JOHN M. CARMACK, as Trustee, etc., et al., Plaintiffs and Respondents,
RICK H. REYNOLDS, Defendant; TODD A. FREALY, as Trustee in Bankruptcy, etc., Claimant and Appellant.
Cir. No. 12-60068, BAP No. CC-11-1433-HPaD, C.D. Cal. Bankr.
Nos. 09-14039-MJ, 09-01205-MJ
Finlayson Toffer Roosevelt & Lilly, Jesse S. Finlayson
and Matthew E. Lilly for Claimant and Appellant.
Offices of David W. Meadows and David W. Meadows for
Eroen Law Firm and Robert C. Eroen for Plaintiffs and
the terms of a spendthrift trust established by his parents,
defendant Rick H. Reynolds is entitled to receive over a
million dollars, all to be paid out of trust principal.
Reynolds filed for bankruptcy before the trust's first
payment, and the bankruptcy trustee seeks to determine what
interest the bankruptcy estate has in the trust. The trust is
governed by California law, and as the United States Court of
Appeals for the Ninth Circuit observed, the relevant
statutory provisions are “opaque.” (Frealy v.
Reynolds (9th Cir. 2015) 779 F.3d 1028, 1029
(Frealy).) Probate Code section 15306.5 appears to
limit the bankruptcy estate to 25 percent of the
beneficiary's interest; other provisions of the Probate
Code suggest no such limitation. The Ninth Circuit asked us
whether the Probate Code limits a bankruptcy estate's
access to a spendthrift trust to 25 percent of the
beneficiary's interest, where the trust pays the
beneficiary entirely out of principal. We hold that the
Probate Code does not impose such an absolute limit on a
general creditor's access to the trust. With limited
exceptions for distributions explicitly intended or actually
required for the beneficiary's support, a general
creditor may reach a sum up to the full amount of any
distributions that are currently due and payable to the
beneficiary even though they are still in the trustee's
hands, and separately may reach a sum up to 25 percent of any
payments that are anticipated to be made to the beneficiary.
parents established the Reynolds Family Trust in 2005. The
trust contains a spendthrift clause, providing that “no
interest in the income or principal of any trust created
under this instrument shall be voluntarily or involuntarily
anticipated, assigned, encumbered, or subjected to
creditor's [sic] claim or legal process before
actual receipt by the beneficiary.” Reynolds's
mother Patsy died in 2007. Following her death,
Reynolds's father Freddie received all the trust's
distributions until Freddie died in 2009.
trust provides that at Freddie's death, Reynolds is
entitled to $250, 000 from the trust if he survives Freddie
by 30 days. In addition, Reynolds is entitled to receive
$100, 000 a year for 10 years and then one-third of the
remainder. All payments are expected to be made from
principal; the trust's assets are in undeveloped real
estate that do not produce income. Those assets are estimated
to be worth several million dollars, although their exact
value will not be known until the trust assets are
after his father died, Reynolds filed for voluntary
bankruptcy under chapter 7 of the United States Bankruptcy
Code. The trustees of the Reynolds Family Trust sought a
declaratory judgment on the extent of the bankruptcy
trustee's interest in the trust. The bankruptcy court
held that under the California Probate Code, the bankruptcy
trustee standing as a hypothetical lien creditor could reach
25 percent of Reynolds's interest in the trust. The
bankruptcy appellate panel affirmed. The bankruptcy trustee
appealed to the Ninth Circuit, which asked us to clarify if
Probate Code section 15306.5 caps a bankruptcy estate's
access to a spendthrift trust at 25 percent of the
beneficiary's interest where the trust pays entirely from
principal. We granted the Ninth Circuit's request.
spendthrift trust is a trust that provides that the
beneficiary's interest cannot be alienated before it is
distributed to the beneficiary. Creditors of the beneficiary
generally cannot reach trust assets while those assets are in
the hands of the trustee, even if they have secured a
judgment against the beneficiary. Rather, creditors must wait
until the trustee makes distributions to the beneficiary. The
law permits such trusts because donors have “the right
to choose the object of [their] bounty” and to protect
their gifts from the donees' creditors. (Canfield v.
Security-First Nat. Bank (1939) 13 Cal.2d 1, 11
(Canfield).) Providing donors some measure of
control over their gifts encourages donors to make those
gifts, to the benefit of the donor, the beneficiary, and
ultimately the beneficiary's creditors.
the Probate Code, spendthrift provisions are generally valid
as to both trust income and trust principal. (Prob. Code,
§§ 15300 [trust income], 15301, subd. (a) [trust
principal]; all statutory references are to the Probate Code
unless otherwise noted.) Yet creditors need not always wait
for distributions to reach the debtor's hands.
Spendthrift provisions are invalid when grantors name
themselves beneficiaries. (§ 15304, subd. (a).) When a
trust includes a valid spendthrift provision, certain
creditors may reach into the trust. Such creditors include
those with claims for spousal or child support (§ 15305)
and those with restitution judgments (§ 15305.5). In
addition, a state or local public entity can reach trust
assets when the beneficiary owes money for public support
(§ 15306, subd. (a)) unless distributions from the trust
are required to care for a disabled beneficiary (§
15306, subd. (b)).
general creditors, including a bankruptcy trustee standing as
a hypothetical lien creditor, have some recourse under three
provisions: section 15301, subdivision (b) (section
15301(b)), section 15306.5, and section 15307. The question
here is how ...