form of pension plan that is exempt under AS 09.38.017. His other liquid assets may be exempt in the sum of $1,750.00 under A.S. 09.38.020 as it existed in 2005. The only other exemption for Mortensen would have been for an automobile in the amount of $3,750.00. After deductions for exemptions, Mortensen had assets totaling $143,914.00.
FN38 Pl.’s Ex. 21; Def.’s Ex. G.
Mr. Mortensen’s balance sheet lists liabilities totaling $49,711.00 as of February 1, 2005.FN39 This sum may be low. At his sec. 341 creditors’ meeting held on September 24, 2009, Mortensen testified that he owed roughly $85,000.00 on credit cards at the time the trust was created.FN40 Using either figure, however, Mortensen was solvent at the time he created the trust. The trust was created in accordance with Alaska law.
FN40 Pl.’s Ex. 2 at 6.
Battley seeks judgment against Mortensen under 11 U.S.C. sec. 548(e), which contains a ten-year limitation period for setting aside a fraudulent transfer. Section 548(e) provides:
(e)(1) In addition to any transfer that the trustee may otherwise avoid, the trustee may avoid any transfer of an interest of the debtor in property that was made on or within 10 years before the date of the filing of the petition, if –
(A) such transfer was made to a self- settled trust or similar device;
(B) such transfer was by the debtor;
(C) the debtor is a beneficiary of such trust or similar device; and
(D) the debtor made such transfer with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made, indebted.FN41
FN41 11 U.S.C. sec. 548(e)(1).
Section 548(e) was added to the Bankruptcy Code in 2005, as part of the Bankruptcy Abuse Prevention and Consumer Protection Act.FN42 Section 548(e) “closes the self-settled trusts loophole” and was directed at the five states that permitted such trusts, including Alaska.FN43 Its main function “is to provide the estate representative with an extended reachback period for certain types of transfers.”FN44 However, the “actual intent” requirement found in sec. 548(e)(1)(D) is identical to the standard found in sec. 548(a)(1)(A) for setting aside other fraudulent transfers and obligations.FN45
FN42 Pub. L. No. 109-8, sec. 1042 (2005).
FN43 5 COLLIER ON BANKRUPTCY para. 548.10, [a] n.6 (N. Alan Resnick & Henry J. Sommer eds., 16th ed.).
FN44 Id., para. 548.10.
FN45 11 U.S.C. sec. 548(a)(1)(A), (e)(1)(D), see also 5 COLLIER ON BANKRUPTCY para. 548.10[d].
Mortensen’s trust, established under AS 34.40.110, satisfies the first three subsections of sec. 548(e) – the Seldovia property was transferred to a self-settled trust, Mortensen made the transfer, and he is a beneficiary of the trust. The determinative issue here is whether Mortensen transferred the Seldovia property to the trust “with actual intent to hinder, delay, or defraud” his creditors.FN46
FN46 11 U.S.C. sec. 548(e)(1)(D).
Mortensen says he did not have this intent when he created the trust and that he simply wanted to preserve the property for his children. Battley counters that Mortensen’s intent is clear from the trust language itself. The trust’s stated purpose was “to maximize the protection of the trust estate or estates from creditors’ claims of the Grantor or any beneficiary and to minimize all wealth transfer taxes.”FN47 Mortensen argues that the trust language cannot be used to determine intent because Alaska law expressly prohibits it. Under Alaska law, “a settlor’s expressed intention to protect trust assets from a beneficiary’s potential future creditors is not evidence of an intent to defraud.”FN48 But is this state statutory provision determinative when applying sec. 548(e)(1)(D) of the Bankruptcy Code?
FN47 Def.’s Ex. A at Mortenson 0006.
FN48 AS 34.40.110(b)(1).
Ordinarily, it is state law, rather than the Bankruptcy Code, which creates and defines a debtor’s interest in property.FN49
FN49 Butner v. United States, 440 U.S. 48, 55 (1979).
Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding.FN50
Here, Congress has codified a federal interest which requires a different result. Only five states allow their citizens to establish self-settled trusts.FN51 Section 548(e) was enacted to close this “self-settled trust loophole.”FN52 As noted by Collier:
[T]he addition of section 548(e) is a reaction to state legislation overturning the common law rule that self-settled spendthrift trusts may be reached by creditors (and thus also by the bankruptcy trustee.)FN53
FN51 In addition to Alaska, Delaware, Nevada, Rhode Island and Utah permit the creation of self-settled trusts.
FN52 5 COLLIER ON BANKRUPTCY para. 548.10, citing H.R. Rep. No. 109-31, 109th Cong., 1st Sess. 449 (2005) (statement of Rep. Cannon).
FN53 5 COLLIER ON BANKRUPTCY para. 548.10[a] (footnotes omitted).
It would be a very odd result for a court interpreting a federal statute aimed at closing a loophole to apply the state law that permits it. I conclude that a settlor’s expressed intention to protect assets placed into a self-settled trust from a beneficiary’s potential future creditors can be evidence of an intent to defraud. In this bankruptcy proceeding, AS 34.40.110(b)(1) cannot compel a different conclusion.
To establish an avoidable transfer under sec. 548(e), the trustee must show that the debtor made the transfer with the actual intent to hinder, delay and defraud present or future creditors by a preponderance of the evidence.FN54 Here, the trust’s express purpose was to hinder, delay and defraud present and future creditors. However, there is additional evidence which demonstrates that Mortensen’s transfer of the Seldovia property to the trust was made with the intent to hinder, delay and defraud present and future creditors.
First, Mortensen was coming off some very lean years at the time he created the trust in 2005. His earnings over the preceding four years averaged just $11,644.00 annually.FN55 He had burned through a $100,000.00 annuity which he had cashed out in 2000. He had also accumulated credit card debt of between $49,711.00 to $85,000.00 at the time the trust was created. He was experiencing “financial carnage” from his divorce. Comparing his low income to his estimated overhead of $5,000.00 per month (or $60,000.00 per year), Mortensen was well “under water” when he sought to put the Seldovia property out of reach of his creditors by placing it in the trust.
FN54 Consolidated Partners Inv. Co. v. Lake, 152 B.R. 485, 488 (Bankr. N.D. Ohio 1993).
FN55 See the discussion herein regarding Mortensen’s income during this time, at pp. 4 – 5.
Further, when Mortensen received the $100,000.00 from his mother he didn’t pay off his credit cards. Rather, he transferred $80,000.00 into the trust after paying a few bills and began speculating in the stock market. He had a substantial credit card debt due to AT&T, approximately $15,200.00,FN56 which was not paid in 2005. This debt had increased to $19,096.00 by the time he filed his bankruptcy petition.FN57 In 2005, Mortensen also owed Capital 1 approximately $6,350.00 in credit card debt.FN58 This debt had bumped up to$7,525.00 when he filed for bankruptcy.FN59 He had a Discover card with a balance of $12,588.00 as of Feb. 1, 2005.FN60 He owed Discover $11,905.00 when he filed bankruptcy.FN61
FN56 Pl.’s Ex. 23.
FN57 Pl.’s Ex. 18 at 13. Citibank took over AT&T”s credit card business. It is listed as a creditor in the debtor’s bankruptcy schedules for a loan with the same account number as the AT&T debt.
FN58 Pl.’s Ex. 24 at 12.
FN59 Pl.s Ex. 18 at 14.
FN60 Pl.’s Ex. 25.
FN61 Pl.’s Ex. 18 at 13.
Mortensen claims he paid these accounts off on a number of occasions and then re-borrowed against them. I can find no evidence of such pay-offs in the documentary evidence and I don’t believe Mortensen. Nor do I believe that the trust repaid Mortensen the $80,000 in 2006. If that had been the case, Mortensen wouldn’t have needed to borrow another $29,000.00 on his credit cards.FN62 I conclude that Mortensen’s transfer of the Seldovia property and the placement of $80,000.00 into the trust constitutes persuasive evidence of an intent to hinder, delay and defraud present and future creditors.
FN62 Pl.’s Ex. 44 shows an increase of about $29,000.00 in credit card debt from February 1, 2005 through December 31, 2006.
Mortensen alleged that the purpose of the trust was to preserve the Seldovia property for his children. Yet he used the trust as a vehicle for making stock market investments. In 2005, the trust had capital gains of nearly $7,000.00.FN63 In 2006, the trust had capital gains of over $26,000.00.FN64 In 2007, the trust had capital gains of $6,448.00.FN65 In 2008 and 2009 the trust had either no capital gain income or experienced losses.FN66 The trust also made a car loan to one of Mortensen’s acquaintances. These activities had no relationship to the trust’s alleged purpose.
FN63 Def.’s Ex. S.
FN64 Def.’s Ex. T.
FN65 Def.’s Ex. U.
FN66 Def.’s Exs. V and W.
The bottom line for Mr. Mortensen is that he attempted a clever but fundamentally flawed scheme to avoid exposure to his creditors. When he created the trust in 2005, he failed to recognize the danger posed by the Bankruptcy Abuse Protection and Consumer Protection Act, which was enacted later that year. Mortensen will now pay the price for his actions. His transfer of the Seldovia property to the Mortensen Seldovia Trust will be avoided.
The trustee has asked for costs and attorney’s fees. His costs will be awarded.
However, under the American Rule, attorney’s fees are generally not recoverable for litigating federal issues absent an agreement or specific statutory authority.FN67 This avoidance action is brought under a provision of the Bankruptcy Code and raises federal issues. The trustee is not entitled an award of attorney’s fees against the defendants.
FN67 Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240 (1975).
The transfer of the Seldovia property from Thomas Mortensen to the Mortensen Seldovia trust will be avoided, pursuant to 11 U.S.C. sec. 548(e). The trustee will be awarded his costs but denied attorney’s fees. An order and judgment will be entered consistent with this memorandum.
In re: James Tillman HICKS, Jr., a/k/a J. T. Hicks, Jr., a/k/a Sonny Hicks, Debtor; Benjamin C. ABNEY, Trustee, Plaintiff v. James Tillman HICKS, Jr., the Citizens and Southern National Bank, and Lois Reagan Hicks, Defendants
Case No. 80-01342A, Adversary No. 81-1877A
UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF GEORGIA ATLANTA DIVISION
22 B.R. 243; 1982 Bankr. LEXIS 3653
July 26, 1982
COUNSEL: [**1] Benjamin C. Abney, Esq., Carr, Abney, Tabb & Schultz, N.W., Atlanta, Georgia, for Plaintiff.
Jeffrey Starnes, Esq., Conyers, Georgia, (attorney for James Tillman Hicks, Jr.).
C. R. Vaughn, Jr., Esq., Vaughn & Barksdale, Conyers, Georgia, (attorney for C&S National Bank and Lois Reagan Hicks).
JUDGES: W. Homer Drake, United States Bankruptcy Judge.
OPINION BY: DRAKE
This case is before the Court on the plaintiff’s Complaint for Declaratory Relief to determine what interest, if any, the debtor may have in certain property held in trust pursuant to his father’s will. The plaintiff alleges that the interest held by the debtor is a vested remainder and that the debtor held this interest when he filed his bankruptcy petition. If this interest exists, it would be part of the estate of the debtor under 11 U.S.C. § 541(a)(5)(A). In re McLoughlin, 507 F.2d 177 (5th Cir. 1975). The defendants contend that the interest which the debtor has under his father’s will is contingent and not vested. The parties have filed Motions for Summary Judgment and submitted briefs in support thereof.
The will in question is that of James Tillman Hicks, Sr., the debtor’s father. Mr. [**2] Hicks, Sr. died May 29, 1970, almost ten years prior to the time the debtor filed his petition in bankruptcy on April 24, 1980. The Citizens and Southern National Bank (“C&S”) and Lois Reagan Hicks are trustees of the residuary trust created pursuant to Item V of the Last Will and Testament of J. T. Hicks, Sr. Lois Reagan Hicks, who was the wife of J. T. Hicks, Sr., and the mother of the debtor, is currently alive. She was given a life estate and the power of appointment which enabled her to direct the trustee to turn over any of the corpus of the trust to any descendant of J. T. Hicks, Sr. or to pay any income from the trust to any descendants of J. T. Hicks, Sr. Lois Reagan Hicks has not exercised this power of appointment.
The power of appointment held by Lois Reagan Hicks gives her total discretion as to the division of the trust corpus among the descendants of J. T. Hicks, Sr. The [*245] vesting of the debtor’s interest in the estate is contingent upon one of two events. The first is the exercise of the power of appointment by Lois Reagan Hicks. The plaintiff contends that this Court should find a vested interest in J. T. Hicks, Jr. Essentially, that would require [**3] the Court to compel Mrs. Hicks to exercise her power of appointment. Section 36-602 of the Ga. Code states that: “Equity may not compel a party, having a discretion, to exercise the power of appointment;”. Based on Ga. Code § 36-602, this Court finds that it cannot compel the exercise of a discretionary power of appointment. See also In re McLoughlin, supra.
Lois Reagan Hicks was given a life estate in the trust created under the will of J. T. Hicks, Sr. Under Georgia law, when a will creates a life estate for the widow, the remainder interest does not vest in the remaindermen until the death of the life tenant, and the estates of the remaindermen who predecease the life tenant are not entitled to an interest in the estate. Ruth v. First National Bank of Atlanta, 230 Ga. 490, 197 S.E.2d 699 (1973). Accordingly, the interest created in the children of J. T. Hicks, Sr. is a contingent remainder. The Ruth case illustrates the second way by which J. T. Hicks, Jr.’s interest could vest, i.e. J. T. Hicks, Jr. would have to survive the life tenant, Lois Reagan Hicks. Because the estate created in the children is a contingent remainder, it is not property of the [**4] debtor’s estate under 11 U.S.C. § 541(a)(5)(A) and therefore it is not subject to the claim of the trustee in bankruptcy. Thornton v. Scarborough, 348 F.2d 17, 22 (1965).
In a recent case, the Fifth Circuit Court of Appeals held that under Georgia law, a father’s will created contingent remainders in his children who are required to survive a mother – life tenant because until her death, her survivors were unascertained persons. In re McLoughlin, 507 F.2d 177, 182 (1975). Since Lois Reagan Hicks is in life and was alive at the time the debtor filed his bankruptcy petition, the beneficiaries of the trust cannot be ascertained, and their interests are contingent. Id. at 181. Because the interest created in the debtor is a contingent remainder, it is non-transferrable under Georgia law. Id. at 181.
Therefore, for the above-stated reasons, the debtor’s interest in J. T. Hicks, Sr.’s will is a contingent remainder and is not subject to the claim of the trustee in bankruptcy as property of the estate under the ambit of 11 U.S.C. § 541. The plaintiff’s Motion for Summary Judgment is hereby denied and the defendants’ Motion for Summary Judgment is granted.
IT IS SO [**5] ORDERED.
At Atlanta, Georgia, this 26 day of July, 1982.
W. HOMER DRAKE, UNITED STATES BANKRUPTCY JUDGE
In re: JAMES EDWARDS KNIGHT, Debtor.
CASE NO. 91-30264-BKC-RAM CHAPTER 7
UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF FLORIDA
164 B.R. 372; 1994 Bankr. LEXIS 192; Bankr. L. Rep. (CCH) P75,789; 30 Collier Bankr. Cas. 2d (MB) 1618; 7 Fla. L. Weekly Fed. B 381
February 22, 1994, Decided
PROCEDURAL POSTURE: A creditor filed an objection to a debtor’s claim of exemption with respect to his interests in trusts created by his parents. The court considered the issue to be whether the trust interests were property of the bankruptcy estate under 11 U.S.C.S. § 541.
OVERVIEW: The debtor’s mother’s trust named him and his sister as beneficiaries after his mother’s life estate. His father’s trust had been divided into two parts at the father’s death. His mother held absolute discretion over the funds in Part A. The provisions in Part B were the same as in the mother’s trust. There were no spendthrift provisions in the trusts. The parties stipulated that the father’s Part A trust was not property of the bankruptcy estate. The court held that the fact that the debtor’s interests in the Part B trust and his mother’s trust were contingent upon his surviving her did not prevent them from being included in the bankruptcy estate. Section 541(a)(1) evidenced a congressional intent to include all legally recognizable interests, including contingent interests. The contingent nature of the debtor’s interests went to a determination of the value to be includible in the estate. The trusts could be modified only with the consent of the debtor, and the court assumed for purposes of valuation that he would not elect to terminate his own interest.
OUTCOME: The court held that the debtor’s interests in his mother’s trust and in the Part B trust created by his father were property of the bankruptcy estate.
Bankruptcy Law > Estate Property > Content
[HN1] Section 541(a)(1) of the Bankruptcy Code, 11 U.S.C.S. § 541(a)(1), defines property of the estate broadly to include all legal and equitable interests of the debtor in property as of the commencement of the case. Unlike the Bankruptcy Act, the Code has eliminated a requirement that the debtor be able to transfer the interest or that his creditors by some means must be able to reach it. By including all legal interests without exception, Congress indicated its intention to include all legally recognizable interests although they may be contingent and not subject to possession until some future time.
Bankruptcy Law > Case Administration > Examiners, Officers & Trustees > Postpetition Transactions
Estate, Gift & Trust Law > Estates Created by Trusts & Wills > Future Interests > General Overview
Estate, Gift & Trust Law > Trusts > Beneficiaries > General Overview
[HN2] For purposes of valuing a beneficiary’s future interest in the corpus of a trust, a court assumes that a beneficiary would not elect to terminate his or her own interest.
Bankruptcy Law > Estate Property > Content
Estate, Gift & Trust Law > Estates Created by Trusts & Wills > Future Interests > General Overview
Estate, Gift & Trust Law > Trusts > General Overview
[HN3] The discretionary right to invade principal affects the value of a debtor’s interests as beneficiary of trusts but it does not render them worthless. Similarly, the fact that the debtor must outlive the life beneficiary in order to obtain his share of the trust principal also does not immunize the interest from becoming property of the estate.
Estate, Gift & Trust Law > Estates Created by Trusts & Wills > General Overview
Estate, Gift & Trust Law > Trusts > Spendthrift Trusts > Exclusion From Bankruptcy Estate
Real Property Law > Estates > Present Estates > Life Estates
[HN4] A contingent remainder is an interest that is alienable and subject to seizure under applicable New York law. Absent any spendthrift provisions which would exclude the interest under 11 U.S.C.S. § 541(c)(2), the debtor’s interests, a 50 percent remainder interest in a trust subject to a life tenancy, are alienable interests that pass to the bankruptcy trustee upon the filing of a bankruptcy case.
Bankruptcy Law > Estate Property > Content
[HN5] There is a material difference between an interest which may be unilaterally extinguished by a grantor and an interest which may be defeated by some condition subsequent. In the former case, there is no interest of value which passes to the estate. In the latter, the value is affected by the possibility of future events which may reduce or eliminate the interest, but the interest has value as of the petition date which can and does pass to the Trustee.
COUNSEL: [**1] For GIAC Leasing: Robert L. Young, Esq., CARLTON, FIELDS, WARD, EMMANUEL, SMITH & CUTLER, P.A., Orlando, Florida.
For Debtor: Leslie G. Cloyd, Esq., ACKERMAN, BAKST, CLOYD & SCHERER, P.A., West Palm Beach, Florida.
OPINION BY: ROBERT A. MARK
[*373] SUPPLEMENTAL MEMORANDUM OPINION DETERMINING ESTATE’S INTEREST IN TRUSTS
The Debtor in this Chapter 7 case scheduled certain property described as contingent unvested interests in various trusts. These trust interests were scheduled as exempt. GIAC Leasing Corporation (“Creditor”) filed an objection to the claim of exemption. Although framed as an objection to exemptions because of the form in which the Debtor listed these interests, the issue is whether the trust interests are property of the estate.
After consideration of the arguments presented in written memoranda and in oral argument and after review of the trust documents, the Court scheduled a hearing on October 20, 1993, to announce its ruling. This Supplemental Memorandum Opinion incorporates and supersedes the findings and conclusions stated on the record on that day.
The Court concludes that the Debtor’s interests in the Dorothy E. Knight Trust and Part B of the Charles E. Knight Trust are [**2] property of the estate; the Debtor’s interest in Part A of the Charles E. Knight Trust is not estate. property.
The Debtor, James Edwards Knight, is the son of Charles E. Knight and Dorothy E. Knight. The interests at issue are the Debtor’s interest in the Dorothy E. Knight Trust (the “Dorothy Trust”) established on October 1, 1937 and the Debtor’s interest in the Charles E. Knight Trust (the “Charles Trust”) established on January 2, 1946. Upon the death of Charles, the Charles Trust was divided into Part A and Part B as described below.
The Dorothy Trust
The Dorothy Trust terminates upon the death of Dorothy who was 90 years old as of the petition date. At her death, under Section 4 of the trust, the principal will be distributed equally to the Debtor and his sister, if they are alive. If the Debtor predeceases his mother, his share will be distributed to his children.
Since 1965, the Debtor’s sister and Dorothy have served as co-trustees of the trust. Prior to the filing of his Chapter 7 case, the Debtor had been receiving some income distributions from this trust pursuant to Section 3, which provides that income “may be paid from time to time in equal [**3] or unequal proportions” to Dorothy, the Debtor or his sister.
[*374] Two other provisions of the trust are relevant to the Court’s analysis. First, the trust may be amended only by the consent of all three trustees. Second, Section 12 of the trust grants the trustees the right to invade principal during Dorothy’s lifetime “in the discretion of the trustees.” According to a supplemental letter submitted by Debtor’s counsel on May 19, 1992, the Dorothy Trust has a value of approximately $ 885,000.00.
The Charles Trust
The Charles Trust, created in 1946 and amended in 1965, was divided, by its terms, into two parts when Charles died. The Debtor, his sister and Dorothy are also co-trustees of this trust.
Dorothy is entitled to receive all of the income from the Part A Trust during her life. At her death, the principal of the Part A Trust will be distributed pursuant to a power of appointment exercisable by Dorothy in her will. The Creditor concedes that the Debtor has no present or future interest in Part A of the Charles Trust, since Dorothy has absolute discretion as to naming him as a beneficiary.
Part B of the Charles Trust is at issue. The Charles Part B Trust provides for Dorothy to [**4] receive income during her lifetime with the principal to be distributed equally to the Debtor and his sister if they are alive, just like the principal of the Dorothy Trust. Also like the Dorothy Trust, Section 12 of the Charles Part B Trust provides for invasion of the principal during Dorothy’s lifetime. Unlike the invasion of principal provision in the Dorothy Trust, the provisions in the Charles Part B Trust are both more specific and mandatory as follows:
Section 12. Payments By the Trustees.
During the lifetime of CHARLES E. KNIGHT the Trustees shall pay and distribute any portion of this Trust as CHARLES E. KNIGHT may direct by notice in writing to the Trustees. Further, the Trustees shall pay and distribute unto CHARLES E. KNIGHT and/or DOROTHY E. KNIGHT at any time during the duration of this Trust so much of the principal thereof as shall be necessary to keep and maintain CHARLES E. KNIGHT and/or DOROTHY E. KNIGHT in the standard of living to which he and/or she may be accustomed, and/or to provide for his and/or her medical care.
The Charles Part B Trust had a value of $ 1,545,000 as of May 19, 1992.
[HN1] Section 541(a)(1) of the Bankruptcy Code defines [**5] property of the estate broadly to include “all legal and equitable interests of the debtor in property as of the commencement of the case.” Unlike the Bankruptcy Act, the Code has eliminated a requirement that the debtor be able to transfer the interest or that his creditors by some means must be able to reach it. In re Ryerson, 739 F.2d 1423 (9th Cir. 1984). By including all legal interests without exception, Congress indicated its intention to include all legally recognizable interests although they may be contingent and not subject to possession until some future time. Id. at 1425, citing H.R. Rep. No. 595, 95th Cong., 1st Sess. 175-76 (1977), reprinted in 1978 U.S. Code Cong. & Ad. News 5963, 6136.
The Debtor argues that he has no vested right to any portion of the principal of the Dorothy Trust unless three contingencies occur: (1) The Debtor survives Dorothy; (2) Dorothy does not amend the trust interest so as to exclude the Debtor as a beneficiary; and (3) the trustees do not consume the entire principal by paying it to Dorothy or other beneficiaries as they may in their discretion do under Section 12 of the [**6] trust instrument. The Debtor similarly argues that he has no right to the principal of the Charles Part B Trust unless he survives his mother and the corpus is not consumed by distributions to Dorothy during her lifetime.
The Debtor is wrong as to Dorothy’s unilateral ability to amend the Dorothy Trust to eliminate his interest. Dorothy certainly has absolute discretion as to the Charles Part A Trust, but she may not amend the Dorothy Trust to exclude the Debtor without the consent of the other trustees. The Debtor’s consent to his exclusion post-petition would constitute an unlawful post-petition transfer of property of the estate under § 549 of the [*375] Code. Moreover, [HN2] for purposes of valuing a beneficiary’s future interest in the corpus of a trust, the Court assumes that a beneficiary would not elect to terminate his or her own interest.
The trustees in their discretion could distribute principal and consume some or all of the trust principal in both the Dorothy Trust and the Charles Part B Trust prior to Dorothy’s death. [HN3] This discretionary right to invade principal affects the value of the interests but it does not render them worthless. Similarly, the fact that the Debtor must [**7] outlive Dorothy in order to obtain his share of the trust principal also does not immunize the interest from becoming property of the estate. See In re Kreiss, 72 Bankr. 933 (Bankr. E.D.N.Y. 1987) (debtor’s contingent remainder interest in trust was property of the estate). In short, the Debtor’s interests in the Dorothy Trust and the Charles Part B Trust had value as of the petition date and are therefore property of the estate.
Three well reasoned bankruptcy cases support the Court’s conclusion. In re Newman, 88 Bankr. 191 (Bankr. C.D.Ill. 1987); In re Kreiss, 72 Bankr. 933 (Bankr. E.D.N.Y. 1987); In re Dias, 37 Bankr. 584 (Bankr. D.Idaho 1984).
In Kreiss, the debtor held a 50% remainder interest in a trust subject to a life tenancy. The court held that this equitable interest, [HN4] a contingent remainder, is an interest that is alienable and subject to seizure under applicable New York law. The same reasoning would apply to both trust interests in this case. Absent any spendthrift provisions which would exclude the interests under § 541(c)(2), the Debtor’s interests [**8] in both the Dorothy Trust and Charles Part B Trust are alienable interests that passed to the bankruptcy trustee upon the filing of this bankruptcy case.
In Newman, the Debtor trust beneficiary was entitled to distribution of the trust principal at the age of 50. The court observed that the broad definition of property of the estate in § 541 includes interests that are strictly contingent. 88 Bankr. at 192, citing In re Brown, 734 F.2d 119, 123 (2d Cir. 1984). The court held that the debtor’s interest in the trust was property of the estate. As in this case, the contingency merely affects the value of the property interest; it does not prevent the property from becoming property of the estate. Newman, 88 Bankr. at 192.
In Dias, the court had to determine whether the debtor’s one-third equitable interest in the corpus of a trust was property of the estate. The debtor, who was 23 when the petition was filed, was entitled to her share when she reached age 25. The court noted that the debtor’s interest, though contingent or subject to divestment, was alienable by her on the petition date. The [**9] court found that the contingency reduced the value of the interest but that “the interest was not so remote or speculative as to have no value,” 37 Bankr. at 587, and was thus property of the estate.
The cases and arguments relied upon by the Debtor either interpret the more restrictive definition of property under the Bankruptcy Act or are old state court decisions finding certain property interests to be beyond the reach of creditors under state law. See e.g., In re Martin, 47 F.2d 498 (7th Cir. 1931); Howbert v. Cauthorn, 100 Va. 649, 42 S.E. 683 (1902); Kenwood Trust & Savings Bank v. Palmer, 285 Ill. 552, 121 N.E. 186 (1918). 1
1 Under the broad definition of property of the estate in § 541 of the Bankruptcy Code, it no longer is necessary for an interest to be transferable or leviable to become property of the estate. Nevertheless, under Florida law, even uncertain future interests in land or other property may be alienated and may be subject to execution. See Richardson v. Holman, 160 Fla. 65, 33 So. 2d 641 (Fla. 1948); Croom v. Ocala Plumbing and Electric Company, 62 Fla. 460, 57 So. 243 (Fla. 1911).
[**10] The Debtor’s reliance on In re Hicks, 22 Bankr. 243 (Bankr. N.D.Ga. 1982) is also misplaced. In that case, the trust instrument gave the debtor’s mother a power of appointment giving her absolute discretion in determining whether the debtor would receive any portion of the trust corpus. As of the bankruptcy filing, the debtor’s mother had not exercised the power of appointment. The court found that it could not compel the exercise of a discretionary power of appointment [*376] and held that the debtor had no interest that passed to the bankruptcy trustee.
The facts and holding in Hicks are consistent with the facts and holding here as to the Charles Part A Trust. As in Hicks, Mrs. Knight has the power of appointment as to the corpus of the Part A Trust. As such, the Debtor’s interest in the Part A Trust is too remote to have value and does not constitute property of the estate. 2
2 The Hicks decision also supports this Court’s holding that the potential income distributions from the Dorothy Trust are not property of the estate since the Debtor has no ability to compel payment of these discretionary distributions. See also, In re Dias, 37 Bankr. at 586, in which the court held that discretionary support distributions were not property of the estate.
[**11] The facts in Hicks are readily distinguishable from the facts presented in the Dorothy Trust and Charles Part B Trust. [HN5] There is a material difference between an interest which may be unilaterally extinguished by a grantor and an interest which may be defeated by some condition subsequent. In the former case, there is no interest of value which passes to the estate. In the latter, the value is affected by the possibility of future events which may reduce or eliminate the interest, but the interest has value as of the petition date which can and does pass to the Trustee.
There is language in Hicks suggesting that a contingent remainder is not property of the estate. 22 Bankr. at 245. While Hicks is correct on its facts because the interest there was subject to a discretionary power of appointment just like the interest in the Charles Part A Trust here, this court does not accept Hicks as authority that all contingent interests are excluded from the estate. Such an overly broad proposition would be inconsistent with § 541 of the Code and contrary to the holdings in Newman, Kreiss and Diascited favorably by the Court.
Other cases cited [**12] by the Debtor dealing with contingent trust interests have ruled against the trustee on § 541(c)(2) grounds, finding that the interest was subject to enforceable spendthrift provisions.See, e.g., In re Davis, 110 Bankr. 573 (Bankr. M.D.Fla. 1989); Horsley v. Maher, 89 Bankr. 51 (D.S.D 1988). There are no spendthrift provisions in the Knight Trusts that would trigger application of the § 541(c)(2) exception.
VALUE OF ESTATE’S INTEREST
The possibility of divestment does not render the trust interests without value as of the filing date. The possibility of divestment by virtue of the Debtor predeceasing Dorothy and the possibility of reduction in the trust corpora, by virtue of distributions prior to her death, do affect the value of the interests. Thus, the estate is not entitled to simply receive one half of the principal of each trust as of the filing date. Instead, the value which passes to the estate is the hypothetical value of the trust interests if they had been seized by creditors or sold by the Debtor as of the date of his Chapter 7 petition. See In re Dias, supra, 37 Bankr. at 587. [**13] If the parties are unable to agree on the value of the trust interests, the Court will conduct a further evidentiary hearing.
The Court has analyzed the trust interests in this case in view of the broad scope of § 541 and the absence of any spendthrift restrictions which would protect the interests from passing to the trustee upon the filing of the bankruptcy case. The Court has also distinguished between interests that are so remote as to be without value because, for example, they depend upon the exercise of a power of appointment, and interests such as the ones here, in which the Debtor is a named beneficiary whose rights may be affected by the occurrence of some future conditions.
The trust interests here are of sufficient certainty to render the interests property of the estate. Thus, the Debtor’s interests in the Dorothy Trust and the Charles Part B Trust are deemed to be property of the estate subject to liquidation by the Trustee. The Debtor’s interest in the income from the Dorothy Trust and his potential interest in the Charles Part A Trust are too remote to have value and are thus not property interests which the Trustee may administer.
A separate order will [**14] be issued in accordance [*377] with this Opinion. 3
3 Pursuant to findings and conclusions announced on the record on October 20, 1993, the Court entered its Order Determining Certain Trust Interests to be Property of the Estate on November 10, 1993. The Debtor’s Motion for Rehearing of that Order is denied in a separate Order entered in conjunction with this Supplemental Opinion.
DATED, this 22nd day of February, 1994.
ROBERT A. MARK, U.S. Bankruptcy Judge
Mary Paula Cooley v. Timothy Cooley
Appellate Court of Connecticut
32 Conn. App. 152; 628 A.2d 608; 1993 Conn. App. LEXIS 338
March 22, 1993, Argued
July 20, 1993, Decided
PRIOR HISTORY: [***1] Action for the dissolution of a marriage, and for other relief, brought to the Superior Court in the judicial district of Hartford-New Britain at Hartford and tried to the court, Goldstein, J.; judgment dissolving the marriage and granting certain other relief, from which the plaintiff appealed and the defendant cross appealed to this court.
DISPOSITION: Reversed in part; further proceedings.
PROCEDURAL POSTURE: In an action for the dissolution of a marriage, and for other relief, brought to the Superior Court in the judicial district of Hartford-New Britain at Hartford (Connecticut) and tried to the court, judgment was granted dissolving the marriage and granting certain other relief. Plaintiff wife appealed and defendant husband cross-appealed.
OVERVIEW: The wife appealed, claiming that the trial court improperly (1) excluded her from a share in a trust, (2) ordered nonmodifiable, time limited periodic alimony, and (3) ordered financial awards. The husband cross appealed, claiming that the trial court improperly (1) assigned the principal of a trust and (2) apportioned personal property. On appeal, the court held that because the husband, having only a limited power of appointment, had no interest, beneficial or otherwise, in the appointive assets of one trust, no portion of those assets could be included in the marital estate. The trial court properly refused to order the husband to exercise his limited power of appointment and properly concluded that the wife was not entitled a share of the one trust. The court found that the financial awards were within the parameters of the trial court’s broad discretion and made in accordance with the law and the evidence. Lastly, for nearly the same reasons that the court concluded that the wife was not entitled to a share in the one trust, it concluded that she as not entitled to a share in a second trust.
OUTCOME: The court reversed the judgment as to the financial orders and remanded the case for further proceedings.
Civil Procedure > Appeals > Standards of Review > De Novo Review
Estate, Gift & Trust Law > Trusts > Interpretation
[HN1] The issue of intent as it relates to the interpretation of a trust instrument is to be determined by examination of the language of the trust instrument itself and not by extrinsic evidence of actual intent. The construction of a trust instrument presents a question of law to be determined in the light of facts that are found by the trial court or are undisputed or indisputable. Where the issue presented concerns the court’s legal conclusion regarding intent of the settlor as expressed solely in the language of the trust created, a reviewing court must decide that issue by determining de novo whether that language supports the court’s conclusion.
Estate, Gift & Trust Law > Trusts > Interpretation
[HN2] A reviewing court cannot rewrite a trust instrument. The expressed intent must control, although this is to be determined from reading the instrument as a whole in the light of the circumstances surrounding the settlor when the instrument was executed, including the condition of the estate, the relations to family and beneficiaries, and their situation and condition. The construing court will put itself as far as possible in the position of the settlor, in the effort to construe any uncertain language used by the settlor in such a way as shall, conformably to the language, give force and effect to the settlor’s intention. But the quest is to determine the meaning of what the settlor said and not to speculate upon what he/she meant to say.
Estate, Gift & Trust Law > Trusts > Beneficiaries > General Overview
[HN3] A power of appointment is a power of disposition given to a person over property not his own by some one who directs the mode in which that power shall be exercised by a particular instrument. The donor does not vest in the donee of the power title to the property, but simply vests in the donee power to appoint the one to take the title. The appointee under the power takes title from the donor, and not from the donee of the power. The ultimate beneficiary really takes from the person who created the power, the donee of the power acting as a mere conduit of the former’s bounty.
Estate, Gift & Trust Law > Trusts > Beneficiaries > General Overview
Governments > Fiduciary Responsibilities
[HN4] A power of appointment is general if it is exercisable in favor of any one or more of the following: the donee of the power, the donee’s creditors, the donee’s estate, or the creditors of the donee’s estate. Any other power of appointment is a nongeneral one. As a matter of both common law doctrine and the practicalities of the situation, the donee of a nongeneral power is not the owner of the appointive assets. The donee is in a fiduciary position with reference to the power and cannot derive personal benefit from its exercise. The donee’s creditors have no more claim to the appointive assets than to property which the donee holds in trust. It is immaterial whether or not the donee exercises the power. The situation differs where the donee possesses a general power of appointment. Where a general power has been created, the donee is substantially in the position of an owner.
Family Law > Marital Termination & Spousal Support > Spousal Support > Obligations > Periodic Support
[HN5] One purpose of limiting the duration of an alimony award is to provide an incentive for the spouse receiving support to use diligence in procuring training or skills necessary to attain self-sufficiency. If the time period for the periodic alimony is logically inconsistent with the facts found or the evidence, it cannot stand. The trial court must consider all of its financial orders as a cohesive unit. The trial court need not make a detailed finding justifying its award of time limited alimony, but the record must indicate the basis for that award, and there must be sufficient evidence supporting the award for the particular duration established.
Family Law > Marital Termination & Spousal Support > Spousal Support > Obligations > Rehabilitative Support
[HN6] The court has great discretion in domestic relations cases, and a reviewing court will give great weight to the financial awards because of the trial court’s opportunity to observe the parties and the evidence. Although time limited alimony awards are essentially rehabilitative in purpose, there may be other valid reasons for awarding such alimony. The particular length of time needed for alimony can sometimes be established by predicting when future earnings, based on earning capacity as known at the time of the dissolution, will be sufficient for self-sufficiency.
Civil Procedure > Appeals > Standards of Review > Abuse of Discretion
Family Law > Marital Termination & Spousal Support > Spousal Support > General Overview
[HN7] A reviewing court is limited to determining whether the trial court abused its discretion in making financial awards.
COUNSEL: Joel M. Ellis, with whom was Catherine P. Klingerman, for the appellant-appellee (plaintiff).
Robert B. Hempstead, for the appellee-appellant (defendant).
JUDGES: Daly, Foti and Landau, Js. The other judges concur.
OPINION BY: FOTI
[*153] [**610] This is an appeal from a judgment rendered in a dissolution of marriage action. The plaintiff withdrew her complaint after the defendant filed a cross complaint. She now appeals, claiming that the trial court improperly (1) excluded her from a share in a trust, (2) ordered nonmodifiable, time limited periodic alimony, and (3) ordered financial awards. The defendant has cross appealed, claiming that the trial court improperly (1) assigned the principal of a trust and (2) apportioned personal property. We reverse the trial court’s [***2] judgment in part.
The parties were married on September 13, 1972, in Hartford. At the time of the dissolution, they had one minor child, a daughter born March 19, 1975. The prior marriage of each party ended in divorce. The defendant has three adult sons from his first marriage, which ended in 1972; he pays $ 7800 annually in alimony to his former spouse. Beginning in 1974, the defendant’s three sons changed their residence from that of their mother to that of the parties for respective periods of three, five and two years. The plaintiff took an active role in raising the defendant’s sons.
The defendant graduated from Yale, and from Wharton School of Finance with a masters degree in business administration. The parties met when they were both employed at the same stock brokerage firm and eventually developed a relationship that led to marriage. [*154] The defendant later worked for another stock brokerage firm, until he became a bank trust officer and vice president for investments. In August 1982, with the plaintiff’s support, the defendant began working as a chartered financial analyst. When he left the bank he earned about $ 39,000; during the next few years his [***3] salary was about $ 20,000 to $ 25,000. He has had significant trust income to cushion the income loss. Since 1986, the defendant has been employed as an independent contractor-salesperson for an investment advisory firm. He is paid on a commission basis, but has had expectations of an equity position with this firm.
The plaintiff stopped working in 1974 when she became pregnant. She organized a local chapter of The Samaritans, Inc., in 1985. In 1988, she received a masters degree in pastoral ministry from St. Joseph College and began work as a part-time assistant photographer, earning $ 100 a week. She has been employed as a personal financial planner since August, 1989, and is now an independent contractor-salesperson, earning commissions for financial planning and selling various financial products. She expects her income to reach $ 20,000 in a few years when she has built a client base, and thereafter to reach between $ 30,000 and $ 40,000.
During his first marriage, the defendant had a drinking problem. His alcoholism also surfaced in this marriage about 1975 and became a significant factor that eventually doomed the relationship. Although he was a functioning alcoholic [***4] who maintained employment, the defendant’s illness transformed him into a distant family figure. After a confrontation with his children and the plaintiff in December, 1981, the defendant stopped drinking and joined Alcoholics Anonymous (AA) in June, 1982. He believes that during his alcoholic period the plaintiff assumed a dominant role in the marital [*155] and parental relationship and was unable to accept him as an equal partner when he became a recovered alcoholic in 1982.
The parties could not agree on therapists, or Al-Anon, or about the defendant’s alcoholism. The defendant initially went to AA five nights a week. He later reduced the number of sessions, but could spend up to four nights a week at AA, which meant he was out of the house for up to fifty-eight hours a week. The loss of family time became a problem for the parties. By 1985, the marriage was in difficulty; divorce proceedings were initiated in 1988. In November, 1990, the trial court rendered a judgment dissolving the marriage and entered financial orders.
The plaintiff first claims that the trial court improperly excluded her from sharing in a trust. The defendant’s [***5] deceased mother set up two trusts in August, 1975, referred to as the “Timothy Trust” and the “Paula Trust.” The trustee of each is an independent bank and both are spendthrift trusts. See General Statutes § 52-321. 1 The plaintiff’s claim relates to the Paula Trust. (Paula is the plaintiff.)
1 General Statutes § 52-321 provides: “Except as provided in sections 52-321a and 52-352b:
“(a) If property has been given to trustees to pay over the income to any person, without provision for accumulation or express authorization to the trustees to withhold the income, and the income has not been expressly given for the support of the beneficiary or his family, the income shall be liable in equity to the claims of all creditors of the beneficiary.
“(b) Any creditor of the beneficiary who has secured a judgment against the beneficiary may bring an action against him and serve the trustees with garnishee process, and the court to which the action is returnable may direct the trustees to pay over the net income derived from the trust estate to the judgment creditor, as the income may accrue, until the creditor’s debt is satisfied.
“(c) The court having jurisdiction over the fund may make such an order for payment pursuant to subsection (b) when the beneficiary is a nonresident of this state, as well as when the beneficiary is a resident, but in the case of a nonresident beneficiary notice shall be given to the nonresident of the action against him as provided in section 52-87. The nonresidence of the beneficiary shall not deprive the court of authority to make such an order.
“(d) If any such trust has been expressly provided to be for the support of the beneficiary or his family, a court of equity having jurisdiction may make such order regarding the surplus, if any, not required for the support of the beneficiary or his family, as justice and equity may require.
“(e) The defendant trustee in any such action shall be entitled to charge in the administration account of the trust such expenses and disbursements as the court to which the action is brought determines to be reasonable and proper.”
[***6] [*156] The Paula Trust was funded in 1975. At that time, the defendant’s mother gifted equal amounts to her four sons. The defendant’s allocation was placed in the Paula Trust. Between the time that the trust was funded and April, 1990, its appreciation was $ 667,848.
During the “initial period” of the Paula Trust, the trust provides that the trustee in its discretion can pay out the annual net income and principal for the care, maintenance and support of the plaintiff as long as she remains married to the defendant. Subject to the plaintiff’s needs, the trustee in its discretion can pay out any remaining income and principal for the maintenance, support and education of the defendant’s children (his three sons and the parties’ daughter). 2 In the [*157] event the marriage terminates, the trustee in its discretion can pay out the annual income and principal solely for the defendant’s children, though not necessarily equally.
2 We note with concern that the trial court did not appoint counsel for the parties’ daughter, who did not reach majority until March 19, 1993; General Statutes § 46b-54 (b); the interests of the minor child and those of the defendant’s three sons were unrepresented throughout this action even though, as secondary beneficiaries under both the Paula Trust and the Timothy Trust, their interests may have been adverse to those of the parties.
We also find troubling the absence of the trustee, Connecticut National Bank, which owes a fiduciary duty to all of the persons whose interests may be affected by the financial orders in this dissolution action. We recognize, however, that because of our disposition of this appeal the trustee may no longer be a necessary party.
[***7] During the initial period, the trust instrument confers on the defendant a limited power to appoint, during his lifetime or by his will, all or any part of the trust principal for the benefit of the plaintiff or his three brothers or any of them.
The trust instrument expressly provides that no interest in the trust, while in the possession of the trustee, shall be subject to the debts, contracts, liabilities, engagements or torts of any beneficiary. The Paula Trust is still in its initial period.
The trial court refused to order that the plaintiff share in the appreciation of the Paula Trust. The court found that, under [**612] article eleventh of the trust instrument, 3 she ceased to be a beneficiary upon the filing of this dissolution action, and, therefore, the defendant’s limited power to appoint to her had ceased.
3 Article eleventh provides in pertinent part: “DEFINITION OF TERMS . . . For purposes of this Indenture, the initiation of any legal proceeding by either said Timothy Cooley or said Paula D. Cooley for either a divorce or a legal separation shall constitute the termination of their marriage and the status of said Paula D. Cooley as a beneficiary hereunder shall terminate upon the filing of such papers.”
[***8] The plaintiff disagrees. She recognizes that, pursuant to article first, § (a), during the initial period the trustee may pay her income and principal only “so long as she shall be married to said Timothy Cooley.” She contends, however, that because the initial period of the trust has not terminated, the defendant still has a limited power to appoint to her. She points out that under article second of the Paula Trust, the “initial period” terminates [*158] only upon one of five occurrences, none of which, undisputedly, has happened. 4 She also points out that article first, § (b), provides that “[a]nything herein to the contrary notwithstanding” the defendant may appoint, during his lifetime or by will, all or any part of the trust principal to her or his brothers, or any of them, but not to himself. The plaintiff argues that by this language, the defendant may exercise his power to appoint to her at any time during his life or by his will, even after the marriage terminates, as long as the “initial period” of the trust has not ceased. She claims that the trial court improperly concluded that, pursuant to article eleventh, she ceased to be both an income beneficiary [***9] and a beneficiary of the defendant’s power of appointment upon her filing of a dissolution action.
4 Article second provides:
“TERMINATION OF INITIAL PERIOD OF TRUST
“The initial period of the trust hereby created shall terminate upon the happening of whichever of the following events shall first occur:
“(a) The remarriage of Susan Cooley, the former wife of said Timothy Cooley.
“(b) The death of said Susan Cooley.
“(c) The death of said Timothy Cooley.
“(d) The termination of the marriage of said Paula D. Cooley to said Timothy Cooley if no issue of said Timothy Cooley shall then be living.
“(e) The death of the last survivor of the issue of said Timothy Cooley living at the time of execution of this Indenture if his marriage to said Paula D. Cooley shall previously have terminated.
“Upon such termination of the initial period of the trust, the Trustee shall set out any balance of the Trust Estate not appointed by an effective exercise of the power of appointment contained in Paragraph FIRST (b) hereof, as it is then constituted, under Paragraph THIRD hereof if said Timothy Cooley shall then be living, or if he is not then living, the Trustee shall set out the same under Paragraph FOURTH hereof if said Paula D. Cooley shall then be living and unremarried, and shall have been married to him at the time of his death. If said Paula D. Cooley is not then living and unremarried, or if she was not married to said Timothy Cooley at the time of his death, the Trustee shall set out the Trust Estate under Paragraph FIFTH hereof.”
[***10] We agree with the plaintiff that, under the terms of the trust, termination of the parties’ marriage appears [*159] not to have affected her position as a possible appointee. We disagree, however, with her contention that the court improperly excluded her from a share in the trust corpus.
[HN1] “The issue of intent as it relates to the interpretation of a trust instrument . . . is to be determined by examination of the language of the trust instrument itself and not by extrinsic evidence of actual intent.” Heffernan v. Freedman, 177 Conn. 476, 481, 418 A.2d 895 (1979). The construction of a trust instrument presents a question of law to be determined in the light of facts that are found by the trial court or are undisputed or indisputable. See Connecticut National Bank & Trust Co. v. Chadwick, 217 Conn. 260, 266, 385 A.2d 1189 (1991). Since the issue presented concerns the court’s legal conclusion regarding intent of the settlor as expressed solely in the language of the trust she created, we must decide that issue by determining de novo whether that language supports the court’s conclusion. See Canaan National Bank v. Peters, 217 Conn. 330, 335, 586 [***11] A.2d 562 (1991).
[**613] [HN2] “[W]e cannot rewrite . . . a trust instrument. The expressed intent must control, although this is to be determined from reading the instrument as a whole in the light of the circumstances surrounding the . . . settlor when the instrument was executed, including the condition of [her] estate, [her] relations to [her] family and beneficiaries, and their situation and condition. ‘The construing court will put itself as far as possible in the position of the . . . [settlor], in the effort to construe . . . [any] uncertain language used by [her] in such a way as shall, conformably to the language, give force and effect to [her] intention.’ . . . But ‘[t]he quest is to determine the meaning of what the . . . [settlor] said and not to speculate upon what [she] meant to say.'” (Citations omitted.) Connecticut Bank & Trust Co. v. Lyman, 148 Conn. 273, 278-79, 170 A.2d 130 (1961).
[*160] In its articulation, the trial court properly concluded that article eleventh terminates the plaintiff’s status as an income beneficiary of the trust upon the filing of divorce papers. The court determined that an inconsistent result would [***12] be possible if it found that even after a divorce the plaintiff remained an appointee under the defendant’s limited power of appointment, with access to the trust corpus. The trial court found this interpretation would be contrary to a harmonious reading of all sections of the trust. The court discerned that the settlor was concerned with the impact of divorce on her proposed gift to her son, and that she desired to protect and preserve the trust from financial claims arising from a dissolution. These intentions are strongly evidenced by the great lengths to which the settlor went to protect the trust assets from claims by the defendant’s first wife, Susan Cooley. The trust instrument also evinces an intent by the settlor to limit the distribution of the trust principal to a very narrow group of persons. Under article sixth, § (c), for instance, in the event that any legal action to enforce a claim against the defendant by his first wife results in a determination that any part of the trust estate may be taken to satisfy such claim, the trustee is directed to terminate the trust as to that part and pay the portion to the defendant’s brothers, the settlor’s other sons; the plaintiff [***13] was not to be a recipient under this provision. Also significant is that the trust’s initial period does not end upon the termination of the parties’ marriage “with issue living.” Under that circumstance, the defendant himself still has no access to trust assets for his own benefit, again evincing the settlor’s intent to shield the assets from the effects of a dissolution judgment. The trust instrument, read as a whole, strongly suggests an intent on the part of the settlor that the plaintiff’s status as a recipient under the trust would change upon termination of the marriage.
[*161] Nevertheless, the phrase “anything herein to the contrary notwithstanding” contained in article first, § (b), appears to preserve the defendant’s power to appoint to the plaintiff even after her filing of divorce papers. While this phrase injects uncertainty into the trust instrument, we need not resolve that uncertainty. We conclude that, even if the language of the trust were crystal clear as to the settlor’s intent that the plaintiff maintain her status as an appointee even after termination of the marriage, the trial court’s decision not to award her a portion of the Paula Trust was proper.
[***14] General Statutes § 46b-81 gives the trial court the power in a dissolution action to “assign to either the husband or wife all or any part of the estate of the other.” A limited power of appointment is not a part of the marital estate that can be awarded in a dissolution action, however.
[HN3] “A power of appointment is a power of disposition given to a person over property not his own by some one who directs the mode in which that power shall be exercised by a particular instrument. . . . The donor does not vest in the donee of the power title to the property, but simply vests in the donee power to appoint the one to take the title. The appointee under the power takes title from the donor, and not from the donee of the power. . . . The ultimate beneficiary really takes from the person who created the power, the donee of [**614] the power acting as a mere conduit of the former’s bounty.” (Citations omitted; internal quotation marks omitted.) Linahan v. Linahan, 131 Conn. 307, 324, 39 A.2d 895 (1944).
Under the terms of the Paula Trust, the defendant was the donee of only a limited or nongeneral power of appointment. [HN4] “(1) A power of appointment is general if it is exercisable [***15] in favor of any one or more of the following: the donee of the power, the donee’s creditors, [*162] the donee’s estate, or the creditors of the donee’s estate. (2) Any other power of appointment is a nongeneral one.” 2 Restatement (Second), Property § 11.4 “Donative Transfers” (1986). “As a matter of both common law doctrine and the practicalities of the situation, the donee of a nongeneral power is not the owner of the appointive assets. The donee is in a fiduciary position with reference to the power and cannot derive personal benefit from its exercise. The donee’s creditors have no more claim to the appointive assets than to property which the donee holds in trust. It is immaterial whether or not the donee exercises the power.” Id., § 13.1, comment (a). The situation differs where the donee possesses a general power of appointment. “Where . . . a general power has been created, the donee is substantially in the position of an owner.” Id. Because the defendant, having only a limited power of appointment, has no interest, beneficial or otherwise, in the appointive assets of the Paula Trust, no portion of those assets may be included in the marital estate.
Nor can the [***16] appointive assets be included in the marital estate by virtue of the plaintiff’s status as the object of the power of appointment given to the defendant. “An object of a power of appointment has an interest analogous to a contingent future interest in the property subject to the power . . . .” Id., § 11.2, comment (d). As one of the possible objects of the defendant’s power, the plaintiff possesses no more than a mere expectancy; her receipt of principal from the trust is wholly contingent upon the defendant’s exercising his discretion to appoint to her. Even if the marriage had continued, the plaintiff’s expectancy might never have been realized if, for example, the defendant had elected to appoint the entire corpus of the Paula Trust to one of his brothers. The plaintiff had no vested right at any [*163] time to the trust corpus that would permit its inclusion in the marital estate. See Rubin v. Rubin, 204 Conn. 224, 231, 527 A.2d 1184 (1987) (future property that is a “mere expectancy” is not subject to division in a divorce action).
Finally, because a limited power of appointment such as the defendant’s is not, itself, an asset of the donee; Supreme Colony [***17] v. Towne, 87 Conn. 644, 648, 89 A. 264 (1914); it may be neither assigned nor delegated. The trial court properly refused to order the defendant to exercise his limited power of appointment and properly concluded that the plaintiff was not entitled a share of the Paula Trust.
The plaintiff next claims that the trial court’s award of nonmodifiable, time limited periodic alimony was clearly erroneous. 5
5 As part of the court’s award, the plaintiff received a lump sum payment of over $ 100,000 as well as the marital residence valued at $ 225,000 subject to a mortgage of approximately $ 30,000. She was awarded alimony of $ 45,000 payable over four years, ending December 7, 1994, plus two additional years at $ 1 per year.
“The issue of time limited alimony has been considered by this court in a number of cases. See Watson v. Watson, 20 Conn. App. 551, 568 A.2d 1044 (1990); Sunbury v. Sunbury, [13 Conn. App. 651, 538 A.2d 1082 (1988)]; O’Neill v. O’Neill, 13 Conn. App. [***18] 300, 536 A.2d 978, cert. denied, 207 Conn. 806, 540 A.2d 374 (1988); Louney v. Louney, 13 Conn. App. 270, 535 A.2d 1318 (1988); Markarian v. Markarian, 2 Conn. App. 14, 475 A.2d 337 (1984). In each of these cases, we stated that [HN5] one purpose of limiting the duration of an alimony award [**615] is to provide an incentive for the spouse receiving support to use diligence in procuring training or skills necessary to attain self-sufficiency. See Markarian v. Markarian, supra, 16.
[*164] “In these cases, we reviewed whether there was sufficient evidence to support the trial court’s finding that the spouse should receive time limited alimony for the particular duration established. If the time period for the periodic alimony is logically inconsistent with the facts found or the evidence, it cannot stand. O’Neill v. O’Neill, supra.” Henin v. Henin, 26 Conn. App. 386, 391-92, 601 A.2d 555 (1992).
The trial court must consider all of its financial orders as a cohesive unit. Brash v. Brash, 20 Conn. App. 609, 614, 509 A.2d 44 (1990). The trial court need not make a detailed finding justifying its award of time limited alimony, [***19] but the record must indicate the basis for that award, and there must be sufficient evidence supporting the award for the particular duration established. Mathis v. Mathis, 30 Conn. App. 292, 293, 620 A.2d 174 (1993); Ippolito v. Ippolito, 28 Conn. App. 745, 751-52, 612 A.2d 131, cert. denied, 224 Conn. 905, 615 A.2d 1047 (1992).
Our review of the record in this case indicates that the trial court considered a number of the criteria set out in General Statutes § 46b-82 in exercising its discretion to award time limited alimony, including the length of the marriage, the causes of the dissolution, the age, health, station, occupation, amount and sources of income, along with the vocational skills, employability, estate and needs of the parties. We recognize that the trial court did not explicitly address each criteria. [HN6] The court has great discretion in domestic relations cases; Savage v. Savage, 25 Conn. App. 693, 695, 596 A.2d 23 (1991); and a reviewing court will give great weight to the financial awards because of the trial court’s opportunity to observe the parties and the evidence. Holley v. Holley, 194 Conn. 25, 29, 478 A.2d 1000 (1984). [***20] While the trial court did not specifically address rehabilitative alimony, the record supports the court’s conclusion that the plaintiff is not in need of [*165] training or further education in order to obtain the skills necessary to attain self-sufficiency. See Wolfburg v. Wolfburg, 27 Conn. App. 396, 400, 606 A.2d 48 (1992). “Although time limited alimony awards are essentially rehabilitative in purpose, there may be other valid reasons for awarding such alimony.” Roach v. Roach, 20 Conn. App. 500, 506, 568 A.2d 1037 (1990). “The particular length of time needed for alimony can sometimes be established by predicting when future earnings, based on earning capacity as known at the time of the dissolution, will be sufficient for self-sufficency.” Wolfburg v. Wolfburg, supra.
The evidence in the record as to the plaintiff’s education, ability and vocational skills, and the absence of any evidence of physical or mental restrictions, reasonably lead to a conclusion that she will resume a successful business career in a relatively short period of time. We conclude that neither placing a time limit on the alimony nor ordering that its duration be nonmodifiable [***21] was logically inconsistent with these factors.
The plaintiff’s final claim is that the trial court improperly awarded the lump sum and periodic alimony and the division of property.
[HN7] As a reviewing court, we are limited to determining whether the trial court abused its discretion in making financial awards. Barnes v. Barnes, 190 Conn. 491, 494-95, 460 A.2d 1302 (1983). To conclude that the trial court abused its discretion, we must first find that the court either incorrectly applied the law or could not reasonably have concluded as it did. Wolfburg v. Wolfburg, supra, 398. Here, the court made clear that it intended to set a greater share of the marital estate to the plaintiff than to the defendant and that one of the difficulties in this matter was to produce an equitable dissolution judgment in a deteriorating financial market. [*166] We have reviewed the record and the evidence in this [**616] case and conclude that the financial awards are within the parameters of the trial court’s broad discretion and made in accordance with the law and the evidence.
The Defendant’s Cross Appeal
The defendant first claims that the trial court improperly [***22] ordered him to exercise his limited power of appointment to appoint to the plaintiff one half of the appreciation of the Timothy Trust. We agree with the defendant.
At the time the defendant’s mother set up the Paula Trust in 1975, she also set up another trust. That trust was funded in 1985 after the defendant’s mother died. The trust property was divided into four equal portions for the defendant and his three brothers; the defendant’s portion is referred to as the Timothy Trust.
Article third, § (a), of the Timothy Trust provides that the trustee, in its discretion, can pay out so much of the annual net income and principal as the trustee deems advisable for the defendant’s care, maintenance and support. Thereafter, the trustee can distribute to the defendant’s four children, not necessarily equally, so much of the balance of the income and principal as the trustee deems advisable for their maintenance, support and education. Article third, § (b), provides that the defendant in his sole discretion may appoint all or any part of the principal of the Timothy Trust, “in trust or otherwise, to or for the benefit of any person, persons or charitable organizations, or any of [***23] them, except himself, his estate, his creditors or the creditors of his estate.” If, at death, the defendant has not exercised [*167] this limited power as to all of the principal of the trust, the balance will be divided equally among his four children.
The trial court determined that because the Timothy Trust did not exclude the plaintiff as a possible beneficiary of the power of appointment and the plaintiff is not a creditor, she should share in the appreciation of the trust principal. As ordered, this would give the plaintiff 50 percent of the difference between the trust’s funding value of $ 237,826 and its market value at the close of business on December 1, 1990, the accounting date nearest to the date of judgment. For nearly the same reasons that we concluded that the plaintiff is not entitled to a share in the Paula Trust, we conclude that she is not entitled to a share in the Timothy Trust.
As we noted earlier in this opinion, a limited power of appointment such as the defendant’s is not an asset of the defendant that can be assigned or transferred. Supreme Colony v. Towne, supra, 648-49. The power does not confer on the defendant any title to or interest [***24] in the appointive property. Bankers Trust Co. v. Variell, 143 Conn. 524, 528, 123 A.2d 874 (1956). Unlike a general power, which in some contexts is deemed to be the equivalent of ownership over the appointive assets, a limited power confers on the donee none of the beneficial enjoyment of the property. Nor does the plaintiff have more than a mere expectancy in the trust property. Rubin v. Rubin, supra.
The plaintiff recommends that we cast aside the common law principle that appointive property is not an asset of the donee and that we recognize an equitable power in the trial court to reach the appointive assets and include them in the marital estate. She urges us to employ “a common sense notion that such powers over wealth should be deemed the equivalent of property subject to a court’s control in a dissolution proceeding.” [*168] The plaintiff relies on a doctrine applicable to general powers, “that property of a third person, not owned by a [donee] but over which he had and has exercised a general power of appointment, is deemed in equity to be charged with the payment of the debts of the donee to the extent that his own estate is insufficient to [***25] satisfy them . . . . and while doubts have often been expressed as to the soundness of the reasons underlying [this doctrine] and the logical difficulties involved have been noted, it has been generally adopted [**617] and applied in appropriate cases. . . . The doctrine is purely one of equity. ‘On no theory of hard fact is the property appointed the property of the donee of the power. But very early equity grafted onto these bald facts a principle of fair dealing. That principle was founded on the idea that a man ought to pay his debts if he could. Equity assumed as a matter of good conscience and sound morals that a man in debt could not honestly have meant to give property to his friends or relatives to the exclusion of his creditors, when he could give it to anybody he chose. . . . This is another of numerous illustrations of the application by courts of “fundamental ethical rules of right and wrong” to the complicated affairs of mankind.'” State ex rel. Beardsley v. London & Lancashire Indemnity Co., 124 Conn. 416, 427-28, 200 A. 567 (1938). In keeping with this principle, the plaintiff also urges us to treat the assets subject to the defendant’s limited [***26] power of appointment as they might be treated under the transfer and succession tax laws if they were subject to a general power of appointment in the defendant. By this analysis, she contends, the appointive assets would be includable in the marital estate and would be subject to distribution by the trial court.
The plaintiff’s position has an obvious flaw: While this equitable principle may apply to general powers of appointment, the power possessed by the defendant [*169] under the Timothy Trust was only a limited power. Although the plaintiff acknowledges this important distinction, she urges us to ignore it. We decline to do so.
We earlier underscored the important difference between a general and a limited or nongeneral power of appointment. Again we point out that the nature of this power is such that the defendant, himself, can derive no personal benefit from its exercise. While it is certainly possible, as the plaintiff proposes, that the defendant can indirectly benefit from the power by appointing to persons — his brothers, for instance — who might turn the money back over to the him, we cannot and will not base our decision on such speculation. The trust [***27] instrument specifically provides that the power may not be exercised for the benefit of the defendant himself, his estate, his creditors, or the creditors of his estate. Financial awards made in a dissolution proceeding are, by their very nature, a benefit to one party and an obligation to another.
Moreover, while the class of appointees under the Timothy Trust is broader than that under the Paula Trust, the trust instrument expressly excludes creditors from the class of appointees. Contrary to the trial court’s statement that the plaintiff is not a creditor, the judgment in this dissolution action established the plaintiff’s status as that of a judgment creditor. See Urrata v. Izzillo, 1 Conn. App. 17, 18, 467 A.2d 943 (1983) (former spouse is a judgment creditor pursuant to a judgment for alimony and child support); see also McAnerney v. McAnerney, 165 Conn. 277, 287, 334 A.2d 437 (1973); 2 Restatement (Second), Property § 13.7 “Donative Transfers,” (1986) Reporter’s note 4 (as a result of divorce, spousal claims established in divorce proceedings entitle spouse to same rights against appointive assets as would be available to a creditor). The plaintiff is [***28] thus no longer a permissible appointee.
[*170] We therefore conclude that the trial court improperly ordered the defendant to exercise his limited power of appointment under the Timothy Trust in favor of the plaintiff. 6
6 The defendant also, as part of this claim on his cross appeal, alleges that the trial court incorrectly calculated the amount of the lump sum payment awarded to the plaintiff. Because of our disposition of the first issue on his cross complaint we find it unnecessary to address this.
The defendant next claims that the trial court abused its discretion in apportioning personal property between the parties. Specifically, he claims that the court failed to consider written proposals submitted by the parties and incorrectly applied the criteria ordinarily relevant to apportionment.
[**618] Because our resolution of the defendant’s first claim requires that we remand the case to the trial court for a reconsideration of all the financial orders; Sunbury v. Sunbury, 210 [***29] Conn. 170, 175, 553 A.2d 612 (1989); we need not address this issue.
The judgment is reversed as to the financial orders and the case is remanded for further proceedings consistent with this opinion.
987 F.Supp. 1160
Joanne R. DEAN, et al., Plaintiffs, v. UNITED STATES of America, Defendant.
United States District Court, W.D. Missouri, Western Division.
December 4, 1997.
Edward J. Essay, Colorado Springs, CO, for Plaintiffs.
Anita L. Mortimer, U.S. Atty’s Office, Kansas City, MO, Carol E. Schultz, U.S. Dept. of Justice, Tax Div., Civil Trial Section, Washington, DC, for Defendant.
LAUGHREY, District Judge.
This case was tried to the Court on November 4 and 5, 1997. Plaintiffs, as the Trustees of the George and Catherine Irrevocable Trust, assert that a wrongful levy was made on trust assets by the Internal Revenue Service (“IRS”). The government claims that the levy was proper because George and Catherine Mossie are delinquent taxpayers and the George and Catherine Irrevocable Trust is merely the alter ego of these delinquent taxpayers. The trustees claim that the trust is not the alter ego of George and Catherine Mossie, therefore, the seizure of trust property by the IRS was wrongful and the property should be returned to the trust.
The Court makes the following findings of fact and conclusions of law.
FINDINGS OF FACT
- In 1950, George W. Mossie married Catherine P. Mossie.
- In 1967, George W. Mossie and Catherine P. Mossie separated and lived apart from one another and continue to do so. During this separation, the Mossies continued to perform their respective functions in the various family businesses and were amicable in their relationship with each other.
- Prior to their separation, the Mossies had four children, Tom Mossie, Joanne R.
Mossie (Dean), Janet A. Mossie and Linda L. Mossie.
- In 1987, the Mossies decided to equally divide part of the real property owned in their individual names. The division was done because of their long-term separation and upon the advice of their estate planning counsel. On February 23, 1987, deeds were prepared and the property was conveyed into their respective 1987 revocable trusts.
- In September of 1987, George W. Mossie was severely injured in an automobile accident and thereafter underwent multiple surgeries which rendered him disabled. In 1988, Catherine P. Mossie suffered a life-threatening illness from which she was not expected to recover. She also had surgery in 1989. Because of these illnesses, George and Catherine Mossie decided to transfer their assets into an irrevocable trust for the sole benefit of their children. This was done on advice of their estate planning counsel.
- In November of 1989, the Mossies executed the George and Catherine Irrevocable Trust (hereinafter 1990 Irrevocable Trust) naming Joanne Mossie Dean and Janet A. Mossie as the trustees. The following assets were to be transferred into the irrevocable trust.
- 20,000 shares of Summit Structural Steel.
- Fifteen duplex units, which had been acquired in 1975 in the name of George and Tom Mossie.
- Lake investment property which was used for family vacations.
- The foregoing assets were not transferred into the trust until December 4, 1990. The delay was caused by the ill health of George and Catherine Mossie.
- When the Mossies transferred their assets into the trust on December 4, 1990, they did not know that their 1988 tax return was being audited by the IRS. At that time, they did not know that they would be assessed back taxes by the IRS. Eventually, the IRS audited the Mossies’ 1987, 1988, 1989, and 1990 jointly-filed tax returns and did assess back taxes against them.
- At the time the assets were transferred into the 1990 Irrevocable Trust, the Mossies had a net worth sufficient to cover their current liabilities and the tax liability that was eventually assessed against them by the IRS.
- After a proceeding in the United States Tax Court to determine the tax deficiency owed by the Mossies for their jointly-filed returns for tax years 1987, 1988, 1989, and 1990, the IRS assessed back taxes and penalties against the Mossies in the amount of $281,093.95.
- On February 8, 1993, the Internal Revenue Service assessed a trust fund recovery penalty in the amount of $109,125.71 against George W. Mossie, Tom Mossie and Summit Structural Steel, relating to the unpaid employment taxes withheld from the wages of the employees of Summit Structural Steel pursuant to I.R.C. § 6672. This assessment was made against George W. and Tom Mossie because they were persons required to collect and truthfully account for and pay over to the United States the federal social security and income taxes withheld from the wages of the employees of Summit Structural Steel, Inc., for the taxable quarter ending June 30, 1992.
- On May 4, 1994, two additional real estate holdings were transferred into the 1990 Irrevocable Trust.
- The west 70 feet of Lot 2, Highway Lane Addition, a subdivision in Lee’s Summit, Missouri.
- Lot 85, Braeside Addition, a subdivision in Lee’s Summit, Jackson County, Missouri, also known as 311 Lincolnwood.
- Log 4, Ziegler Addition, a subdivision in Lee’s Summit, Jackson County, Missouri.
These properties were titled in the name of Alamo Real Estate Company, a company owned by George and Catherine Mossie, which was dissolved in 1994 because of financial difficulty.
- In 1995, notices of a federal tax lien were filed with the Recorder of Deeds for Jackson County, Missouri, and Morgan County, Missouri, against property held in the names of Joanne R. Dean and Janet A. Mossie, as co-trustees of the 1990 Irrevocable Trust. These liens were levied against
the trustees as the nominees or alter egos of George W. Mossie and Catherine P. Mossie.
- The 1990 Irrevocable Trust is not the nominee or alter ego of delinquent taxpayers George W. Mossie and Catherine P. Mossie.
- The assets of the 1990 Irrevocable Trust are controlled by the Plaintiff trustees and not George W. Mossie and Catherine P. Mossie.
- Except for a brief period at the beginning of the trust when Catherine Mossie used old checks to pay for rental property expenses, all trust checks are signed by the trustees. Catherine Mossie used the old checks because she did not want to waste them.
- All deeds and other transfer documents are signed by the trustees.
- All tax returns are executed by the trustees.
- All promissory notes are executed by the trustees.
- All management decisions concerning the trust and its property are made by the trustees, not Catherine or George Mossie.
- George and Catherine Mossie do receive some benefits from the trust.
- The trustees permit Catherine Mossie to live at 311 Lincolnwood Drive, which has been the family home for the last 33 years. Catherine Mossie does not pay rent to live at 311 Lincolnwood Drive. Catherine Mossie does pay the utilities at 311 Lincolnwood Drive.
- The trust also provides a car to Catherine Mossie and George Mossie which is available for their personal use.
- The trustees would permit George and Catherine Mossie to stay at the family vacation home, but only Catherine has gone there since 1990 and only once or twice.
- George Mossie did not significantly benefit when the trust loaned $275,000 to Summit Structural Steel to pay employment taxes and penalties for the period ending June 30, 1992. At the time of the loan, the majority shareholder of Summit Structural Steel was the 1990 Irrevocable Trust, and the minority shareholder was Tom Mossie. When the employment taxes of Summit Structural Steel were paid off, the trust and Tom Mossie, as owners of the corporation, were the primary beneficiaries. It would be illusory to say that the loan was, therefore, for the benefit of George Mossie merely because he was also liable as an officer of the corporation.
- George and Catherine Mossie receive no money from the trust except reimbursement for minimal expenses incurred on behalf of the trust and for gasoline and auto maintenance.
- George and Catherine Mossie have provided benefits to the trust.
- Catherine Mossie presently manages fifteen duplex rental units which are owned by the trust. She also managed the units when they were owned by her husband and her son. She receives no compensation from the trust for her management of the rental units. She received no compensation for managing the rental property when it was owned by her husband and son.
- Catherine Mossie is the bookkeeper for the trust and is not paid for this service.
- George Mossie infrequently helps with the rental units by picking up parts needed for repairs.
- After the transfer of the rental units to the trust, Catherine Mossie’s responsibilities were decreased and were assumed by the trustees. Tom Mossie and the trustees now are actively involved in the maintenance, cleaning and repair of the rental units. The trustees make the ultimate management decisions concerning the rental property.
- Other than to recommend the bank and to introduce the trustees to the bank officers, neither George nor Catherine Mossie helped the trustees to get a loan from the LaMonte Bank to pay employment taxes owed by Summit Structural Steel.
CONCLUSIONS OF LAW
Pursuant to § 6321 and 6322 of the Internal Revenue Code (26 U.S.C., “the Code”) a tax lien in favor of the United States attaches to all properties and rights to property of a delinquent tax payer from the date the tax liability is assessed. Glass City Bank of Jeanette, Pa. v. United States, 326
U.S. 265, 267-68, 66 S.Ct. 108, 110-11, 90 L.Ed. 56 (1945). The federal tax lien continues until the tax liability is fully satisfied or becomes unenforceable due to lapse of time. 26 U.S.C. § 6322; Guthrie v. Sawyer, 970 F.2d 733, 735 (10th Cir.1992).
The United States may also file tax liens against property held by a third party, (i.e., person other than the taxpayer) where the third party is the nominee or alter ego of the taxpayer. When such a lien has been filed, the United States may levy upon the property. See, e.g., G.M. Leasing Corp. v. United States, 429 U.S. 338, 350-51, 97 S.Ct. 619, 627-28, 50 L.Ed.2d 530 (1977); F.P.P. Enters. v. United States, 830 F.2d 114, 117-18 (8th Cir.1987); Loving Saviour Church v. United States, 728 F.2d 1085, 1086 (8th Cir. 1984).
A third party who claims an interest in the property seized by the government may challenge the seizure in a wrongful levy action in the United States District Court pursuant to Code § 7426. In such an action, the initial burden is on the Plaintiff to prove (1) an interest in the property and (2) the tax assessment is for taxes owed by another taxpayer. The burden then shifts to the government to produce substantial evidence showing a nexus between the property and the taxpayer. The Plaintiff has the ultimate burden of proving that the levy was wrongful and should be overruled. Xemas, Inc. v. United States, 689 F.Supp. 917, 922 (D.Minn. 1988), aff’d, 889 F.2d 1091 (8th Cir.1989), cert. denied, 494 U.S. 1027, 110 S.Ct. 1472, 108 L.Ed.2d 610 (1990).
It appears that state law controls the question of whether a third party is the alter ego of the taxpayer. Aquilino v. United States, 363 U.S. 509, 513, 80 S.Ct. 1277, 1280, 4 L.Ed.2d 1365 (1960); Morgan v. Comm’r of Internal Revenue, 309 U.S. 78, 82, 60 S.Ct. 424, 426, 84 L.Ed. 585 (1940). “[I]n the application of a federal revenue act, state law controls in determining the nature of the legal interest which the taxpayer had in the property … sought to be reached by statutes.” Id. at 82, 60 S.Ct. at 426. While Aquilino and Morgan seem to clearly indicate that state law controls in a wrongful levy case such as this, there has been confusion over the issue. It appears that some federal courts have considered more than state law to determine whether a third-party is the alter ego of the taxpayer, e.g., James E. Edwards Family Trust by Edwards v. United States, 572 F.Supp. 22, 24-25 (D.N.M. 1983); Loving Saviour Church, 728 F.2d at 1086; Valley Finance, Inc. v. United States, 629 F.2d 162 (1980) (“Given the diversity of corporate structures and the range of factual settings in which unjust and inequitable results are alleged, it is not surprising that no uniform standard exists for determining whether a corporation is simply the alter ego of its owner.” Id. at 172.) One court has held, however, that the question of whether state or federal law controls is of little importance because the standards are so similar. “The issue under either state or federal law depends upon who has ‘active’ or ‘substantial control.’” Shades Ridge Holding Co., Inc. v. United States, 880 F.2d 342 (11th Cir.1989). While the Court believes that Aquilino and Morgan require application of state law in this case, the Court’s conclusion would be the same even if the additional factors suggested by the government and considered in other federal cases were also taken into account.
While the Missouri courts have never considered the alter ego doctrine in the context of a trust, the doctrine has been applied in the corporate context where an effort is being made to pierce the corporate veil. Collet v. American Nat’l Stores, Inc., 708 S.W.2d 273, 283 (Mo.App.1986). In such cases, the Missouri courts use a three-part test. An individual will be deemed to be the alter ego of a corporation when:
1) The individual completely dominates and controls the finances, policy and business practice of the other corporation.
2) Such control was for an improper purpose such as “fraud or wrong, or … unjust act in contravention of [a third parties’] legal rights.”
3) The alter ego’s control of the corporation caused injury to the third party. National Bond Finance Co. v. General Motors Corp., 238 F.Supp. 248, 256 (W.D.Mo. 1964), aff’d, 341 F.2d 1022 (8th Cir.1965); K.C. Roofing Center v. On Top Roofing, Inc., 807 S.W.2d 545 (Mo.App.1991). The alter
ego doctrine, however, will only apply where a corporation has “no separate mind, will or existence of its own.” Thomas Berkeley Consulting Eng’r, Inc. v. Zerman, 911 S.W.2d 692, 695 (Mo.App.1995).
Because there is no Missouri law applying the alter ego doctrine to trusts, the court assumes that the same standard applied in the corporate context would be applied to trusts. At a minimum, Missouri law would require a showing that the alter ego of the trust so dominated it that the trust had “no separate mind, will or existence of its own.” Thomas Berkeley, 911 S.W.2d at 695. Applying this standard to the 1990 Irrevocable Trust, it is clear that the trust is not the alter ego of George and Catherine Mossie.
Like thousands of aging adults, George and Catherine Mossie created a trust for the benefit of their children, making it irrevocable as their health deteriorated. They did not rely on a mail order product peddled by tax protesters. They set up their trust with an estate planner from a sophisticated law firm. They executed the documents necessary to transfer the legal title of their assets to the trust, and, other than a brief period when Catherine Mossie wrote checks for the rental property using old personal checks rather than trust checks, the trustees executed all documents requiring signatures by the owner of the trust property. Tax returns were executed by the trustee. Checks were signed by the trustees. The trustees decided how to spend trust assets, when to make repairs on the rental property, and the rent to be paid by tenants. The trustees borrowed and repaid money in the name of the trust. In other words, the legal control of the trust assets has consistently been exercised by the trustee, not the taxpayer. These trusts were not a sham and did “coincide with economic reality.” F.P.P. Enters., 830 F.2d at 117. Also see James Edwards Family Trust, 572 F.Supp. at 24. While it is true that there is a family relationship between the trustees and the taxpayers, the taxpayers had forever given up the right to control the disposition of the trust property and whatever advice the taxpayer gives to the trustee can be ignored. The government minimizes the importance of legal title and legal control, but the ancient law of trust is grounded in just such distinctions.
The government is correct that practical control is an important consideration, but the Court finds that the balance weighs in favor of the taxpayer on this question as well. After the trusts were created, the behavior of the trustees and settlors changed. The trustees made the decisions about the assets and also became more actively involved in the cleaning, maintenance and rental of the duplexes. While Catherine Mossie continues to be involved in the maintenance of the rental property, it is clear that she does not control the decision-making. George Mossie is no more involved in the rental property than any parent who occasionally helps their children with business advice or runs an errand for them to pick up supplies. It is not unusual for parents to continue to help their children, even after the parents’ assets are placed in trust. Indeed, even where a parent’s assets are transferred in fee simple presently to the children, most parents continue to help. Indeed, even if parents have never transferred any property to their children, parents help children with their property. That is how families do function and should function. It would substantially undermine trust law if such behavior was sufficient to characterize the settlor as the alter ego of the trust and negate the validity of the trust.
The trust does not support George and Catherine Mossie. They receive no money from the trust except reimbursement for minimal expenses incurred on behalf of the trust. It is true that they both drive cars owned by the trust for their personal use and Catherine Mossie lives in the family home. But these facts alone are insufficient to characterize the trust as the alter ego of the taxpayers. A beneficiary of the trust could sue the trustees for failing to comply with a term of the trust, but small deviations from the trust are not enough to invalidate the whole trust.
The government attempted to show that the $275,000 loan made to Summit Structural Steel, Inc. was for the benefit of George Mossie because he was chairman of the board and, in that capacity, was liable for the
past-due employment taxes of the corporation. Tom Mossie, however, owned 49 per cent of the stock of Summit Structural Steel and, as president of the corporation and a stockholder, was also liable for the employment taxes. More importantly, the trust owned 51 per cent of the stock and would be directly liable if the taxes were not paid. Any benefit to George Mossie under these circumstances is illusory and is certainly not enough evidence that the trust had “no separate mind, will, or existence of its own.” Thomas Berkeley, 911 S.W.2d at 695.
The fact that the trustee’s parents were permitted to use the family vacation property is de minimis given that they had little or no contact with the vacation property, did not use it even when it was in their own name and such sharing would be expected. It is also significant that at the time the property was placed in trust, the taxpayers had sufficient assets to meet their tax liability and to provide for their own personal expenses. There is no evidence that the trust was created for an improper purpose.
The cases cited by the government in support of their argument that the alter ego doctrine is applicable to this case are not persuasive because they are factually distinguishable. The government’s authority falls into two categories. The first group of cases involve trusts established by or with the assistance of tax protestors. The so-called “family” trusts give the settlor complete access to the trust property so that the settlor can use it for self-support. This is because the trustee is completely controlled by the settlor. Loving Saviour Church, 728 F.2d at 1086. (The taxpayer transferred all assets to a trust and the trust transferred the assets to a church which was established and controlled by the taxpayer. The taxpayer/settlor received all his support from the church which received all the income from the taxpayer’s chiropractic practice); F.P.P. Enters. 830 F.2d at 117 (The trust lacked the essential elements of a trust. The trust failed to identify beneficiaries and the taxpayer, not the trustee, exercised control over the trust property. The taxes on the trust property and the expenses paid to maintain the trust property were deducted from the personal income tax of the taxpayer.)
In the second group of cases cited by the government, corporations have been found to be the alter ego of the taxpayer because the taxpayer controls the corporate entity. Wilcox v. United States, 983 F.2d 1071 (6th Cir.1992) (Table); 1992 WL 393581 (unpublished per curium opinion) (The corporation and trust were the alter ego of taxpayer/anesthesiologist because the taxpayer commingled corporate, individual and pension property and as the only shareholder and officer of the corporation and as the only trustee of the pension had complete control over the disposition of corporate and pension property. Wolfe v. United States, 798 F.2d 1241 (9th Cir.1986), cert. denied, 482 U.S. 927, 107 S.Ct. 3210, 96 L.Ed.2d 697 (1987) (Wolfe was deemed to be the alter ego of corporation/taxpayer because Wolfe was the sole shareholder of the corporation and, as the director and president of the corporation, made all corporate decisions without consulting with the other directors. Corporate expenses, including personnel costs, were paid from a sole proprietorship operated by Wolfe and all income of the corporation was put into the sole proprietorship’s bank account); Ames Investment, Inc. v. United States, 819 F.Supp. 666 (E.D.Mich.1993), aff’d, 36 F.3d 1097, 1994 WL 529863 (6th Cir.1994) (A corporation was formed to purchase and manage real estate. The first property purchased was a house which was used as the personal residence of the taxpayer who was a shareholder and director of the corporation. This house was the most valuable asset of the corporation. It was never rented or used as an office. There were never any corporate meetings and there was no capitalization of the corporation or any profit from the corporation.)
The common thrust of all these cases is that the alter ego doctrine will apply when the delinquent taxpayer is really in control of the corporation or trust and so dominates it that the corporation or trust form exists, but there is no substance to it. As already discussed, the 1990 Irrevocable Trust is a valid trust instrument, created for a valid purpose, comports with economic reality, and the trustees, in most aspects, have respected the terms of the trust. To permit the alter ego doctrine to apply in such a case would require
an expansion of the alter ego doctrine which the Court is unwilling to do without clearer direction from Congress or the Missouri courts. The Court, therefore, finds that the levies by the IRS against the assets of the George and Catherine Irrevocable Trust of December 4, 1990, was unlawful. The property seized by the IRS pursuant to the levies shall be returned to the trustees and all tax liens related to the unlawful levies shall be released. The Plaintiffs’ request for damages and attorneys’ fees is denied.
One troubling aspect of this case is the fact that the family home was deeded to the trust but Catherine Mossie has continued to control and occupy the home since the formation of the trust. The trustees acknowledged at trial that they and the Mossies have always understood that Catherine Mossie would continue to occupy the house until her death. Catherine Mossie also holds a deed of trust against the house which secures a promissory note in favor of Catherine Mossie. That promissory note is in default and has been since the property was transferred into trust. Catherine Mossie has the beneficial interest in the property during her lifetime and holds the key to the legal title at any time that she chooses to foreclose on the property. While it is true that the trust holds legal title until foreclosure, effectively Catherine Mossie controls the future disposition of the family home. While an argument could be made that the house was never a part of the trust, even though legal title was transferred to it, the government has insisted during this litigation that the house was properly placed in trust and is subject to the trust. The government’s position, therefore, forecloses a finding that the house is subject to the IRS levy because it is the property of the delinquent taxpayer, Catherine Mossie, not the property of the trust. The Court’s decision in this case, however, does not preclude the IRS from levying on property owned by Catherine Mossie, such as the promissory note and deed of trust on the property at 311 Lincolnwood. The only issue before this Court, however, is whether the levy by the IRS against the assets of the trust was wrongful. The Court has rejected the government’s argument that the 1990 Irrevocable Trust is the alter ego of George and Catherine Mossie and, therefore, the IRS levy on the trust property was wrongful and the trust property must be returned to the trust and the liens released from the trust property.
Accordingly, it is hereby ORDERED that:
- Judgment be entered in favor of Plaintiff trustees.
- The property of the 1990 Irrevocable Trust which has been seized by the IRS to satisfy the tax liability of George and Catherine Mossie shall be returned to the trustees.
- The 1995 tax liens filed with the Recorder of Deeds for Jackson County, Missouri, and Morgan County, Missouri, against property held in the name of Joanne R. Dean and Janet A. Mossie as co-trustees of the 1990 Irrevocable Trust shall be forthwith release.
- The Plaintiffs’ request for damages and attorneys’ fees is denied.