Frealy v. Reynolds
- Summarized by David Hercher , U.S. Bankruptcy Court, District of Oregon
- 8 years 2 months ago
- Citation:
- Frealy v. Reynolds, No. 12-60068 (9th Cir. Mar. 9, 2015).
- Tag(s):
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- Ruling:
- The Ninth Circuit has asked the California Supreme Court whether Probate Code § 15306.5 imposes an absolute cap of 25% on a bankruptcy estate’s access to a debtor-beneficiary’s interest in a spendthrift trust.
- Procedural context:
- The trustee of a spendthrift trust of which the chapter 7 debtor is the beneficiary filed an adversary proceeding asking the bankruptcy court to determine what interest, if any, the bankruptcy estate has in trust property. Debtor filed a motion for partial summary judgment, which the bankruptcy granted. A divided Ninth Circuit Bankruptcy Appellate Panel affirmed. On March 9, 2015, the Ninth Circuit certified to the California Supreme Court the question listed above, and it stayed further proceedings in this action pending the state supreme court’s decision whether to accept certification.
- Facts:
- In debtor’s motion for partial summary judgment, he argued that § 15306.5 limits the estate to 25% of debtor’s interest in the trust. The bankruptcy trustee countered that the estate is entitled to more than 25% because Probate Code § 15301(b) gives unrestricted access to the entire amount payable to debtor and, alternatively, that Probate Code § 15307 allows the estate to reach any amount of the trust interest not necessary for debtor’s education and support. In ruling for debtor, the bankruptcy held that § 15306.5 establishes an absolute maximum cap on what is recoverable by a judgment creditor at 25%. Although the BAP affirmed, its majority read § 15301(b) as merely setting forth the procedure that a creditor must follow to satisfy a claim from the principal of a spendthrift trust once the principal is payable but not yet distributed to the beneficiary. The Ninth Circuit agreed with the bankruptcy judge that the California Probate Code “is anything other than crystal clear.” The statute is subject to two vastly different readings: one giving creditors unfettered access to a beneficiary’s interest in the trust and another restricting creditors’ access to 25%. The Ninth Circuit was reluctant to decide which reading prevails without the authoritative guidance of the California Supreme Court.
- Judge(s):
- Alex Kozinski and Susan P. Graber, Circuit Judges, and Charles R. Breyer, Senior District Judge for the Northern District of California, sitting by designation.
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