Markham, etc v. Fay
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Markham, etc v. Fay, (1st Cir. 1996).
Opinion
USCA1 Opinion
UNITED STATES COURT OF APPEALS UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT FOR THE FIRST CIRCUIT
____________________
No. 95-1631
PAUL F. MARKHAM, TRUSTEE,
Plaintiff,
v.
CLAIRE M. FAY, AS TRUSTEE OF HIGHLAND AVENUE NURSING HOME
TRUST, PARKER HILL NURSING HOME TRUST,
AND GREEN PASTURES NURSING HOME TRUST,
Defendant, Appellant,
and
UNITED STATES,
Defendant, Appellee.
____________________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Robert B. Collings, U.S. Magistrate Judge] _____________________
____________________
Before
Torruella, Chief Judge, ___________
Bownes, Senior Circuit Judge, ____________________
and Stahl, Circuit Judge. _____________
____________________
Richard H. Gens for appellant. _______________
Annette M. Wietecha, Attorney, with whom Donald K. Stern, ____________________ ________________
United States Attorney, Of Counsel, Loretta C. Argrett, Assistant __________________
Attorney General, Gary R. Allen, Attorney, and Jonathan S. Cohen, _____________ _________________
Attorney, Tax Division, United States Department of Justice, were
on brief for appellee.
____________________
February 7, 1996
____________________
BOWNES, Senior Circuit Judge. Appellant Claire M. BOWNES, Senior Circuit Judge. ____________________
Fay ("Fay"), in her capacity as trustee of three trusts,
appeals the magistrate judge's ruling that a federal tax lien
upon her individual property extends to the entire assets of
the trusts. Fay contends that the magistrate judge erred
because the property of the trusts would not be considered
her own under Massachusetts law. Fay also raises federal
statutory and constitutional issues, contending that Appellee
Internal Revenue Service ("IRS") does not have a valid lien
upon the trust property because it failed to comply with
statutory notice and limitations requirements as to the
trusts, and also that the trust beneficiaries were
indispensable parties who were not joined and were deprived
of property without due process of law. We hold that there
was no statutory or constitutional error and that the
magistrate judge correctly held that the lien attached to the
entire property of the Green Pastures and Parker Hill Nursing
Home Trusts. We also hold that the magistrate judge erred in
holding that the lien attached to the entire property of the
Highland Avenue Nursing Home Trust. Thus, we affirm in part,
reverse in part, and remand for a new judgment.
I. BACKGROUND AND PROCEDURAL HISTORY _________________________________
In a published opinion, the magistrate judge made
extensive findings of fact, Markham v. Fay, 884 F. Supp. 594 ______________
(D. Mass. 1995), none of which are in dispute in this appeal.
-2- 2
We recount those necessary to provide context to the issues
before us.
During the 1960s and 1970s, Fay and others created
a number of legal entities for the purpose, inter alia, of _____ ____
owning and operating nursing homes in Massachusetts. Three
of those entities -- the Green Pastures Nursing Home Trust,
the Parker Hill Nursing Home Trust and the Highland Avenue
Nursing Home Trust -- are involved in this appeal. Fay
created the trusts in 1974, conveying to herself as trustee
of each trust the nursing home for which the trust was named.
A fourth entity, Regina Nursing Home, Inc. ("the
corporation"), was incorporated in 1961. Fay became its
president and sole stockholder in 1967, then assigned all of
her stock to her sister Theresa Dzialo (Dzialo) sometime
during the 1970s. The corporation owned the Chester Manor
Nursing Home. At no time were the trusts and the corporation
organized or operated as one entity, and each owned different
property.
In June of 1976, Fay, as trustee of the trusts and
president of the corporation, sold the Parker Hill, Green
Pastures, Highland Avenue and Chester Manor Nursing Homes to
trusts owned by Louis Almeida ("Almeida"), in exchange for
mortgages and other consideration. Almeida filed for
bankruptcy in 1978. By then, the only assets owned by the
trusts and the corporation were the mortgages, and Almeida
-3- 3
had defaulted on them. On October 2, 1990, the bankruptcy
court awarded the trusts and the corporation, as secured
creditors, the proceeds from the bankruptcy trustee's sale of
the nursing homes, amounting to $67,809.89.
On October 10, 1990, the IRS filed a derivative
claim with the bankruptcy court "for the purpose of obtaining
any dividend which may become payable to Claire M. Fay." The
IRS's claim was premised on Fay's individual tax liability.
In 1979, in view of Almeida's bankruptcy, the IRS had
assessed Fay individually as a "responsible person" under 26
U.S.C. 6671 and 6672 for income and F.I.C.A. taxes Almeida
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USCA1 Opinion
UNITED STATES COURT OF APPEALS UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT FOR THE FIRST CIRCUIT
____________________
No. 95-1631
PAUL F. MARKHAM, TRUSTEE,
Plaintiff,
v.
CLAIRE M. FAY, AS TRUSTEE OF HIGHLAND AVENUE NURSING HOME
TRUST, PARKER HILL NURSING HOME TRUST,
AND GREEN PASTURES NURSING HOME TRUST,
Defendant, Appellant,
and
UNITED STATES,
Defendant, Appellee.
____________________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Robert B. Collings, U.S. Magistrate Judge] _____________________
____________________
Before
Torruella, Chief Judge, ___________
Bownes, Senior Circuit Judge, ____________________
and Stahl, Circuit Judge. _____________
____________________
Richard H. Gens for appellant. _______________
Annette M. Wietecha, Attorney, with whom Donald K. Stern, ____________________ ________________
United States Attorney, Of Counsel, Loretta C. Argrett, Assistant __________________
Attorney General, Gary R. Allen, Attorney, and Jonathan S. Cohen, _____________ _________________
Attorney, Tax Division, United States Department of Justice, were
on brief for appellee.
____________________
February 7, 1996
____________________
BOWNES, Senior Circuit Judge. Appellant Claire M. BOWNES, Senior Circuit Judge. ____________________
Fay ("Fay"), in her capacity as trustee of three trusts,
appeals the magistrate judge's ruling that a federal tax lien
upon her individual property extends to the entire assets of
the trusts. Fay contends that the magistrate judge erred
because the property of the trusts would not be considered
her own under Massachusetts law. Fay also raises federal
statutory and constitutional issues, contending that Appellee
Internal Revenue Service ("IRS") does not have a valid lien
upon the trust property because it failed to comply with
statutory notice and limitations requirements as to the
trusts, and also that the trust beneficiaries were
indispensable parties who were not joined and were deprived
of property without due process of law. We hold that there
was no statutory or constitutional error and that the
magistrate judge correctly held that the lien attached to the
entire property of the Green Pastures and Parker Hill Nursing
Home Trusts. We also hold that the magistrate judge erred in
holding that the lien attached to the entire property of the
Highland Avenue Nursing Home Trust. Thus, we affirm in part,
reverse in part, and remand for a new judgment.
I. BACKGROUND AND PROCEDURAL HISTORY _________________________________
In a published opinion, the magistrate judge made
extensive findings of fact, Markham v. Fay, 884 F. Supp. 594 ______________
(D. Mass. 1995), none of which are in dispute in this appeal.
-2- 2
We recount those necessary to provide context to the issues
before us.
During the 1960s and 1970s, Fay and others created
a number of legal entities for the purpose, inter alia, of _____ ____
owning and operating nursing homes in Massachusetts. Three
of those entities -- the Green Pastures Nursing Home Trust,
the Parker Hill Nursing Home Trust and the Highland Avenue
Nursing Home Trust -- are involved in this appeal. Fay
created the trusts in 1974, conveying to herself as trustee
of each trust the nursing home for which the trust was named.
A fourth entity, Regina Nursing Home, Inc. ("the
corporation"), was incorporated in 1961. Fay became its
president and sole stockholder in 1967, then assigned all of
her stock to her sister Theresa Dzialo (Dzialo) sometime
during the 1970s. The corporation owned the Chester Manor
Nursing Home. At no time were the trusts and the corporation
organized or operated as one entity, and each owned different
property.
In June of 1976, Fay, as trustee of the trusts and
president of the corporation, sold the Parker Hill, Green
Pastures, Highland Avenue and Chester Manor Nursing Homes to
trusts owned by Louis Almeida ("Almeida"), in exchange for
mortgages and other consideration. Almeida filed for
bankruptcy in 1978. By then, the only assets owned by the
trusts and the corporation were the mortgages, and Almeida
-3- 3
had defaulted on them. On October 2, 1990, the bankruptcy
court awarded the trusts and the corporation, as secured
creditors, the proceeds from the bankruptcy trustee's sale of
the nursing homes, amounting to $67,809.89.
On October 10, 1990, the IRS filed a derivative
claim with the bankruptcy court "for the purpose of obtaining
any dividend which may become payable to Claire M. Fay." The
IRS's claim was premised on Fay's individual tax liability.
In 1979, in view of Almeida's bankruptcy, the IRS had
assessed Fay individually as a "responsible person" under 26
U.S.C. 6671 and 6672 for income and F.I.C.A. taxes Almeida
failed to pay for the nursing homes' employees during the tax
years 1976 through 1978.1 On October 31, 1979, IRS filed a
notice of federal tax lien for $200,213.45 against Fay
individually, and refiled it on January 27, 1986. In 1984,
the IRS sued Fay individually, and on December 30, 1990,
judgment was entered against her in the amount of
$699,142.21, including penalties and interest.
On October 31, 1990, the IRS delivered to the
bankruptcy trustee (but not to the corporation) a notice of
levy on the corporation as alter ego and/or nominee of Fay.
The IRS did not file any liens, lawsuits or notices thereof
____________________
1. Fay apparently continued to be involved in managing the
nursing homes after selling them to Almeida. The efficacy of
the assessment against her is not before us in this appeal.
-4- 4
against the trusts, Fay as trustee of the trusts, or the
beneficiaries of the trusts.
On February 12, 1991, Paul F. Markham ("Markham"),
the bankruptcy trustee who held the proceeds of the sale of
the nursing homes, filed an interpleader action in
Massachusetts Superior Court seeking a determination of the
rights of the various claimants to the interpled fund.
Markham named as defendants Fay individually and as trustee
of the trusts, the corporation, the United States, and two
attorneys seeking payment for litigating the claims of the
trusts and the corporation before the bankruptcy court. On
March 14, 1991, the IRS removed the case to the United States
District Court for the District of Massachusetts. On May 5,
1993, the court denied summary judgment to the IRS, the
corporation and the trusts, granted summary judgment in favor
of the attorneys (awarding them $16,970), and then referred
the case to the magistrate judge for all purposes including
trial and entry of judgment.
After a bench trial, the magistrate judge issued an
opinion, holding that the IRS was entitled to the entire
proceeds of the sale of the Parker Hill, Green Pastures and
Highland Avenue Nursing Homes because Fay had reserved to
herself such significant powers in the trusts that their
assets would be considered her own under Massachusetts law.
884 F. Supp. at 607, 609. The magistrate judge also held
-5- 5
that the government had failed to prove that the trusts or
the corporation were Fay's alter egos, and found that the IRS
had not established that Fay used the trusts for a fraudulent
purpose or for her own individual benefit. Id. at 604. __
Judgment was entered for the IRS in the amount of $27,732.85
plus 55% of the accumulated interest, and for the corporation
in the amount of $23,107.04 plus 45% of the accumulated
interest.2 Fay, in her capacity as trustee of the three
trusts, then filed this appeal.
Before we proceed to the legal issues, we clarify
the present status of the trusts and the proceeds of the sale
of the nursing homes. Since 1978, the trusts have not held
any property other than the mortgages on the nursing homes,
and have not engaged in any transaction or business other
than pursuing their claims against Almeida's bankrupt estate
and defending the bankruptcy court's award. Although
dormant, the trusts continue to exist. They were in no way
terminated by the bankruptcy trustee's sale of the nursing
homes. Rather, the bankruptcy court awarded the sale
proceeds to the trusts in satisfaction of the mortgages. We
refer to the sale proceeds as trust property, although not
____________________
2. After the attorneys were paid at the summary judgment
stage, $50,839.89 plus accumulated interest remained. The
parties stipulated at trial that the fund was attributable as
follows: $23,107.04 to the corporation; $16,046.63 to
Highland Avenue Nursing Home Trust; $11,246.12 to Parker
Hill Nursing Home Trust; and $440.10 to Green Pastures
Nursing Home Trust.
-6- 6
yet paid to the trusts, because the proceeds will become
trust property unless paid to the IRS.
-7- 7
II. STATUTORY AND CONSTITUTIONAL ISSUES ___________________________________
Fay first contends that the IRS does not have a
valid lien against the trust property because it did not
comply with statutory notice and statute of limitations
requirements as to the trusts. It gave no notice of
assessment as to the trust property in 1979, did not join the
trusts, Fay as trustee, or the trust beneficiaries as
defendants in its 1984 suit against Fay individually, and did
not proceed against them by separate suit, assessment,
demand, lien or levy. Second, Fay contends that because the
IRS sought in the interpleader action to collect from the
trust property as such, the beneficiaries were indispensable
parties who were required to be joined in their own right.
Finally, Fay argues that because the beneficiaries were given
no opportunity to appear and defend their rights in the
interpleader action, the magistrate judge's ruling deprived
them of property without due process of law.
The IRS responds first that it is only Fay's own
property from which it seeks to collect and all notice and
limitations requirements were met with respect to her. The
IRS concedes that if it had sought to hold the trustee, the
trusts or the beneficiaries personally liable as Fay's
transferees, it would have had to institute a collection
action directly against them within six years from the
assessment of the tax. See United States v. Updike, 281 U.S. ___ _______________________
-8- 8
489, 493 (1930); 26 U.S.C. 6901. The IRS, however, asserts
that it sought to collect the taxes out of property that
would be considered Fay's own under Massachusetts law.
Notice and limitations requirements with respect to the
trusts therefore were not implicated. As to Fay's joinder
and due process arguments, the IRS responds that the
bankruptcy trustee named Fay as trustee in the interpleader
action, she has represented the interests of the
beneficiaries throughout this litigation, and at no time have
the beneficiaries as such sought to intervene. Furthermore,
the IRS argues, the beneficiaries' exclusive remedy is a suit
for wrongful levy brought pursuant to 26 U.S.C. 7426(a),
which is now time-barred because no such suit was brought
within nine months from the date of levy, as required by 26
U.S.C. 6532(c).
Although the magistrate judge did not precisely
resolve these issues,3 we will review them de novo as __ ____
matters of federal law. Horton Dairy, Inc. v. United States, ___________________________________
986 F.2d 286, 290 (8th Cir. 1993). First, we must untangle
____________________
3. The magistrate judge stated at the beginning of his
analysis that the separate structures of the trusts could be
disregarded for notice and statute of limitations purposes if
they were Fay's alter egos, but went on to hold that they
were not Fay's alter egos, and never addressed whether the
trusts were required to be treated separately under the
distinct theory that prevailed -- that the trust property
would be considered Fay's own under Massachusetts law. The
magistrate judge did not mention Fay's joinder or due process
arguments.
-9- 9
the web of statutory and procedural requirements implicated
in this phase of Fay's appeal. Once the IRS makes an
assessment of a taxpayer's liability, it has sixty days in
which to "give notice to each person liable for the unpaid
tax, stating the amount and demanding payment thereof." 26
U.S.C. 6303(a). Once notice and demand are given and the
tax goes unpaid, a lien in favor of the United States
automatically arises "upon all property and rights to
property, whether real or personal, belonging to such
person." 26 U.S.C. 6321. Whether and to what extent a
particular piece of property constitutes property of the
taxpayer to which a federal tax lien can attach is a question
of state law. Aquilino v. United States, 363 U.S. 509, 512 __________________________
(1960). The lien arises at the time the assessment is made
and continues until the liability is satisfied or becomes
unenforceable by lapse of time. 26 U.S.C. 6322. The IRS
may collect the tax by levy or by bringing a proceeding in
court, which according to the pre-1990 version of 26 U.S.C.
6502 applicable in this case, must be done "within six years
after the assessment of the tax."4 26 U.S.C. 6502(a)
(1988). A lien becomes unenforceable by lapse of time upon
expiration of the six-year statute of limitations for
collection, but if the government brings suit within six
____________________
4. The statute was amended in 1990 to extend the limitations
period to ten years. 26 U.S.C. 6502(a) (1994).
-10- 10
years from assessment and receives a judgment in its favor,
the life of the lien is extended indefinitely. See Rodriguez ___ _________
v. Escambron Dev. Corp., 740 F.2d 92, 94 n.3 (1st Cir. 1984). _______________________
There is no dispute that the IRS assessed a tax
against Fay individually in 1979, that it gave notice and
demand to her within sixty days, that a lien dating from the
assessment arose against all of Fay's property and rights to
property, that the IRS timely filed a civil action against
Fay individually in 1984, that it refiled the notice of tax
lien in 1986, and that it obtained a judgment in December of
1990 that extended the life of the lien on Fay's property
indefinitely. That brings us to the IRS's collection
efforts beginning with the derivative claim in the bankruptcy
court in October of 1990 and leading to the interpleader
action below. As stated above, the IRS may collect by levy
or by a proceeding in court. 26 U.S.C. 6502(a). The
briefs are unhelpful (at best) as to which route the IRS
took. The IRS indicates that it levied on the trust
property, but the IRS may collect by levy only after
notifying the taxpayer in writing of its intention to make
such levy. 26 U.S.C. 6331(a), (b), (d)(1). The notice of
levy upon the corporation as Fay's alter ego did not
constitute notice of levy on the trust property because,
inter alia, the trusts and the corporation each held _____ ____
different property. Because it has never notified Fay of an
-11- 11
intention to levy on the trust property, there has been no
levy.
Other than by levy, the IRS can collect by a
proceeding in court, either by bringing an action pursuant to
26 U.S.C. 7403, or by simply suing for the amount owed and
then exercising "the usual rights of a judgment creditor" to
enforce any judgment obtained. United States v. Rodgers, 461 ________________________
U.S. 677, 682 (1983). This is not a section 7403 action and
neither party contends that it is.5 The IRS is therefore
exercising the usual rights of a judgment creditor. It
asserts (inconsistently with its indication that it levied on
the trust property) that the Federal Debt Collection
Procedure Act of 1990 (FDCPA), 28 U.S.C. 3001, et seq., __ ___
governs the interpleader proceedings, and Fay does not
contend otherwise. Fay's tax indebtedness is a "debt" as
defined in the FDCPA because it is "an amount owing to the
United States on account of [an] . . . assessment." 28
U.S.C. 3002(3)(B). Except to the extent that another
federal law specifies procedures for recovering on a judgment
for a debt arising under such law, the FDCPA is the exclusive
civil procedure for the government to recover a judgment on a
____________________
5. The government has the right in a section 7403 proceeding
to seek a forced sale of the entire property in which a
delinquent taxpayer has an interest even where innocent
others also have an interest in the property. This special
privilege arises from the express terms of section 7403,
Rodgers, 461 U.S. at 697, and is not available to the _______
government here.
-12- 12
debt. 28 U.S.C. 3001(a), (b). The tax code (from which
the debt arose) does specify procedures for recovering on a
judgment by levy, 26 U.S.C. 6331, and by filing an action
in a federal district court to enforce a lien, 26 U.S.C.
7403, but does not contain specific procedures for otherwise
recovering on a judgment, for example by filing a derivative
claim in bankruptcy court and litigating against the taxpayer
in a resulting interpleader action, as the IRS did here.
Thus, the procedures of the FDCPA appropriately control. I f
the magistrate judge was correct that the entire property of
each trust would be considered Fay's own under Massachusetts
law, then the IRS had a valid lien on that property that it
could seek to enforce in the interpleader action. By
notifying Fay in 1979, the IRS complied with the plain
language of section 6303(a) requiring notice and demand on
the only "person liable." The IRS also complied with the
statute of limitations by suing Fay in 1984 within six years
of the tax assessment in 1979 as required by section 6502(a).
The judgment obtained in 1990 extended the life of the lien,
so that the IRS's effort to enforce the judgment in the
interpleader action was timely. Fay argues that the IRS
failed to establish a nexus between the taxes owed by her
individually and the proceeds of the sale of the nursing
homes, but the IRS does not contend that the tax liability
was incurred by the trusts such that the judgment could be
-13- 13
satisfied directly from the entire trust property regardless
of whether it belonged to Fay. Rather, the IRS has a valid
lien upon Fay's individual property and rights to property
that it may enforce out of any trust property that under
Massachusetts law belongs to Fay, even though the claim arose
independently of the trusts.
As to whether the beneficiaries were indispensable
parties who were deprived of an opportunity to be heard in
their own right, we begin by rejecting the IRS's argument
that the beneficiaries' only remedy is a suit for wrongful
levy under 26 U.S.C. 7426(a). Third parties are limited to
that remedy only when the government proceeds by levy,
Rodgers 461 U.S. at 682-83, 695-96, which it has not done. _______
Rather, whether the beneficiaries were required to be joined
is governed by Fed. R. Civ. P. 19. See 28 U.S.C. 3003(f) ___
(Federal Rules of Civil Procedure apply in FDCPA actions).
That rule provides in relevant part that a person subject to
service of process and whose joinder will not deprive the
court of subject matter jurisdiction "shall be joined as a
party in the action if . . . the person claims an interest
relating to the subject of the action and is so situated that
the disposition of the action in the person's absence may (i)
as a practical matter impair or impede the person's ability
-14- 14
to protect that interest . . . ."6 Courts applying this
rule generally have held that beneficiaries are indispensable
parties in actions like this to collect a tax or other debt
from the trust corpus, see Tick v. Cohen, 787 F.2d 1490, ___ ______________
1495-96 (11th Cir. 1986); United States v. Fried, 183 F. ________________________
Supp. 371, 373 (E.D.N.Y. 1960), and actions analogous to this
seeking to terminate a trust. See Hansen v. Peoples Bank, ___ _______________________
594 F.2d 1149 (7th Cir. 1979). "The general rule is, that in
suits respecting trust-property, brought either by or against
the trustees, the cestuis que trust as well as the trustees _______ ___ _____
are necessary parties." Carey v. Brown, 92 U.S. 171, 172 _______________
(1875); see also Stevens v. Loomis, 334 F.2d 775, 777 (1st ___ ____ __________________
Cir. 1964). An exception to the general rule, however,
exists when the trustee represents the beneficiaries'
interests fully and without conflict. 3A James W. Moore,
Moore's Federal Practice 19.08 at 175-76 (2d ed. 1985).
The bankruptcy trustee joined Fay both individually
and as trustee in the interpleader action. Fay had the duty
as trustee under the three declarations of trust to represent
the beneficiaries' interests in any lawsuit. While, at least
____________________
6. In contrast, in an action to enforce a lien or subject
property to payment of tax brought pursuant to 26 U.S.C.
7403, "[a]ll persons . . . claiming any interest in the
property involved" are required to be made parties. 26
U.S.C. 7403(b); United States v. Big Value Supermarkets, _________________________________________
Inc., 898 F.2d 493, 496 (6th Cir. 1990) (section 7403(b) is ____
mandatory); United States v. Overman, 424 F.2d 1142, 1146 _________________________
(9th Cir. 1970) (same).
-15- 15
on the surface, the fact that the trustee in this case
incurred the debt that the trust property might be reached to
pay indicates a potential conflict between Fay and the other
beneficiaries, all signs are that Fay represented them
zealously and without conflict. Fay has not asserted any
claim to the fund in her individual right throughout the
course of this litigation, but has appeared only in her
capacity as trustee. Moreover, as settlor and one of the
beneficiaries of the trust, Fay's interest in protecting the
trust property would seem to be at least as strong as that of
the other beneficiaries. The beneficiaries as such did not
seek to intervene at any point when the district court or the
magistrate judge could have joined them as parties in their
own right. This is not to say that the issue was waived,
Freeman v. Northwest Acceptance Corp., 754 F.2d 553, 559 (5th ____________________________________
Cir. 1985) (failure to raise below the issue of whether a
party should have been joined does not result in waiver), but
it does indicate that the beneficiaries did not perceive any
failure on Fay's part to represent their interests at the
time. And on appeal, Fay fails to describe any conflict
between her interests and those of the other beneficiaries,
any way in which their interests were not represented, or any
way in which the litigation might have gone differently if
they had been joined. As will be seen, resolution of the
core issue in the case -- whether the property of any of the
-16- 16
trusts would be considered Fay's own under Massachusetts law
-- depended factually only on the language of the trust
instruments, documents that were before the magistrate judge
and are before us. Although in an abundance of caution it
may have been better for the beneficiaries to have been
joined, as it turned out, Fay faithfully represented their
interests. We therefore hold that the beneficiaries were not
indispensable parties. The same considerations defeat Fay's
argument that the beneficiaries were deprived of property
without due process of law. Moreover, assuming the
magistrate judge was right, the beneficiaries were not
deprived of their own property.
III. WAS THE TRUST PROPERTY FAY'S OWN UNDER MASSACHUSETTS _______________________________________________________
LAW? When the IRS assessed taxes owed by Fay as a ____
"responsible person" in 1979, a federal tax lien arose "upon
all property and rights to property, whether real or
personal, belonging to" Fay. 26 U.S.C. 6321, 6322. The
tax code "creates no property rights but merely attaches
consequences, federally defined, to rights created under
state law." United States v. Bess, 357 U.S. 51, 55 (1958). ______________________
Whether and to what extent Fay's powers, interests and rights
in the trusts constitute property to which the federal tax
lien could attach is a question of state law. Aquilino, 363 ________
U.S. at 512.
-17- 17
We review de novo the issue of whether the trust __ ____
instruments gave Fay such extensive powers over the trust
property that it was in effect her own under Massachusetts
law. Salve Regina College v. Russell, 499 U.S. 225, 231 _________________________________
(1991); Losacco v. F.D. Rich Constr. Co., 992 F.2d 382, 384 _________________________________
(1st Cir. 1993). In doing so, we will take care not to
extend state law beyond its well-marked boundaries in an area
such as trust law that is quintessentially the province of
state courts.
Initially, we clarify that it was not improper for
Fay, the settlor of the trusts, to designate herself as both
sole trustee and one of the trusts' beneficiaries. Under the
common law of trusts, "trustees may be included among the
beneficiaries of a trust." Mahoney v. Board of Trustees, ______________________________
973 F.2d 968, 971 (1st Cir. 1992), citing Restatement
(Second) of Trusts 99, 115 (1959); William F. Fratcher, 2
Scott on Trusts, 99.2, 115 (4th ed. 1987). And a sole
trustee who is also the settlor may be one of two or more
beneficiaries. Sullivan v. Burkin, 460 N.E.2d 572, 575 (Mass. __________________
1984); Ascher v. Cohen, 131 N.E.2d 198, 199-200 (Mass. 1956); _______________
Restatement (Second) of Trusts 100.
When a trustee is also a beneficiary, she holds the
legal title to the entire trust property in trust for all of
the beneficiaries (including herself), has a duty to deal
with it for the benefit of the beneficiaries, and does not
-18- 18
hold legal title to any of the trust property free of trust
to use as she pleases. There is no partial merger of the
legal and equitable interests. Restatement (Second) of
Trusts 99 cmt. b; 2 Scott on Trusts 99.3. It follows
that a creditor generally cannot reach a
trustee/beneficiary's interest in a trust, such as these,
with a spendthrift provision. Restatement (Second) of Trusts
99 cmt. b.
When a beneficiary is also the settlor, however,
she cannot keep property beyond the reach of her creditors by
placing it in a spendthrift trust for her own benefit. See ___
Merchants Nat'l Bank v. Morrissey, 109 N.E.2d 821, 823 (Mass. _________________________________
1953); Forbes v. Snow, 140 N.E. 418, 419 (Mass. 1923). A _______________
settlor/beneficiary's creditors therefore can reach "the
maximum amount which the trustee under the terms of the trust
could pay to him or apply for his benefit." Restatement
(Second) 156(2), quoted in Ware v. Gulda, 117 N.E.2d 137, ______ __ _____________
138 (Mass. 1954). This, of course, does not mean that the
interest of any other beneficiary may be reached by the
settlor/beneficiary's creditors. 2 Scott on Trusts 114.
As a matter of federal law, a tax lien extends only to
property or rights to property belonging to the delinquent
taxpayer, and not to property belonging to innocent third
parties. Rodgers, 461 U.S. at 690. Whether the tax lien in _______
this case attaches to the entire property of each trust
-19- 19
depends on whether the trust instruments give Fay the power
to eliminate the other beneficiaries' interests.
A. The Parker Hill and Green Pastures Nursing __________________________________________
Home Trusts ___________
On January 21, 1974, Fay created the Green Pastures
and Parker Hill Nursing Home Trusts under declarations of
trust whose terms were identical except for the names of the
trusts and the identity of their assets. Fay named herself
sole trustee and conveyed to herself as trustee the
respective nursing homes. Fay named herself and her two sons
as the beneficiaries of each trust, all in equal shares,
until the trusts terminate.7 She named her sister Dzialo as
the remainder beneficiary of each trust -- upon termination,
the trust property and undistributed income were to
immediately vest in her free of trust.
The magistrate judge ruled that the IRS was
entitled to reach that part of the interpled fund that
represents the assets of the Green Pastures and Parker Hill
Nursing Home Trusts, based on Fay's "copious" rights and
powers as settlor, sole trustee and one of the beneficiaries
of the trusts, and her reserved right as settlor to alter,
____________________
7. The trusts are to terminate at the earliest of the
following: twenty years from the date the trusts were
declared; Fay's election to terminate; her death; or
appointment of a guardian of her or a conservator of her
property. Although twenty years have now passed since Fay
created the trusts in 1974, we assume the trusts' continuing
existence because our point of reference is the date this
litigation began.
-20- 20
amend or revoke the trusts, although Fay has not exercised
those powers or otherwise used the trusts for her exclusive
benefit. 884 F. Supp. at 607.
Traditionally, Massachusetts has given full effect
to inter vivos trusts, regarding their assets as trust
property rather than that of the settlor in spite of broad
powers reserved to him or her, at least while those powers
remain unexercised. See National Shawmut Bank v. Joy, 53 ___ ______________________________
N.E.2d 113, 122-25 (Mass. 1944); Guthrie v. Canty, 53 N.E.2d ________________
1009, 1010 (Mass. 1944). But another line of cases has more
recently emerged from the Massachusetts Court of Appeals. In
State Street Bank and Trust Co. v. Reiser, 389 N.E.2d 768 ___________________________________________
(Mass. App. Ct. 1979), the court broke with tradition,
holding that a settlor/beneficiary's creditors could reach
trust assets upon his death where he had reserved powers to
amend or revoke and to direct the disposition of principal
and income during his lifetime, even though the powers
remained unexercised at the time of his death, and even
though the remainder beneficiaries' rights in the trust
vested upon his death because there was no further
possibility that he could exercise his powers. Id. at 770- __
71. The court emphasized that the settlor's powers gave him
the right until his death to destroy all other beneficial
interests in the trust. Id. at 771. __
-21- 21
Similarly, in ITT Commercial Finance Corp. v. ___________________________________
Stockdale, 521 N.E.2d 417 (Mass. App. Ct. 1988), the court _________
relied on Reiser to hold (in the alternative) that a ______
settlor's creditor could reach trust assets upon his death
where the settlor was sole trustee, his children were the
life and remainder beneficiaries, and he had a general power
to amend and revoke and a specific power to substitute
beneficiaries until his death. Id. at 417-18. As in Reiser, __ ______
his creditors could reach the trust assets even though he had
not exercised his powers and the other beneficiaries'
interests had vested. See also Wolfe v. Wolfe, 486 N.E.2d ___ ____ _______________
747, 749 (Mass. App. Ct. 1985) (5/6 of trust property could
be reached to satisfy alimony judgment where settlor had
power to alter, amend and revoke and absolute right to
withdraw 5/6 of principal; remainder beneficiaries' rights
were not vested).
The touchstone of the analysis, then, is whether
the trust instrument as a whole gives Fay the power to
eliminate the interests of all others in the trust. As
settlor, Fay reserved to herself the right "to alter, amend
and revoke this Trust, in whole or in part, and to terminate
the same." These unrestricted and unconditional powers
include the right to substitute or strike out other
beneficiaries, Leahy v. Old Colony Trust Co., 93 N.E.2d 238, _____________________________
239 (Mass. 1950), to vary the income or principal paid to the
-22- 22
beneficiaries while the trust continues, including the power
not to pay them at all, State Street Trust Co. v. Crocker, 28 _________________________________
N.E.2d 5 (Mass. 1940), and to completely revoke the trust.
Sevinor v. Stahler, 84 N.E.2d 447, 448-49 (Mass. 1949). If __________________
Fay revoked the trust, or amended it to make herself the sole
beneficiary, the legal title and equitable interest would
merge and thereby terminate the trust. See Atkins v. Atkins, ___ ________________
180 N.E.2d 613, 614 (Mass. 1932); Langley v. Conlan, 98 N.E. _________________
1064, 1066 (Mass. 1912). As Fay points out, the trust
property would not vest free of trust in her if she caused it
to terminate, but in her sister Dzialo. Fay, however, could
amend the trust to delete that provision.
As trustee, Fay has broad powers to manage and
control the trust property. The IRS makes much of these
powers, but we attribute them no significance whatsoever.
Broad powers are typically conferred on a trustee as an
effective way to manage trust property. Trustees who are
also beneficiaries, "like trustees generally, have the power
to do acts that are 'necessary or appropriate to carry out
the purposes of the trust and are not forbidden by the terms
of the trust.'" Mahoney, 973 F.2d at 971, citing Restatement _______
(Second) of Trusts 186. As we have held in the estate tax
context, a settlor/trustee's administrative and management
powers cannot be equated with ownership. See Old Colony ___ __________
-23- 23
Trust Co. v. United States, 423 F.2d 601, 602-03 (1st Cir. ___________________________
1970).
As trustee, Fay is to hold the nursing homes "in
trust" for the "general purposes" of the trusts, and to hold
and accumulate the principal and net income "for the use and
benefit of said beneficiaries." The sentence immediately
following that direction provides: "However, anything to the
contrary herein notwithstanding, the Trustee shall have full
power and discretion to pay over to said beneficiaries so
much or all or any part of the trust property, whether
principal or net income, as she shall deem proper." We think
that this sentence, in the context of the trust instrument as
a whole, gives Fay the power to pay income and/or invade
principal for her benefit alone.
We recognize, as we have before, that under
Massachusetts law, a trustee is restricted in the exercise of
even broad discretionary powers by the terms of the trust
viewed as a whole, and by the trustee's fiduciary duty to use
his or her best judgment in good faith. State Street Bank __________________
and Trust v. United States, 634 F.2d 5, 9 (1st Cir. 1980) ____________________________
(citations omitted); see also Fine v. Cohen, 623 N.E.2d 1134, ___ ____ _____________
1139 (Mass. App. Ct. 1993); Dana v. Gring, 371 N.E.2d 755, _____________
760-61 (Mass. 1977); Woodberry v. Bunker, 268 N.E.2d 841, 843 ___________________
(Mass. 1971); Old Colony Trust Co. v. Sillman, 223 N.E.2d _________________________________
504, 506 (Mass. 1967). In particular, a trustee may not
-24- 24
exercise a broad discretionary power to shift beneficial
interests in a trust. Fine, 623 N.E.2d at 1139; Boston Safe ____ ___________
Deposit and Trust Co. v. Stone, 203 N.E.2d 547, 552 (Mass. ________________________________
1965). A Massachusetts court necessarily would evaluate a
trustee's conduct, if challenged, in light of the powers and
duties set forth in the trust instrument. Stone, 203 N.E.2d _____
at 552; Fine, 623 N.E.2d at 1139. In Copp v. Worcester ____ __________________
County Nat'l Bank, 199 N.E.2d 200 (Mass. 1964), the court __________________
found that the trust instrument's direction that the trustee
invade principal for the life beneficiary was enforceable and
not unrestricted because it was to be in a stated amount and
only as necessary for her reasonable support and maintenance.
Id. at 202-03. In cases interpreting trustee powers for __
federal estate tax purposes, ascertainable standards limiting
trustee discretion have been found where the trust instrument
directed principal and/or income to be distributed for a
specific purpose (such as education and support), or
expressed an intent to preserve principal for remainder
beneficiaries, or both. See State Street Bank and Trust v. ___ _______________________________
United States, 634 F.2d at 9; Old Colony Trust Co. v. United _____________ _______________________________
States, 317 F. Supp. 618, 622 (D. Mass. 1970);Dana, 371 ______ ____
N.E.2d at 761; Woodberry, 268 N.E.2d at 843; Worcester County _________ ________________
National Bank v. King, 268 N.E.2d 838, 840 (Mass. 1971); _______________________
Sillman, 223 N.E.2d at 507-08. _______
-25- 25
If Fay exercised her discretion so as to take the
trust property for herself, thereby depleting or destroying
the others' interests, we doubt that a court could determine
that she had violated her fiduciary duty in carrying out the
terms of the trusts because the trust instruments as a whole
do not limit her discretion or define the other
beneficiaries' interests in income and principal. They do
not give Fay's sons the right to any particular proportion of
the trust income or principal, the right to receive it at any
particular time or interval, the right to receive it for
their support or any other definite purpose, or the right to
receive it free of trust when the trust terminates. Fay's
sister's remainder interest could amount to nothing if Fay
decided to pay all of the income and principal to herself.
Under these circumstances, we think that Fay's sons and
sister would have had little or no recourse if she took the
trust property for her own benefit. We recognize that Fay
has not done so, but what is dispositive for these purposes
is whether the trust instrument contained ascertainable
limits on her power to pay income or invade principal for her
benefit alone that the other beneficiaries could rely on to
enforce any rights of their own. Moreover, we do not think
that the other beneficiaries' interests in the trust are
vested. Although that apparently makes no difference in
light of Reiser and Stockdale, it does mean that their rights ______ _________
-26- 26
are inchoate at the present time. Under Massachusetts law,
whether a right in a trust has vested depends on "whether, in
substance, the interest is sufficiently established to
constitute an interest or right which has accrued to its
holder." New England Merchants Nat'l Bank v. Groswold, 444 ______________________________________________
N.E.2d 359, 363 (Mass. 1983). That an interest is "subject
only to total or partial defeat by biological events" does
not make it inchoate. Id. Thus, a beneficiary's right to __
receive part of the trust property that depends only on his
or her survival until the death of other persons is a vested
property right. See Id.; Billings v. Fowler, 279 N.E.2d 906, ___ __ __________________
908 (Mass. 1972); Whiteside v. Merchants' Nat'l Bank, 187 ____________________________________
N.E. 706, 709 (Mass. 1933); Alexander v. McPeck, 75 N.E. 88, ___________________
92 (Mass. 1905). But where the right depends on the exercise
or non-exercise of powers held by another, the beneficiary's
right does not vest until the person holding the powers can
no longer exercise them. See Reiser, 389 N.E.2d at 770 ___ ______
(remainder interests of beneficiaries became vested upon
death of settlor because his powers to amend or revoke the
trust and direct payments from it died with him); Old Colony __________
Trust Co. v. Clemons, 126 N.E.2d 193 (Mass. 1955) (rights of _____________________
remainder beneficiaries did not vest until settlor's death
where he had the right to revoke the trust or change
beneficiaries). Any right in Fay's sons or sister to receive
part of the trust property is not contingent on a mere
-27- 27
biological event, but on whether or not Fay exercises her
power to amend or revoke the trusts, and on to whom and in
what amounts she distributes income and principal while the
trust continues. Their interests therefore are not vested.
Due to the broad nature of Fay's powers and the
limited and unenforceable nature of the beneficial interests,
Fay has the power to eliminate the interests of her sons and
her sister. We therefore think that a Massachusetts court
would treat the entire trust property of the Green Pastures
and Parker Hill Nursing Home Trusts as Fay's own in favor of
her creditors. Like the settlors in Reiser, Stockdale and ______ _________
Wolfe, Fay has the right to amend and revoke the trusts and _____
to direct disposition of principal and income. Although
there is nothing invalid in the roles of settlor, trustee and
beneficiary co-existing in the same person, in this case it
meant that Fay had the power as trustee to distribute income
and principal in whatever proportion she deemed proper, the
right as a beneficiary to receive income and principal in
whatever amount she as trustee deemed proper, and the
unrestricted power as settlor to alter, amend, or revoke the
trusts. The trusts at issue here are even more vulnerable to
Fay's creditors than those at issue in Reiser and Stockdale ______ _________
because the other beneficiaries' interests in the trust have
not vested and Fay remains able to exercise her powers and
thus deplete or destroy them.
-28- 28
We do not hold that the trusts are invalid -- a
trust in which the settlor has reserved to herself the power
to alter, amend or revoke, and is also the sole trustee and
one of the trusts' beneficiaries with a right to receive
income and principal in her own discretion as trustee, is not
invalid. See Roberts v. Roberts, 646 N.E.2d 1061, 1064 ___ ___________________
(Mass. 1995); Sullivan, 460 N.E.2d at 575; Ascher, 131 N.E.2d ________ ______
at 199-200. And although it may be only a technical
distinction, we do not hold that Fay must exercise her power
to amend or revoke to satisfy the tax debt. See In re ___ ______
Cowles, 143 B.R. 5, 10 (Bankr. D. Mass. 1992) ("The Court can ______
allow the creditors to reach the assets of the trust without
requiring revocation of the trust."). Rather, we hold that
the federal tax lien on Fay's individual property reaches the
entire assets of the Green Pastures and Parker Hill Nursing
Home Trusts because Fay has the power to eliminate the other
beneficiaries' interests and treat the trust property as her
own based on the following combination of provisions in the
trust instruments: (1) Fay as settlor has the power to alter,
amend or revoke, which, if exercised, could result in the
entire trust property vesting in her; (2) Fay as trustee has
absolute discretion to pay income and principal to the
beneficiaries, including herself, in whatever proportion she
deems appropriate, even if such payments entirely deplete the
other beneficial interests; and (3) Fay is settlor, trustee
-29- 29
and a beneficiary. Fay invokes George v. Kitchens by Rice ___________________________
Bros., Inc., where we stated that "a power of revocation ____________
under Massachusetts law is not considered property . . . and
cannot be reached by creditors." 665 F.2d 7, 8 (1st Cir.
1981). George remains a correct interpretation of ______
Massachusetts law where, as in that case, the only power
reserved by the settlor, who was also the trustee but not a
beneficiary, was the power to revoke.
Because the tax lien consequently attaches to the
mortgages now held by the trusts, the lien attaches to the
proceeds of the sale of the nursing homes that would
otherwise replace the mortgages as trust property. Cf. __
Phelps v. United States, 421 U.S. 330, 334 (1975) (when _________________________
property subject to tax lien is transferred, the lien
attaches to the proceeds of the transfer).
B. The Highland Avenue Nursing Home Trust ______________________________________
On August 14, 1974, Fay created the Highland Avenue
Nursing Home Trust, naming herself as sole trustee for her
life, and the beneficiaries as herself, her two sons and her
sister Dzialo, "in equal shares." Paragraph 11 of the
declaration of trust provides as follows: "The Trustee, may,
subject to the limitations herein expressed, acquire, own,
and dispose of any interest in this trust [to] the same
extent as if she were not a Trustee." The magistrate judge
found that paragraph 11 gives Fay the power to treat the
-30- 30
principal and income of the trust as her own, and held that
the IRS was therefore entitled to the proceeds of the sale of
the Highland Avenue Nursing Home. 884 F. Supp. at 609-10.
In reaching that conclusion, the magistrate judge first
observed that the meaning of the trust instrument as a whole
was difficult to discern, raising the suspicion that it was
drafted "so as to give the trustee free reign but also so as
to contain other language purporting to constrain the trustee
merely to have something at which to point if the trust were
attacked." Id. at 607. Against this backdrop, the __
magistrate judge found specific ambiguity in paragraph 11, in
that the term "any interest" could mean either Fay's
"beneficial interest" or the "income and principal" of the
trust. Id. at 609. Resolving the ambiguity against Fay as __
drafter, the magistrate judge concluded that "any interest"
must mean the "income and principal" of the trust. This was
so because the only other instance in which the word
"interest" is used without being modified by the word
"beneficial" is in paragraph 23, referring to the "interest
of any beneficiary hereunder, either as to income or
principal."8 The magistrate judge then read out of
____________________
8. Paragraph 23 is the spendthrift provision, providing that
"[t]he interest of any beneficiary hereunder, either as to
income or to principal, shall not be anticipated, alienated,
or in any manner assigned by such beneficiary and shall not
be subject to any legal process, bankruptcy proceedings, or
the interference or control of creditors or others, nor the
subject matter of any contract or trust made or entered into
-31- 31
paragraph 11 the phrase "subject to the limitations herein
expressed," based on his interpretation of the trust
instrument as imposing no limitation on Fay's powers as
trustee. Id. at 609. Paragraph 11 therefore meant that Fay __
could treat the principal and income as her own free of
trust. Id. at 609-10. We hold that the magistrate judge __
erred as a matter of law in interpreting paragraph 11 as
giving Fay the power to treat the principal and income of the
trust as her own. First, we fail to see in the trust _____
instrument a purpose to mislead or an unusual or unfair
allocation of powers, rights and interests among the settlor,
the trustee and the beneficiaries. Fay reserved no powers to
herself as settlor, but the magistrate judge seemed to find
it significant that on the one hand, Fay as trustee holds
legal title to and has extensive powers to manage and dispose
of the trust property, while on the other, the beneficiaries
do not have any title in the trust property, but "shares of
beneficial interests" that cannot be transferred or assigned
without offering them first to the other beneficiaries, and
that are "personal property, giving only the rights in this
instrument specifically set forth." Id. at 607-09. __
The trust instrument's definition of the various
powers, rights and interests was a correct statement of the
Massachusetts law of trusts. The creation of a trust results
____________________
by any beneficiary."
-32- 32
in the separation of the legal interest in the trust
property, which is in the trustee, from the beneficial
interest in the trust, which is in the beneficiaries. 2
Scott on Trusts, 99. The trustee holds the legal title to
the trust property in trust for the beneficiaries, while the
beneficiaries hold beneficial interests, which are equitable
in nature. See Russell v. Russell, 468 N.E.2d 1104, 1106 ___ ___________________
(Mass. App. Ct. 1984) (defining a trust as the "manifestation
of an intention to create a fiduciary relationship with
respect to property, [which] subject[s] the person by whom
the title to the property is held to equitable duties to deal
with the property for the benefit of another person")
(internal quotation marks and citations omitted); National ________
Shawmut Bank v. Cumming, 91 N.E.2d 337, 338 (Mass. 1950) _________________________
(referring to the trustee's "title" to and the beneficiary's
"beneficial interests" in the trust property); Worcester _________
Trust Co. v. Turner, 96 N.E. 132, 134 (Mass. 1911) (trustee ___________________
holds title to the principal; beneficiary has a right to
receive so much of it as necessary in the trustee's
discretion, but no absolute right to the fund itself). A
trustee does not hold trust property as her own due to the
fact that she holds legal title to it. See Cook v. Howe, 182 ___ ____________
N.E. 581, 582-83 (Mass. 1932) (trustee who holds legal title
to real estate in trust for a beneficiary may not keep the
proceeds as his own); cf. Cantor v. Wilbrahim and Monson __ ________________________________
-33- 33
Academy, 609 F.2d 32, 35 (1st Cir. 1979) (trustee is the _______
legal owner, but the trust itself is the debtor for purposes
of the Bankruptcy Act). Rather, a trustee holds legal title
in order to manage the trust property, and typically has
broad powers to do so as a practical way of conducting the
trust's business. Like any trustee's powers, Fay's powers to
hold, manage and dispose of the trust property were subject
to the "specific limitations herein contained," that is, to
conduct the trust business "for the benefit of the holders of
the shares hereunder."
That the beneficiaries' interests were "personal
property" was also a correct statement of the law. Where, as
here, a trust contains both real and personal property,9 and
the trust instrument directs that the trust assets be
liquidated upon termination of the trust, the beneficiaries'
interests are personal property from the trust's inception.
See Priestley v. Burrill, 120 N.E. 100, 104-05 (Mass. 1918); ___ _____________________
Dana v. Treasurer and Receiver General, 116 N.E. 941, 943-44 _______________________________________
(Mass. 1917).
____________________
9. Fay as trustee was to "hold [the Highland Avenue Nursing
Home] and cash so to be acquired by her, as well as all other
property which she may acquire as such Trustee together with
the proceeds thereof," and was "authorized to manage and
maintain the trust property and invest and reinvest the
property and proceeds of the trust in real estate, mortgages,
securities of any lawful business and to engage in any lawful
business."
-34- 34
The language providing that "ownership of a
beneficial interest . . . shall not entitle the beneficiary
to any title in or to the trust property whatsoever, or right
to call for a partition or division of the same, or for an
accounting," is not unfamiliar in Massachusetts trusts. See, ___
e.g., Gardiner v. United States, 49 F.2d 992, 994 (1st Cir. ____ __________________________
1931); Lauricella v. Lauricella, 565 N.E.2d 436, 437 (Mass. _________________________
1991); State Street Trust Co. v. Hall, 41 N.E.2d 30, 32, 35 ______________________________
(Mass. 1942); Dana, 116 N.E. at 942.10 As set forth above, ____
it is a correct statement of the law of trusts that
beneficiaries do not hold title to the trust property;
____________________
10. Trusts that contain similar provisions and that have a
similar purpose in that at least part of the purpose of the
trust is to carry on a business, are common in Massachusetts.
Whether such a trust is, for various purposes, a pure trust,
a business trust or a partnership has often been litigated,
and depends on the relative powers of the trustees and
beneficiaries, whether the primary activity of the trust is
commercial, and whether it issues transferrable certificates
of shares. See Hecht v. Malley, 265 U.S. 144 (1924); Pope ___ ________________ ____
and Cottle Co. v. Fairbanks Realty Trust, 124 F.2d 132 (1st _________________________________________
Cir. 1941); Bomeisler v. M. Jacobson & Sons Trust, 118 F.2d ______________________________________
261 (1st Cir. 1941); Gardiner, 49 F.2d 992; In re Village ________ ______________
Green Realty Trust, 113 B.R. 105 (Bankr. D. Mass. 1990); In __________________ __
re Medallion Realty Trust, 120 B.R. 245 (Bankr. D. Mass. ___________________________
1990); In re L & V Realty Trust, 61 B.R. 423 (Bankr. D. Mass. ________________________
1986); First Eastern Bank v. Jones, 602 N.E.2d 211 (Mass. _____________________________
1992); Hall, 41 N.E.2d 30; Baker v. Comm'r of Corps. and ____ _______________________________
Taxation, 148 N.E. 593 (Mass. 1925); Dana, 116 N.E. 941; ________ ____
Frost v. Thompson, 106 N.E. 1009 (Mass. 1914); Williams v. __________________ ___________
Inhabitants of Milton, 102 N.E. 355 (Mass. 1913). See also _____________________ ___ ____
Takemi Ueno, Defining a "Business Trust": Proposed Amendment ________________________________________________
of Section 101 (9) of the Bankruptcy Code, 30 Harv. J. on ____________________________________________
Legis. 499 (1993). That question is not before us, but
trusts with characteristics like those of the Highland Avenue
Nursing Home Trust are a "lawful method of transacting
business in [the] Commonwealth." Hall 41 N.E.2d at 34. ____
-35- 35
rather, they own an equitable interest in the trust property.
Although we are somewhat concerned about the language
purporting to deny the beneficiaries a right to call for an
accounting, that language would have been disregarded if the
beneficiaries had petitioned a court for an accounting.
Briggs v. Crowley, 224 N.E.2d 417, 421 (Mass. 1967). And _________________
spendthrift provisions like the one here are valid in
Massachusetts. Pemberton, 411 N.E.2d at 1312. _________
Second, we think that the interpretation of the ______
term "any interest" in paragraph 11 as "income and principal"
is extraordinarily strained, but more to the point, it does
not follow even from that interpretation that the
beneficiaries other than Fay do not have enforceable
equitable interests in the trust or that Fay has the power to
eliminate those interests in her own favor. Although we
agree that paragraph 11 is ambiguous viewed in isolation, it
is not susceptible of the meaning the magistrate judge
attributed to it when viewed in the context of the trust
instrument as a whole. The magistrate judge did not take
account of the distribution of powers in the trust that
should have led to the conclusion that Fay did not have the
power to eliminate the other beneficiaries' interests.
Fay did not reserve to herself the right to
unilaterally alter, amend or revoke the trust, but granted it
to those holding a majority of beneficial shares. The trust
-36- 36
is to terminate twenty years after Fay's death, or may be
terminated earlier "by a majority vote of all shares
outstanding, at a meeting of the trustee and the
beneficiaries, called for that expressly stated purpose," at
which the trustee may not vote. Whenever the trust
terminates, the then trustee(s) must wind up the affairs of
the trust, liquidate the assets and distribute the proceeds
among the beneficiaries in proportion to the shares owned by
them. The trust "may be amended or altered in any part
whatever . . . with the consent of a majority percentage of
vote as hereinbefore provided."
A settlor may either reserve powers to herself or
grant them to others, Crocker, 28 N.E.2d at 7, but a trust _______
"cannot be revoked or altered except by a reserved power to
do so, which must be exercised in strict conformity with its
terms." Trager v. Schwartz, 189 N.E.2d 509, 511-12 (Mass. ___________________
1963) (citations omitted). See also Markell v. Sidney B. ___ ____ _____________________
Pfeifer Found., Inc., 402 N.E.2d 76, 92 (Mass. App. Ct. _____________________
1980); Stahler v. Sevinor, 84 N.E.2d 447, 448 (Mass. 1949); __________________
Thorp v. Lund, 116 N.E. 946 (Mass. 1917). The Highland _______________
Avenue Nursing Home Trust therefore could only be altered or
revoked by the beneficiaries holding a majority of shares.
Just as Fay could eliminate other beneficiaries of the Green
Pastures or Parker Hill Nursing Home Trusts as part of her
power to alter or amend, those holding a majority of
-37- 37
beneficial shares in the Highland Avenue Nursing Home Trust
could eliminate Fay as a beneficiary by exercising their
power to amend "in any part whatever." Furthermore, the
other beneficiaries could have ousted Fay as trustee.
Although beneficiaries cannot appoint a new trustee without
an express grant of power to do so, where, as here, they have
a power to revoke and to compel the trustee to transfer the
trust property to them, they can revoke the trust and
immediately create a new trust, naming a new trustee. 2
Scott on Trusts 108.4; Restatement (Second) of Trusts 108
cmt. i.
Moreover, Fay does not have unbridled discretion as
trustee to take income or invade principal at the expense of
the other beneficiaries, who have enforceable interests in
the trust. While Fay may distribute net earnings in such
amount as she sees fit, she must make some distribution at
least annually "in the proportion to the shares owned by the
beneficiaries." Furthermore, the trust instrument evidences
Fay's intent that, upon termination, the trust property go to
beneficiaries in addition to herself or her successors. At
that time, the assets must be liquidated and the proceeds
distributed proportionately among the beneficiaries.
Although Fay is the settlor, trustee and a
beneficiary, the trust instrument gives her no power to
unilaterally alter, amend or revoke the trust, limits her
-38- 38
discretion as trustee to distribute income, and limits her
right to receive income as a beneficiary to an amount in
proportion to the shares owned by her. Fay's rights and
powers therefore were not so centralized as to make the
entire trust property her own.
In light of the trust instrument as a whole, we
conclude that paragraph 11 does not mean that Fay has the
power to treat the principal and income of the trust as her
own free of trust. The term "any interest" could mean Fay's
beneficial interest, so that paragraph 11 means that Fay,
like any other beneficiary and although she is the trustee,
may acquire, own and dispose of shares in accordance with the
conditions and procedures set forth in the declaration of
trust;11 receive annual distributions out of net earnings
in proportion to her share; and have her equitable interest
in the trust pass to her successors upon her death.12 See ___
____________________
11. Paragraph 13 provides that "the beneficial interests
hereby created shall not be transferrable or assignable
without first offering said shares to the other beneficiaries
in writing." The trustee must notify the remaining
beneficiaries of a beneficiary's offer to sell shares; they
or any of them may accept the offer, or, alternatively, three
arbitrators may be chosen to ascertain the value of the
offered shares; the beneficiary desiring to sell may do so
free of restriction thirty days from the date of the
arbitrators' determination if the beneficiary desiring to buy
has not paid the amount so determined; and if more than one
beneficiary desires to buy, they may buy the offered shares
in proportion to the shares held by them.
12. The executors, administrators or assigns of any deceased
beneficiary are to succeed to his or her rights under the
trust.
-39- 39
Andreson v. Andreson, 562 N.E.2d 91, 92 n.2 (Mass. App. Ct. ____________________
1990) (trust instrument stated that "[a]ny trustee may
without impropriety become a beneficiary hereunder and
exercise all rights of a beneficiary with the same effect as
though he were not a trustee."). Alternatively, the term
"any interest" could mean the trust principal and
undistributed income, so that paragraph 11 means that Fay as
trustee had full power to manage the business of the trust
free of the control of the other beneficiaries (who could
remove her as a beneficiary or as trustee). Cf. Navarro Sav. __ ____________
Assoc. v. Lee, 446 U.S. 458, 459, 465 n.14 (1980) (trustees _____________
had exclusive authority over trust property free from control
of shareholders "as if the Trustees were the sole owners of
the Trust Estate in their own right," while shareholders had
power to terminate or amend). Under any interpretation, Fay
was "subject to the limitations herein expressed," that is,
her duty as trustee to hold the trust property "in trust, to
manage and dispose of the same for the benefit of the holders
of the shares."
In sum, we hold that the entire property of the
Highland Avenue Trust does not constitute Fay's "property" or
"rights to property" to which the federal tax lien could
attach because the trust instrument defines the various
powers, rights and interests in accordance with the law of
trusts, gives the beneficiaries other than Fay enforceable
-40- 40
equitable interests in the trust property, and does not give
Fay the unilateral power to eliminate their rights.
The lien does, however, attach to whatever aspect
of Fay's beneficial interest in the Highland Avenue Nursing
Home Trust that constitutes present "property or rights to
property" under Massachusetts law.13 While a federal tax
lien attaches to property and rights to property that the
taxpayer acquires at any time after assessment, it does not
attach unless and until the taxpayer acquires what is defined
as property by state law. United States v. McDermott, __ ___________________________
U.S. __, 113 S. Ct. 1526, 1530 (1993). Thus, courts have
held that while a federal tax lien attaches to a
taxpayer/beneficiary's present right to receive distributions
of income or principal, it does not attach to the trust
corpus when he or she has no present right to receive it.
United States v. Cohn, 855 F. Supp. 572, 576-77 (D. Conn. ______________________
1994); In re Cavanaugh, 153 B.R. 224, 228 (Bankr. N.D. Ill. _______________
1993); Wilson v. United States, 140 B.R. 400, 404, 407 _________________________
(Bankr. N.D. Tex. 1992). See also In re Lyons, 148 B.R. 88 ___ ____ ___________
(Bankr. D.D.C. 1992) ("a federal tax lien may attach to a
____________________
13. The spendthrift clause is ineffective as to Fay's
beneficial interest because she is both settlor and
beneficiary. See Morrissey, 109 N.E.2d at 823; Forbes, 140 ___ _________ ______
N.E. at 419. Moreover, a spendthrift clause is "merely a
state-created exemption from the reach of creditors, and not
an aspect of the substantive [property] right" to which a
federal lien attaches. United States v. Rye, 550 F.2d 682, _____________________
685 (1st Cir. 1977).
-41- 41
taxpayer's vested right, under a trust . . . to receive
periodic payments or distributions of property then due or
that will become due in the future.").
Fay's right to receive annual distributions from
net earnings in proportion to her share until her death or
until the trust terminates earlier is a presently vested
property right. See Forbes, 140 N.E. at 420. Because "a ___ ______
settlor cannot place property in trust for his own benefit
and keep it beyond the reach of his creditors," Fay's
"creditors can reach the maximum amount which the trustee
under the terms of the trust could pay to [her] or apply for
[her] benefit." Ware v. Gulda, 117 N.E.2d 137, 138 (Mass. ______________
1954), citing Restatement (Second) of Trusts 156(2)
(internal quotation marks and additional citations omitted).
Fay's right to sell her share is not a present
right to property because she cannot sell it to anyone other
than her co-beneficiaries without at least their passive
consent. See note 11, supra. In United States v. Bess, the ___ _____ ______________________
Supreme Court held that a lien attached to an insured's right
under the terms of his life insurance policy to exchange the
policy for its cash surrender value during his lifetime. 357
U.S. at 56. Fay's right to sell her beneficial share is
similar to Bess's right to exchange his policy for cash,
except that Fay's right to sell is qualified and limited by
-42- 42
the rights of the other beneficiaries to buy her share, while
Bess's right to cash in his policy was unqualified. This
distinction is critical because Fay has property to which a
tax lien can attach only insofar as conferred by the trust
instrument as it would be enforced by state law. Cf. Chicago __ _______
Mercantile Exch. v. United States, 840 F.2d 1352, 1354-56 ___________________________________
(7th Cir. 1988) (where taxpayer could transfer his exchange
seat only as authorized and on the conditions prescribed in
the exchange rules, with no rights in or to the membership or
the proceeds of the sale of such membership except as
specifically granted in the rules, the full extent of
member's property interest in the seat, which had already
been involuntarily sold, was the remainder of the proceeds
after internal claims were paid.). Although we have not
found any Massachusetts case discussing whether a qualified
right to sell a beneficial interest in a trust is property,
we have no doubt that a Massachusetts court would enforce the
other beneficiaries' right to buy Fay's share if she
attempted to sell it to an outsider without consulting them
or without their consent. Fay's limited right to sell her
share therefore is not a present right to property. The
lien, of course, will attach to the proceeds from the sale of
Fay's share if and when she sells it (assuming the tax debt
is not paid), because she will then be holding her own
property free of trust.
-43- 43
Nor does Fay have present property rights in the
trust corpus. As a beneficiary, she has no title to the
trust property or right to call for a partition or division
of it as long as the trust continues, and has "only the
rights in this instrument specifically set forth." She has
no right to receive or withdraw any of the trust principal.
Cf. In re Cowles, 143 B.R. 5, 10 (Bankr. D. Mass. 1992) __ _____________
(settlor had the power to withdraw "any part or all of the
trust property," so his creditors could reach the entire
trust principal); Wolfe, 486 N.E.2d at 749 (settlor had the _____
right to withdraw 5/6 of the trust corpus, so his creditor
was permitted to reach that part of the trust principal).
According to the declaration of trust, Fay could receive her
share of the liquidated assets during life only if those
owning a majority of beneficial shares vote to terminate the
trust during her lifetime; otherwise, her executors,
administrators or assigns will succeed to her rights upon her
death.
As set forth in Part III(A), under Massachusetts
law, whether a right in a trust has vested depends on
"whether, in substance, the interest is sufficiently
established to constitute an interest or right which has
accrued to its holder," that is, whether it is subject to
defeat only by biological events, in which case the right is
vested, Groswold, 444 N.E.2d at 363, or whether it is subject ________
-44- 44
to defeat by another person's decision to exercise a power
that he or she holds, in which case the right does not vest
until the person holding the power can no longer exercise it.
Reiser, 389 N.E.2d at 770; Clemons, 126 N.E.2d 193. The ______ _______
possibility that Fay might receive a share of the trust
corpus during her lifetime hinges on whether or not a
majority of the holders of beneficial shares vote to
terminate the trust, and whether or not they decide to amend
the trust by removing her as a beneficiary. Thus, it does
not amount to a present right to property under Massachusetts
law. The lien will attach to her share of the assets if and
when the trust terminates during her lifetime (again assuming
the tax debt is still unpaid), because she will then be
holding her own property free of trust.
Assuming that a majority of the beneficiaries do
not vote to terminate the trust during Fay's lifetime, her
executors, administrators or assigns will succeed to her
rights under the trust upon her death. In Bess, the Supreme ____
Court stated with regard to the proceeds of a life insurance
policy that "[i]t would be anomalous to view as 'property'
subject to lien proceeds never within the insured's reach to
enjoy, and which are reducible to possession by another only
upon the insured's death when his right to change the
beneficiary comes to an end." Id. at 55-56. But in __
Massachusetts, the right of a trust beneficiary to have his
-45- 45
share of the trust corpus paid over to his successors upon
death has been treated as a present right to property during
the beneficiary's lifetime. See, e.g., Forbes, 140 N.E. at ___ ____ ______
420; Alexander, 75 N.E. at 92. In those cases, however, the _________
trust instrument unequivocally provided that the
beneficiary's share of the corpus was to be paid over, free
of trust, to the beneficiary's successors upon death.
Whether there will be any interest in the trust to which
Fay's heirs or assigns could succeed depends, again, on
whether those holding a majority of beneficial shares vote to
terminate the trust before Fay's death, or to eliminate Fay
as a beneficiary. We think that Fay's right to have her
successors receive income or principal from the trust
therefore is too ethereal to constitute a present right to
property. The lien will attach, however, upon Fay's death to
whatever beneficial interest she holds at that time, again
assuming the tax debt remains unpaid. Cf. Welch v. Paine, __ ______________
120 F.2d 141, 143 n.2 (1st Cir. 1941) (creditors of a
decedent must be paid before his property passes to the next
of kin).
We remand to the magistrate judge to fashion an
order enforcing the tax lien on Fay's present right to
receive annual distributions from net earnings in proportion
to her share. That the value of this right may be difficult
to discern does not alter the conclusion that the lien
-46- 46
presently attaches, Rye, 550 F.2d at 685; Raihl v. United ___ ________________
States, 152 B.R. 615, 619 (Bankr. 9th Cir. 1993), but it does ______
not flow from that conclusion that the property can be
executed upon immediately. United States v. Overman, 424 __________________________
F.2d 1142, 1145 (9th Cir. 1970). Under the FDCPA, property
held in trust is "co-owned property," cf. United States v. __ _________________
Coluccio, 51 F.3d 337, 342 (2d Cir. 1995) (funds in ________
constructive trust are co-owned property), which the
government can execute on only "to the extent such property
is subject to execution under the law of the State in which
it is located."14 28 U.S.C. 3203(a); 28 U.S.C.
3010(a).
In Massachusetts, a trust cannot be terminated in
order to pay a creditor at any time earlier than the terms of
the trust provide, at least where there are beneficiaries
other than the debtor. See Forbes, 140 N.E. at 421; ___ ______
Alexander, 75 N.E. at 91. Fay's beneficial right to receive _________
an annual share of net earnings can, however, be executed
upon in one of two ways. First, even though it ordinarily
could not be reached and applied "until a future time or is
of uncertain value," it can be reached and applied "if the
value can be ascertained by sale, appraisal or by any means
____________________
14. When the IRS seeks to collect other than through a
section 7403 proceeding or by levy, it has the privileges of
an ordinary judgment creditor, Rodgers, 461 U.S. at 682, 697, _______
or in this case, whatever privileges the FDCPA confers.
-47- 47
within the ordinary procedure of the court." Mass. Gen. L.
ch. 214 3(6). See also New England Merchants Nat'l Bank v. ___ ____ ___________________________________
Hoss, 249 N.E.2d 635, 638 (Mass. 1969); Whiteside, 187 N.E. ____ _________
at 710; Alexander, 75 N.E. at 92. Thus, Fay's right to _________
receive annual distributions from net earnings conceivably
could be sold and the proceeds paid to the IRS if its value
could be ascertained and a buyer found. Alternatively, her
share of net earnings could be paid to the IRS as it comes
due annually according to the terms of the trust. Forbes, ______
140 N.E. at 421; see also United States v. Solheim, 953 F.2d ___ ____ ________________________
379, 382 (8th Cir. 1992); Cohn, 855 F. Supp. 572, 576-77; ____
United States v. Taylor, 254 F. Supp. 752, 758 (N.D. Cal. ________________________
1966), cited with approval in Rye, 550 F.2d at 685. The ________________________ ___
magistrate judge may proceed according to either method,
holding hearings or other proceedings as necessary.
IV. CONCLUSION __________
On remand, the judgment should be modified as
follows: The United States is entitled to $11,686.22 (the
proceeds of the sale of the Green Pastures and Parker Hill
Nursing Homes) plus the accumulated interest on those
proceeds. The Highland Avenue Nursing Home Trust is entitled
to $16,046.63 (the proceeds of the sale of the Highland
Avenue Nursing Home), plus the accumulated interest, less any
amount determined to be presently payable to the IRS. The
magistrate judge shall fashion an order enforcing the tax
-48- 48
lien on Fay's right to annual payments from net earnings of
the Highland Avenue Nursing Home Trust.
Affirmed in part, reversed in part, and remanded Affirmed in part, reversed in part, and remanded ___________________________________________________
for a new judgment. No costs. for a new judgment. No costs. _____________________________
-49- 49
Related
Carey v. Brown
92 U.S. 171 (Supreme Court, 1875)
United States v. Bess
357 U.S. 51 (Supreme Court, 1958)
Aquilino v. United States
363 U.S. 509 (Supreme Court, 1960)
Phelps v. United States
421 U.S. 330 (Supreme Court, 1975)
Navarro Savings Assn. v. Lee
446 U.S. 458 (Supreme Court, 1980)
Salve Regina College v. Russell
499 U.S. 225 (Supreme Court, 1991)
United States Ex Rel. Internal Revenue Service v. McDermott
507 U.S. 447 (Supreme Court, 1993)
Helen McLanahan Stevens v. Chauncey C. Loomis
334 F.2d 775 (First Circuit, 1964)
Old Colony Trust Company, of the Estate of John H. Cunningham v. United States
423 F.2d 601 (First Circuit, 1970)
United States v. James A. Overman, Marie T. Overman, Circle J. Inc., a Corporation
424 F.2d 1142 (Ninth Circuit, 1970)
United States v. Owen M. Rye
550 F.2d 682 (First Circuit, 1977)
Lucile Hansen v. Peoples Bank of Bloomington as Trustee of the Trust of Olga J. Nydegger and A. W. Augspurger
594 F.2d 1149 (Seventh Circuit, 1979)
Nancy Cantor, Trustee of the Cantor Monson Trust, Debtor v. Wilbraham and Monson Academy
609 F.2d 32 (First Circuit, 1979)
State Street Bank and Trust v. United States
634 F.2d 5 (First Circuit, 1980)
Karen A. George v. Kitchens by Rice Bros., Inc.
665 F.2d 7 (First Circuit, 1981)
Maria Elisa Rodriguez v. Escambron Development Corp.
740 F.2d 92 (First Circuit, 1984)
Ed Freeman and Wife Sharon Freeman, Cross-Appellants v. Northwest Acceptance Corporation, Cross-Appellee
754 F.2d 553 (Fifth Circuit, 1985)
Chicago Mercantile Exchange v. United States of America, and Gnp Commodities, Inc.
840 F.2d 1352 (Seventh Circuit, 1988)
William Mahoney v. Board of Trustees, Boston Shipping Association-International Longshoremen's Association, Afl-Cio Pension Plan
973 F.2d 968 (First Circuit, 1992)
Horton Dairy, Inc., and First National Bank of Conway, Appellees/cross-Appellants v. United States of America, Appellant/cross-Appellee
986 F.2d 286 (First Circuit, 1993)
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Markham, etc v. Fay, Counsel Stack Legal Research, https://law.counselstack.com/opinion/markham-etc-v-fay-ca1-1996.