- Citation:
- United States Court of Appeals for the Eighth Circuit, No. 10-2117, No. 2123, Appeals from the United States District Court for the Western District of Arkansas, August 12, 2011
- Tag(s):
-
- Ruling:
- The Court held that because the debtor was the beneficiary of a valid spendthrift trust under non-bankruptcy law, her interest in the distributions of net income from that spendthrift trust was entitled to the same protections and restrictions after she filed her bankruptcy petition, pursuant to Section 541(c)(2) of the Bankruptcy Code, as it enjoyed before she filed her bankruptcy petition.
- Procedural context:
- Appeal from an order of the District Court affirming the judgment of the Bankruptcy Court in an interpleader and declatory judgment action.
- Facts:
- Ronald Reagan ("Ronald") died February 1, 2000, leaving an estate valued at nearly $20 million. Ronald's will created a testamentary trust ("Trust") for the benefit of his wife Cheryl Reagan, which included a spendthrift provision. Under the terms of the Trust, commencing with Ronald's death, Cheryl was to receive periodic distributions of the net income generated by the corpus of the Trust. Cheryl was also named as the executrix of Ronald's estate. Approximately four years after Ronald's death, one of Robert's sons ("Bachelor") obtained a probate court order permanently freezing the remaining assets of Ronald's estate, removing Cheryl as executrix of the estate and appointing Bachelor as successor personal representative based upon grounds of Cheryl's defalcation as the executrix. Cheryl subsequently filed a chapter 11 bankruptcy petition. The Bankruptcy Court later lifted the automatic stay allowing the final administration of Ronald's estate in the probate court to proceed. When the Trust later began to generate income from certain funding, the bank that was named as trustee in Ronald's will filed an interpleader and declatory judgment action in the Bankruptcy Court, asking the court to address the single issue of which of the two defendants, Cheryl as the income beneficiary of the Trust or the chapter 11 trustee was entitled to the Trust distributions. The court stated that this issue turned on whether Cheryl's interest in the net income from the Trust was property of her bankruptcy estate. Under federal and Arkansas law, the court concluded that Cheryl's interest in the net income from the Trust would be property of her estate under Section 541(a)(1) unless an exception applied. The relevant exception in this instance was Section 541(c)(2) which provides that if there is a "restriction on the transfer of a beneficial interest of the debtor in a trust" and such restriction "is enforceable under applicable non-bankruptcy law," the restriction is also enforceable under federal bankruptcy law. While the appellants wanted the Court to address creditors' rights to the net income distributions paid from the Trust, the Court limited its holding to the single issue before the Bankruptcy Court: Whether Cheryl or her bankruptcy estate is entitled to the net income from the Trust. Affirming the Bankruptcy Court's reliance upon Patterson v. Shumate, 504 U.S. 753 (1992), the Court held that because Cheryl was the beneficiary of a valid spendthrift trust under non-bankruptcy law, her interest in the net income distributions from the Trust was entitled to the same protections and restrictions after she filed her bankruptcy petition as it enjoyed before she filed her bankruptcy petition.
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