Security Pacific Bank Washington v. Chang
| Decision Date | 11 April 1996 |
| Docket Number | No. 93-17384,93-17384 |
| Parties | 96 Cal. Daily Op. Serv. 2535, 96 Daily Journal D.A.R. 4204, 96 Daily Journal D.A.R. 4319 SECURITY PACIFIC BANK WASHINGTON, Plaintiff-Appellant, v. Jing Long CHANG, aka Alan J.L. Chang, et al., Defendants-Appellees. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Robert J. Smolenski, Smolenski & Wooddell, Honolulu, Hawaii, for the plaintiff-appellant.
Enver W. Painter, Jr., Honolulu, Hawaii, for the defendants-appellees.
Appeal from the United States District Court for the District of Hawaii; Harold M. Fong, Chief Judge, Presiding. No. CV-91-00512-HMF.
Before: HUG, Chief Judge; THOMPSON and O'SCANNLAIN, Circuit Judges.
We must decide whether, under Hawaii law, a creditor is barred from reaching property held in a revocable living trust with a spendthrift clause when the property had formerly been held in tenancy by the entirety between the debtor and his wife.
Appellant Security Pacific Bank Washington (the "Bank") appeals the district court's grant of summary judgment in favor of Appellees Jing Long Chang (aka Alan Chang) and Chu Whea Wu Chang (aka Julia Chang) in the Bank's diversity action seeking to satisfy a judgment against Alan Chang by reaching real property held in a spendthrift trust. Prior to conveying the real property to the Alan Chang Trust, the Changs held the property in tenancy by the entirety.
On March 27, 1990, Alan Chang and his wife, Julia Chang, established two revocable living trusts: the Alan Chang Trust with Alan Chang as trustee and beneficiary, and the Julia Chang Trust with Julia Chang as trustee and beneficiary. Each trust contains the following spendthrift provision:
In each trust, the trust property at creation consisted of $10 "and such other property that Settlor may from time to time transfer to the Trustee." The first page of the Alan Chang Trust Agreement lists Alan Chang as the settlor, and the first page of the Julia Chang Trust Agreement lists Julia Chang as the settlor.
On the same day that the Changs established the two trusts, the Changs jointly conveyed to the trusts three pieces of real property which the Changs held as tenants in the entirety. For each parcel, the Changs conveyed by warranty deed an undivided, one-half interest in the respective parcel to the Alan Chang Trust, and an undivided, one-half interest in the respective parcel to the Julia Chang Trust. Although one of these properties has since been sold, the remaining two properties, located in Honolulu, are still held by the trusts as tenants in common.
In June 1990, Alan Chang signed documents that made him a guarantor to the Bank of the obligations of Qantek Information Corporation ("Qantek") in the amount of approximately $2,000,000. When Alan Chang defaulted on this obligation, the Bank filed a suit for breach of contract and fraudulent conveyance in the district court on September 16, 1991, asserting diversity jurisdiction. On April 13, 1992, the Bank moved for summary judgment on its breach-of-contract claim.
On April 20, 1993, the district court entered the order granting in part the Bank's motion for summary judgment. The district court found that Alan Chang is indebted to the Bank pursuant to his guarantee and that, in satisfaction of its judgment against Alan Chang, the Bank may execute against any assets held in trust by Alan Chang with the exception of the real property held by the Alan Chang Trust. The court reserved ruling on whether the Bank may reach the real property in the Alan Chang Trust.
On April 19, 1993, the district court held a hearing on two additional, opposing motions for summary judgment brought by the Bank and the Changs. On April 22, 1993, the district court granted the Changs' motion for summary judgment and denied the Bank's motion for summary judgment. The district court refused to allow the Bank to satisfy Alan Chang's debt by reaching the real property held in trust by Alan Chang, as trustee.
The district court certified its grant of summary judgment for the Changs as a final judgment on November 17, 1993. The Bank filed a timely notice of appeal on December 16, 1993.
Pursuant to a Stipulation and Order entered July 26, 1993, the district court held Alan Chang to be indebted to the Bank in the amount of $2,033,147.81 plus, potentially, additional attorneys' fees and costs.
Hawaii has long recognized the validity of spendthrift trusts. Welsh v. Campbell, 41 Haw. 106 (1955).
A spendthrift trust is defined as one created to provide a fund for a beneficiary and at the same time secure it against his improvidence or incapacity. It is an active trust with provisions against alienation of the fund or property by the voluntary act of the beneficiary or through legal process by creditors.
Id. at 107. However, Hawaii also follows the majority rule that a spendthrift trust established by the settlor for his own benefit is invalid against the settlor's creditors. Cooke Trust Co. v. Lord, 41 Haw. 198, 202-05 (1955); see Restatement (Second) of Trusts § 156(1) (1959) (); George T. Bogert, Trusts § 40, at 155 (6th ed. 1987).
Here, the applicability of the prohibition against self-settled spendthrift trusts depends upon whether Alan Chang was the settlor of the Alan Chang Trust. Security Pacific Bank Wash. v. Chang, 818 F.Supp. 1343, 1345 (D.Haw.1993). The Bank argues that Alan Chang's role in conveying the real property to the trusts and the actual language of the Alan Chang Trust confirm that Alan Chang was the settlor. The Changs contend that Alan Chang could not have been the settlor because the properties were not his to dispose of, but were instead placed in the Alan Chang Trust by the joint conveyance of Alan and Julia Chang as tenants by the entirety.
Hawaii recognizes the validity of tenancies by the entirety and affords such tenancies the protections that have come to serve as their hallmarks. "A tenancy by the entirety is a unique form of ownership in which both spouses are jointly seized of property such that neither spouse can convey an interest alone nor can one spouse's creditor attach the property to satisfy a debt." Traders Travel Int'l v. Howser, 69 Haw. 609, 613, 753 P.2d 244, 246 (1988); see also Haw.Rev.Stat. § 509-2 (1993). "The indivisibility of the estate, except by joint action of the spouses, is an indispensable feature of the tenancy by the entirety." Sawada v. Endo, 57 Haw. 608, 614, 561 P.2d 1291, 1296 (1977); see also In the Matter of the Estate of David Au, 59 Haw. 474, 480 n. 10, 583 P.2d 966, 970 n. 10 (1978).
In its judgment, the district court not only acknowledged that "a spendthrift trust established by the settlor for his own benefit is invalid against the settlor's creditors," Security Pacific Bank, 818 F.Supp. at 1345, but also specifically noted that this principle was "the basis for the court's [earlier ruling] that the other assets of the [Alan Chang Trust] could be reached by the Bank." Id. Thus, the district court implicitly recognized that Alan Chang was the settlor of the Alan Chang Trust. In addition, the court conceded that "[t]he language of the Chang Trust itself supports [the Bank's argument] by specifically naming Alan Chang as the settlor of the trust." Id.
Nevertheless, relying upon the holding by a Missouri Court of Appeals in Bolton Roofing Co. v. Hedrick, 701 S.W.2d 183 (Mo.Ct.App.1985), the district court concluded that "there is no policy reason to invalidate this spendthrift clause." Security Pacific Bank, 818 F.Supp. at 1346. The court explained that since "the operation of the tenancy in the entirety would have prevented [the creditors] from reaching the property[, the] individual creditors are not deprived of an individual asset that they could have reached absent the spendthrift clause." Id.
In Bolton, the husband and wife conveyed their interests as tenants in the entirety to a spendthrift trust with the husband as sole trustee and with the husband, wife, and their two sons as beneficiaries. 701 S.W.2d at 184. More than six years after this conveyance, the Bolton Roofing Company obtained a judgment against the husband. The Missouri court held that the spendthrift clause prevented Bolton from reaching the real estate held in the trust. Id. at 185.
The Bolton court relied upon the following Missouri statutory provision that codifies the prohibition against self-settled spendthrift trusts: " 'If the settlor is also a beneficiary of the trust, a provision restraining the voluntary or involuntary transfer of his beneficial interest will not prevent his creditors from satisfying claims from his interest in the trust estate.' " Id. at 184 (quoting Mo.Rev.Stat. § 456.080.3 (Supp.1984)). The court defined "settlor" as "one who furnishes the consideration for the creation of a trust." Id. at 184 (citing Black's Law Dictionary 1539 (4th ed. 1968)). The Missouri court concluded that since
Bolton would not have had any legal right to levy against the real estate owned jointly by Wayne and Alta prior to the time they conveyed it under the trust agreement[,] ... Bolton could not have the same real estate, after it had been conveyed to the trustee by Wayne and Alta, as tenants by the entireties, sold to satisfy an individual debt of Wayne's.
In addition to relying on Bolton, the district court relied on dicta in the Hawaii Supreme Court's decision in Sawada. The Sawada court held that a husband and wife's conveyance of land held in tenancy by the entirety to their sons...
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