Peggy S. Levin v. Wachovia Bank

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 09-2344
PEGGY S. LEVIN, Trustee,
Plaintiff - Appellant,
v.
WACHOVIA BANK; DAVID STROEHMANN, SR.; SAM WOLCOTT,
Defendants - Appellees.
Appeal from the United States District Court for the Eastern
District of North Carolina, at Raleigh. Terrence W. Boyle,
District Judge. (4:09-cv-00087-BO)
Argued: March 23, 2011 Decided: June 28, 2011
Before MOTZ and WYNN, Circuit Judges, and Ronald Lee GILMAN,
Senior Circuit Judge of the United States Court of Appeals for
the Sixth Circuit, sitting by designation.
Affirmed by unpublished opinion. Judge Wynn wrote the opinion,
in which Judge Motz and Senior Judge Gilman concurred.
ARGUED: William Peak Janvier, EVERETT, GASKINS, HANCOCK &
STEVENS, Raleigh, North Carolina, for Appellant. Michael J.
Parrish, WARD & SMITH, PA, New Bern, North Carolina, for
Appellees. ON BRIEF: James M. Hash, EVERETT, GASKINS, HANCOCK &
STEVENS, Raleigh, North Carolina, for Appellant. Paul A.
Fanning, WARD & SMITH, PA, Greenville, North Carolina, for
Appellees.
Unpublished opinions are not binding precedent in this circuit.
2
WYNN, Circuit Judge:
This case requires us to determine whether a debtor’s
remainder interests in the corpus of two spendthrift trusts are
property of his bankruptcy estate. The bankruptcy court ruled
that they were; on appeal, the district court ruled that they
were not. For the reasons explained below, we believe the
district court is correct that the debtor’s remainder interests
are not part of his bankruptcy estate, and consequently we
affirm the judgment of the district court.
I.
By a trust instrument dated November 23, 1976, Gertrude S.
Stroehmann created a trust (the “1976 trust”) for the benefit of
her two children and their issue. The corpus of the 1976 trust
was first divided into two equal shares: one for the benefit of
Harold Stroehmann, Jr. (“Harold, Jr.”) and his issue, and one
for the benefit of David Stroehmann, Sr. (“David, Sr.”), and his
issue. The David, Sr. share was further divided into separate
shares for the benefit of his two children, J. Kathryn
Stroehmann and David Stroehmann, Jr. (“David, Jr.”), the debtor
in this case.
Wachovia Bank, N.A. is the sole trustee of the 1976 trust.
The 1976 trust grants the trustee the power to distribute income
and principal in its “sole and absolute discretion.” The only
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mandatory distribution occurs at the trust’s termination, when
the remaining principal and retained income are to be paid to
the named beneficiaries. The instrument provides that the trust
shall continue until the death of the last to die of Harold, Jr.
and David, Sr.. Harold, Jr. has already died.
The 1976 trust contains a spendthrift provision. Article
XII states that “[t]he interest of any beneficiary in the corpus
or income of any trust shall not be subject to assignment,
alienation, pledge, attachment, or claims of creditors and shall
not otherwise be voluntarily or involuntarily alienated or
encumbered by such beneficiary.” The value of the debtor’s
share of the corpus of the 1976 trust was valued at $684,285.77
as of January 6, 2009.
A second trust (the “Will trust”) was created by the terms
of the Last Will and Testament of Gertrude S. Stroehmann, which
was executed on November 18, 1987. A residuary clause in the
Will directed that the residue of the estate be divided into two
equal shares to be held in trust. One of these shares was
divided further between David, Sr., and his children. David,
Jr., the debtor in this case, is one of the children of David,
Sr., and therefore a beneficiary of the Will Trust.
Defendants David, Sr., Samuel Wolcott, and Wachovia Bank,
N.A., are the trustees of the Will Trust. The Will trust
mandates that the trustee make distributions of all the net
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income of a grandchild’s share in at least quarterly
installments. It further states that a trustee has absolute
discretion to invade the principal for the medical expenses,
support, and education of the beneficiaries.
The Will trust also contains a spendthrift provision. The
“Protective Provision” of the Will Trust states:
I direct that all legacies and all shares and
interests in my estate and any property appointed
under this will, whether principal or income, while in
the hands of my personal representatives, trustees or
the guardians of property, shall not be subject to
attachment, execution, or sequestration for any tort,
debt, contract, obligation or liability of any legatee
or beneficiary and shall not be subject to pledge,
assignment, conveyance or anticipation.
The trustees of the Will trust are directed to pay out, in full,
a grandchild’s remaining share when that grandchild reaches the
age of forty-five years old. If a grandchild dies before
reaching that age, the grandchild’s remaining interest passes to
other beneficiaries named in the Will trust.
A codicil to the Will, dated March 10, 1988, modifies this
last provision, making the grandchild’s interest pass to the
grandchild’s estate. The codicil further provides that “[n]o
principal or income of any grandchild’s trust may be used for
any person other than the grandchild for whom held . . . .”
David, Jr. was born on March 2, 1965 and reached the age of
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forty-five on March 2, 2010. 1 The debtor’s interest in the
principal of the Will trust had a value of $299,581.31 as of
January 6, 2009.
David, Jr., filed a Chapter 7 petition for bankruptcy on
June 12, 2007. Plaintiff Peggy S. Levin, the Chapter 7 Trustee
appointed to David, Jr.’s case, filed an adversary proceeding on
March 14, 2008. Plaintiff asked the bankruptcy court to order
Defendants to turn over all amounts distributed to the debtor
under “the Stroehmann Trust” since the filing of the petition,
including the principal of the trust, and all future income
generated by the trust. 2 Defendants filed a motion to dismiss
the complaint on June 18, 2008.
The bankruptcy court conducted a hearing on July 10, 2008.
In a subsequent order, the bankruptcy court reasoned that the
1976 trust gives the debtor separate interests in the trust: (1)
an interest in the income from the trust during the life of the
trust, (2) an interest in the principal during the life of the
trust, and (3) a future interest in the principal that must be
paid to the debtor upon the termination of the trust. Later in
the order, the bankruptcy court recognized the latter two
1
The Will trust therefore terminated, at least with regard
to the debtor’s share, during the pendency of this appeal.
2
The initial complaint does not distinguish between the two
trusts, but names all three Defendants as trustees.
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interests as two aspects of the same thing; the debtor’s right
to receive principal is divided into: (1) the present right to
receive disbursements of principal at the discretion of the
trustees, and (2) the future right to receive mandatory
distribution of principal upon termination of the trust.
Ultimately, the bankruptcy court granted Defendants’ motion
to dismiss as to the debtor’s right to receive income and
principal distributions during the life of the trust. 3 The
bankruptcy court denied, however, the motion to dismiss “as to
the debtor’s future remainder interest in the trust principal,”
finding that such an interest “is a separate property interest
of the debtor that is property of the bankruptcy estate.”
Defendants filed a motion for summary judgment on January 9,
2009. Plaintiff filed a motion for summary judgment on January
12, 2009.
During the course of the proceedings, Plaintiff learned
that the debtor was the beneficiary of another trust, the Will
trust (discussed above). With leave of the bankruptcy court,
Plaintiff filed an amended complaint on February 2, 2009,
requesting an order that Defendants turn over all amounts paid
since the filing of the petition under the 1976 trust and the
3
Both the bankruptcy court and the district court found
these interests protected by a valid spendthrift provision.
Plaintiff does not challenge this ruling on appeal.
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Will trust, all future amounts to be paid under either trust,
and declaring that the debtor’s interest in both trusts is
property of the bankruptcy estate. Defendants filed answers to
the amended complaint and filed another motion for summary
judgment.
In an order entered on March 30, 2009, the bankruptcy court
referred to its previous order regarding only the 1976 trust and
recognized that “[t]his is the same issue previously determined
in this case, only with relation to a different trust
agreement.” Consistent with its previous order, the bankruptcy
court granted Plaintiff summary judgment insofar as “the
debtor’s remainder interests in both trusts are property . . .
that belong[s] to the bankruptcy estate.” The bankruptcy court
granted Defendants summary judgment “to the extent that the
income and principal distributions during the life of the trusts
are not property of the bankruptcy estate.”
Defendants appealed to the district court. The district
court reversed the bankruptcy court, concluding that the
debtor’s “future remainder interest in the principal of the
Trusts is protected by a valid spendthrift provision.” Wachovia
Bank, N.A. v. Levin, 419 B.R. 297, 303 (E.D.N.C. 2009).
Plaintiff appealed to this Court.
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II.
Initially we address a question of justiciability raised by
Defendants. Defendants argue that this appeal should be
dismissed as moot since provisions in both trusts permit
distribution of the entire principal prior to termination.
This Court has recognized that “when, pending appeal, an
event occurs, without the fault of the defendant, that makes it
impossible for the court to grant effective relief to the
plaintiff, should the plaintiff prevail on the merits, the
appeal should be dismissed and the court should not proceed to
judgment.” Cent. States, Se. and Sw. Areas Pension Fund v.
Cent. Transp., Inc., 841 F.2d 92, 95-96 (4th Cir. 1988). “The
mootness doctrine is a limit on our jurisdiction that originates
in Article III’s case or controversy language.” Townes v.
Jarvis, 577 F.3d 543, 554 (4th Cir. 2009) (quotation marks and
brackets omitted), cert. denied, 130 S. Ct. 1883 (2010). A
claim is not moot, however, as long as the parties have a
concrete interest in the outcome of the litigation. In re Balt.
Emergency Servs. II, Corp., 432 F.3d 557, 560 n.* (4th Cir.
2005).
In the present case, Defendants argue that provisions of
the trusts permit the trustees to disburse the entire principal
prior to the termination of the trusts. It follows, according
to Defendants, that a judgment for Plaintiff “would not lead to
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the recovery of any value for the benefit of [the debtor’s]
creditors.” Brief of Appellees at 7-8. Defendants conclude
from this that the harm allegedly suffered by Plaintiff cannot
be redressed by a favorable decision.
Defendants do not, however, assert that as trustees they
have distributed the entire principal of the trusts. Indeed,
noticeably lacking from Defendants’ argument is any suggestion
that they have actually exercised their discretion under the
trust provisions that they claim prevent Plaintiff from
obtaining redress. Insofar as Plaintiff seeks to compel the
transfer of the debtor’s presently held remainder interests in
both trusts, the case is not rendered moot by the mere
possibility that they may later have no value. See In re Smith,
71 F.2d 378, 380 (9th Cir. 1934) (subsequent payment of trust
principal did not render appeal moot where question raised was
whether debtor’s remainder interest was transferable in
bankruptcy).
Plaintiff observes in reply that the Will trust has already
terminated, and the debtor’s remainder interest in that trust is
now identifiable. We do not believe this circumstance has any
bearing on the alleged mootness of this appeal. Insofar as the
parties continue to dispute the debtor’s entitlement to his
remainder interests, the parties have a concrete interest in the
outcome of the litigation. It follows that the case is not
10
moot. See In re Balt. Emergency Servs. II, Corp., 432 F.3d at560 n.*.
III.
We turn now to the merits of Plaintiff’s appeal. “We
review the judgment of a district court sitting in review of a
bankruptcy court de novo, applying the same standards of review
that were applied in the district court.” In re Merry-Go-Round
Enters., Inc., 400 F.3d 219, 224 (4th Cir. 2005). Thus, we
review the bankruptcy court’s factual findings for clear error,
and we review questions of law, including summary judgment, de
novo. Id.; see also In re French, 499 F.3d 345, 351 (4th Cir.
2007).
A.
The bankruptcy estate includes “all legal or equitable
interests of the debtor in property as of the commencement of
the case,” with some exceptions. 11 U.S.C. § 541(a)(1). One
such exception provides 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 title.” 11 U.S.C. § 541(c)(2). The
bankruptcy court and the district court agreed that this
provision excludes from the property of the bankruptcy estate
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interests in trust that are protected under a spendthrift clause
that is enforceable under applicable state law. See Patterson
v. Shumate, 504 U.S. 753, 758 (1992) (“The natural reading of
the provision 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 nonbankruptcy law.”).
The parties do not dispute that the 1976 trust and the Will
trust are subject to Pennsylvania state law. Pennsylvania law
recognizes that “[a] spendthrift provision is valid only if it
restrains both voluntary and involuntary transfer of a
beneficiary’s interest.” 20 Pa. Cons. Stat. Ann. § 7742(a)
(West 2006). Subject to certain exceptions not alleged to apply
here, “a creditor or assignee of the beneficiary of a
spendthrift trust may not reach the interest or a distribution
by the trustee before its receipt by the beneficiary.” Id. at §
7742(c). Both the bankruptcy court and the district court found
that both trusts here contained spendthrift provisions that are
valid under state law.
Pennsylvania courts “construe[] spendthrift provisions
broadly.” In re Blanchard, 201 B.R. 108, 125 (Bankr. E.D. Pa.
1996). “No principle in the law of wills and trusts is more
firmly and clearly established than that the intention of the
testator or settlor must prevail.” Clark v. Clark, 411 Pa. 251,
255, 191 A.2d 417, 419-20 (1963). “The law rests its protection
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of what is known as a spendthrift trust fundamentally on the
principle of cujus est dare, ejus est disponere. [He who has a
right to give, has the right to dispose of the gift.] It allows
the donor to condition his bounty as suits himself so long as he
violates no law in so doing.” In re Morgan’s Estate, 223 Pa.
228, 230, 72 A. 498, 499 (1909).
B.
In this case, Plaintiff argues that the bankruptcy court
correctly ruled that the debtor’s remainder interests in both
trusts are property of the bankruptcy estate. Plaintiff
concedes that the debtor’s interests in income and principal
during the life of the trusts are protected by the spendthrift
provisions and therefore not part of the bankruptcy estate.
Plaintiff contends, however, that the debtor’s remainder
interests in the corpus of the trusts are not similarly
protected.
Plaintiff relies on Ginsburg v. Hilsdorf, 30 Pa. D. & C.2d
384 (1962). In Ginsburg, the Court of Common Pleas of
Pennsylvania considered whether the defendants’ interests in
three trusts might be attached in light of the spendthrift
provisions the trusts contained. Id. at 390. The defendants in
Ginsburg were the vested remaindermen of the trusts’ corpus, but
13
were not beneficiaries entitled to any of the income. Id. at
395-96. The spendthrift provision stated:
No sum payable by my Trustees under the provisions of
the foregoing trust shall be pledged, assigned,
transferred or sold, or in any manner whatsoever
anticipated, charged or encumbered by the
beneficiaries thereunder, or any of them, or be in any
manner liable in the hands of my Trustees for the
debts, contracts and engagements of the beneficiaries
thereunder, or any of them.
Id. at 394-395. The court found it clear from this provision
that the settlors intended to protect only the income
beneficiary. “If they intended the spendthrift provision to
protect the vested remainderman they could have said so. . . .
In failing to include the remainder interests in the spendthrift
provisions, the testators have left the door open to the present
attachment proceedings.” Id. at 395.
The Ginsburg court distinguished other, more expansive,
spendthrift provisions such as that which appeared in Riverside
Trust Co. v. Twitchell, 342 Pa. 558, 20 A.2d 768 (1941). The
defendant in Riverside was the income beneficiary of a trust
established by her aunt. Id. at 560, 20 A.2d at 769. The
spendthrift provision there stated
that there shall be no power of anticipation or of
pledge or assignment either of the income or of the
principal of the Trust Fund, or of any interest
therein whatsoever; and the Trustee, its successors
and assigns, shall hold and administer the Trust and
pay over the income received by it as aforesaid, and
the principal sum upon the termination of the Trust,
as herein provided, free from any debts, liabilities,
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obligations or other engagements whatsoever of the
Grantor, or of any persons who, by the terms hereof,
may be or become beneficiaries hereunder.
Id. at 560-61, 20 A.2d at 769-70. The Riverside court held that
the spendthrift provision was meant to protect both income and
principal. 4 Id. at 561-62, 20 A.2d at 770.
The Ginsburg court also distinguished the spendthrift
provision that appeared in Harder v. Follansbee, 102 Pitts. L.
J. 231 (Pa. C.P. 1954). 5 The trust instrument in Harder directed
the trustee to pay the income to the settlor’s widow for life,
and thereafter to the defendant, who also held a remainder
interest in the corpus. Id. at 231. The trust contained a
spendthrift provision that stated, “neither the principal nor
income of this trust fund shall in any manner be liable to the
control or answerable for the debts, contracts or engagements of
the beneficiaries hereunder or liable to any charge,
encumbrance, assignment, conveyance or anticipation by them.”
Id. at 232. The Harder court held that the provision protected
the defendant’s interest in both income and principal. 6 Id.
4
The provision in Riverside, the Ginsburg court said, is “a
far cry from the one in the case at bar.” Ginsburg, 30 Pa. D. &
C.2d at 394.
5
This case is not available on Westlaw or Lexis but may be
obtained through public resources in the State of Pennsylvania.
6
The Ginsburg court stated simply that such a provision as
appeared in Harder did not appear in the instant case.
Ginsburg, 30 Pa. D. & C.2d at 393.
15
Plaintiff notes that the spendthrift provisions here did
not explicitly cover the trust principal upon termination of the
trusts, as did the provision in Riverside. Plaintiff asserts
that the language of the trusts here, particularly that of the
Will trust, is similar to the language of the trusts construed
in Ginsburg. Plaintiff concludes that the debtor’s remainder
interests in the trusts are therefore not subject to the
protection of the spendthrift provision.
The spendthrift provision of the 1976 trust protects “[t]he
interest of any beneficiary in the corpus or income of any
trust” and the spendthrift provision of the Will Trust protects
“all shares and interests in my estate and any property
appointed under this will, whether principal or income.” Thus,
unlike the spendthrift provision in Ginsburg, the provisions
here explicitly mention both the income and the corpus/principal
of the trusts. They are therefore more analogous to the
spendthrift provisions distinguished by Ginsburg than the
provisions at issue in that case.
Indeed, Harder is directly on point. Like the debtor in
this case, the defendant in Harder held both an interest in the
income and a remainder interest in the principal of the trust.
Harder, 102 Pitts. L. J. at 231. The court held that the
spendthrift provision obviously applied to income but also to
16
the defendant’s remainder interest in the principal. Id. at
232. The same reasoning applies here.
C.
Plaintiff next argues that this Court should join those
courts that have held a debtor’s remainder interest in a
spendthrift trust upon termination of the trust is part of the
bankruptcy estate. See In re Britton, 300 B.R. 155 (Bankr. D.
Conn. 2003); In re Crandall, 173 B.R. 836 (Bankr. D. Conn.
1994); Matter of Strasma, 26 B.R. 449 (Bankr. W.D. Wis. 1983).
Plaintiff insists that if the debtor holds an interest in the
corpus of a spendthrift trust upon its termination, “then those
funds cannot, by the plain language of the trust, be subject to
the spendthrift clause which necessarily must terminate with the
trust.” Brief of Appellant at 18. Plaintiff recognizes that
the district court relied on Pennsylvania bankruptcy cases
contrary to her position, but argues that the courts that
decided those cases “failed to consider that they were expanding
the scope of spendthrift protection beyond that provided for by
state law.” Brief of Appellant at 22.
The district court explained that the apparent split of
authority does not support the bankruptcy court’s conclusion
that the principal here is unprotected because Pennsylvania law
alone controls this case. As the district court recognized,
17
Pennsylvania law protects remainder interests in the corpus of a
trust if the spendthrift provision of the trust instrument so
provides. See Clark, 411 Pa. at 256, 191 A.2d at 420 (holding
that attempted conveyance of remainder interest in a trust was
invalid because the spendthrift provision prohibited beneficiary
from making any binding commitment of principal or income during
the life of the trust); In re Blanchard, 201 B.R. at 126(applying Pennsylvania law to provide spendthrift protection to
debtor’s remainder interest in the corpus of a trust and to
exclude the debtor’s interest in the corpus from the bankruptcy
estate); In re Katz, 220 B.R. 556, 565 (Bankr. E.D. Pa. 1998)
(holding that when the debtor’s entire interest in a trust was
protected by a valid spendthrift provision, the debtor could not
assign his interest in either the principal or the income before
they were distributed); cf. In re Will of Rintz, 2007 Phila. Ct.
Com. Pl. LEXIS 254 (June 19, 2007) (approving the distribution
of certain income and principal directly to the trust
beneficiary, despite the claims of his Chapter 7 bankruptcy
trustee, because they were protected by a valid spendthrift
provision).
The issue is thus not whether we should choose to follow
one line of cases or another. Rather, we are compelled to
follow applicable nonbankruptcy law. 11 U.S.C. § 541(c)(2). In
this case, that means we apply Pennsylvania law. Under
18
Pennsylvania law, “the intention of the testator or settlor must
prevail.” Clark, 411 Pa. at 255, 191 A.2d at 419-20. For the
reasons explained above, we believe that by explicitly invoking
the trusts’ principal, the settlor here intended the spendthrift
provisions to apply to the debtor’s remainder interests therein.
The spendthrift provisions here represent “[a] restriction
on the transfer of a beneficial interest of the debtor in a
trust that is enforceable under applicable nonbankruptcy law.”
11 U.S.C. § 541(c)(2). The debtor’s remainder interests in the
trusts’ principal are therefore not included in his bankruptcy
estate. Id. The determination of the district court is
consequently
AFFIRMED.
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