United States v. Kevin Harris , 854 F.3d 1053 ( 2017 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
UNITED STATES OF AMERICA, No. 16-10152
Plaintiff-Appellee,
D.C. No.
v. 3:95-cr-00227-TEH-1
MICHAEL F. HARRIS,
Defendant, OPINION
and
KEVIN HARRIS; SCOTT HARRIS;
HOLLY PATUBO, Co-Trustees,
Garnishees-Appellants.
Appeal from the United States District Court
for the Northern District of California
Thelton E. Henderson, District Judge, Presiding
Argued and Submitted March 17, 2017
San Francisco, California
Filed April 20, 2017
Before: Richard C. Tallman and Paul J. Watford, Circuit
Judges, and Louis Guirola, Jr.,* Chief District Judge.
Per Curiam Opinion
*
The Honorable Louis Guirola, Jr., Chief United States District Judge
for the Southern District of Mississippi, sitting by designation.
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SUMMARY**
Garnishment
The panel affirmed the district court’s decision that a writ
of continuing garnishment attaches to a beneficiary’s interest
in discretionary support trusts, in a case in which the
beneficiary, Michael Harris, owes restitution ordered
following his 1997 conviction.
The panel held that Harris’s interest in the trusts, which
were established by his parents for his support, qualifies as
“property” under 28 U.S.C. §§ 3002(12), 3205(a) and
18 U.S.C. § 3613(c). The panel wrote that because Harris
has a right to receive distributions under California law, his
interest in the discretionary trusts is not a mere expectation;
that his disclaimer of his interest in the trusts does not prevent
the attachment of the writ of garnishment; and that the trusts’
spendthrift clauses do not protect the trusts’ assets from the
enforcement of a federal lien.
Noting that the government is not attempting to compel
distributions from the trusts, the panel wrote that any current
or future distributions from the trusts to Harris shall be
subject to the continuing writ of garnishment until the
restitution judgment is satisfied.
**
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
UNITED STATES V. HARRIS 3
COUNSEL
Howard D. Neal (argued), Neal & Associates, Oakland,
California, for Appellants.
Julie C. Reagin (argued), Assistant United States Attorney;
Sara Winslow, Chief, Civil Division; Brian Stretch, United
States Attorney; United States Attorney’s Office, San
Francisco, California; for Plaintiff-Appellee.
OPINION
PER CURIAM:
In 1997, Michael Harris was convicted of eight federal
criminal counts related to theft from an employee benefit
plan. He was sentenced to 30 months in prison and ordered
to pay $646,000 in restitution. He has paid only a small
fraction of that amount. The government later learned that
Harris is a beneficiary of two irrevocable, discretionary trusts
established by his parents for his support. In 2015, the
government applied for a writ of continuing garnishment for
any property distributed to Harris from the trusts. See
28 U.S.C. § 3205(a).1 The trustees opposed the application
on the ground that Harris had disclaimed his interest in the
trusts, with the exception of several checking and investment
accounts. The district court granted the writ and ordered the
1
Section 3205(a) provides: “A court may issue a writ of garnishment
against property (including nonexempt disposable earnings) in which the
debtor has a substantial nonexempt interest and which is in the possession,
custody, or control of a person other than the debtor, in order to satisfy the
judgment against the debtor.”
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trustees to pay to the United States all current and future
amounts distributed to Harris under the trusts.
We have jurisdiction under 28 U.S.C. § 1291 and must
decide whether a writ of continuing garnishment may attach
to a beneficiary’s interest in a discretionary support trust. We
review the district court’s legal conclusions on this issue de
novo. See Lim v. City of Long Beach, 217 F.3d 1050, 1054
(9th Cir. 2000).
We begin with the procedure for identifying property
subject to federal writs of garnishment. A federal restitution
order is “a lien in favor of the United States on all property
and rights to property” as if the liability were for “a tax
assessed under the Internal Revenue Code of 1986.”
18 U.S.C. § 3613(c). In examining the statutes that govern
tax liens, as we must do here, the Supreme Court has noted
that Congress used broad language so as “to reach every
interest in property that a taxpayer might have.” United
States v. Nat’l Bank of Commerce, 472 U.S. 713, 720 (1985).
“Property” subject to garnishment under these statutes
“includes any present or future interest, whether legal or
equitable, in real, personal (including choses in action), or
mixed property, tangible or intangible, vested or contingent,
wherever located and however held (including community
property and property held in trust (including spendthrift and
pension trusts)).” 28 U.S.C. § 3002(12). In determining
whether a property right falls within this definition, “the
important consideration is the breadth of the control the
taxpayer could exercise over the property,” which we assess
with reference to the state law governing the right. Drye v.
United States, 528 U.S. 49, 61 (1999) (alterations omitted)
(quoting Morgan v. Comm’r, 309 U.S. 78, 83 (1940)).
UNITED STATES V. HARRIS 5
To determine whether Harris’s interest in the trusts fits
within this expansive definition of property, we look first to
the trusts themselves and to the laws of California, the state
that governs them. See id. at 52. In California, an irrevocable
trust provides its beneficiaries with “a vested and present
beneficial interest in the trust property.” Empire Props. v.
Cty. of Los Angeles, 52 Cal. Rptr. 2d 69, 73 (Ct. App. 1996).
Per the trust documents, the amount payable to Harris is
subject to the absolute discretion of the trustees. The first
trust, known as the Restated Trust, provides that “[t]he
Trustee shall payout of income which in the Trustee’s
absolute discretion will help support [Harris], which in the
opinion of the Trustee will allow [Harris] to properly manage
his affairs.” That trust also states that “[t]he Trustee may pay
to [Harris] or for his benefit, so much of the principal as the
Trustee deems necessary or advisable from time to time for
his health, maintenance, education, and best interest.” The
second trust, known as the Harris Trust, provides that the
trustees “may” distribute both the trust’s income and
principal for Harris’s support, again subject to their absolute
discretion. Each trust also contains a spendthrift clause,
which provides that “[t]he interest of the beneficiary in
principal or income shall not be subject to the claims of any
creditor, any spouse for alimony or support, or others, or to
legal process, and may not be voluntarily or involuntarily
alienated or encumbered.”
We note that despite the discretionary language of the
trusts, California law grants Harris the right to compel
distributions from the trusts, insofar as those distributions are
necessary to fulfill the trusts’ purposes. Even if a trust
confers “absolute, sole, or uncontrolled discretion on a
trustee,” the trustee must “act in accordance with fiduciary
principles” and must not act in bad faith or in disregard of the
6 UNITED STATES V. HARRIS
trust’s purposes. Cal. Prob. Code § 16081(a) (internal
quotation marks omitted). Under § 17200 of the California
Probate Code, a beneficiary of a trust “may petition the court
. . . concerning the internal affairs of the trust,” which are
defined to include “[s]ettling the accounts and passing upon
the acts of the trustee, including the exercise of discretionary
powers.” Cal. Prob. Code § 17200(a), (b)(5); Young v.
McCoy, 54 Cal. Rptr. 3d 847, 854 (Ct. App. 2007) (allowing
judicial review of a trustee’s decision not to make
discretionary payments to a beneficiary). The “basic inquiry”
in such an action is whether the trustee “acted in the state of
mind contemplated by the trustor.” Young, 54 Cal. Rptr. 3d
at 854 (quoting In re Greenleaf’s Estate, 225 P.2d 945, 948
(Cal. 1951)). Thus, even though the trust purports to grant
the trustees absolute discretion over distributions, Harris can
petition the probate court to ensure that the trustees’ exercise
of that discretion is consistent with the trusts’ purposes.
Mindful of the rights granted to trust beneficiaries under
California law, we hold that Harris’s interest falls within the
federal definition of “property.” As the court held in United
States v. Taylor, 254 F. Supp. 752 (N.D. Cal. 1966), when a
beneficiary “has a basic beneficial right to receive payments”
from a discretionary trust, a government lien may “attach[] to
and subsist against that right.” Id. at 756. In this respect, a
taxpayer’s property right in a discretionary trust “differs from
any other property right only in that it has no permanently
fixed dollar value.” Id. Harris argues that he has only a
“mere expectation” of future distributions, and that a federal
lien may not attach to this expectation because it is not a
property interest. But because Harris has a right to receive
distributions under California law, his interest in the
discretionary trusts is not a mere expectation. Instead, it
UNITED STATES V. HARRIS 7
constitutes “property” under the expansive definition stated
in 28 U.S.C. §3002(12).
Moreover, Harris’s alleged disclaimer of his interest in
the trusts cannot defeat the writ of garnishment. “Once it has
been determined that state law creates sufficient interests in
the taxpayer to satisfy the requirements of the federal tax lien
provision, state law is inoperative to prevent the attachment
of the federal liens.” Drye, 528 U.S. at 52 (alterations
omitted) (quoting United States v. Bess, 357 U.S. 51, 56–57
(1958)). As discussed above, California law gives Harris a
right to distributions from the trusts. This right falls within
the broad definition of property in 28 U.S.C. § 3002(12), so
Harris’s disclaimer under state law is “inoperative to prevent
the attachment of” the writ of garnishment. Drye, 528 U.S.
at 52.
Finally, the trusts’ spendthrift clauses have no effect on
our analysis because a spendthrift clause does not protect a
trust’s assets from the enforcement of a federal lien.
Leuschner v. First W. Bank & Trust Co., 261 F.2d 705,
707–08 (9th Cir. 1958).
In sum, we conclude that Harris’s interest in the trusts
qualifies as property under the federal debt collection
procedure that applies in this case. The government is not
attempting to compel distributions from the trusts. However,
any current or future distributions from the trusts to Harris
shall be subject to the continuing writ of garnishment, until
the restitution judgment is satisfied.
8 UNITED STATES V. HARRIS
Trustees shall bear all costs of appeal. See Fed. R. App.
P. 39(a)(2).
AFFIRMED.