Moody, Matter of

• Court: U.S. Court of Appeals — Fifth Circuit
• Writing for the Court: Before CLARK, Chief Judge, WILLIAMS and DAVIS; JERRE S. WILLIAMS
• Citation: Moody, Matter of, 837 F.2d 719 (5th Cir. 1988)
• Decision Date: 19 February 1988
• Docket Number: No. 87-2636,87-2636
• Parties: 18 Collier Bankr.Cas.2d 881, Bankr. L. Rep. P 72,195 In the Matter of Shearn MOODY, Jr., Debtor. W. Steve SMITH, Trustee, Plaintiff-Appellee, v. Shearn MOODY, Jr., Defendant-Appellant. Summary Calendar.

Page 719

837 F.2d 719

18 Collier Bankr.Cas.2d 881, Bankr. L. Rep. P 72,195

In the Matter of Shearn MOODY, Jr., Debtor W. Steve SMITH, Trustee, Plaintiff-Appellee, v. Shearn MOODY, Jr., Defendant-Appellant.

No. 87-2636

Summary Calendar.

United States Court of Appeals Fifth Circuit.

Feb. 19, 1988.

Kevin Dubose, University of Houston, Law Cntr. Houston, Tex., for defendant-appellant.

Ben B. Floyd, E. Ann Dickerson, Bonham, Carrington & Fox, Houston, Tex., for plaintiff-appellee.

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

Before CLARK, Chief Judge, WILLIAMS and DAVIS, Circuit Judges.

JERRE S. WILLIAMS, Circuit Judge:

Appellant, Shearn Moody, Jr., appeals the district court's order requiring Moody National Bank of Galveston to give Bankruptcy Trustee Smith at least 72 hours advance notice prior to any contemplated or actual distribution by the bank as trustee of funds from a spendthrift trust established by Mr. Moody's grandfather to appellant or his designated agent. We affirm the district court's notice requirement.

I.

On November 14, 1983, Shearn Moody, Jr. filed a voluntary Chapter 13 bankruptcy petition in the United States Bankruptcy Court for the Middle District of North Carolina. The case was converted to a Chapter 11 proceeding on March 21, 1984, and a Chapter 11 trustee was appointed. Moody's bankruptcy case was then transferred to the Southern District of Texas, and appellee, W. Steve Smith, was appointed successor trustee. On June 28, 1985, Trustee Smith filed a complaint against Shearn Moody, Jr. and Moody National Bank of Galveston, trustee, seeking a determination of the rights of the parties under a spendthrift trust, including a turnover of funds received and to be received from this trust, an accounting, a temporary restraining order, and a preliminary injunction.

The trust at issue was created by Shearn Moody, Jr.'s grandfather, the late W.L. Moody, Jr., on December 26, 1934. This trust has been held to be a spendthrift trust by both state and federal district courts. ¹ No party disputes the spendthrift status of the trust. The provisions of this spendthrift trust require the trustee to pay over to the beneficiaries monthly the net amount of income and cash dividends received from the trust corpus. ² Shearn Moody, Jr. is one of the trust's beneficiaries. He has a life estate in a pro rata share of all the net income and cash dividends derived from the trust corpus.

In his second amended complaint against Shearn Moody, Jr. and Moody National Bank, Trustee Smith sought to recover from Mr. Moody the trust distributions made to him within the 180 day period subsequent to the filing of his bankruptcy petition on November 14, 1983. Smith claimed these distributions, which totaled $77,151.99, ³ were property of the bankruptcy estate pursuant to 11 U.S.C. Sec. 541(a)(5)(A). ⁴ In the event Moody no longer had possession of these distributions, the trustee requested an equivalent amount plus interest from the trust distributions that had been escrowed pursuant to a previous court order ⁵ or from the trust funds currently on deposit in the court's registry pursuant to another prior court order. ⁶

Trustee Smith also sought a declaration that all trust distributions made to or for the benefit of Shearn Moody, Jr. after the filing of his bankruptcy petition were subject to various post-petition claims. The claims include Trustee Smith's claims for recovery of pre- and post-petition transfers and damages, claims of Moody's post-petition creditors, claims which were not discharged, and Trustee Smith's damages related to several of his suits against Moody, including the damages arising from his prosecution of Trustee's Motion for Enforcement and Trustee's Emergency Motion to Compel Turnover of Books and Records. Smith requested that a charge be placed on all existing, escrowed, and future trust distributions attributable to Moody's interest in the trust for the satisfaction of these claims and that the Bank be required to give Smith ten working days advance notice of the exact date, place, time and manner of each and every future trust distribution to Moody. ⁷ In the event that the court declined to place a charge on Moody's existing, escrowed, and future trust distributions, Trustee Smith requested that Moody National Bank be directed to continue to deposit all of Moody's future distributions into the account established pursuant to the January 16, 1986, court order.

On January 20, 1987, appellee Smith filed a motion for summary judgment. The court granted this motion on March 2, 1987. In its order the district court held that the trust distributions made within the 180 day window following the filing of Shearn Moody, Jr.'s bankruptcy petition were property of his bankruptcy estate pursuant to 11 U.S.C. Sec. 541(a)(5)(A) despite the spendthrift provisions of the trust and the related statutory provision, 11 U.S.C. Sec. 541(c)(2). The court held that Moody had already converted these distributions, resulting in a diminution in the value of his bankruptcy estate, and further held that Trustee Smith could recover the December 15, 1983, and April 3, 1984, trust distributions from Moody, or their value, pursuant to 11 U.S.C. Sec. 550(a). The court also awarded Trustee Smith interest and costs. ⁸ The court, however, declined to place a charging order against the various past and future trust distributions to Moody. But the court did extend the January 16, 1986, order for a period of 60 days from the entry of the Order Granting Summary Judgment "in order to give the [trustee] an opportunity to attempt to execute against distributions from [the trust] to the Defendant Debtor on deposit, and to be deposited, in the Defendant Debtor's account at the Defendant Bank for recovery of the [trustee's] post-petition claims against the Defendant Debtor, including the summary judgment granted hereby." (emphasis added).

On April 16, 1987, Trustee Smith filed an Application for Writ of Garnishment against Moody National Bank, garnishee, to recover the $77,151.99 plus interest from Moody's escrowed trust distribution funds deposited in the bank pursuant to the January 16, 1986, order.

The district court denied Trustee Smith's garnishment application, apparently finding that the trust funds on deposit at Moody National Bank were still protected from garnishment by the spendthrift provisions of the trust since the deposit of the funds by the bank into this account did not constitute receipt of the funds by Moody or his agent. ⁹ The court also dissolved the January 16, 1986, order prohibiting the distribution of trust funds to Shearn Moody, Jr. by Moody National Bank. The court, however, ordered that Moody National Bank give Trustee Smith and his attorney at least 72 hours prior written and oral notice of any contemplated or actual distribution by the bank of the spendthrift trust funds, including those presently escrowed and on deposit. The notification is "to include the date and hour of such distribution, the method of transfer, the complete name and address of such addressee, designee or transferee as well as the source of such instructions if other than those contained in the trust instrument."

The only issue before us is Shearn Moody, Jr.'s appeal of this 72 hour notice provision.

II.

A beneficiary's interest in a spendthrift trust is excluded from his bankruptcy estate by 11 U.S.C. Sec. 541(c)(2), if state law and the trust so provide. ¹⁰ Matter of Goff, 706 F.2d 574, 580 (5th Cir.1983). Texas law and the trust in the case at bar do so provide. ¹¹ In general, a spendthrift trust is one in which the right of the beneficiary to future payments of income or capital cannot be voluntarily transferred by the beneficiary or reached by his or her creditors. In re Brooks, 60 B.R. 155, 159 (Bankr.N.D.Tex.1986); Hines v. Sands, 312 S.W.2d 275, 278 (Tex.Civ.App.--Fort Worth 1958, no writ). Spendthrift trusts have long been held valid by Texas courts. Hines v. Sands, 312 S.W.2d at 278.

Unless the settlor creates the trust and makes himself beneficiary, the corpus and future income of a spendthrift trust in the hands of the trustee is not subject to execution or garnishment by the creditors of a beneficiary. Furthermore, income from a spendthrift trust which has already accrued in the hands of the trustee, but which has not yet been paid to the beneficiary, is also exempt from the claims of a beneficiary's creditors. First Bank & Trust v. Goss, 533 S.W.2d 93, 95 (Tex.Civ.App.--Houston [1st Dist.] 1976, no writ); Hines v. Sands, 312 S.W.2d at 278.

The exclusion of spendthrift trust income payments from a debtor's bankruptcy estate is tempered slightly by 11 U.S.C. Sec. 541(a)(5)(A). Under that statutory provision, the income payments from a spendthrift trust which the beneficiary is entitled to receive or does receive within the 180 day period after the filing of the bankruptcy petition are brought into the bankruptcy estate. ¹² 11 U.S.C. Sec. 542(c)(2) does not prevent this "reaching forward." In re Kragness, 58 B.R. 939, 944 (Bankr.D.Or.1986); Matter of Hecht, 54 B.R. 379, 384 (Bankr.S.D.N.Y.1985), affirmed sub nom, Togut v. Hecht, 69 B.R. 290 (S.D.N.Y.1987). This result is consistent with the theory of the spendthrift trust because once trust income is paid to the beneficiary the income so paid is no longer subject to the protection of the spendthrift provisions contained in the trust. In re Kragness, 58 B.R. at 944; Togut v. Hecht, 69 B.R. at 291. The Texas law on spendthrift trusts leads to the same result. Neither the Texas Trust Code nor the applicable common law undertake to protect trust property from the reach of a beneficiary's creditors once such property has been distributed to the beneficiary.

The corollary that necessarily must follow from this holding is that income distributions from a spendthrift trust that occur after the 180 day window of Sec. 541(a)(5)(A)...