Biegler v. Heep ( 1999 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
STEVEN BIEGLER, C.P.A.; STEVEN
BIEGLER & ASSOCIATES, PC; KEITH
L. PHILLIPS, Trustee,
Plaintiffs-Appellants,
and
No. 97-2765
JOHN P. GIRARDI; JANET E. GIRARDI,
Plaintiffs,
v.
HATSY HEEP,
Defendant-Appellee.
Appeal from the United States District Court
for the Eastern District of Virginia, at Richmond.
Robert E. Payne, District Judge.
(CA-96-637)
Argued: December 3, 1998
Decided: February 2, 1999
Before MURNAGHAN and MICHAEL, Circuit Judges, and
HERLONG, United States District Judge for the
District of South Carolina, sitting by designation.
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Affirmed by unpublished per curiam opinion.
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COUNSEL
ARGUED: Leonard Edward Starr, III, LEONARD E. STARR, III,
P.C., Sandston, Virginia, for Appellants. John Dinshaw McIntyre,
WILLCOX & SAVAGE, P.C., Norfolk, Virginia, for Appellee. ON
BRIEF: Bruce H. Matson, LECLAIR RYAN, Richmond, Virginia,
for Appellants. Gary A. Bryant, WILLCOX & SAVAGE, P.C., Nor-
folk, Virginia, for Appellee.
_________________________________________________________________
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
_________________________________________________________________
OPINION
PER CURIAM:
The instant case is an appeal by certain creditors of Hatsy Heep
("Heep"), who filed for bankruptcy, from a ruling that the spendthrift
clauses in four trusts in which Heep had a contingent remainder inter-
est operate to preclude the trusts' inclusion in Heep's estate for the
purposes of her bankruptcy proceedings. The creditors maintain that
a deferred inclusion, rather than an outright exclusion is the proper
result under bankruptcy law. However, we affirm because the district
court's conclusions are correct, as they are supported by the applica-
ble bankruptcy laws.
I.
At issue in this case are four trusts created by Herman F. Heep
("Herman"). Herman created the trusts in Texas and was domiciled
there for all periods relevant to the instant litigation. Hatsy Heep, Her-
man's granddaughter, had a contingent interest in all four trusts,
which were also subject to spendthrift clauses. She is also the debtor,
having filed her bankruptcy petition in September, 1994. One of the
contingencies -- the death of Heep's mother -- occurred in 1998,
between the submission of briefs to us and oral argument before us.
Because the question of whether the interests are included in the
estate depends on the nature of the interests at the time Heep filed her
petition, we recount the facts as they stood immediately prior to the
death of Heep's mother.
2
The four trusts can be placed into two categories: the two "Houston
Trusts," which are inter vivos trusts, and the two "Austin Trusts,"
which are testamentary trusts. Both the Houston Trusts and the Austin
Trusts have been administered by a Texas trustee, since Herman has
already passed away.
Under the first Houston trust ("Houston Trust Number I"), Heep's
mother, Mary Lou Heep Henderson ("Henderson"), is the sole income
beneficiary, but Heep will receive a share of the corpus if Henderson
dies and Heep is living at her death. The spendthrift provision in
Houston Trust I reads as follows:
Neither the corpus nor the income of the Trust Estate shall
ever, under any circumstances, be liable for or charged with
the or any of the debts, contracts, liabilities, engagements,
torts or obligations, present or future, of any beneficiary
hereof, nor shall the same be ever subject to seizure by a
claimant or creditor of any beneficiary under any writ or
proceeding of any character at law or in equity, and no bene-
ficiary thereof shall have the right or power to give, grant,
sell, transfer, assign, convey, mortgage, pledge, charge or
otherwise encumber or in any manner anticipate or dispose
of her interest or proportionate interest in, or any part of, the
property held in Trust under this Trust so long as such prop-
erty or any undistributed portion thereof is held in Trust. No
right of any disposition of any such property shall vest in
any beneficiary unless and until the same shall have been
actually transferred, conveyed or paid over to her.
Houston Trust I, ¶ 15.
Heep is a discretionary income beneficiary under Houston Trust II,
but shares that designation with Henderson and Henderson's other
children. Income distributions to Heep are at the sole discretion of the
trustee. Moreover, Heep's interest in the trust is subject to the same
contingencies as listed in Houston Trust I, namely, Henderson must
die and Heep must be living at Henderson's death. Like the first
Houston trust, Houston Trust II contains a spendthrift provision that
reads as follows:
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Neither the corpus nor the income of any Trust Estate, nor
any interest therein, under any circumstances shall ever be
liable for or charged with any of the debts, contracts, liabili-
ties, torts or obligations, present or future, of any beneficiary
thereof, nor shall the same be ever subject to seizure by any
claimant or creditor of any beneficiary under any writ or
proceeding of any character; and no beneficiary thereof shall
have the power to give, sell, assign, convey, pledge, charge
or otherwise encumber or in any manner anticipate or dis-
pose of his or her interest in such Trust Estate, or the income
therefrom, until the same shall have been actually trans-
ferred, conveyed, or paid over to him or her free and clear
of such Trust.
Houston Trust II, ¶ 14.
Herman also provided for Heep in the Austin Trusts. Under Austin
Trust I, Henderson receives a life estate and the remainder is vested
in her issue, including Heep. Moreover, the will vests the trustee with
the authority to make discretionary income distributions to Henderson
and her issue. However, Heep's interest in the corpus of the trust is
subject to the two conditions in the Houston Trusts, namely that Hen-
derson dies and Heep is alive at Henderson's death, and an additional
requirement that she is at least thirty-five years old.
Heep receives her full share of Austin Trust II only if Henderson
dies and Heep is alive and at least fifty years old at Henderson's
death. If Henderson dies before Heep reaches fifty, but Heep is at
least forty-five, Heep still receives half of her interest in the trust cor-
pus. Heep would receive the other half when she attains fifty years of
age.
Finally, Herman's will contained a spendthrift provision that is
applicable to both Austin Trusts:
Spendthrift Provision: No part of any Trust Estate, under
any circumstances, shall ever be liable for or charged with
any of the torts or obligations of any beneficiary or subject
to seizure by any creditor of any beneficiary; no beneficiary,
under any circumstances, shall have the power to anticipate
4
or dispose of his or her interest in any Trust Estate in any
manner until the same shall have been actually distributed
to him or her free and clear of such Trust.
Last Will of Herman Heep, ¶ 13.
As we noted, Henderson passed away in 1998, after the briefs were
submitted but before oral argument was heard. Heep is alive and is
at least forty-five years old, but not yet fifty. Therefore, Heep is now
entitled to a one-third share of both Houston Trusts and Austin Trust
I. She is also entitled to one-sixth of Austin Trust II, and will receive
the other one-sixth (which makes a total of one-third of the entire
trust) when she turns fifty.
II.
The district court's conclusions of fact are reviewable for clear
error. See Jiminez v. Mary Washington College , 57 F.3d 369, 379 (4th
Cir. 1995). Its conclusions of law are reviewable de novo. See Bunch
v. Thompson, 949 F.2d 1354, 1367 (4th Cir. 1991).
Both the bankruptcy court and the district court concluded that 11
U.S.C. § 541(c)(2) (1994) operated to exclude Heep's contingent
interests in the four trusts from her estate for the purposes of the
bankruptcy. We find no error in that conclusion.
As a general rule, Congress intended that as much of the debtor's
property as is practicable be included in the bankruptcy estate. See 11
U.S.C. § 541(a)(1) (1994). In fact, § 541(a)(1) specifically includes in
the bankruptcy estate "all legal or equitable interests of the debtor in
property as of the commencement of the case." Id. (emphasis added).
However, in § 541(c)(2), Congress provided an exception to the
general rule of inclusion of property in the bankruptcy estate. That
exception applies to beneficial interests that contain restrictions on
transfers. See id. The statute states that"[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 sec-
tion." Id.
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Appellants concede that Texas law applies here, 1 and that under
Texas law, the spendthrift clauses are valid.2 The only question left
for our review then is whether § 541(c)(2) excludes from the bank-
ruptcy estate trust property subject to a valid spendthrift clause.
Appellants argue that § 541(c)(2) does not bar their recovery here.
They argue that the trust assets are not permanently excluded from the
estate but are included subject to the restrictions of the spendthrift
trust. Moreover, they assert, such a reading is consistent with the stat-
ute because there really is no "exclusion" in§ 541(c)(2). Finally, they
argue, if Congress wanted to exclude spendthrift trusts, it would have
done so in § 541(b), where it specifically states that certain property
is "excluded." Id.
However, appellants' arguments ignore not only our precedent, but
Supreme Court precedent. In Patterson v. Shumante, 504 U.S. 753,
758 (1992), the Supreme Court recognized that § 541(c)(2) operates
as an exclusion of property defined therein from the bankruptcy
estate. See id. ("The natural reading of[§ 541(c)(2)] entitles a debtor
to exclude from property of the estate any interest in a plan or trust
that contains a transfer restriction enforceable under any relevant non-
bankruptcy law."). We have previously recognized that same princi-
ple. See In re Moore, 907 F.2d 1476, 1477 (4th Cir. 1990) ("Thus, if
``applicable non bankruptcy law' enforces a restriction on the transfer
of a debtor's interest in a trust, that interest will not be considered part
of the bankrupt's estate."). Notably, in both Patterson and Moore, the
trustees unsuccessfully argued that § 541(c)(2) applied only to state
law. See Patterson, 504 U.S. at 757-58; Moore, 907 F.2d at 1477-79.
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1 Texas law applies because we are required to apply the choice of law
rules of the forum state when we review bankruptcy proceedings. See In
re Merritt Dredging Co., Inc., 839 F.2d 203, 206 (4th Cir. 1988). The
forum state of the bankruptcy court was Virginia. Under Virginia law,
wills and trusts are interpreted under the law of the state in which the tes-
tator was domiciled. Here, the testator was domiciled in Texas.
2 Under TEX. PROP. CODE § 112.035 (West. 1994), the settlor may "pro-
vide in the terms of the trust that the interest of a beneficiary in the
income or in the principal or in both may not be voluntarily or involun-
tarily transferred before payment or delivery of the interest to the benefi-
ciary by the Trustee." Id.
6
In fact, the trustee in Moore argued that§ 541(c)(2) only excluded
spendthrift trusts from the bankruptcy estate.3 See id. Both courts
rejected that reading of § 541(c)(2) in favor of the literal reading of
the statute, which is broader. In light of the above precedents, the
Appellants' argument must fail.
Appellants' other arguments also are not persuasive. They argue
that even before her mother's death, Heep's interests in the trusts
were legal, not beneficial, and the district court erred in finding them
to be beneficial interests. Since § 541(c)(2) only covers beneficial
interests, they argue that Heep's interests were never covered. That
argument fails for several reasons. First, in three of the trusts, Heep
was an income beneficiary who did not become entitled to the corpus
until Henderson's death. Income interests are beneficial, not legal
interests. See BLACK'S LAW DICTIONARY 156 (6th ed. 1990) (defining
beneficial interests). Thus, at the time that the case commenced, and
at the time that the district court heard the Appellants' appeal from
the bankruptcy court, the interests were beneficial. Her interest in the
other trust (Houston Trust I) was also beneficial because the legal title
was not given to her but to the trustee, who distributed the income to
Henderson and the principal to Henderson's issue (including Heep).
Thus, the district court did not err in finding that the interests were
beneficial.
Finally, Henderson's death does not entitle the Appellants to
Heep's interests. Under § 541(a)(1), the only interests includable are
those owned or controlled by the debtor "as of the commencement of
the case." Id. The bankruptcy code also permits trustees to recover
any interests acquired by the debtor within 180 days of the filing of
the bankruptcy petition if that interest would have been considered
property of the estate if owned by the debtor at the time of filing. See
11 U.S.C. § 541(a)(5) (1994). In addition, according to
§ 541(c)(1)(A), property upon which restrictions of transfer have been
placed may become property of the estate, "except as provided in
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3 At the time, many circuits viewed § 541(c)(2) as applying only to
state spendthrift trust law. See, e.g., In re Daniel, 771 F.2d 1352, 1360
(9th Cir. 1985); In re Lichstrahl, 750 F.2d 1488, 1490 (11th Cir. 1985);
In re Graham, 726 F.2d 1268, 1271 (8th Cir. 1984); Matter of Goff, 706
F.2d 574, 587 (5th Cir. 1983).
7
paragraph (2) of this subsection" -- i.e. , § 541(c)(2). Therefore, Con-
gress intended that property falling within the ambit of § 541(c)(2)
remains excluded from the bankruptcy estate.
Moreover, the property would not be includable even if subsection
(c)(2) were not excluded from subsection (c)(1). Since the trust prop-
erty was not includable at the commencement of the bankruptcy, it
could only be included if the contingencies had occurred within the
180 day window provided in § 541(a)(5). See In re Moody, 837 F.2d
719, 722-23 (5th Cir. 1988) (holding that interests subject to spend-
thrift trusts are not recoverable under § 541(a)(5) unless the debtor
receives his interest within the 180 day period); In re Baydush, 171
B.R. 953, 958-59 (E.D. Va. 1994). Here, Heep filed her bankruptcy
petition on September 8, 1994. Thus, the trust property would have
been includable until March 7, 1995. However, at that time, Heep still
had a contingent interest subject to the spendthrift clauses. Her inter-
ests did not vest until shortly before oral argument before us in 1998.
Therefore, Heep's interests are not includable in her bankruptcy
estate.
CONCLUSION
In conclusion, we affirm the district court's ruling that under 11
U.S.C. § 541(c)(2), Hatsy Heep's contingent interests are not included
in her estate for the purposes of her bankruptcy petition. Our decision
comports with Supreme Court and circuit precedent. Moreover, as
Heep's interest in each of the trusts remained contingent well beyond
the 180 day recovery period granted to the trustee under 11 U.S.C.
§ 541(a)(5), the income distributions now due her also are not a part
of the bankruptcy estate.
AFFIRMED
8