In re Brown

• Decision Date: 28 August 2002
• Docket Number: No. 01-16211.,01-16211.
• Citation: 303 F.3d 1261
• Parties: In re Jane McLean BROWN, Debtor. Deborah Menotte, Plaintiff-Appellant, v. Jane McLean Brown, Defendant-Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

303 F.3d 1261

In re Jane McLean BROWN, Debtor Deborah Menotte, Plaintiff-Appellant, v. Jane McLean Brown, Defendant-Appellee.

No. 01-16211.

United States Court of Appeals, Eleventh Circuit.

August 28, 2002.

COPYRIGHT MATERIAL OMITTED

Morris Gary Miller, Adorno & Zedes, P.A., West Palm Beach, FL, for Plaintiff-Appellant.

David Lloyd Merrill, Cohen, Conway, Copeland, Copeland, Paiva & Merrill, P.A., Fort Pierce, FL, for Plaintiff-Appellee.

Appeal from the United States District Court for the Southern District of Florida.

Before EDMONDSON, Chief Judge, and BLACK and COX, Circuit Judges.

BLACK, Circuit Judge:

This case involves a Chapter 7 bankruptcy debtor seeking to exclude her interest in a trust from the bankruptcy estate. The trust, which was created by the debtor prior to insolvency, was established to provide income to the debtor for her lifetime with the remainder ultimately being given to several charities. Based on the presence of a spendthrift clause prohibiting assignment or alienation, the debtor contends her interest in the trust is exempt from her bankruptcy estate. Alternatively, the debtor contends her interest is exempt because the trust qualifies as a support trust. Having created the trust for her own benefit, however, the debtor cannot shield her interest in the trust from her creditors. This interest, consisting of a yearly income stream from the trust assets, is not exempt from the debtor's bankruptcy estate. The corpus of the trust, however, is not likewise subject to the claims of the debtor's creditors.

I. BACKGROUND

A. Establishment of the Trust

Appellee Jane McLean Brown (Appellee), the debtor in the bankruptcy case giving rise to this appeal, suffers from chronic alcoholism. In 1993, her mother died, leaving her an inheritance of approximately $250,000. In order to protect the inheritance from her own improvidence, Appellee decided to place the money into an irrevocable trust which would pay her a monthly income for life. On August 11, 1993, Appellee executed the trust agreement, entitled Irrevocable Charitable Remainder Unitrust Agreement (ICRUA).

Under the ICRUA, Appellee is entitled to receive an annual amount equal to 7% of the net worth of the trust, valued as of the first day of each taxable year. The payments are due in monthly installments. Appellee, who is unemployed, lives off of the monthly payments flowing from the ICRUA. Appellee is the only beneficiary currently entitled to receive income payments under the trust.

As a trust beneficiary, Appellee's only rights are to receive the 7% income payments. Although Appellee also serves as trustee, her powers are generally limited to directing investment decisions. She does not have the discretion to invade the trust corpus or to alter the amount of payments made to the trust beneficiaries. Furthermore, Appellee is prohibited from assigning or otherwise alienating her interest in the trust by virtue of a "spendthrift" clause contained into the ICRUA:

To the extent permitted by law, no beneficiary shall have any power to dispose of or to charge by way of anticipation any interest given to her, and all sums payable to any beneficiary shall be free and clear of her debts, contracts, dispositions and anticipations, and shall not be taken or reached by any legal or equitable process in satisfaction thereof.

See Article IV of the ICRUA.

Upon Appellee's death, the 7% yearly trust income payments will be made to her daughter for life.¹ At the daughter's death, the corpus of the trust will pass to four charities listed in the ICRUA. Although the ICRUA expressly reserves Appellee's right to designate substitute or additional charitable beneficiaries by testamentary instruction, the right of redesignation is limited to substituting or adding other charities meeting certain Internal Revenue Code qualifications.²

B. Chapter 7 Bankruptcy

On February 4, 1999, Appellee filed a voluntary petition for Chapter 7 bankruptcy. Appellant Deborah Menotte (Appellant) was appointed as the Chapter 7 trustee. In her bankruptcy petition, Appellee listed secured and unsecured claims totaling $110,023.53. Although Appellee acknowledged her interest in the ICRUA, no value for the interest was included as part of her asset calculation.³ Rather, Appellee claimed her interest in the trust was exempt from the bankruptcy estate. Appellant objected, arguing self-funded trusts are not insulated from the claims of creditors.

On July 26, 2000, the bankruptcy court overruled Appellant's objection to the claimed exemption. Based on the presence of the spendthrift clause, the bankruptcy court concluded Appellee's interest in the trust could not be attached by her creditors. As an additional ground for exemption, the bankruptcy court indicated the trust also qualified as a support trust, which is a type of trust established to provide for a beneficiary's needs. The bankruptcy court rejected Appellee's alternative argument that her interest in the trust constituted an exempt annuity.

On November 8, 2001, Appellant filed an appeal to the United States District Court for the Southern District of Florida. On appeal, Appellant argued the bankruptcy court erred in finding the ICRUA was exempt from the bankruptcy estate as either a spendthrift trust or a support trust. The district court affirmed in part, finding the ICRUA was exempt from the bankruptcy estate based on its spendthrift provision. Although it did not need to reach the bankruptcy court's other ground for exemption, the district court indicated the trust likely would not qualify as a support trust because the ICRUA provided for payment of a fixed sum to Appellee each year regardless of the amount needed for her support. Having not been raised on appeal, the issue of whether the trust qualified as an exempt annuity was not addressed by the district court.⁴ This appeal followed.

II. STANDARD OF REVIEW

In bankruptcy appeals, legal determinations of the bankruptcy court and the district court are subject to de novo review. Bush v. JLJ, Inc. (In re JLJ, Inc.), 988 F.2d 1112, 1116 (11th Cir.1993).

III. DISCUSSION

An estate in bankruptcy consists of all interests in property possessed by the debtor at the time of her bankruptcy filing. 11 U.S.C. § 541(a)(1) (1994). Where there is a restriction on transfer of the debtor's interests under applicable non-bankruptcy law, however, such restriction remains effective even in bankruptcy. 11 U.S.C. § 541(c)(2). As a result, spendthrift and support trusts are excluded from a debtor's bankruptcy estate to the extent they are protected from creditors under applicable state law.⁵ The state law applicable in this case is the law of the State of Florida. We will examine in turn whether the ICRUA qualifies as either a spendthrift trust or a support trust under Florida law.

A. The ICRUA as a Spendthrift Trust

In Florida, trusts containing valid spendthrift provisions are protected from the reach of creditors, so long as the beneficiaries cannot exercise dominion over the trust assets. See generally Waterbury v. Munn, 159 Fla. 754, 32 So.2d 603, 605 (Fla.1947) (en banc) (recognizing the validity of spendthrift trusts); Croom v. Ocala Plumbing & Elec. Co., 62 Fla. 460, 57 So. 243, 244-45 (Fla.1911) (holding creditors could reach trust property, despite presence of spendthrift clause, where the beneficiaries possessed absolute control over the property). Where a trust is self-funded by a beneficiary, however, there is an issue as to whether the trust's spendthrift provision is valid as against creditors of the settlor-beneficiary. We conclude it is not, and the beneficiary's interest is subject to alienation by her creditors.

1. Validity of the ICRUA's Spendthrift Provision as Against Appellee's Creditors

Spendthrift trusts are defined under Florida law as "those trusts that are created with a view of providing a fund for the maintenance of another, and at the same time securing it against his own improvidence or incapacity for self-protection." Croom, 57 So. at 244 (emphasis added); see also Waterbury, 32 So.2d at 605 ("A spendthrift trust is one that is created with the view of providing a fund for the maintenance of another, and at the same time securing it against his own improvidence or incapacity for self protection.").

As impliedly recognized by the definition of spendthrift trusts set forth in Croom, Florida law will not protect assets contained within a spendthrift trust to the extent the settlor creates the trust for her own benefit, rather than for the benefit of another.⁶ See In re Witlin, 640 F.2d 661, 663 (5th Cir. Unit B 1981) (holding, under Florida law on spendthrift trusts, debtor's interest in his Keogh plan was not exempt from his bankruptcy estate where the debtor was both the beneficiary and the settlor of the plan);⁷ In re Wheat, 149 B.R. 1003, 1004-05 (Bankr.S.D.Fla.1992) (holding, under Florida law on spendthrift trusts, debtor's deferred compensation plan was not exempt from his bankruptcy estate where it was self-funded); In re Williams, 118 B.R. 812, 815 (Bankr. N.D.Fla.1990) (holding, under Florida law on spendthrift trusts, debtor's interests in his employer's thrift plan was not exempt from his bankruptcy estate where it was self-settled); JOHN G. GRIMSLEY, FLORIDA LAW OF TRUSTS § 15-5(b) (4th ed. 1993) ("A settlor cannot create for himself a spendthrift trust to avoid creditors."); 55A FLA. JUR.2D Trusts § 78 (2000) ("The trustee and the sole beneficiary cannot be one in the same under spendthrift trust law. A settlor cannot create a spendthrift trust for his or her own benefit.").

This limitation comports with the common law of trusts.⁸ See, e.g., RESTATEMENT (SECOND) OF TRUSTS § 156(1) (1959) ("Where a person creates for his own benefit a trust with a provision restraining the voluntary or involuntary transfer of his interest, his transferee or creditors can reach his interest."); GEORGE GLEASON BOGERT & GEORGE TAYLOR BOGERT,...