Frealy v. Reynolds

• Decision Date: 09 March 2015
• Docket Number: No. 12–60068.,12–60068.
• Citation: 779 F.3d 1028
• Parties: Todd A. FREALY, Attorney, Chapter 7 Trustee of Estate of Rick Reynolds, Appellant, v. Rick H. REYNOLDS; John M. Carmack, Co–Trustee of the Reynolds Family Trust and Co–Trustee of the Reynolds Family Trust–Survivor's Trust, as amended; John Morris, Co–Trustee of the Reynolds Family Trust and Co–Trustee of the Reynolds Family Trust–Survivor's Trust, as amended, Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

779 F.3d 1028

Todd A. FREALY, Attorney, Chapter 7 Trustee of Estate of Rick Reynolds, Appellant

v.Rick H. REYNOLDS; John M. Carmack, Co–Trustee of the Reynolds Family Trust and Co–Trustee of the Reynolds Family Trust–Survivor's Trust, as amended; John Morris, Co–Trustee of the Reynolds Family Trust and Co–Trustee of the Reynolds Family Trust–Survivor's Trust, as amended, Appellees.

No. 12–60068.

United States Court of Appeals, Ninth Circuit.

March 9, 2015.

Jesse S. Finlayson (argued), Finlayson Toffer Roosevelt & Lilly LLP, Irvine, CA, for Appellant.

David W. Meadows (argued), Law Offices of David W. Meadows, Los Angeles, CA, for Appellees.

BAP No. 11–1433.

Before: ALEX KOZINSKI and SUSAN P. GRABER, Circuit Judges, and CHARLES R. BREYER, Senior District Judge.^*

ORDER CERTIFYING A QUESTION TO THE CALIFORNIA SUPREME COURT

ORDER

PER CURIAM:

This appeal requires us to determine the extent to which a bankruptcy estate may reach a beneficiary's interest in a spendthrift trust under the California Probate Code. The beneficiary claims that California Probate Code section 15306.5 caps the bankruptcy estate's access at 25 percent of his trust interest, which consists entirely of payments from principal. The bankruptcy trustee, on the other hand, seeks to reach more than 25 percent of the beneficiary's interest under Probate Code sections 15301(b) and 15307, which it reads as not subject to the section 15306.5 cap.

We find no controlling precedent in the decisions of the California Supreme Court or Courts of Appeal. See Cal. R. Ct. 8.548(a)(2) (permitting certification where there is “no controlling precedent” from the state court); Sullivan v. Oracle Corp., 557 F.3d 979, 983 (9th Cir.2009) (order) (looking to decisions of California appellate courts). Nor has our court considered the interplay between section 15306.5 and other Probate Code sections governing creditors' access to spendthrift trusts. We held in Neuton v. Danning (In re Neuton), 922 F.2d 1379, 1383 (9th Cir.1990), that section 15306.5 allows a bankruptcy estate to reach 25 percent of a spendthrift trust. But, unlike in the present case, the beneficiary in Neuton had argued that all of his interest in the spendthrift trust was protected from the bankruptcy estate, while the bankruptcy estate claimed only 25 percent under section 15306.5. Id. We therefore had no occasion to examine whether a bankruptcy estate could access more than 25 percent under other Probate Code sections.

A substantial sum of money hangs in the balance, as the beneficiary stands to lose—and the bankruptcy estate stands to gain—the entirety of his trust interest. Their fate, and the fates of future beneficiaries and their creditors, hinges on the interpretation of opaque sections of the Probate Code. Because the resolution of this appeal could transform the terrain of California trust law, we respectfully request that the California Supreme Court exercise its discretion to accept and decide the certified question below.

I. Question Certified

Pursuant to Rule 8.548 of the California Rules of Court, we request that the California Supreme Court answer the following question:

Does section 15306.5 of the California Probate Code impose an absolute cap of 25 percent on a bankruptcy estate's access to a beneficiary's interest in a spendthrift trust that consists entirely of payments from principal, or may the bankruptcy estate reach more than 25 percent under other sections of the Probate Code?

We understand that the Court may reformulate our question, and we agree to accept and follow the Court's decision.

II. Background

A. Applicable California Statutes

The California Probate Code recognizes the validity of spendthrift provisions that restrict transfer of a beneficiary's interest in income and principal, so long as that interest hasn't yet been paid to the beneficiary.See Cal. Prob.Code §§ 15300, 15301(a). Section 15301(a) permits the restraint against transfer of trust principal, subject to certain exceptions set forth in sections 15301(b) and 15304 –07:

Except as provided in subdivision (b) and in Sections 15304 to 15307, inclusive, if the trust instrument provides that a beneficiary's interest in principal is not subject to voluntary or involuntary transfer, the beneficiary's interest in principal may not be transferred and is not subject to enforcement of a money judgment until paid to the beneficiary.

Cal. Prob.Code § 15301(a).

One of these exceptions, section 15306.5(a), allows general creditors to satisfy money judgments out of payments to which the beneficiary is entitled. The section provides:

Notwithstanding a restraint on transfer of the beneficiary's interest in the trust under Section 15300 or 15301, and subject to the limitations of this section, upon a judgment creditor's petition under Section 709.010 of the Code of Civil Procedure, the court may make an order directing the trustee to satisfy all or part of the judgment out of the payments to which the beneficiary is entitled under the trust instrument or that the trustee, in the exercise of the trustee's discretion, has determined or determines in the future to pay to the beneficiary.

Cal. Prob.Code § 15306.5(a). Creditors, upon petition to the court, may thus reach payments to which the beneficiary is entitled subject to “the limitations of this section.” Id.

One of the limitations states as follows:

An order under this section may not require that the trustee pay in satisfaction of the judgment an amount exceeding 25 percent of the payment that otherwise would be made to, or for the benefit of, the beneficiary.

Cal. Prob.Code § 15306.5(b). Along the same lines, section 15306.5(f) specifies that “the aggregate of all orders for satisfaction of money judgments against the beneficiary's interest in the trust may not exceed 25 percent of the payment that otherwise would be made to, or for the benefit of, the beneficiary.” Cal. Prob.Code § 15306.5(f). Section 15306.5(c) further restricts creditors' access, stating that “[a]n order under this section may not require that the trustee pay in satisfaction of the judgment any amount that the court determines is necessary for the support of the beneficiary and all the persons the beneficiary is required to support.” Cal. Prob.Code § 15306.5(c).

Section 15301(b) contains another exception to the general rule against transfer of a spendthrift trust beneficiary's interest in principal:

After an amount of principal has become due and payable to the beneficiary under the trust instrument, upon petition to the court under Section 709.010 of the Code of Civil Procedure by a judgment creditor, the court may make an order directing the trustee to satisfy the money judgment out of that principal amount.

Cal. Prob.Code § 15301(b).

And section 15307, titled “Income in excess of amount for education and support; application to creditors' claim,” states:

Notwithstanding a restraint on transfer of a beneficiary's interest in the trust under Section 15300 or 15301, any amount to which the beneficiary is entitled under the trust instrument or that the trustee, in the exercise of the trustee's discretion, has determined to pay to the beneficiary in excess of the amount that is or will be necessary for the education and support of the beneficiary may be applied to the satisfaction of a money judgment against the beneficiary. Upon the judgment creditor's petition under Section 709.010 of the Code of Civil Procedure, the court may make an order directing the trustee to satisfy all or part of the judgment out of the beneficiary's interest in the trust.

Cal. Prob.Code § 15307.

Unlike sections 15306.5, 15301(b) and 15307, which apply to general creditors, the remaining exceptions pertain to either preferred creditors or the unique situation in which the settlor of the trust is also a beneficiary. See Cal. Prob.Code § 15304 (invalidating the restraint against transfer where the beneficiary is also the settlor); id. § 15305 (court may order the trust to satisfy a money judgment for support of the beneficiary's spouse, former spouse or minor child); id. § 15305.5 (same, where there is a judgment against the beneficiary awarding restitution for the commission of a felony); id. § 15306 (same, where the beneficiary is liable for reimbursement to the state of California for public support furnished to him or his spouse or minor child).

B. Facts Of Our Case

Appellee Rick Reynolds is a beneficiary of the Reynolds Family Trust, which contains the following spendthrift provision: “No interest in the income or principal of any trust created under this instrument shall be voluntarily or involuntarily anticipated, assigned, encumbered, or subjected to [a] creditor's claim or legal process before actual receipt by the beneficiary.” The trust is composed of three sub-trusts—the Bypass Trust, the Marital Trust and the Survivor's Trust. Thirty days after his father's death in 2009, Reynolds became entitled to $250,000 from the Bypass Trust, $100,000 a year for ten years from the Survivor's Trust and one-third of the residue of the Survivor's Trust thereafter. All, or substantially all, of these distributions will be made from trust principal, as the trust assets are not expected to generate income.

The day after his father died, Reynolds filed a voluntary Chapter 7 bankruptcy petition. The trust trustee subsequently filed an adversary proceeding asking the bankruptcy court to determine what interest, if any, the bankruptcy estate has. Reynolds filed a motion for partial summary judgment, arguing that section 15306.5 limits the bankruptcy estate to 25 percent of his interest in the spendthrift trust. The bankruptcy trustee countered that the estate is entitled to more than 25 percent because section 15301(b) gives creditors unrestricted access to distributions of principal “due and payable,” and all of Reynolds's distributions from the trust were expected to be made from principal. Alternatively, the bankruptcy trustee argued that section 15307 allows the...