In re Cleopatra Cameron Gift Trust

• Decision Date: 26 June 2019
• Docket Number: 28424
• Citation: 931 N.W.2d 244
• Court: South Dakota Supreme Court
• Parties: In the MATTER OF the CLEOPATRA CAMERON GIFT TRUST, DATED MAY 26, 1998, and the Cameron Family Exempt GST Trust FBO Cleopatra Cameron, created under the Cameron Family Trust, dated December 20, 1996, as amended.

931 N.W.2d 244

In the MATTER OF the CLEOPATRA CAMERON GIFT TRUST, DATED MAY 26, 1998, and the Cameron Family Exempt GST Trust FBO Cleopatra Cameron, created under the Cameron Family Trust, dated December 20, 1996, as amended.

28424

Supreme Court of South Dakota.

ARGUED ON NOVEMBER 13, 2018

OPINION FILED June 26, 2019

DREW DUNCAN, AMANDA W. ENGEL of The Duncan Law Firm, LLP, Sioux Falls, South Dakota, Attorneys for appellant Christopher Pallanck.

COREY THOMAS DENEVAN of Boyce Law Firm, LLP, Sioux Falls, South Dakota, Attorneys for appellee Trident Trust Company.

REBECCA L. WILSON of Myers Billion, LLP, Sioux Falls, South Dakota, Guardian Ad Litem for appellee minor children C.S.C.-P. and T.C.C.-P.

JAYNA M. VOSS, BOBBI L. THURY of Legacy Law Firm, P.C., Sioux Falls, South Dakota, Attorneys for appellee Cleopatra Cameron.

SALTER, Justice

[¶1.] Trust beneficiary Cleopatra Cameron filed a petition in the circuit court requesting a determination of whether the trust’s spendthrift provision prohibits direct payments of her child support obligation to her ex-husband, Christopher Pallanck. A California family court previously ordered the direct payments as part of the couple’s divorce, citing a particular feature of California trust law. The circuit court concluded the direct payment order was a method of enforcing Cleopatra’s child support obligation to be determined under local law and, therefore, not entitled to full faith and credit. The court further determined that South Dakota law recognizes the validity of spendthrift clauses and their prohibition upon compulsory direct payments to a beneficiary’s creditors, like Christopher, who now appeals. We affirm.

Background

[¶2.] Cleopatra’s father, Arthur A. Cameron Jr., established the Cameron Family Trust for his own benefit during his life. He also established the Cleopatra Cameron Irrevocable Gift Trust, under which Cleopatra was the primary beneficiary. Arthur died on September 2, 2001, and the Family Trust was partitioned into individual shares for each of his three children, including a share for Cleopatra. This share was further divided into the GST¹ Exempt Trust and the Non-GST Exempt Trust. Spendthrift provisions in the Gift Trust, Non-GST Exempt Trust, and GST Exempt Trust (collectively the Trust) prohibit the trustee from making direct payments to Cleopatra’s creditors and grant the trustee the sole discretion to make distributions.

[¶3.] Cleopatra and Christopher were married in 2005 and lived in California with their two young children. Christopher commenced a divorce action in January 2009 in Santa Barbara County, California. During the pendency of the divorce, the California family law court (the family court) entered interim orders granting Christopher sole custody of the children, as well as establishing temporary child support and spousal support obligations for Cleopatra. At the time, Cleopatra received Trust distributions of $ 40,000 per month which, when considered with Christopher’s relatively modest income from part-time employment, yielded a monthly child support obligation for Cleopatra of $ 8,863. In addition, the court ordered Cleopatra to pay Christopher interim spousal support of $ 14,761 per month and interim attorney’s fees of $ 50,000.

[¶4.] The family court joined the Trust in the divorce action on February 3, 2009, to facilitate regular payment of the interim financial obligations it had imposed upon Cleopatra. The family court later confirmed that its intent was to utilize a particular feature of California trust law to require the Trust to directly fund Cleopatra’s child support obligation.²

[¶5.] On March 10, 2009, the family court conducted a hearing on Christopher’s motion to show cause to determine whether Cleopatra and Wells Fargo, who were co-trustees at the time, should be held in contempt for failing to pay temporary child support. The court found that Cleopatra and Wells Fargo acted in bad faith and abused their discretion when they failed to satisfy the child support obligation and issued the following order:

The [c]ourt will order the Bank, and its successor, and Mother to pay child support, spousal support, and attorney fees from Mother’s Trust including any other ordered awards in this action until further order of the [c]ourt. Wells Fargo Bank and any successor are joined in this action until further order of [c]ourt.

(Emphasis added.)

[¶6.] Wells Fargo objected on the basis that the family court had no authority to order direct payments from a spendthrift trust to a creditor or child support obligee.

However, it ultimately complied with the March 10, 2009, order, made the payments directly to Christopher, and did not seek interlocutory appellate review.

[¶7.] Around the time the divorce action was beginning, Cleopatra and Wells Fargo requested approval from a different California judge sitting as a probate court to resign their positions as co-trustees. The probate court granted the request and approved the appointment of BNY Mellon (BNY) as the sole successor trustee in April 2009, after BNY agreed to be bound by the family court’s March 10 child support and spousal support order.

[¶8.] At this juncture, it seems helpful to explain the provisions of California trust law which are at the heart of this appeal. Where, as here, child support obligors are trust beneficiaries who do not have the ability to compel distributions, California’s probate code, nevertheless, allows a court to "order the trustee to satisfy ... [a] support judgment out of ... future payments that the trustee, pursuant to the exercise of the trustee’s discretion , determines to make to or for the benefit of the beneficiary." Cal. Prob. Code § 15305(c) (West 2019) (emphasis added). A California Court of Appeal panel has interpreted this text to authorize an order compelling a trustee to satisfy an unpaid support obligation where the trial court finds the trustee has exercised its discretion in bad faith to deny a request for a distribution. Ventura Cty. Dep't of Child Support Servs. v. Brown , 117 Cal.App.4th 144, 11 Cal. Rptr. 3d 489, 498 (2004). Relying upon the fact that the trustee had not exercised its discretion to satisfy a child support obligation, the Ventura County court concluded:

[A] court may overcome the trustee’s discretion under the narrow circumstances present here: when there is an enforceable child support judgment that the trustee refuses to satisfy. Under these circumstances, the trial court may order the trustee to satisfy past due and ongoing support obligations from the trust.

Id.

[¶9.] In addition to imposing interim support obligations upon Cleopatra, the family court also ordered "Mother and/or the Trusts" to pay interim attorney’s fees to Christopher. The court initially ordered $ 50,000 in attorney’s fees and then ordered an additional $ 100,000 in attorney’s fees on June 16, 2009, both of which were paid by the Trust. The court ordered another $ 100,000 for attorney’s fees on December 1, 2009. BNY elected to appeal the December 1 attorney’s fee award, which was immediately reviewable under California law.

[¶10.] In an April 2011 unpublished decision, a California Court of Appeal panel reversed the family court’s order to the extent it required BNY to make direct attorney’s fee payments to Christopher. In re Marriage of Pallanck , No. 1304784, 2011 WL 1459964 (Cal. Ct. App. Apr. 18, 2011). The appellate court concluded the Ventura County exception that allows a court to order a trustee to make direct payments from a spendthrift trust is narrow and depends upon the existence of an enforceable child support obligation that a trustee refuses in bad faith to satisfy. Id. at *4. The family court’s December 1 order, by contrast, did not involve a child support obligation or a bad faith "refusal to satisfy a delinquent order."³ Id. [¶11.] While the attorney’s fees appeal was pending, the family court issued a final judgment of divorce on October 26, 2010. The judgment incorporated a written statement of decision, dated May 17, 2010, in which the family court granted Christopher legal and physical custody of the couple’s two minor children. Cleopatra’s parenting time was significantly restricted and subject to supervision. The court set Cleopatra’s monthly child support at $ 8,786 and ordered the Trust to "make the child support payments directly to Father each and every month[,]" adopting "in full" its earlier "comments on this subject made in [c]ourt and in writing[.]"

[¶12.] Following the judgment, the family court later modified the amount of Cleopatra’s child support obligation on October 9, 2012. The decision does not reference the Trust as a party or incorporate the rulings from the 2010 judgment, and it is unclear from the record that the Trust received notice of the modification proceeding. Nevertheless, the Trust continued to pay child support directly to Christopher following the modification.

[¶13.] A few months earlier, in July 2012, Cleopatra invoked her authority under the Trust instruments to move the situs of the Trust to South Dakota. BNY resigned as the sole trustee in 2014 and was replaced by Citicorp Trust of South Dakota. Citicorp resigned the same year and was replaced by Bankers Trust Company of South Dakota. On February 28, 2014, Cleopatra petitioned for court supervision of the Trust in Lincoln County, seeking several forms of relief, including approval of the change of situs and amendment of the Trust instruments. The circuit court granted Cleopatra’s petition and concluded supervision of the Trust after allowing Cleopatra’s requested relief. The Trust continued to pay child support to Christopher for a period of time despite its new situs.

[¶14.] Around November 2016, Trident Trust Company, Inc. (Trident) became the acting trustee, and Empire Trust (Empire) was appointed as the trust protector. See SDCL 55-1B-1(2) (defining the role of trust protector); SDCL 55-1B-6 (listing potential statutory "powers and discretions"...