- CC-11-1433-HPaD (BAP 9th Cir. Aug. 4, 2012); 2012 Bankr. LEXIS 4023
- In the majority opinion of the Bankruptcy Appellate Panel for the Ninth Circuit Court of Appeals ("BAP 9th Cir."), the Court, affirming the bankruptcy court order and judgment, held that the chapter 7 trustee ("Trustee") was entitled to reach only up to 25% of the chapter 7 debtor's ("Debtor") interests in two "spendthrift" trusts established under the California Probate Code §§ 15300 et seq ("Probate Code"). The majority found that, under the Probate Code, while a beneficiary's interest in the income and principal of a spendthrift trust is protected from the claims of creditors as long as the income and/or principal remains in the trust, once the income or principal of a spendthrift trust is distributed to a beneficiary, it can be reached by creditors. Cal. Prob. Code §§ 15300, 15301. The Court went on to hold that of the recognized exceptions to the foregoing general rule, only the exception contained in Probate Code section 15306.5, which provides that a money judgment creditor may satisfy its judgment out of the payments to which the beneficiary is entitled under the spendthrift trust so long as the payment does not exceed 25% of the payment that otherwise would be made to the beneficiary, was applicable because the Debtor was only permitted to receive distributions from principal and not income (and thus the exception in section 15307 was inapplicable). The dissent disagreed with the majority's analysis and interpretation of the California Probate Code and contended that a more appropriate reading would permit the Trustee to seek, in the discretion of the bankruptcy court, additional amounts above and beyond the 25% cap under Cal Prob. Code § 15307.
- Procedural context:
- The trustees of the spendthrift trusts filed an adversary proceeding seeking a declaratory judgment determining whether and to what extent the Debtor's bankruptcy estate held an interest in the trusts. Subsequently, the Debtor filed a motion for partial summary judgment seeking partial summary adjudication and judicial declaration that pursuant to the Probate Code, particularly section 15306.5, the estate was entitled to reach no more than 25% of the Debtor's interest the trusts. The Trustee opposed the summary judgment motion, arguing that distributions of principal amounts payable to a beneficiary under a trust are not protected under Probate Code section 15301(b). Accordingly, the Trustee contended that the estate could potentially reach all of the distributions to be made to the Debtor, which were expected to be made from principal. Alternatively, the Trustee maintained that, under Probate Code section 15307, the estate could reach the Debtor's interest in all amounts from the trusts over and above what he required for his education and support. After a hearing on the Debtor's summary judgement motion, the bankruptcy court held that the Probate Code allowed the estate a maximum of 25% of the Debtor's interest in the spendthrift trusts, less any amount the debtor needed for his support or support of his dependents. The bankruptcy court entered an order and judgment to that effect in the adversary proceeding. The Trustee thereafter timely filed an appeal with the BAP 9th Circuit.
- In 2005, the Debtor's parents established a family trust. In November 2007, the Debtor's mother died and the family trust was split into three sub-trusts: (a) the Bypass Trust; (b) the Marital Trust; and, (c) the Survivor's Trust. Debtor's father retained the right during his lifetime to receive all the income from each of the trusts. While the Bypass Trust and the Marital Trust (together, the "Family Trust") were vested and not subject to further amendment, the Survivor's Trust ("Survivor's Trust") was amended from time to time by Debtor's father, who died in March 2009. Under the terms and conditions of the trusts, once the Debtor survived hid father by thirty days, he was entitled to receive distributions from the Family Trust and the Survivor's Trust. The assets in the Survivor's Trust were interests of undeveloped real property that did not generate income. Thus, the distributions to the Debtor were expected to be paid from trust principal. The terms of the last amended Survivor's Trust provided that after the Debtor survived his father for ten years, he would receive a final distribution of one-third of the remaining principal. The Family Trust and the Survivor's Trust were "spendthrift" trusts, containing provisions that "[n]o in-terest in the income or principal of any trust created under this instrument shall be voluntarily or involun-tarily anticipated, assigned, encumbered, or subjected to creditor's [sic] claim or legal process before actual receipt by the beneficiary." The Debtor filed a voluntary chapter 7 petition in March 2009 (apparently unaware of the existence of or his rights in the trusts). In April 2009, the trustees of the trusts filed the aforementioned adversary proceeding. The Debtor thereafter amended his schedules to list his vested interest in the Survivor's Trust.
- HOLLOWELL, PAPPAS and DUNN, Bankruptcy Judges. PAPPAS, Bankruptcy Judge, Dissenting.
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