Matter of Hecht
| Decision Date | 21 October 1985 |
| Docket Number | Bankruptcy No. 82 B 10438,Adv. No. 84-5382A. |
| Citation | 54 BR 379 |
| Parties | In the Matter of Mary Ellen HECHT, M.D., formerly d/b/a the Hecht Group, Debtor. Albert TOGUT, as Trustee in Bankruptcy for Mary Ellen Hecht, M.D., formerly d/b/a the Hecht Group, Plaintiff, v. Mary Ellen HECHT, M.D., and the Mercantile Safe-Deposit & Trust Company, Defendants. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
Togut, Segal & Segal, New York City, for trustee.
Sudler and Barth, New York City, for Mary Ellen Hecht.
Winick and Rich, P.C., New York City, for Mercantile Safe-Deposit and Trust Co.
On March 8, 1982, Dr. Mary Ellen Hecht ("Hecht") filed a petition for relief under Chapter 7 of the Bankruptcy Reform Act of 1978 ("Code"), seeking to liquidate and distribute the assets of her estate. Since the filing of her petition, Hecht, as the beneficiary of two spendthrift trusts, has continued to receive income payments generated by the trusts, but has not included these payments, or any part thereof, as property of the estate.
Albert Togut, who was appointed permanent trustee (the "Trustee"), commenced this adversary proceeding seeking to recover distributed trust income from Hecht and Mercantile Safe-Deposit & Trust Co. ("Mercantile"), the trustee of the spendthrift trusts.1 Hecht moved to dismiss the Trustee's complaint. In accordance with Fed.R. Civ.P. 12(b)(6) and Bankruptcy Rule 7012(b)(6), Hecht's motion is being treated as one for summary judgment. The parties were given a reasonable opportunity to present all material pertinent to such a motion and have exchanged numerous memoranda.
The issues presently before this Court are:
1) whether the Trustee is barred by the doctrine of laches from proceeding with this action;
2) whether the laws of the State of Maryland or New York are applicable in determining the validity of the spendthrift trust provisions;
3) whether the trustee under § 541(a)(5)(A) of the Code is entitled to any of the post petition payments received by Hecht, and if so, in what amount; and
4) whether requiring Hecht to turn over funds to the Trustee contravenes the Code's "fresh start" policy.
Hecht is one of four beneficiaries of two spendthrift trusts which were created in the separate wills of Hecht's grandparents, Moses S. Hecht and Blanch N. Hecht. The wills provide that the remainders of the Hechts' estates were to be placed in trust and that the appointed Trustees were to divide the trust into four equal parts for the benefit of the Hechts' four grandchildren. The wills further provide that the income from the four trusts is to be paid in equal monthly installments. Both wills state:
Except as otherwise in this will provided, whenever and wherever I have herein provided for payments to be made, I do hereby direct that said payments shall be made into the hands of the respective beneficiaries thereunto entitled and not in the hands of any other, whether claiming by authority of such beneficiaries or otherwise, my will and direction being that no beneficiary shall be entitled at any time to alienate, anticipate or encumber his or her share of the income or principal, and that the same shall at no time be taken or attached for his or her debts. . . .
Last Will and Testament of Blanch H. Hecht at 13; Last Will and Testament of Moses S. Hecht at 18-19. The wills also specifically provide that "the Trusts created by this, my Last Will and Testament, shall be Maryland Trusts and that all questions pertaining to their validity, construction, and administration shall be determined in accordance with the laws of the State of Maryland" (emphasis added). Last Will and Testament of Blanch H. Hecht at 18; Last Will and Testament of Moses S. Hecht at 22.
The two trusts provide Hecht with a combined annual income of approximately $68,000 and are administered by Mercantile, which has its place of business in Maryland. Since the filing of the petition, Mercantile has continued to pay Hecht the income generated by the trusts.
Hecht contends that the Trustee's cause of action is barred by the equitable doctrine of laches and should therefore be dismissed because of an alleged failure to promptly commence this action. Even if this action is not dismissed, Hecht claims that the Trustee is not entitled to any portion of the trust income. Hecht argues that the transfer restriction found on spendthrift trust income under Maryland law applies and precludes the Trustee from claiming any portion of such income. Hecht also argues that requiring the turnover of any trust income will result in extreme hardship to her which contravenes the fresh start policy found in the Code.
The Trustee contends that this action was timely commenced within two years of his being appointed permanent trustee, and that his claim is not barred by laches. He asserts that the trust income is property of the estate under Section 541 of the Code, and that as a judicial lien creditor under § 544, he is entitled to recover these post petition income payments.
The Trustee contends that New York and not Maryland law applies, and that under N.Y.Civ.Prac.Law § 5205 (McKinney 1984), he is entitled to 10% of all future income and any portion of the remaining 90% that exceeds the debtor's reasonable living requirements. Alternatively, the Trustee argues that if Maryland law does apply, he is entitled to recover pursuant to § 541(a)(5) the actual income of approximately $34,000 received by Hecht in the 180 days following the filing of the petition. Finally, the Trustee claims that the turnover of any income payments does not contravene the Code's fresh start policy.
For the following reasons, this Court grants summary judgment as a matter of law to the Trustee and holds that the Trustee can recover the income Hecht actually received or was entitled to receive by the terms of the trusts, and which Mercantile was obligated to distribute, in the 180 days following the filing of the petition. A further hearing shall be held to determine the amount which must be turned over to the Trustee.
Section 546(a) of the Code provides:
An action or proceeding under section 544 . . . may not be commenced after the earlier of (1) two years after the appointment of a trustee under Section 702. . . . (Emphasis added.)
The Trustee was appointed permanent trustee on April 15, 1982 and commenced this action on March 9, 1984, less than two years after his appointment. This action, therefore, is not time barred by the statute of limitations in § 546(a).
Neither is it barred by the doctrine of laches, which considers the following factors: (1) proof of delay in asserting a claim despite the opportunity to do so; (2) lack of knowledge on the defendant's part that a claim would be asserted; and (3) prejudice to the defendant by the allowance of the claim. Rapf v. Suffolk County of New York, 755 F.2d 282, 292 (2d Cir.1985). In the present case, the Trustee filed this action within the appropriate time period; Hecht was aware that the Trustee would attempt to recover property of the estate in order to make distributions to creditors; and Hecht has not shown that the allowance of a claim contemplated by the Code would result in prejudice to her. Furthermore, it is apparent that the Trustee has not "inexcusably slept on his rights so as to make a decree against Hecht unfair." Prudential Lines, Inc. v. Exxon Corp., 704 F.2d 59, 65 (2d Cir.1983). Thus laches is not a valid defense to the Trustee's action.
Code § 541(a)(1) defines property of the estate to include "all legal or equitable interests of the debtor in property as of the commencement of the case." Spendthrift trusts, however, are excluded from this otherwise broad coverage by § 541(c)(2) which provides that "a restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title." The legislative history of § 541(c)(2) demonstrates that the drafters intended to preserve the traditional status of spendthrift trusts. H.R.Rep. No. 595, 95th Cong., 1st Sess. 369 (1977); S.Rep. No. 989, 95th Cong., 2d Sess. 83 (1978), U.S.Code Cong. & Admin.News 1978, pp. 5787, 5869, 6325. See also In re Reuben F. Leimer, 54 B.R. 587, 13 B.C.D. 293, 294 (D.Neb.1985) ().
Maryland law is the applicable nonbankruptcy law referred to in § 541(c)(2) which governs the validity and operation of the spendthrift trusts and the trustee's right to future or already distributed income. Section 271(a) of the Restatement (Second) Conflict of Laws states that "the administration of a trust of interests in movables created by will is governed as to matters which can be controlled by the terms of the trust by the local law of the state designated by the testator to govern the administration of the trust." See also Restatement (Second) Conflict of Laws § 269(b)(i) () In Rousseau v. United States Trust Company of New York, 422 F.Supp. 447 (S.D.N.Y.1976), the Court found that "the administration of a testamentary trust is governed by the law of the state designated by the testator to govern its administration." Id. at 460.
The will creating the Hecht trusts specifically states that Maryland law is to govern "all questions pertaining to their validity,...
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Self-settled spendthrift trusts: should a few bad apples spoil the bunch?
...by the law of the trust's situs, rather than law of the bankrupt beneficiary's domicile); see also Togut v. Hecht (In re Hecht), 54 B.R. :379 (Bankr. S.D.N.Y. 1985), aff'd 69 B.R. 290 (S.D.N.Y. 1987); In re Accounting of New York Trust Co., 87 N.Y.S.2d 787 (N.Y. Sup. Ct. (31.) SCOTT & F......