REVISED United States Court of Appeals,
Fifth Circuit.
Nos. 96-50137, 96-50138.
In The Matter of Billy R. SHURLEY and Jane Bryant Shurley, Debtors.
Billy R. SHURLEY and Jane Bryant Shurley, Appellants,
v.
TEXAS COMMERCE BANK—AUSTIN, N.A. and Texas Commerce Bank—San Angelo, N.A., Appellees.
In The Matter of Billy R. SHURLEY and Jane Bryant Shurley, Debtors.
TEXAS COMMERCE BANK—SAN ANGELO, N.A., Texas Commerce Bank—Austin, N.A. and Dennis Elam, Trustee, Appellees.
In The Matter of Billy R. SHURLEY and Jane Bryant Shurley, Debtors.
William H. ARMSTRONG, II, Appellant,
TEXAS COMMERCE BANK—SAN ANGELO, N.A., Dennis Elam, Trustee, and Texas Commerce Bank—Austin, Appellees.
June 20, 1997.
Appeals from the United States District Court for the Western District of Texas.
Before REAVLEY, JOLLY and BENAVIDES, Circuit Judges.
REAVLEY, Circuit Judge:
The question here is to what extent the assets of a
spendthrift trust settled by a bankruptcy debtor and others are
1 included in the debtor's bankruptcy estate. The bankruptcy and
district courts held that the entirety of the debtor's interest in
the trust is property of the bankruptcy estate. We limit the
estate to the property contributed to the trust by the debtor.
BACKGROUND
In 1965 M.D. Bryant, Ethel Bryant, Anne Bryant Ridge, and Jane
Bryant Shurley created a trust under Texas law. M.D. and Ethel
Bryant were husband and wife. Anne Bryant Ridge and Jane Bryant
Shurley are their daughters. The trust is known as the "M.D.
Bryant Family Trust" or the "Bryant Family Trust."
The parents and daughters contributed real property to the
trust. The property consisted of ranches owned by the family,
including one owned by Shurley. Shurley contributed approximately
11,000 acres of raw land from the south of a west Texas ranch (her
contribution herein the "Marfa ranch").1 The trust agreement
states that the property contributed by the parents "represents
two-thirds (2/3) of the total value of all of said real property to
be contributed and that the value of that portion of said real
property to be contributed by [the two daughters] each represents
(1/6) of the total value of all of said real property to be
contributed."
The trust agreement provided that additional property could be
1 The briefs indicate that the "Marfa Ranch" also refers to a larger tract of land out of which came the acreage Shurley contributed to the trust. In this opinion the "Marfa ranch" means only that acreage owned by Shurley and conveyed to the trust in 1965, together with any mineral interests she may have owned and conveyed to the trust.
2 added to the trust at a later date. According to Shurley the vast
bulk of the corpus of the trust came through pourover provisions in
the parents' wills, which were executed at the same time the trust
agreement was executed. She claims that the Marfa ranch represents
only two percent of the value of the total assets of the trust.
The parents died in 1967 and 1971.
Under the trust agreement, while the parents were alive,
two-thirds of the income generated by the trust was distributed to
the parents and one-sixth of the income was distributed to each of
the daughters. Upon the death of one parent, the income was
distributed equally among the living parent and the daughters.
Upon the death of the second parent, the two daughters each
received half of the income if both were living at the time. The
agreement has provisions for the children and other descendants of
the daughters to receive income from the trust and distribution of
its assets upon final termination of the trust.
In 1992, Shurley and her husband filed for bankruptcy under
Chapter 7 of the Bankruptcy Code. Since Shurley's parents were
deceased at the time, she and her sister each had a one-half
interest in the income from the trust. The Marfa ranch was still
held by the trust. Two bank creditors and the bankruptcy trustee
brought an adversary action, seeking a declaratory judgment that
Shurley's interest in the trust was property of the bankruptcy
estate. After a trial, the bankruptcy court entered a judgment
declaring that Shurley's "entire interest in the [trust], being an
undivided 50 percent interest in the principal assets and income of
3 the [trust], is property of the Chapter 7 bankruptcy estate." In
its memorandum opinion it enjoined the trustee of the trust "from
disbursing any beneficial interest previously held by Mrs. Shurley
to anyone other than" the bankruptcy trustee.2 Shurley and the
trustee of the trust3 appealed to the district court, which
affirmed. This appeal followed.
DISCUSSION
We review the bankruptcy court's factual findings under the
clearly erroneous standard, and we review its legal conclusions de
novo.4
Under section 541 of the Bankruptcy Code5 a bankruptcy estate
is created at the commencement of the bankruptcy case. Section
541(a)(1) states that "[e]xcept as provided in subsections (b) and
(c)(2) of this section, all legal or equitable interests of the
debtor in property as of the commencement of the case" is included
in the estate. Subsection (c)(2) states the exclusion relevant
here: "A restriction on the transfer of a beneficial interest of
the debtor in a trust that is enforceable under applicable
nonbankruptcy law is enforceable in a case under this title."
Section 541(c)(2) excludes "spendthrift trusts" from the
bankruptcy estate if such a trust protects the beneficiary from
2 In re Shurley, 171 B.R. 769, 789 (Bankr.W.D.Tex.1994). 3 For convenience, appellants Shurley and the trustee of the trust are sometimes collectively referred to as Shurley. 4 In re Herby's Foods, Inc., 2 F.3d 128, 130-31 (5th Cir.1993).
5 11 U.S.C. § 541.
4 creditors under applicable state law.6 "In general, a spendthrift
trust is one in which the right of the beneficiary to future
payments of income or capital cannot be voluntarily transferred by
the beneficiary or reached by his or her creditors."7
The Bryant Family Trust agreement vests in the trustee
authority over the trust assets. Among other powers vested in the
trustee, the agreement provides:
The trustee (and his successors) shall have full power and authority: to manage, handle, invest, reinvest, sell for cash or credit, or for part cash and part credit, convey, exchange, hold, dispose of, lease for any period of time, whether or not longer than the life of the trust, improve, repair, maintain, work, develop, operate, use, mortgage, or pledge all or any part of the funds.... The trustee shall have full power to determine the manner in which expenses are to be borne and in which receipts are to be credited as between principal and income, and also to determine what shall constitute income or net income and what shall constitute corpus and principal.... [B]eneficiaries shall have no right or power to transfer, assign, convey, sell or encumber said trust estate and interest therein, legal or equitable, during the existence of these trusts.
The agreement expressly provides that trust assets cannot be
reached by creditors of the beneficiaries.8
6 Patterson v. Shumate, 504 U.S. 753, 762, 112 S.Ct. 2242, 2248, 119 L.Ed.2d 519 (1992) (noting legislative history that § 541(c)(2) "continues over the exclusion from property of the estate of the debtor's interest in a spendthrift trust to the extent the trust is protected from creditors under applicable State law."); In re Moody, 837 F.2d 719, 722-23 (5th Cir.1988) ("A beneficiary's interest in a spendthrift trust is excluded from his bankruptcy estate by 11 U.S.C. § 541(c)(2), if state law and the trust so provide."). 7 Id. at 723. 8 The agreement states: "The interest of the beneficiaries in the trust estate and the increase and proceeds thereof, both legal and equitable, so long as the same are held in trust, shall not be subject in any manner to any indebtedness, judgment, judicial process, creditors' bills, attachment, garnishment, execution,
5 By vesting control of the trust in the trustee, denying the
beneficiaries control over the trust, and denying creditors of the
beneficiaries access to trust assets, the trust agreement qualifies
as a spendthrift trust under Texas law. For two reasons, however,
the bankruptcy court concluded that the trust assets are not beyond
the reach of creditors under state law. The first reason, which we
reject in part, is that spendthrift trust protection under state
law does not extend to a trust settled by the beneficiary herself.
The second reason, which we reject, is that Shurley exercised
sufficient control over the trust to make the assets subject to her
creditors.
A. The Self-Settlor Rule and its Consequences
The bankruptcy court's principal reason for holding that
Shurley's interest in the trust is property of the bankruptcy
estate is that she was one of the original settlors of the trust.
We have recognized that a beneficiary's interest in a spendthrift
trust is not subject to claims of creditors under Texas law
"[u]nless the settlor creates the trust and makes himself
beneficiary."9 The rationale for this "self-settlor" rule is
receivership, charge, levy, seizure or encumbrance, of or against said beneficiaries; nor shall the interest of the beneficiaries in said trust be in any manner reduced or affected by any transfer, assignment, conveyance, sale, encumbrance, act, omission or mishap, voluntary or involuntary, anticipatory or otherwise of said beneficiaries...." 9 Id. at 723. See also Daniels v. Pecan Valley Ranch, Inc., 831 S.W.2d 372, 378 (Tex.App.—San Antonio 1992, writ denied) ("In Texas, a settlor cannot create a spendthrift trust for his own benefit and have the trust insulated from the rights of creditors."); Tex. Prop.Code Ann. § 112.035(d) ("If the settlor is also a beneficiary of the trust, a provision restraining the
6 obvious enough: a debtor should not be able to escape claims of
his creditors by himself setting up a spendthrift trust and naming
himself as beneficiary. Such a maneuver allows the debtor, in the
words of appellees, to "have his cake and eat it too." As one
Texas court has explained:
Public policy does not countenance devices by which one frees his own property from liability for his debts or restricts his power of alienation of it; and it is accordingly universally recognized that one cannot settle upon himself a spendthrift or other protective trust, or purchase such a trust from another, which will be effective to protect either the income or the corpus against the claims of his creditors, or to free it from his own power of alienation. The rule applies in respect of both present and future creditors and irrespective of any fraudulent intent in the settlement or purchase of a trust.10
The novel issue presented here is whether the entirety of a
beneficiary's interest in a spendthrift trust is subject to
creditors' claims where the trust is only partially self-funded by
the beneficiary. There is no compelling Texas authority on this
issue, but we conclude that on these facts Texas courts would
surely hold that the partially self-funded spendthrift trust is
only partially subject to creditors' claims.
Allowing creditors to reach only the self-settled portion of
the trust is consistent with the other long-standing rule of Texas
law that a settlor should be allowed to create a spendthrift trust
that shields trust assets from the beneficiary's creditors.
voluntary or involuntary transfer of his beneficial interest does not prevent his creditors from satisfying claims from his interest in the trust estate."). 10 Glass v. Carpenter, 330 S.W.2d 530, 533 (Tex.Civ.App.—San Antonio 1959, writ ref'd n.r.e.).
7 "Spendthrift trusts have long been held valid by Texas courts."11
The bankruptcy court's ruling ignores the wishes of Shurley's
parents, the primary settlors of the trust, and the state's policy
of respecting their expectations. "Spendthrift trusts are not
sustained out of consideration for the beneficiary. Their
justification is found in the right of the donor to control his
bounty and secure its application according to his pleasure."12
Allowing creditors to reach only that portion of the trust
contributed by Shurley would further the policy of allowing her
parents to create a spendthrift trust for the benefit of Shurley
that is protected from her creditors, while giving effect to the
exception for self-settled trusts. At least one court from another
jurisdiction agrees with this this approach,13 and we believe that
Texas courts would do the same. Accordingly we hold that the
property which Shurley herself contributed to the trust—the Marfa
ranch—is not protected from creditors under state law and is
therefore property of the bankruptcy estate, but that all other
assets of the trust are not property of the estate.14
11 Moody, 837 F.2d at 723. 12 Hines v. Sands, 312 S.W.2d 275, 279 (Tex.Civ.App.—Fort Worth 1958, no writ). 13 In re Johannes Trust, 191 Mich.App. 514, 479 N.W.2d 25, 29 (1991) ("[The self-settlor's] creditors can reach the assets of the trust and compel payment in the maximum amount that would be in the trustee's discretion with respect to that portion of the assets that came from [the self-settlor], but not with respect to any portion of the trust that came from other individuals, particularly petitioner."). 14 We note that the Marfa ranch was still held by the trust when Shurley commenced her bankruptcy case. If the ranch had been sold,
8 We so hold despite Shurley's "power of appointment" granted by
the trust agreement. Under the agreement each sister has a right
to allocate assets of the trust to specified beneficiaries. The
agreement states that the sisters "shall each have a special power
of appointment over an adjusted one-half (1/2) of the trust assets,
to appoint such adjusted one-half (1/2) of the assets of said trust
to and among their children and lineal descendants.... Neither
[daughter] can appoint assets to herself, her creditors, her
estate, or the creditors of her estate." If a daughter does not
exercise her power of appointment, the trust agreement provides
that her interest shall be distributed in equal shares "to her
children and lineal descendants, and to the lineal descendants of
a deceased child, per stirpes." Shurley represents on appeal that
she has not exercised her special power of appointment because she
is content with the trust's distribution provisions for her
descendants.
This power of appointment does not alter our conclusion that
the Marfa ranch is property of the bankruptcy estate. The
Bankruptcy Code expressly excludes such a power of appointment from
the bankruptcy estate, since section 541(b)(1) provides that
property of the estate does not include "any power that the debtor
prior to the bankruptcy filing, this case would be more complicated. We would still hold that some portion of Shurley's interest in the trust was self-settled and therefore property of the estate, but would have to engage in a further analysis of (1) how to value the self-settled portion of the trust, through tracing of assets or some other method of calculating Shurley's proportionate contribution to the trust relative to the other settlors' contributions, and (2) who should have the burden of proof on this issue.
9 may exercise solely for the benefit of an entity other than the
debtor." However, while the power of appointment to others does
not become property of the estate under § 541(b)(1), the property
which became part of the bankruptcy estate under the Code upon the
commencement of the bankruptcy case now belongs to that estate and
is controlled by the bankruptcy trustee. Regardless of how Shurley
might indicate that trust assets should be divided upon her death,
the Marfa ranch now belongs to the bankruptcy estate, and her
designation of beneficiaries is irrelevant. The bankruptcy estate
will be divided among creditors according to the Code, regardless
of Shirley's appointment of assets under the trust agreement.
The exercise of the power of appointment under the trust
agreement is analogous to a will, and has no more effect on the
property of the bankruptcy estate and creditor priorities than a
garden-variety will of the debtor. With an ordinary will, the
heirs only receive the stipulated items of the property that were
owned by the testator. Stated more simply, a testator can only
give away that which was hers. Here, the Marfa ranch no longer
belongs to Shurley; it is property of the bankruptcy estate.
Shurley argues that she only has a life estate in the Marfa
ranch and other trust assets in the form of an equitable interest
in the income from the trust assets during her life, and that
creditors therefore cannot reach the corpus of the trust even if it
is self-settled. She is correct that absent distributions of
corpus at the discretion of the trustee or a premature termination
of the trust (discussed below), the trust agreement only provides
10 her with an income interest in the trust assets, with the remainder
going to other beneficiaries. Shurley cites authority that even
when a settlor creates a trust for herself, creditors can only
reach trust assets to the extent of the settlor's interest.15
The issue here—whether the creditors can reach only Shurley's
income from the Marfa ranch or the ranch itself—does not turn on
whether the Shurley's interest in the trust is "equitable," since
the Bankruptcy Code defines property of the bankruptcy estate to
include "all legal or equitable interests of the debtor in
property."16 Resolution of this question turns on whether creditors
can reach the trust corpus under state law, regardless of how the
interest is characterized.
We conclude that under Texas law creditors can reach not only
Shurley's income from the Marfa ranch but the ranch itself, in
light of Bank of Dallas v. Republic National Bank of Dallas.17 In
Bank of Dallas, the debtor settled a trust with spendthrift
language for the benefit of herself and her children. The debtor
was to receive the net income of the trust during her lifetime,
with the remainder going to her children or other beneficiaries
named in her will. The trust agreement further provided that
"[w]henever the trustee determines that the income of the Settlor
15 E.g., Fordyce v. Fordyce, 80 Misc.2d 909, 365 N.Y.S.2d 323, 328 (N.Y.Sup.Ct.1974) ("Even in the case of a self-settled trust, creditors can only reach the interest the settlor retained for himself."). 16 11 U.S.C. § 541(a)(1). 17 540 S.W.2d 499 (Tex.Civ.App.—Waco 1976, writ ref'd n.r.e.)
11 from all sources known to the trustee is not sufficient for her
reasonable support, comfort, and health and for reasonable support
and education of Settlor's descendants, the trustee may in its
discretion pay to, or use for the benefit of, Settlor or one or
more of Settlor's descendants so much of the principal as the
trustee determined to be required for those purposes."
The court held that "where a settlor creates a trust for his
own benefit, and inserts a spendthrift clause, it is void as far as
then existing or future creditors are concerned, and they can reach
his interest under the trust by garnishment."18 It further held
that income from the trust was subject to creditor claims, and that
"the interest of [the debtor] in the trust is such that the corpus
may be reached by her creditors."19
The court considered the Restatement (Second) of Trusts § 156
(1959), which provides:
(1) Where a person creates for his own benefit a trust with a provision restraining the voluntary or involuntary transfer of his interest, his transferee or creditors can reach his interest.
(2) Where a person creates for his own benefit a trust for support or a discretionary trust, his transferee or creditors can reach the maximum amount which the trustee under the terms of the trust could pay to him or apply for his benefit.
The court also looked to comment e of this section, which
states that "[w]here by the terms of the trust a trustee is to pay
the settlor or apply for his benefit as much of the income or
principal as the trustee may in his discretion determine, his
18 Id. at 501. 19 Id. at 501-02.
12 transferee or creditors can reach the maximum amount which the
trustee could pay to him or apply for his benefit." Applying these
rules the court held that the creditor could reach the corpus of
the trust, even though the debtor only had a life interest in the
trust.
By this reasoning the creditors are able to reach the
self-settled asset of the trust in our case, namely the Marfa
ranch. The trust agreement states that "[i]f the trustee
determines that the net income of said trust is insufficient to
maintain and support any of the beneficiaries of said trust or
their children and lineal descendants in their accustomed manner of
living, taking into account, however, such beneficiary's income
from all other sources, the trustee may use so much of the corpus
of said trust as the trustee sees fit to make up such deficiency."
This language is even broader than the language of the trust
agreement in Bank of Dallas, since in our case the trustee can make
grants of trust corpus to support the beneficiaries' or their
descendants' "accustomed manner of living," while in Bank of Dallas
the trustee was limited to making such distributions to support the
beneficiary's "reasonable support, comfort, and health" and the
reasonable support and education her descendants. If anything, the
former term grants even more discretion to the trustee than the
latter. Accordingly we conclude that the creditors in our case can
reach the corpus of the trust under Texas law as to that
property—the Marfa ranch—contributed by Shurley to the trust, and
that the ranch is therefore property of the estate.
13 The court in Bank of Dallas also quoted comment c to § 156,
which states that "[i]f the settlor reserves for his own benefit
not only a life interest but also a general power to appoint the
remainder by deed or will or by deed only or by will alone, the
creditors can reach the principal of the trust as well as the
income." In Bank of Dallas the debtor apparently had a general
power to appoint the remaining trust assets by will, while in our
case Shurley and her sister have a special power of appointment,
meaning that the trust document limits the choice of recipients of
appointed assets to the sisters' descendants. We do not see this
factual distinction as significant. Comment c was only one of
three comments to § 156 (comments c, d, and e) quoted by the court
in Bank of Dallas, and § 156 itself, as we read it, states than any
self-settled support or discretionary trust is subject to creditor
claims up to "the maximum amount which the trustee under the terms
of the trust could pay to" the beneficiary. We cannot fathom why
the court would have reached a different result if the debtor had
had a special rather than a general power of appointment. Before
even mentioning the Restatement, the court stated without
qualification that, under Texas law, "where a settlor creates a
trust for his own benefit, and inserts a spendthrift clause, it is
void as far as then existing or future creditors are concerned, and
they can reach his interest under the trust by garnishment."20
A similar result was reached in State v. Nashville Trust Co.21
20 Bank of Dallas, 540 S.W.2d at 501. 21 28 Tenn.App. 388, 190 S.W.2d 785 (1944).
14 The debtor was the beneficiary of a spendthrift trust holding real
estate. The debtor built a mansion on the property. The court
held that the debtor had self-settled the trust to the extent of
the improvements he had made, and that the property was therefore
subject to the creditor's claim to the extent of the debtor's
improvements. The debtor argued that even if he "can be held to
have contributed to the trust property, enhanced its value, and to
that extent created a spendthrift trust for his own benefit, only
his interest in such enhancement, i.e. his life estate in such
enhancement, may be subjected and that the remainder interest of
his children ... may not be subjected for any debt of his."22 The
court rejected this argument, reasoning that the debtor's children
"could only be donees or volunteers and could take no benefits
under such transfer as against his creditors. So we think the
chancellor did not err against defendants in decreeing that the
[creditor] had a right to subject the land for the amount by which
its value had been enhanced by reason of the improvements."23 The
court held that the creditor was entitled to a lien on the trust
property for the value of the debtor's improvements, and that the
creditor was "entitled to a sale of the land, if necessary, to
enforce the lien."24
Shurley argues that creditors cannot reach the corpus of the
trust because of our decisions in In re Goff, 706 F.2d 574 (5th
22 Id. 190 S.W.2d at 791. 23 Id. at 792. 24 Id. at 799.
15 Cir.1983) (Goff I), and In re Goff, 812 F.2d 931 (5th Cir.1987)
(Goff II ). In Goff I we held that the debtor's Keogh plan, a
pension trust under the ERISA statute,25 was not a spendthrift trust
excluded from the bankruptcy estate under Bankruptcy Code §
541(c)(2) because it was self-funded. We stated that "[t]he
general rule is well established that if a settlor creates a trust
for his own benefit and inserts a "spendthrift' clause, restraining
alienation or assignment, it is void as far as creditors are
concerned and they can reach the settlor's interest in the trust."26
In Goff II, a creditor claimed that its recorded judgment
against the debtor gave it a statutory lien against the property
held in the pension trust, and that it therefore had a secured
bankruptcy claim. The bankruptcy trustee argued that the claim was
unsecured. We held that the claim was unsecured, because under
Texas law a judgment lien only attaches to real property in which
the debtor has legal title, and the debtor only had equitable title
to the real property in the trust. We stated that "[t]he trust
remains valid; only the spendthrift clause is void, allowing
creditors to reach the property held in trust by garnishment."27
Goff II did not, as appellants argue, hold that creditors cannot
25 29 U.S.C. §§ 1001 et seq. 26 Goff I, 706 F.2d at 587. The principal holding of the case—that a qualified ERISA pension plan is not excluded from the bankruptcy estate because the federal ERISA statute is not "applicable nonbankruptcy law" under Bankruptcy Code § 541(c)(2)—was expressly overruled in Patterson, 504 U.S. at 757 n. 1, 112 S.Ct. at 2246 n. 1 (citing Goff I ). 27 Goff II, 812 F.2d at 933.
16 reach the corpus of a self-funded trust with an invalid spendthrift
clause. It held only that a judgment lien against the debtor did
not create a secured claim against the assets of the trust. We
have cited Goff II for the proposition that "[a] creditor can reach
the trust assets" of a trust funded by the debtor-beneficiary.28
As with the Bryant Family Trust, the trust in question (1)
contained a spendthrift clause, (2) provided the debtor with a life
interest in the income, with the remainder going to other
beneficiaries, and (3) provided that the trustee could invade the
corpus of the trust for the debtor's support, maintenance and
welfare.
Shurley points out that when she made the original
contribution of the Marfa ranch to the trust, it was subject to a
note and lien. She argues that this lien should affect our
analysis, but we disagree. There is no dispute that Shurley was
the owner of the ranch when she conveyed it to the trust, even if
it was encumbered with a lien. The note and lien may have affected
the value of the property at the time the trust was funded, but
they did not affect ownership of the property. When determining
the property of the estate, the Bankruptcy Code looks to the
debtor's property "as of the commencement of the case."29 It makes
no more sense to look to the value of the ranch at the time of the
creation of the trust than in does to look to the value of any
other property of the debtor on the date of acquisition. If the
28 In re Latham, 823 F.2d 108, 111 (5th Cir.1987). 29 11 U.S.C. § 541(a)(1).
17 debtor owns stock, bonds, real estate or other property, the
original value or cost basis of those assets is irrelevant to the
bankruptcy matter of defining the estate. Accordingly a lien on
the ranch at the time of the trust's creation does not alter our
conclusion that the ranch is property of the bankruptcy estate.
The ranch might have appreciated or depreciated in value for any
number of reasons since 1965, including the balance on the note,
but it is still property of the bankruptcy estate.
Shurley argues that there was no proof by appellees that she
had any equity in the ranch at the time of creation of the trust,
reasoning that she could not be a self-settlor if the property she
contributed was worthless. Assuming that Shurley is legally
correct—that a settlor's contribution to a trust of real property
in which she had no equity at the time of the trust's creation does
not fall within the self-settlor rule—the bankruptcy court found
that she had equity in the property at the time of the creation of
the trust in 1965.30 This fact finding is not clearly erroneous.
Shurley purchased the ranch from her parents in 1950 for
$131,366.64 and assumed a $50,000 balance on the note.31 The
balance on the note was only $23,000 when the property was conveyed
to the trust.32 Moreover, in the trust agreement itself, Shurley
as a signatory represented that "the value of that portion of said
30 Shurley, 171 B.R. at 778-79 n. 5. 31 Shurley paid only $200 down for the ranch, and executed 25 separate promissory notes to her parents, which were annually forgiven by the parents. 32 The note was subsequently paid off by the trust.
18 real property to be contributed by [Shurley and her sister] each
represents (1/6) of the total value of all of said real property to
be contributed." This declaration is an admission by Shurley that
the property she contributed had some value, exceeding the balance
on the note, since the trust assumed the note.
B. Beneficiary Control
The bankruptcy court concluded that "[e]ither substantial
control or self-settlement may operate to invalidate protective
trust provisions."33 It found that Shurley exercised too much
control over the trust to qualify as the beneficiary of a
spendthrift trust. We find none of the reasons given persuasive.34
First, the court found that "Mrs. Shurley, in conjunction with
her father during his life, had the power to revoke, alter, or
amend the Trust document, or distribute the Trust assets back to
the settlors."35 We disagree. The agreement provides that "M.D.
Bryant (the father) with the concurrence of either Settlor Anne
Bryant Ridge or Settlor Jane Bryant Shurley, shall have the right
at any time during his lifetime to revoke, alter and amend said
trust and distribute the assets of said trust to the Settlors in
the same proportion as the original contributions by each of said
Settlor, taking into account any adjustment under paragraph (b)."
33 Shurley, 171 B.R. at 782. 34 We assume without deciding that the court was legally correct in concluding that "substantial control" can render a spendthrift or other protective trust subject to creditor claims. We note however that we do not believe that appellees have cited any Texas authority for this proposition. 35 Id. at 783.
19 The power to revoke or amend the trust was vested in the father,
not the daughters. Shurley had no authority to alter the trust.
She only had the authority to prevent her father from doing so, and
only if she and her sister vetoed the change. At most therefore
she and her sister in combination had the power to ensure the
perpetuation of the trust. Further, this power lapsed upon the
death of the father in 1967. We find no authority that such a
limited power rendered the trust subject of creditor claims against
the beneficiaries.
Second, the bankruptcy court noted that the agreement provided
that Shurley had the right to petition three "special trustees" for
the partial or complete termination of the trust. The agreement
provides for the appointment of certain named special trustees,
including a state judge, after the death of the parents. It states
that "[u]pon application made by either daughter ... or both,
showing that termination would best serve the intended purpose of
the trust, such Special Trustees shall in their sole and absolute
discretion have the power and authority by unanimous consent to
terminate in whole or in part and from time to time the trust or
trusts established hereunder." Again, this provision does not vest
in Shurley the power to terminate or alter the trust. It only
authorizes her to request such a change from special trustees, who
have "in their sole and absolute discretion" the authority to alter
the trust. Even absent such a provision, Shurley, like all Texas
trust beneficiaries, had a statutory right to seek judicial
modification or termination of the trust if "compliance with the
20 terms of the trust would defeat or substantially impair the
accomplishment of the purposes of the trust."36 No court has ever
held that such a statutory right renders a spendthrift trust
subject to creditor claims.
Third, the bankruptcy court noted Shurley's special power of
appointment. This provision merely gave the daughters the
authority to allocate trust assets to their descendants. It grants
no authority to the daughters to allocate assets to themselves. As
explained above, the Bankruptcy Code expressly excludes such a
power of appointment from the bankruptcy estate. Section 541(b)(1)
of the Code provides that property of the estate does not include
"any power that the debtor may exercise solely for the benefit of
an entity other than the debtor."
Aside from the terms of the trust agreement, the bankruptcy
court found that Shurley had exercised de facto control over the
trust. The court found:
Outside the Trust document, the Shurleys also manipulated Trust assets and governed the initial Trustee, Bryant Williams. The Shurleys were regularly able to obtain unrestricted corpus distributions and loans. While the Trust provides for such distributions, the liberality and circumstances under which they were requested and granted suggested a domination by M.D. Bryant, Mrs. Shurley and Mrs. Watkins of Mr. Williams. Only recently had any corpus distribution request been denied, and only recently had the successor Trustee, Mr. Armstrong, started to make only "loans," to the exclusion of corpus distributions. Indeed, in the early days of the Trust, the initial Trustee, on behalf of the Trust, executed promissory notes as a comaker for the Shurleys. Part of the malleability of Bryant Williams may have arisen either from his fear of being replaced for failing to abide by the wishes of Mrs. Shurley and Mrs. Watkins, or from his close relationship with the family. While M.D.
36 Tex. Prop.Code Ann. § 112.054 (Vernon 1995).
21 Bryant, the Shurleys and the Watkines may not have held all of the puppet strings to Mr. Williams, they held enough of them to exert the control necessary to defeat the Trust's protective attributes.37
Shurley strongly denies that the evidence at trial supported these
findings, arguing for example that there is no evidence that the
first trustee ever made a single distribution of trust corpus or a
single loan to Shurley or any other beneficiary. Appellees argue
that in addition to the above-quoted findings, Shurley, among other
things, "used the Trust income to induce extensions of credit to
herself and her husband," and "engaged in "trustee shopping' to
help further her control of the trust assets."
Even if these findings are taken as undisputed, they do not
establish control by the daughters over the trust assets sufficient
to make the trust subject to their creditors. The fact that the
trustees liberally bestowed trust assets on the daughters, by
itself, does not establish de facto control by the daughters over
the affairs of the estate. The daughters were after all two of the
principal beneficiaries of the trust, and distributions of the
wealth of the the trust to the daughters is entirely consistent
with its apparent purpose. The agreement provides that the trustee
was not limited to distributing income generated from the corpus of
the trust. As discussed above, it expressly authorized the trustee
to make distributions from the trust corpus "[i]f the trustee
determines that the net income of said trust is insufficient to
maintain and support any of the beneficiaries of said trust or
37 Shurley, 171 B.R. at 783.
22 their children and lineal descendants in their accustomed manner of
living...." It also expressly authorized the trustee to "loan
money to ... and otherwise deal with any and all persons" including
"the beneficiaries of this trust."
As one Texas decision has explained in denying a creditor's
claim against assets held by a spendthrift trust:
the purpose of such a trust is not defeated by the fact that the trustee is authorized in his discretion to apply a part of the corpus of the fund to the use of the beneficiary in accordance with the terms of the trust. Neither is the purpose of such trust defeated by the fact that the trustee is authorized or even required to turn the entire trust fund or property over to the beneficiary absolutely at some fixed time in the future.38
Appellees did not establish that loans or grants from the
trust to the daughters, on their face consistent with the purpose
and language of the trust, amounted to de facto control of the
trust by the daughters. Further, the fact that the beneficiary of
a spendthrift trust may have behaved as a spendthrift only shows
the prescience of the settlors, and should not defeat the
protective features of the trust. Appellees' focus on the behavior
of Shurley as beneficiary is misplaced, since as explained above,
spendthrift trusts are not shielded from creditors "out of
consideration for the beneficiary. Their justification is found in
the right of the donor to control his bounty and secure its
application according to his pleasure."39
38 Adams v. Williams, 112 Tex. 469, 248 S.W. 673, 679 (1923).
39 Hines v. Sands 312 S.W.2d 275, 279 (Tex.Civ.App.—Fort Worth 1958, no writ).
23 C. Whether the Trust Is an Annuity
By separate appeal Shurley argues that the bankruptcy court
erred in denying her summary judgment motion urging that her
interest in the trust is an "annuity" exempt from creditors under
Texas law.
Under Texas law and Bankruptcy Code § 522, Texas debtors may
elect either state or federal exemptions from creditors.40
Shurley's claims that her interest in the trust is an annuity
exempt from creditors under Tex. Ins. Code Ann. art. 21.22 (Vernon
Supp.1997), which provides an exemption for "all money or benefits
of any kind, including policy proceeds and cash values, to be paid
or rendered to the insured or any beneficiary under any policy of
insurance or annuity contract issued by a life, health or accident
insurance company, including mutual and fraternal insurance, or
under any plan or program of annuities and benefits in use by an
employer or individual." The emphasized language was added by a
1993 amendment to the statute, after Shurley filed for bankruptcy.
This argument fails for two reasons. First, her interest in
the trust was not issued by an insurance company or employer, so
the only conceivable claim of exemption is that her interest is
part of a "plan or program of annuities and benefits in use by an
... individual." The reference to an individual was added to the
statute after the bankruptcy filing. In determining exemptions we
must apply the law in effect at the time the debtor entered
40 In re Walden, 12 F.3d 445, 448 (5th Cir.1994).
24 bankruptcy.41 Although Texas exemption laws are liberally
construed,42 the exemption Shurley claims simply did not exist at
the commencement of her bankruptcy case. We cannot agree with
Shurley that the 1993 amendment merely "clarified" legislative
intent insofar as it added a reference to non-employer annuities
that are not issued by insurance companies.43 The statute plainly
did not apply to such annuities prior to the amendment.
Second, we do not believe that Shurley's trust interest can
be characterized as an annuity in any event. One Texas court has
described an annuity as a "a form of investment which pays
periodically during the life of the annuitant or during a term
fixed by contract rather than on the occurrence of a future
contingency."44 We have cited this same definition with approval.45
While all annuities do not make payments in fixed, predetermined
41 Walden, 12 F.3d at 449 n. 7. In so holding, Walden was interpreting the same state statute at issue here, Insurance Code art. 21.22 42 Id. at 448. 43 We assume without deciding that Shurley is correct that an annuity under the current statute can be issued by an entity other than an insurance company. But see art. 21.22(6) ("For purposes of regulation under this code, an annuity contract issued by a life, health, or accident insurance company, including a mutual company or fraternal company, or under any plan or program of annuities or benefits in use by an employer or individual, shall be considered a policy or contract on insurance."). Texas, like all states, comprehensively regulates insurers and insurance policies. 44 Steves & Sons, Inc. v. House of Doors, Inc., 749 S.W.2d 172, 175 (Tex.App.—San Antonio 1988, writ denied) (quoting In re Howerton, 21 B.R. 621 (Bankr.N.D.Tex.1982)). 45 In re Young, 806 F.2d 1303, 1306 (5th Cir.1987) (quoting Howerton ).
25 amounts,46 we do not believe that the term extends to a trust where
future payments are highly contingent on the future circumstances
of the beneficiaries. The trust agreement provides that the
trustee "may" make distributions of trust corpus if he determines
that such distributions are needed to "maintain and support any of
the beneficiaries or their children or lineal descendants in their
accustomed manner of living." Any such good faith determination by
the trustee is "final and binding on all interested parties." Such
distributions were in fact made. By design, such distributions are
tied to contingencies unknown at the time of the creation of the
trust, and are not consistent with the concept that an annuity
makes payments without regard to "the occurrence of a future
contingency."47 In addition, under terms of the trust agreement
discussed above, payments to Shurley were contingent on (1) the
death of her parents, since her interest increased on the death of
one parent and increased again on the death of the second parent,
(2) whether the father, with the consent of either sister, chose to
terminate the trust, and (3) whether the special trustees
terminated the trust.
Further, Shurley's argument simply proves too much, since if
her interest in the trust is an annuity, then all beneficiaries of
self-settled trusts could make the same argument, as long as the
46 With a variable annuity, "payments to the purchaser vary with investment performance." NationsBank of North Carolina, N.A. v. Variable Annuity Life Ins. Co., 513 U.S. 251, 254, 115 S.Ct. 810, 812, 130 L.Ed.2d 740 (1995). 47 Steves & Sons, 749 S.W.2d at 175.
26 trust agreement called for periodic payments to the settlor for
life or a fixed term. We cannot accept that the Texas legislature
intended this result, which would reject the universally recognized
rule, and one codified by Texas statute, that a settlor cannot
create his own spendthrift trust and shield its assets from
creditors. If the legislature had intended this result, it would
have repealed Tex. Prop.Code Ann. § 112.035(d), which provides that
"[i]f the settlor is also a beneficiary of the trust, a provision
restraining the voluntary or involuntary transfer of his beneficial
interest does not prevent his creditors from satisfying claims from
his interest in the trust estate."
CONCLUSION
In summary, we conclude that the Marfa ranch and income
generated therefrom is property of the estate.48 The judgment is
reversed and the case is remanded for further proceedings
consistent with this opinion.
REVERSED and REMANDED.
48 Income from the ranch belongs to the estate because the Bankruptcy Code defines property of the estate to include "[p]roceeds, product, offspring, rents, or profits of or from property of the estate." 11 U.S.C. § 541(a)(6).