Ahlswede, In re, No. 73-2506

CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)
Writing for the CourtBefore CHAMBERS, KOELSCH and KILKENNY; KOELSCH
Citation516 F.2d 784
PartiesIn the Matter of Arthur Clarke AHLSWEDE and Dorothy Ahlswede, Bankrupts. Richard W. STEBBINS, Trustee, Appellant, v. CROCKER CITIZENS NATIONAL BANK, Appellee.
Docket NumberNo. 73-2506
Decision Date29 April 1975

Page 784

516 F.2d 784
In the Matter of Arthur Clarke AHLSWEDE and Dorothy
Ahlswede, Bankrupts.
Richard W. STEBBINS, Trustee, Appellant,
v.
CROCKER CITIZENS NATIONAL BANK, Appellee.
No. 73-2506.
United States Court of Appeals,
Ninth Circuit.
April 29, 1975.

Page 785

Bruce D. Roberts (argued), Reno, Nev., for appellant.

Richard R. Clements (argued), Los Angeles, Cal., for appellee.

OPINION

Before CHAMBERS, KOELSCH and KILKENNY, Circuit Judges.

KOELSCH, Circuit Judge:

This case presents a unique question regarding the extent of a bankruptcy court's equitable power to subordinate a creditor's claim against the bankruptcy estate.

Page 786

Bankrupt is one of four beneficiaries of a so-called "spend-thrift" trust created inter vivos by his father. The trust instrument provides that "(t)he interests of all beneficiaries other than the Trustor in principal or income shall not be subject to claims of their creditors or others nor to legal process and may not be voluntary (sic ) or involuntary (sic ) alienated or encumbered." The trust situs is California; California law enforces such trust provisions. See Kelly v. Kelly, 11 Cal.2d 356, 79 P.2d 1059 (1938); Cal.Civ.Code § 867. But see Cal.Civ.Code § 859; II Scott on Trusts § 152.1, at 1143 and n.21 (3d ed. 1967); Comment, Trusts: Spendthrift Trusts in California: Civil Code Sections 859 and 867: Planning and Construction of Spendthrift Provisions, 40 Cal.L.Rev. 441, 442 (1952). The effect of the trust provision is that upon the bankruptcy of the beneficiary his equitable interest in the income and principal of the trust estate, being non-assignable and immune from judicial process under California law, does not pass to the trustee of the bankruptcy estate, under Section 70(a)(5) of the Bankruptcy Act, 11 U.S.C. § 110(a)(5), and title remains in the trustee of the spendthrift trust. 1 See 4A Collier on Bankruptcy P 70.26, at 364-71 (rev.ed.1971); Restatement of Trusts 2d §§ 149, 152 (1959); Danning v. Lederer, 232 F.2d 610 (7th Cir. 1956); Scott, supra, § 152.2, at 1150-51.

The claimant in this bankruptcy proceeding is the Crocker National Bank (Bank), the trustee of the bankrupt's spendthrift trust, claiming on behalf of the trust. The Bank's claim derives from a number of promissory notes, held as assets of the trust, evidencing loans made to the bankrupt at various times either by his father or the Bank, and now due the trust.

The trust instrument sets up a plan for equal periodic distributions of the income and principal of the trust to the four beneficiaries. It also provides that if a beneficiary is indebted to the trust when a distribution is scheduled, his distributive portion must first be used to offset his indebtedness. All of the bankrupt's shares of trust income and principal have heretofore been applied to discharge his obligations to the trust, and several distributions remain to be made.

However, in this proceeding the Bank seeks to have the remaining indebtedness immediately discharged (insofar as possible) by allowing the trust to share in the bankruptcy estate on a parity with the general creditors. The ultimate effect of such a recovery by the Bank for the trust will be, of course, that the bankrupt's obligations to the trust will be diminished by reducing the shares going to general creditors, and the share of the trust which the bankrupt will ultimately receive will increase.

The trustee in bankruptcy objected to the claim, but the referee allowed it as provable, apparently concluding that the notes reflected bona fide debts rather than anticipatory distributions of the bankrupt's share of the trust estate. 2 However, the referee subordinated the Bank's claim to those of the other creditors. The referee justified his exercise of his general equitable powers on the rationale that it was unfair that the spendthrift trust should insulate the bankrupt's beneficial interest in the trust from the general creditors but that the trust should share with the creditors in the bankrupt's other assets, thereafter distributing assets in an equivalent

Page 787

amount to the bankrupt free of the creditor's claims. 3

On review, the district court reversed, holding that under the circumstances the Bankruptcy Act permits the Bank to share equally with the other unsecured general creditors, and that the referee lacked cognizable equitable grounds for subordinating the claim. We agree.

The trustee quite properly concedes that, despite the fact that the trust's claim against the bankrupt is to some extent 4 secured by his distributive share of the trust, the Bank's claim was properly filed as an unsecured claim. The Bankruptcy Act defines a secured creditor as one "who has security for his debt upon the property of the bankrupt of a nature to be assignable under this title" (11 U.S.C. § 1(28) ). The bankrupt's interest in the trust is not assignable and not part of the bankruptcy estate; consequently the trust's claim is not secured within the meaning of the Act, and the Bank may file its claim as unsecured. Ivanhoe Bldg. Assn. v. Orr,295 U.S. 243, 55 S.Ct. 685, 79 L.Ed. 1419 (1935).

The remaining question therefore is whether the referee could subordinate the Bank's claim (undoubtedly thereby defeating it).

Subordination is an equitable power. We recognize the principle that a bankruptcy court is a court of equity, charged to apply equitable principles to reach equitable results when administering the Bankruptcy Act. In doing so, the...

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41 practice notes
  • SSA Baltimore Federal Credit Union v. Bizon, Civ. No. K-83-1850
    • United States
    • United States District Courts. 1st Circuit. United States District Court (Maine)
    • June 30, 1984
    ...First Northwestern Trust were both decided under prior law would not appear to alter their applicability herein. 12 See In re Ahlswede, 516 F.2d 784, 786 (9th Cir.1975), cert. denied sub nom., Stebbins v. Crocker-Citizens National Bank, 423 U.S. 913, 96 S.Ct. 218, 46 L.Ed.2d 142 (1975); Dan......
  • In re Pajaro Dunes Rental Agency, Inc., Bankruptcy No. 91-53976-ASWCZ. Adv. No. 92-5006.
    • United States
    • United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Northern District of California
    • October 19, 1994
    ...Corp.), 642 F.2d 1174, 1178 (9th Cir.1981) ("Westgate"), citing Stebbins v. Crocker Citizens National Bank (In re Ahlswede), 516 F.2d 784, 788 (9th Cir.1975), cert. denied, 423 U.S. 913, 96 S.Ct. 218, 46 L.Ed.2d 142 (1975). Undercapitalization can be included within the scope of inequitable......
  • In re Atallah, Bankruptcy No. 87-03181S.
    • United States
    • United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania
    • January 18, 1989
    ...Trust Co., 240 U.S. 427, 429, 36 S.Ct. 391, 392, 60 L.Ed. 723 (1916); In re McLoughlin, 507 F.2d 177, 181 (5th Cir.1975); In re Ahlswede, 516 F.2d 784, 786 (9th Cir.), cert. denied, 423 U.S. 913, 96 S.Ct. 218, 46 L.Ed.2d 142 (1975). Thus to the extent a state recognized the validity of a sp......
  • Matter of Velis, Civ. A. No. 90-2217 (MTB).
    • United States
    • United States District Courts. 3th Circuit. United States District Courts. 3th Circuit. District of New Jersey
    • January 23, 1991
    ...vest in the bankruptcy trustee. First Northwestern Trust Co., 622 F.2d at 391; Stebbins v. Crocker Citizens Nat'l Bank (In re Ahlswede), 516 F.2d 784, 786 (9th Cir.), cert denied, 423 U.S. 913, 96 S.Ct. 218, 46 L.Ed.2d 142 Despite other fundamental changes wrought by the Bankruptcy Code, Co......
  • Request a trial to view additional results
41 cases
  • SSA Baltimore Federal Credit Union v. Bizon, Civ. No. K-83-1850
    • United States
    • United States District Courts. 1st Circuit. United States District Court (Maine)
    • June 30, 1984
    ...First Northwestern Trust were both decided under prior law would not appear to alter their applicability herein. 12 See In re Ahlswede, 516 F.2d 784, 786 (9th Cir.1975), cert. denied sub nom., Stebbins v. Crocker-Citizens National Bank, 423 U.S. 913, 96 S.Ct. 218, 46 L.Ed.2d 142 (1975); Dan......
  • In re Pajaro Dunes Rental Agency, Inc., Bankruptcy No. 91-53976-ASWCZ. Adv. No. 92-5006.
    • United States
    • United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Northern District of California
    • October 19, 1994
    ...Corp.), 642 F.2d 1174, 1178 (9th Cir.1981) ("Westgate"), citing Stebbins v. Crocker Citizens National Bank (In re Ahlswede), 516 F.2d 784, 788 (9th Cir.1975), cert. denied, 423 U.S. 913, 96 S.Ct. 218, 46 L.Ed.2d 142 (1975). Undercapitalization can be included within the scope of inequitable......
  • In re Atallah, Bankruptcy No. 87-03181S.
    • United States
    • United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania
    • January 18, 1989
    ...Trust Co., 240 U.S. 427, 429, 36 S.Ct. 391, 392, 60 L.Ed. 723 (1916); In re McLoughlin, 507 F.2d 177, 181 (5th Cir.1975); In re Ahlswede, 516 F.2d 784, 786 (9th Cir.), cert. denied, 423 U.S. 913, 96 S.Ct. 218, 46 L.Ed.2d 142 (1975). Thus to the extent a state recognized the validity of a sp......
  • Matter of Velis, Civ. A. No. 90-2217 (MTB).
    • United States
    • United States District Courts. 3th Circuit. United States District Courts. 3th Circuit. District of New Jersey
    • January 23, 1991
    ...vest in the bankruptcy trustee. First Northwestern Trust Co., 622 F.2d at 391; Stebbins v. Crocker Citizens Nat'l Bank (In re Ahlswede), 516 F.2d 784, 786 (9th Cir.), cert denied, 423 U.S. 913, 96 S.Ct. 218, 46 L.Ed.2d 142 Despite other fundamental changes wrought by the Bankruptcy Code, Co......
  • Request a trial to view additional results

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