Wetzel v. Bank

Citation649 F.3d 831,66 Collier Bankr.Cas.2d 162
Decision Date12 August 2011
Docket NumberNos. 10–2117,10–2123.,s. 10–2117
PartiesFrederick S. WETZEL, III, TrusteeG. Latta Bachelor, successor Personal Representative of the Estate of Ronald E. Reagan, Appellant,v.REGIONS BANK; Cheryl A. Reagan, Appellees.Frederick S. Wetzel, III, Trustee, Appellant,G. Latta Bachelor, successor Personal Representative of the Estate of Ronald E. Reagan,v.Regions Bank; Cheryl A. Reagan, Appellees.
CourtUnited States Courts of Appeals. United States Court of Appeals (8th Circuit)

OPINION TEXT STARTS HERE

Frederick S. Wetzel, Little Rock, AR, Roger D. Rowe, on the brief, Little Rock, AR, for Appellant.Lyle D. Foster, Guy W. Murphy, Conway, AR, for Appellee.Before MELLOY, BOWMAN, and BENTON, Circuit Judges.PER CURIAM.

Frederick Wetzel, the trustee of Cheryl Reagan's bankruptcy estate, and Latta Bachelor, the personal representative of Ronald Reagan's probate estate, appeal from an order of the District Court 1 affirming the judgment of the Bankruptcy Court 2 in this interpleader and declaratory-judgment action filed by Regions Bank. We affirm.

Ronald Reagan (Ronald) died February 1, 2000, leaving an estate valued at almost $20 million. Ronald's will created a testamentary trust (Trust C) for the benefit of his wife Cheryl Reagan (Cheryl). Trust C included a spendthrift provision,3 which stated:

Except as otherwise provided herein, all payments of principal and income payable, or to become payable, to the beneficiary of any trust created hereunder shall not be subject to anticipation, assignment, pledge, sale or transfer in any manner, nor shall any said beneficiary have the power to anticipate or encumber such interest, nor shall such interest, while in the possession of my Executor or Trustee, be liable for, or subject to, the debts, contracts, obligation, liabilities or torts of any beneficiary.J.A. 180–81.

Under the terms of Trust C, commencing with Ronald's death, Cheryl was to receive distributions of the net income generated by the corpus of Trust C. The distributions were to be paid at least quarterly and were to continue for Cheryl's lifetime. After Cheryl's death, Ronald's two sons from a previous marriage were to receive the corpus of Trust C.

Ronald's will also named Cheryl as executrix of his estate and directed her, in that capacity, to fund Trust C by transferring Ronald's stock in Chem–Fab Corporation (less certain deductions not relevant here) to the trustee of Trust C, Regions Bank.4 Contrary to the instructions in the will, however, Cheryl did not transfer the Chem–Fab stock to Regions, nor did she fund Trust C with the proceeds from the sale of the stock. Instead, when the Chem–Fab stock was sold shortly after Ronald's death for about $13 million, Cheryl used those proceeds to finance a series of unsuccessful business ventures.

On April 23, 2004, more than four years after Ronald's death, one of Ronald's sons filed an ex parte petition with the Circuit Court of Garland County, Arkansas (the probate court), and on May 11, 2004, the court permanently froze the remaining assets of Ronald's estate. On November 17, 2004, Cheryl filed a voluntary Chapter 11 bankruptcy petition. In June 2006, the probate court removed Cheryl as executrix of Ronald's estate and appointed Bachelor as the estate's successor personal representative. In April 2007, the Bankruptcy Court lifted the automatic stay in Cheryl's bankruptcy case, allowing the final administration of Ronald's estate in the probate court to proceed. Shortly thereafter, the Bankruptcy Court appointed Wetzel as the trustee in Cheryl's bankruptcy case. On January 15, 2008, the probate court authorized Bachelor to fund Trust C in the initial amount of $2.4 million in cash and certain investments still held by Ronald's estate and to transfer title of Trust C to Regions, the trustee named in Ronald's will.

On September 23, 2008, as Trust C began to generate income from its initial funding, Regions filed an interpleader and declaratory-judgment action in the Bankruptcy Court, asking the court to decide which of two defendants, Cheryl as the income beneficiary of Trust C or Wetzel as the trustee of Cheryl's bankruptcy estate, was entitled to the distributions of net income from Trust C. Bachelor, as the personal representative of Ronald's estate and a creditor in Cheryl's bankruptcy case, successfully petitioned to intervene in Regions's action. Bachelor asserted two claims in Cheryl's bankruptcy case. The first claim was based on Cheryl's “defalcation as executrix” and was eventually liquidated in a settlement agreement between the parties for approximately $5.6 million. Br. of Appellants at 14. As part of the settlement, Bachelor agreed that he would not attempt to collect this amount from the distributions to Cheryl of net income from Trust C.5 Bachelor's second claim against Cheryl arose from the settlement of a civil action he had filed against 1919M Street Associates, LP (1919M). Earlier, 1919M had obtained a roughly $1.5 million judgment against Cheryl in connection with a failed business deal, and Bachelor had accepted an assignment of 1919M's judgment against Cheryl as “payment” under a settlement agreement with 1919M. Bachelor was not prohibited from attempting to collect this amount from the distributions to Cheryl of net income from Trust C.

Ruling on Regions's interpleader and declaratory-judgment action, the Bankruptcy Court held that because Trust C included a spendthrift provision, Cheryl's “interest in net income distributions [from Trust C] is not property of the bankruptcy estate.” Bankr.Ct. Op. of July 21, 2009, at 2. The court ordered that the interpleaded funds be distributed to Cheryl and not to Wetzel, her bankruptcy trustee.

Bachelor and Wetzel appealed to the District Court, which affirmed the judgment of the Bankruptcy Court. Wetzel v. Regions Bank (In re Reagan), 433 B.R. 263 (W.D.Ark.2010). On appeal to this court, Appellants argue that Cheryl's behavior as executrix of Ronald's estate should render the otherwise valid spendthrift provision in Ronald's will unenforceable under Arkansas law and thus unenforceable under bankruptcy law, thereby permitting Wetzel to seize for the bankruptcy estate the distributions of net income from Trust C that would otherwise be payable to Cheryl. Appellants also argue that the Bankruptcy Court improperly concluded that distributions of net income from Trust C, once paid to Cheryl, are exempt from execution under Arkansas law.

As a second court of review in this bankruptcy matter, we apply the same standards of review as the District Court, “reviewing the [B]ankruptcy [C]ourt's factual findings for clear error and its conclusions of law de novo.” Contractors, Laborers, Teamsters & Eng'rs Health & Welfare Plan v. Killips (In re M & S Grading, Inc.), 526 F.3d 363, 367 (8th Cir.2008).

Regions asked the Bankruptcy Court to address a single issue: Whether Cheryl or the trustee of her bankruptcy estate is entitled to the distributions of net income from Trust C. The issue turns on whether Cheryl's interest in the net income from Trust C is property of her bankruptcy estate. While federal law controls whether the interest is property of Cheryl's bankruptcy estate, Arkansas law defines the nature and extent of that interest. See Ferris, Baker Watts, Inc. v. Stephenson (In re MJK Clearing, Inc.), 371 F.3d 397, 401 (8th Cir.2004); N.S. Garrott & Sons v. Union Planters Nat'l Bank (In re N.S. Garrott & Sons), 772 F.2d 462, 466 (8th Cir.1985) (“The nature and extent of the debtor's interest in property are determined by state law ... [but] once that determination is made, federal bankruptcy law dictates to what extent that interest is property of the estate.”).

Section 541(a)(1) of the federal bankruptcy code defines a bankruptcy “estate” to include “all legal or equitable interests of the debtor in property as of the commencement” of the bankruptcy case, subject to some exceptions. 11 U.S.C. § 541(a)(1). Under Arkansas law, the income beneficiary of a trust has an interest in trust property “begin[ning] on the date specified in the terms of the trust.” Ark.Code Ann. § 28–70–301(a) (2004). Here, Ronald's will stated that Cheryl was entitled to receive distributions of net income from Trust C beginning on the date of his death on February 1, 2000. When Cheryl filed her bankruptcy petition in November 2004, her interest in the distributions of net income from Trust C had been vested for several years, even though no income was generated by the trust until it was funded in 2008. The distributions of net income from Trust C were contingent on the trust producing income, but contingent interests of a debtor at the time of his bankruptcy filing are property of the bankruptcy estate. See Law v. Stover (In re Law), 336 B.R. 780, 782 (8th Cir. BAP 2006) (“Property of the estate includes contingent interests in future payments.”).

Thus under federal and Arkansas law, Cheryl's interest in the net income from Trust C would be property of her bankruptcy estate under § 541(a)(1) unless an exception applies. One such exception is described in § 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 nonbankruptcy law,” the restriction is also enforceable under federal bankruptcy law. 11 U.S.C. § 541(c)(2). Appellants do not dispute that a valid spendthrift provision in a trust instrument is a “restriction on the transfer of a beneficial interest.” Nor do they dispute that Arkansas law is “applicable nonbankruptcy law.” Thus, if Trust C's spendthrift provision restricts the transfer of Cheryl's interest in the distributions of net income from Trust C and the spendthrift provision is enforceable under Arkansas law, then Cheryl's interest in the distributions of net income from Trust C is not property of her bankruptcy estate.

The Bankruptcy Court reasoned that because Trust C's...

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