Calhoun v. Rawlins

• Decision Date: 27 June 2018
• Docket Number: No. 17–P–40,17–P–40
• Citation: 93 Mass.App.Ct. 458,106 N.E.3d 684
• Court: Appeals Court of Massachusetts
• Parties: Shonna CALHOUN & others v. Jason M. RAWLINS, special representative, & others.

93 Mass.App.Ct. 458

106 N.E.3d 684

Shonna CALHOUN & others¹

v.Jason M. RAWLINS, special representative,² & others.³

No. 17–P–40

Appeals Court of Massachusetts, Plymouth..

Argued February 1, 2018

Decided June 27, 2018

Richard B. Reiling, Boston, (Richard C. Woods, Jr., also present) for the plaintiffs.

Stephen M. LaRose, Boston, (Charles Dell'Anno, Boston, & Edward M. Joyce, Jr., Pembroke, also present) for the defendants.

Present: Trainor, Blake, & Lemire, JJ.

BLAKE, J.

At issue in this case is whether the assets of an irrevocable spendthrift trust, established in 2007 on behalf of a disabled husband upon divorce from his wife, are available to satisfy any damages awarded in a subsequent personal injury action against the former husband. Resolution of the issue requires us to consider whether the trust was self-settled. We conclude that successful plaintiffs in this action may recover damages from the trust.

Background. a. The Probate and Family Court proceedings. Before the motor vehicle accident at issue in this case, Brian K. McInerney was involved in a motor vehicle accident in 2001, in which he sustained a severe traumatic brain injury

. In September of 2004, a judge of the Probate and Family Court appointed coguardians for him due to his inability to make medical and other important decisions.⁴

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Having married in 1987, McInerney and his former wife, Susan J. Stone, separated in January of 2004. McInerney filed a complaint for divorce on March 8, 2005, requesting an equitable division of the marital assets under G. L. c. 208, § 34.⁶

Throughout the marriage, Stone held significant assets in her own name, including accounts at KeyBank National Association (KeyBank), at least some of which derived from a trust created for Stone's benefit by her grandfather. McInerney worked for only one year during the marriage; Stone worked as an artist and then as a mental health counsellor, making a modest salary. During the marriage, the family was supported primarily, if not exclusively, by Stone's income from her employment and her assets.

McInerney, by his guardian, and Stone executed a separation agreement, which was incorporated into the judgment of divorce nisi. The separation agreement was later amended by stipulation and approved by a judge of the Probate and Family Court. The amended separation agreement (ASA), dated January 26, 2007, settled McInerney's and Stone's rights and obligations to one another upon dissolution of their marriage.⁷ In pertinent part, the ASA provided that Stone would transfer approximately thirty-five percent of the funds in her KeyBank accounts to a spendthrift trust to be created for McInerney.⁸ In addition, the ASA contained provisions regarding the marital home, a vacation home in Maine, the purchase of a home in Plymouth for McInerney, and other assets, including assets inherited by Stone. The ASA provided that the division of assets would survive entry of the judgment of divorce nisi and would have independent legal significance. By approving the ASA and incorporating it into the judgment of divorce nisi, the Probate and Family Court judge found that the terms were fair and reasonable.

B. Creation of the Brian K. McInerney Irrevocable Trust. The Brian K. McInerney Irrevocable Trust (trust) was created on March 23, 2007, and, though irrevocable, the trustees were given complete discretion to distribute as much of the income and principal of the assets in the trust as they felt were necessary to meet the reasonable needs of McInerney. The terms of the trust identified Stone as the settlor, McInerney as the beneficiary, and their children, Elise and Dru, as the remainder beneficiaries. The trustees at that time were McInerney's sister and guardian (Jean E. McInerney⁹ ), and Bank of America as the corporate trustee. The trust provides that the "interest of any beneficiary created herein, either as to income or principal, shall not be alienated, anticipated or in any other manner assigned by such beneficiary and shall not be subject to legal process, bankruptcy proceedings, or the interference or control of creditors."

Pursuant to the ASA, on May 7, 2007, Stone transferred $3,538,402.34 of stocks and bonds to the trust. She also transferred the Plymouth home valued at $538,400 into the trust. In addition, McInerney transferred assets standing in his own name, totaling more than $120,000, into the trust.

C. The motor vehicle accident at issue. On April 30, 2014, plaintiffs Shonna Calhoun and a minor child, Timothy Pink, Jr., were involved in a motor vehicle accident with McInerney. It is alleged that McInerney was traveling seventy-six miles per hour in a thirty-five miles per hour zone, crossed the yellow line to pass a vehicle, and collided head on with a vehicle being driven by Calhoun. The crash caused serious injuries to Calhoun and the minor child, and McInerney died from his injuries.

The plaintiffs¹⁰ commenced this action in Superior Court seeking damages for McInerney's negligence and a judgment declaring that the assets of the trust are available to them to satisfy any damages award. The parties filed cross motions for summary judgment solely on the issue whether the trust's assets are available to the plaintiffs. A judge (motion judge) determined that only the assets that McInerney contributed to the trust are reachable. The motion judge found that the assets contributed by Stone are not reachable because Stone was the sole owner of the assets until they entered the trust and McInerney never had any prior legal or equitable interest in them. A separate and final judgment entered on the declaratory judgment claim. See Mass.R.Civ.P. 54(b), 365 Mass. 820 (1974). The plaintiffs appeal.

Discussion. a. Spendthrift trusts. When faced with the question whether creditors may reach the assets of spendthrift trusts, our cases distinguish between spendthrift trusts that are created by third parties, such as parents, and spendthrift trusts that are self-settled by an individual who is both settlor and beneficiary. It has long been the law in this Commonwealth that a trust created by a third-party settlor may protect a beneficiary's interest in the trust from creditors through spendthrift provisions. See Broadway Natl. Bank v. Adams, 133 Mass. 170, 173–174 (1882) ; Pacific Natl. Bank v. Windram, 133 Mass. 175, 176 (1882). Even in the face of public policy arguments favoring access, a third-party settlor's intent to deny creditors of a beneficiary recovery against trust assets has been enforced. Pemberton v. Pemberton, 9 Mass. App. Ct. 9, 20, 411 N.E.2d 1305 (1980). The theory behind the enforcement of these spendthrift trusts is that the settlor of a trust is the absolute owner of his property and, in giving a gift, has "the entire right to dispose of it, either by an absolute gift ... or by a gift with such restrictions or limitations, not repugnant to law, as he [sees] fit to impose." Adams, supra at 173.

Self-settled trusts, where the beneficiary is also the settlor, however, cannot be used to protect one's assets from creditors. "The established policy of this Commonwealth long has been that a settlor cannot place property in trust for his own benefit and keep it beyond the reach of creditors." Ware v. Gulda, 331 Mass. 68, 70, 117 N.E.2d 137 (1954), quoting from Merchants Natl. Bank v. Morrissey, 329 Mass. 601, 605, 109 N.E.2d 821 (1953). "To permit a man ... to attach to a valuable interest in property retained by himself the quality of inalienability and of exemption from his debts, seems to us to be going further than a sound public policy will justify." Windram, 133 Mass. at 176–177. Thus, "[w]hen a person creates for his own benefit a trust for support or a discretionary trust, his creditors can reach the maximum amount which the trustee, under the terms of the trust, could pay to him or apply for his benefit." State St. Bank & Trust Co. v. Reiser, 7 Mass. App. Ct. 633, 636, 389 N.E.2d 768 (1979). "This is so even if the trust contains spendthrift provisions." Ibid. See Ware, supra. This concept also has been codified in the Massachusetts Uniform Trust Code. General Laws c. 203E, § 505(a )(2), inserted by St. 2012, c. 140, § 56, provides that notwithstanding the presence of a spendthrift provision, "[w]ith respect to an irrevocable trust, a creditor or assignee of the settlor may reach the maximum amount that can be distributed to or for the settlor's benefit."¹¹ See Restatement (Second) of Trusts § 156(2) (1959) ("Where a person creates for his own benefit a trust for support or a discretionary trust, his transferee or creditors can reach the maximum amount which the trustee under the terms of the trust could pay to him or apply for his benefit"). See also Restatement (Third) of Trusts § 58 (2003).

In Cohen v. Commissioner of the Div. of Med. Assistance, 423 Mass. 399, 414, 668 N.E.2d 769 (1996), cert. denied sub nom. Kokoska v. Bullen, 519 U.S. 1057, 117 S.Ct. 687, 136 L.Ed.2d 611 (1997), the Supreme Judicial Court described self-settled spendthrift trusts as created "for the purpose of having your cake and eating it too." "Under such a trust, a grantor puts his assets in a trust of which he is the beneficiary, giving his trustee discretion to pay out monies to gratify his needs but limiting that discretion so that the trustee may not pay the grantor's debts." Ibid. The court noted that this jurisdiction and others have long followed the Restatement principle for self-settled trusts. Ibid.

On appeal, KeyBank and Jean "do not quibble with this well-established principle" applicable to self-settled trusts, and even agree that the motion judge correctly applied G. L. c. 203E, § 505(a )(2), in concluding that the funds contributed to the trust by McInerney from his own accounts are available to the plaintiffs. KeyBank and Jean contend only that the rule does not apply to the trust assets supplied by Stone. Thus, the determination whether the trust is self-settled or settled by Stone...