Lundgren v. Hoglund

• Decision Date: 31 December 1985
• Docket Number: No. 85-159,85-159
• Court: Montana Supreme Court
• Parties: Dan H. LUNDGREN, Plaintiff and Respondent, v. William S. HOGLUND, Defendant. Everett M. LUNDGREN, Plaintiff and Respondent, v. William S. HOGLUND, Defendant. Jesse WHITNEY, Plaintiff and Respondent, v. William S. HOGLUND, Defendant. and First Interstate Bank of Kalispell, N.A., Trustee and Appellant.

Page 809

711 P.2d 809

219 Mont. 295

Dan H. LUNDGREN, Plaintiff and Respondent, v. William S. HOGLUND, Defendant.

Everett M. LUNDGREN, Plaintiff and Respondent, v. William S. HOGLUND, Defendant.

Jesse WHITNEY, Plaintiff and Respondent, v. William S. HOGLUND, Defendant. and First Interstate Bank of Kalispell, N.A., Trustee and Appellant.

No. 85-159.

Supreme Court of Montana.

Submitted on Briefs Aug. 27, 1985.

Decided Dec. 31, 1985.

Steven E. Cummings, Murphy, Robinson, Heckathorn & Phillips, Kalispell, for trustee and appellant.

Randall S. Ogle, Kalispell, for plaintiffs-respondents.

SHEEHY, Justice.

In this case we decide that spendthrift provisions in a trust are valid in Montana, and that judgment creditors of a beneficiary under a spendthrift trust may not execute upon the proceeds due from the spendthrift trust to the beneficiary before distribution by the trustee.

First Interstate Bank appeals from a judgment of the District Court, Eleventh Judicial District, Flathead County, which ordered the bank as trustee to pay to judgment creditors the income due to the beneficiary of a spendthrift trust. We reverse.

There are four issues on appeal. First, does the Bank have standing to appeal? Second, did the District Court have jurisdiction over the Bank? Third, can a judgment creditor reach income from a spendthrift trust before the income has been distributed to the beneficiary? Fourth, should the spendthrift provision be applied under the facts and circumstances of this case?

The plaintiffs-respondents in this case made unsecured loans to William S. Hoglund in 1970. William Hoglund's father, Stewart Hoglund, died testate in 1980. Four days after his father's death, William Hoglund assigned his distributive share of his father's estate to the respondents. At the same time he confessed judgment to the respondents.

Stewart Hoglund's will established a testamentary trust with a spendthrift provision. The will named First Interstate Bank as trustee. The will provided that William was to receive two-thirds of the trust income during his life. On William's death the trust principal would be divided among Stewart's grandchildren.

By writs of execution, the respondents, as judgment creditors, attempted to levy on the trust income due to William in the hands of the trustee, prior to the time it was paid. The trustee returned the writs of execution unsatisfied saying all the money was held in a trust under a spendthrift provision.

The judgment creditors instituted supplemental proceedings and the chief trust officer of the Bank was summoned to be examined regarding the trust provision. After the hearing, the judgment creditors moved for an order directing the Bank as trustee to pay the income from the trust to the judgment creditors. The District Court entered a judgment ordering the Bank as trustee to pay all income due to William Hoglund from the trust to the judgment creditors.

The first issue on appeal is whether the First Interstate Bank has standing to appeal the order of the District Court directing it to pay the spendthrift trust income directly to the judgment creditors. The Montana Rules of Appellate Civil Procedure state:

A party aggrieved may appeal from a judgment or order ... in the following cases: ... (c) From a judgment or order ... allowing ... the payment of a debt. Rule 1, M.R.App.Civ.P.

The respondents contend the Bank does not have standing to appeal because the Bank was neither a party nor an intervenor in the litigation below and the Bank has no individual interest in the outcome of the litigation. Although the Bank was not a party below, it is the subject of an order by the District Court directing it to pay trust income to the judgment creditors.

Non-parties are allowed to appeal if they are aggrieved by a court order. Holter v. Moore and Co. (Colo.App.1983), 681 P.2d 962; Makani Development Co., Ltd. v. Stahl (1983) 4 Hawaii App. 542, 670 P.2d 1284; Tisdale v. Wheeler Brothers Grain Co., Inc. (Okla.1979), 599 P.2d 1104. Further, as trustee of the Stewart Hoglund trust, the Bank has a fiduciary duty to preserve and protect the trust assets. The trustee has an appealable interest where it is directed to pay trust assets to creditors even though it has no personal stake in the suit. Clay v. Hamilton (1945), 116 Ind.App. 214, 63 N.E.2d 207; Pugh v. St. Louis Police Relief Assoc. (1944), 237 Mo.App. 922, 179 S.W.2d 927; Cregg v. Electri-Craft Corp. (1944), 268 App.Div. 814, 49 N.Y.S.2d 174; Chinnis v. Cobb (1936), 210 N.C. 104, 185 S.E. 638; Knettle v. Knettle (1931), 164 Wash. 468, 3 P.2d 133.

The second issue on appeal is whether the District Court had jurisdiction over the Bank. This action began as supplemental proceedings to discover the assets of William Hoglund. The Bank contends it was not a party to the proceedings and became involved only after the District Court ordered it to pay the income of the trust in violation of the spendthrift provision. The Bank contends the validity of the spendthrift provision can be addressed only in a plenary proceeding as provided by Sec. 25-14-104, MCA, which states:

25-14-104. Procedure when debt to or ownership of judgment debtor denied. If it appear that a person or corporation alleged to have property of the judgment debtor or to be indebted to him claims an interest in the property adverse to him or denies the debt, the court or judge may authorize, by an order made to that effect, the judgment creditor to institute an action against such person or corporation for the recovery of such interest or debt; and the court or judge may, by order, forbid a transfer or other disposition of such interest or debt until an action can be commenced and prosecuted to judgment. Such order may be modified or vacated by the judge granting the same or the court in which the action is brought, at any time, upon such terms as may be just. (Emphasis added.)

However, in this case there is no one who claims an interest in the trust adverse to the judgment debtors or denies the debt. The issue here is not whether William Hoglund owes the debts or whether the trustee has prior claim to the trust assets over the judgment creditors. The issue is the validity and effect of a spendthrift provision in a Montana trust. This is an issue of first impression.

The vast majority of states which have considered the validity of spendthrift provisions have found them valid. Nichols v. Eaton (1875), 91 U.S. 716, 1 Otto 716, 23 L.Ed. 254; In re Bucklin's Estate (1952), 243 Iowa 312, 51 N.W.2d 412; Preminger v. Union Bank & Trust Co. (1974), 54 Mich.App. 361, 220 N.W.2d 795; In re Heyl's Estate (1945), 352 Pa. 407, 43 A.2d 130; Huestis v. Manley (1939), 110 Vt. 413, 8 A.2d 644; Erickson v. Bank of California (1981), 28 Wash.App. 337, 623 P.2d 721. In fact only three states have found spendthrift trusts invalid. Bogert, Trusts Sec. 222 (rev. 2d ed. 1979); Brahmey v. Rollins (1935), 87 N.H. 290, 179 A. 186; Sherrow v. Brookover (1963), 174 Ohio St. 310, 189 N.E.2d 90; Petition of Smyth (1927), 49 R.I. 27, 139 A. 657. Many other states impose statutory limits on spendthrift clauses. Bogert, Trusts Sec. 222 (rev. 2d ed. 1979).

Spendthrift provisions in trusts are generally upheld on one of two policy grounds. First, the intention of the testator, as far as possible, should be given effect by the courts. Traditionally, a testator who gives without any pecuniary return can attach conditions to the gift during the life of the donee. "Why a parent, or one who loves another, and wishes to use his own property in securing the object of his affection, as far as property can do it, from the ills of life, the vicissitudes of fortune, and even his own improvidence, or incapacity of self-protection, should not be permitted to do so, is not readily perceived." Nichols v. Eaton (1875) 91 U.S. 716, 1 Otto 716, 23 L.Ed. 254. A recent Washington case upheld the validity of spendthrift trusts on the grounds of freedom of alienation. "The owner and donor of the property should be free to select the trust beneficiary who will enjoy his bounty, and should be able to put enforceable provisions in the trust which will prevent his trust beneficiary from voluntarily conveying or assigning his interest, thus precluding any creditors from taking that interest away from the beneficiary." Erickson v. Bank of California (1982), 97 Wash.2d 246, 643 P.2d 670, 672.

Second, spendthrift provisions are upheld because the creditor has no reason to rely on assets or income from a spendthrift trust. "[I]nasmuch as such a gift [in a spendthrift trust] takes nothing from the prior or subsequent creditors of the beneficiary to which they previously had the right to look for payment, they cannot complain that the donor has provided that the property or income shall go or be paid personally to the beneficiary and shall not be subject to the claims of creditors." Huestis v. Manley (1939), 110 Vt. 413, 8 A.2d 644, 646.

We hold spendthrift provisions to be valid in Montana. The spendthrift provision at issue here states:

No interest of any beneficiary of any trust created hereunder shall be subject to sale, assignment, pledge, or transfer by any beneficiary in any form or manner whatsoever, nor shall the principal of the trust or the income arising therefrom be liable for any debt of or any judgment against any beneficiary through the process of any court.

This provision makes the attempted assignment by William Hoglund invalid. However, the judgment creditors can still execute on their judgment, after the trust income has been paid to the beneficiary. Restatement of Trusts, Sec. 152, comment j.

Respondent contends that Sec. 72-24-210, MCA, controls here. That section states:

72-24-210. Profits of land liable to creditors in certain cases. When a trust is created to receive the rents and profits of real property and no valid direction for accumulation is given, the surplus of such rents and profits, beyond the...