Levin v. Wachovia Bank

Summarized by Beth Harrill , U.S. Bankruptcy Court, Northern District of Georgia
14 years 8 months ago

Citation:

2011 WL 2550435 (09-2344) (4th Cir. June 28, 2011) (unpublished)

Tag(s):

4th Circuit

Ruling:

In an unpublished opinion, the Fourth Circuit affirmed the District Court, holding that, under applicable Pennsylvania law, the spendthrift provisions of two trusts of which the chapter 7 debtor was a beneficiary represent “[a] restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law” pursuant to § 541(c)(2). As a result, it concluded that the debtor’s remainder interests in the trusts’ principal were not property of the bankruptcy estate under § 541(a)(1). The only issue on appeal was whether a debtor’s remainder interests in the corpus of the spendthrift trusts were property of the estate. (The Fourth Circuit noted that the Chapter 7 Trustee had conceded that the debtors’ interests in income and principal during the life of the trusts were protected by the spendthrift provisions). As a threshold matter, the Fourth Circuit rejected the Defendant trustees’ argument that the appeal should be dismissed as moot on the theory that provisions of the trusts permit the trustees to disburse the entire principal prior to the termination of the trusts. It noted, however, that there was no assertion that the trustees actually had distributed the entire principal of the trusts. In addition, the Fourth Circuit concluded that the fact that the Will Trust had terminated during the course of the litigation had no bearing on the mootness issue. As to the merits, the Fourth Circuit focused on the language of the spendthrift provisions. The 1976 Trust protects “the interest of any beneficiary in the corpus or income of any trust” and the Will Trust protects “all shares and interests in my estate and any property appointed under this will, whether principal or income.” Such provisions, the Fourth Circuit reasoned, protect not only income, but also the remainder interest in the principal. Because Pennsylvania law controlled and because Pennsylvania law protects the remainder interest in the corpus of a trust if a trust’s spendthrift provision so provides, the Fourth Circuit concluded that the district court correctly held that the chapter 7 debtor’s remainder interests in the corpus of the trusts were not property of the estate.

Procedural context:

Appeal by Chapter 7 Trustee of judgment of the District Court of the Eastern District of North Carolina (419 B.R. 297 (E.D.N.C. 2009)), reversing the Bankruptcy Court of the Eastern District of North Carolina.

Facts:

Chapter 7 debtor was beneficiary of two spendthrift trusts (referred to in the opinion as the 1976 Trust and the Will Trust). Each trust granted its trustees the authority to distribute income and principal in their discretion with a mandatory distribution at the trusts’ termination with remaining principal and income to be paid to the beneficiaries. Each trust contained a spendthrift provision. The Chapter 7 Trustee brought an adversary proceeding seeking turnover from the trustee of the 1976 Trust all amounts distributed to the debtor, including the principal of the trust, and all future income generated by the trust. The bankruptcy court granted the Defendant trustee’s motion to dismiss with respect to the debtor’s right to receive income and principal distributions during the life of the trust, finding such funds were protected by the spendthrift provision. The bankruptcy court denied the motion with respect to the debtor’s future remainder interest in the trust's principal, concluding it was property of the bankruptcy estate. Upon discovering the existence of the Will Trust, the Chapter 7 Trustee amended the complaint to seek turnover of these funds as well. On motions for summary judgment with respect to both trusts, the bankruptcy court ruled as follows: (1) the court granted summary judgment to the Defendant trustees, concluding that the income and principal distributions during the life of the trusts were not property of the estate; and (2) it granted summary judgment to the Chapter 7 Trustee, concluding that the debtor’s remainder interests in both trusts were property of the bankruptcy estate. The Defendant trustees appealed the latter ruling. The District Court reversed the bankruptcy court, concluding that the debtor’s remainder interests in the principal of the trusts were protected by valid spendthrift provisions. The Chapter 7 Trustee appealed the District Court order to the Fourth Circuit Court of Appeals.

Judge(s):

Wynn (concurring Motz, Gilman)

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