Bendon v. Reynolds (In Re Reynolds)

479 B.R. 67, 2012 Bankr. LEXIS 4023
CourtUnited States Bankruptcy Appellate Panel for the Ninth Circuit
DecidedAugust 24, 2012
DocketBAP CC-11-1433-HPaD; Bankruptcy 09-14039; Adversary 09-01205
StatusPublished
Cited by6 cases

This text of 479 B.R. 67 (Bendon v. Reynolds (In Re Reynolds)) is published on Counsel Stack Legal Research, covering United States Bankruptcy Appellate Panel for the Ninth Circuit primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Bendon v. Reynolds (In Re Reynolds), 479 B.R. 67, 2012 Bankr. LEXIS 4023 (bap9 2012).

Opinions

OPINION

HOLLOWELL, Bankruptcy Judge.

The bankruptcy court granted the debt- or’s summary judgment motion, concluding that the bankruptcy estate was entitled to no more than 25% of the debtor’s beneficiary interest in a spendthrift trust. The chapter 7 trustee appealed. For the reasons explained below, we AFFIRM.

I. FACTS

In 2005, Rick Reynold’s (the Debtor’s) parents, Freddie Hugo Reynolds (Freddie) and Patsy R. Reynolds (Patsy), established the Reynolds Family Trust. Patsy died in November 2007. Upon her death, the Reynolds Family Trust was split into three sub-trusts: (a) the Bypass Trust; (b) the Marital Trust; and, (e) the Survivor’s Trust. Freddie retained the right during his lifetime to receive all the income from each of the trusts. While the Bypass [70]*70Trust and the Marital Trust (together, the Family Trust) were vested and not subject to further amendment, the Survivor’s Trust (Survivor’s Trust) was amended from time to time by Freddie. He died on March 3, 2009.

Once the Debtor survived Freddie by thirty days, he was entitled to receive distributions from the Family Trust and the Survivor’s Trust. From the Family Trust, he was entitled to $250,000. Additionally, the Debtor was a one-third beneficiary of the Survivor’s Trust, along with his sisters, entitled to receive $100,000 per year for ten years. The assets in the Survivor’s Trust are interests of undeveloped real property, which do not generate income. Thus, the distributions to the Debtor are expected to be paid from trust principal. The terms of the last amended Survivor’s Trust provided that after the Debtor survived Freddy for ten years, he would receive a final distribution of one-third of the remaining principal. Although the exact amount of the Debtor’s interest in the Survivor’s Trust is unknown, the bankruptcy trustee believes it could be as much as several million dollars.

The Family Trust and the Survivor’s Trust are “spendthrift” trusts, containing provisions that “[n]o 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.”

The Debtor filed a voluntary chapter 7 petition on March 4, 2009.1 Sandra L. Bendon was appointed the chapter 7 bankruptcy trustee (the Trustee). On April 28, 2009, John Carmack, sole trustee of the Family Trust and co-trustee, with John Morris, of the Survivor’s Trust, filed an adversary proceeding seeking a declaratory judgment determining whether and to what extent the bankruptcy estate held an interest in the Family Trust and the Survivor’s Trust.

On January 14, 2010, the Debtor filed a motion for partial summary judgment (MSJ). The Debtor sought a partial summary adjudication and judicial declaration that pursuant to California Probate Code §§ 15300 et seq. (referred to herein as the Probate Code or by the sections 15300-15307), particularly 15306.5, a maximum 25% of a beneficiary’s interest in a spendthrift trust is property of a bankruptcy estate. Therefore, the Debtor argued that the estate was entitled to reach no more than 25% of the Debtor’s interest in the Family Trust and the Survivor’s Trust.

The Trustee opposed the MSJ. The Trustee acknowledged that Probate Code 15306.5 capped a judgment creditor’s2 recovery at 25% of a beneficiary’s interest in a spendthrift trust. However, she argued that distributions of principal amounts payable to a beneficiary under a trust, even if the trust contains a spendthrift provision, are not protected under Probate Code 15301(b). Thus, the Trustee assert[71]*71ed that because the distributions from the Family Trust and the Survivor’s Trust were expected to be made from principal, the estate could potentially reach all of the Debtor’s interests. Alternatively, the Trustee asserted that, under Probate Code 15307, the estate could reach the Debtor’s interest in all amounts from the Family Trust and the Survivor’s Trust over and above what he required for his education and support.

At the hearing on the MSJ, the bankruptcy court disagreed with the Trustee’s interpretation of the Probate Code. It interpreted the Probate Code as allowing the estate a maximum of 25% of a debtor’s interest in a spendthrift trust, less any amount the debtor needed for his support or support of his dependents. The bankruptcy court entered its order granting the MSJ on June 6, 2011. A final judgment was entered on July 29, 2011. The Trustee timely appealed.

II.JURISDICTION

The bankruptcy court had jurisdiction over this proceeding under 28 U.S.C. §§ 1384 and 157(b)(2)(A). We have jurisdiction under 28 U.S.C. § 158.3

III.ISSUE

Did the bankruptcy court err in determining that the estate was entitled to a maximum of 25% of the Debtor’s interests in the Family Trust and the Survivor’s Trust?

IV.STANDARD OF REVIEW

We review orders granting summary judgment de novo. Bamonte v. City of Mesa, 598 F.3d 1217, 1220 (9th Cir.2010). We review questions of California statutory construction de novo. Ehrenberg v. S. Cal. Permanente Med. Group (In re Moses), 167 F.3d 470, 473 (9th Cir.1999). Whether property is included in a bankruptcy estate is a question of law reviewed de novo. Birdsell v. Coumbe (In re Coumbe), 304 B.R. 378, 381 (9th Cir. BAP 2003); Cisneros v. Kim (In re Kim), 257 B.R. 680, 684 (9th Cir. BAP 2000), aff’d, 35 Fed.Appx. 592 (9th Cir.2002); see also Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979) (“Property interests are created and defined by state law.”).

V.DISCUSSION

Summary judgment may be granted when the record shows that “there is no genuine issue as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a)(made applicable by Rule 7056). There is no issue as to any material facts in this case, therefore, we address the legal question of what portion of the Debtor’s beneficial interests in the Family Trust and the Survivor’s Trust may be reached by the Trustee.

A. The Bankruptcy Estate

The bankruptcy estate includes “all legal or equitable interests of the debtor in [72]*72property as of the commencement of the case.” 11 U.S.C. § 541(a)(1). However, property containing “[a] restriction on the transfer of a beneficial interest of the debt- or in a trust that is enforceable under applicable nonbankruptcy law” is excluded from the estate. 11 U.S.C. § 541(c)(2); In re Cutter, 398 B.R. at 19; In re Kim, 257 B.R.

Free access — add to your briefcase to read the full text and ask questions with AI

Related

Cite This Page — Counsel Stack

Bluebook (online)
479 B.R. 67, 2012 Bankr. LEXIS 4023, Counsel Stack Legal Research, https://law.counselstack.com/opinion/bendon-v-reynolds-in-re-reynolds-bap9-2012.