G. Latta Bachelor v. Regions Bank

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
No. 10-2117
___________
Frederick S. Wetzel, III, Trustee *
*
G. Latta Bachelor, successor *
Personal Representative of the Estate *
of Ronald E. Reagan, * Appeals from the United States
* District Court for the
Appellant, * Western District of Arkansas.
*
v. * [PUBLISHED]
*
Regions Bank; Cheryl A. Reagan, *
*
Appellees. *
___________
No. 10-2123
___________
Frederick S. Wetzel, III, Trustee, *
*
Appellant, *
*
G. Latta Bachelor, successor *
Personal Representative of the Estate *
of Ronald E. Reagan, *
*
v. *
*
Regions Bank; Cheryl A. Reagan, *
*
Appellees. *
___________
Submitted: May 9, 2011
Filed: August 12, 2011
___________
Before MELLOY, BOWMAN, and BENTON, Circuit Judges.
___________
PER CURIAM.
Frederick Wetzel, the trustee of Cheryl Reagan's bankruptcy estate, and Latta
Bachelor, the personal representative of Ronald Reagan's probate estate, appeal from
an order of the District Court1 affirming the judgment of the Bankruptcy Court2 in this
interpleader and declaratory-judgment action filed by Regions Bank. We affirm.
Ronald Reagan (Ronald) died February 1, 2000, leaving an estate valued at
almost $20 million. Ronald's will created a testamentary trust (Trust C) for the benefit
of his wife Cheryl Reagan (Cheryl). Trust C included a spendthrift provision,3 which
stated:
Except as otherwise provided herein, all payments of principal and
income payable, or to become payable, to the beneficiary of any trust
created hereunder shall not be subject to anticipation, assignment,
pledge, sale or transfer in any manner, nor shall any said beneficiary
have the power to anticipate or encumber such interest, nor shall such
1
The Honorable Robert T. Dawson, United States District Judge for the Western
District of Arkansas.
2
The Honorable Ben T. Barry, United States Bankruptcy Judge for the Western
District of Arkansas.
3
A spendthrift trust is intended "to provide a fund for the maintenance of a
beneficiary and at the same time to secure the fund against his improvidence or
incapacity . . . . Most states permit spendthrift trust provisions that prohibit creditors
from attaching a spendthrift trust." Law Dictionary 1400 (6th ed. 1990).
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interest, while in the possession of my Executor or Trustee, be liable for,
or subject to, the debts, contracts, obligation, liabilities or torts of any
beneficiary.
J.A. 180–81.
Under the terms of Trust C, commencing with Ronald's death, Cheryl was to
receive distributions of the net income generated by the corpus of Trust C. The
distributions were to be paid at least quarterly and were to continue for Cheryl's
lifetime. After Cheryl's death, Ronald's two sons from a previous marriage were to
receive the corpus of Trust C.
Ronald's will also named Cheryl as executrix of his estate and directed her, in
that capacity, to fund Trust C by transferring Ronald's stock in Chem-Fab Corporation
(less certain deductions not relevant here) to the trustee of Trust C, Regions Bank.4
Contrary to the instructions in the will, however, Cheryl did not transfer the Chem-
Fab stock to Regions, nor did she fund Trust C with the proceeds from the sale of the
stock. Instead, when the Chem-Fab stock was sold shortly after Ronald's death for
about $13 million, Cheryl used those proceeds to finance a series of unsuccessful
business ventures.
On April 23, 2004, more than four years after Ronald's death, one of Ronald's
sons filed an ex parte petition with the Circuit Court of Garland County, Arkansas (the
probate court), and on May 11, 2004, the court permanently froze the remaining assets
of Ronald’s estate. On November 17, 2004, Cheryl filed a voluntary Chapter 11
bankruptcy petition. In June 2006, the probate court removed Cheryl as executrix of
Ronald's estate and appointed Bachelor as the estate's successor personal
representative. In April 2007, the Bankruptcy Court lifted the automatic stay in
4
The trustee named in Ronald's will was Arkansas Bank & Trust, which was
later acquired by Regions Bank.
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Cheryl's bankruptcy case, allowing the final administration of Ronald's estate in the
probate court to proceed. Shortly thereafter, the Bankruptcy Court appointed Wetzel
as the trustee in Cheryl's bankruptcy case. On January 15, 2008, the probate court
authorized Bachelor to fund Trust C in the initial amount of $2.4 million in cash and
certain investments still held by Ronald's estate and to transfer title of Trust C to
Regions, the trustee named in Ronald's will.
On September 23, 2008, as Trust C began to generate income from its initial
funding, Regions filed an interpleader and declaratory-judgment action in the
Bankruptcy Court, asking the court to decide which of two defendants, Cheryl as the
income beneficiary of Trust C or Wetzel as the trustee of Cheryl's bankruptcy estate,
was entitled to the distributions of net income from Trust C. Bachelor, as the personal
representative of Ronald's estate and a creditor in Cheryl's bankruptcy case,
successfully petitioned to intervene in Regions's action. Bachelor asserted two claims
in Cheryl's bankruptcy case. The first claim was based on Cheryl's "defalcation as
executrix" and was eventually liquidated in a settlement agreement between the parties
for approximately $5.6 million. Br. of Appellants at 14. As part of the settlement,
Bachelor agreed that he would not attempt to collect this amount from the
distributions to Cheryl of net income from Trust C.5 Bachelor's second claim against
Cheryl arose from the settlement of a civil action he had filed against 1919M Street
Associates, LP (1919M). Earlier, 1919M had obtained a roughly $1.5 million
judgment against Cheryl in connection with a failed business deal, and Bachelor had
accepted an assignment of 1919M's judgment against Cheryl as "payment" under a
settlement agreement with 1919M. Bachelor was not prohibited from attempting to
collect this amount from the distributions to Cheryl of net income from Trust C.
5
The settlement document provides that Bachelor "agrees not to offset [his]
claim against any future or current trust income or other income due the debtor or her
bankruptcy estate." J.A. 238.
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Ruling on Regions's interpleader and declaratory-judgment action, the
Bankruptcy Court held that because Trust C included a spendthrift provision, Cheryl's
"interest in net income distributions [from Trust C] is not property of the bankruptcy
estate." Bankr. Ct. Op. of July 21, 2009, at 2. The court ordered that the interpleaded
funds be distributed to Cheryl and not to Wetzel, her bankruptcy trustee.
Bachelor and Wetzel appealed to the District Court, which affirmed the
judgment of the Bankruptcy Court. Wetzel v. Regions Bank (In re Reagan), 433 B.R.
263 (W.D. Ark. 2010). On appeal to this court, Appellants argue that Cheryl's
behavior as executrix of Ronald's estate should render the otherwise valid spendthrift
provision in Ronald's will unenforceable under Arkansas law and thus unenforceable
under bankruptcy law, thereby permitting Wetzel to seize for the bankruptcy estate the
distributions of net income from Trust C that would otherwise be payable to Cheryl.
Appellants also argue that the Bankruptcy Court improperly concluded that
distributions of net income from Trust C, once paid to Cheryl, are exempt from
execution under Arkansas law.
As a second court of review in this bankruptcy matter, we apply the same
standards of review as the District Court, "reviewing the [B]ankruptcy [C]ourt's
factual findings for clear error and its conclusions of law de novo." Contractors,
Laborers, Teamsters & Eng'rs Health & Welfare Plan v. Killips (In re M & S Grading,
Inc.), 526 F.3d 363, 367 (8th Cir. 2008).
Regions asked the Bankruptcy Court to address a single issue: Whether Cheryl
or the trustee of her bankruptcy estate is entitled to the distributions of net income
from Trust C. The issue turns on whether Cheryl's interest in the net income from
Trust C is property of her bankruptcy estate. While federal law controls whether the
interest is property of Cheryl's bankruptcy estate, Arkansas law defines the nature and
extent of that interest. See Ferris, Baker Watts, Inc. v. Stephenson (In re MJK
Clearing, Inc.), 371 F.3d 397, 401 (8th Cir. 2004); N.S. Garrott & Sons v. Union
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Planters Nat'l Bank (In re N.S. Garrott & Sons), 772 F.2d 462, 466 (8th Cir. 1985)
("The nature and extent of the debtor's interest in property are determined by state law
. . . [but] once that determination is made, federal bankruptcy law dictates to what
extent that interest is property of the estate.").
Section 541(a)(1) of the federal bankruptcy code defines a bankruptcy "estate"
to include "all legal or equitable interests of the debtor in property as of the
commencement" of the bankruptcy case, subject to some exceptions. 11 U.S.C.
§ 541(a)(1). Under Arkansas law, the income beneficiary of a trust has an interest in
trust property "begin[ning] on the date specified in the terms of the trust." Ark. Code
Ann. § 28-70-301(a) (2004). Here, Ronald's will stated that Cheryl was entitled to
receive distributions of net income from Trust C beginning on the date of his death on
February 1, 2000. When Cheryl filed her bankruptcy petition in November 2004, her
interest in the distributions of net income from Trust C had been vested for several
years, even though no income was generated by the trust until it was funded in 2008.
The distributions of net income from Trust C were contingent on the trust producing
income, but contingent interests of a debtor at the time of his bankruptcy filing are
property of the bankruptcy estate. See Law v. Stover (In re Law), 336 B.R. 780, 782
(B.A.P. 8th Cir. 2006) ("Property of the estate includes contingent interests in future
payments.").
Thus under federal and Arkansas law, Cheryl's interest in the net income from
Trust C would be property of her bankruptcy estate under § 541(a)(1) unless an
exception applies. One such exception is described in § 541(c)(2), which provides
that if there is a "restriction on the transfer of a beneficial interest of the debtor in a
trust" and such restriction "is enforceable under applicable nonbankruptcy law," the
restriction is also enforceable under federal bankruptcy law. 11 U.S.C. § 541(c)(2).
Appellants do not dispute that a valid spendthrift provision in a trust instrument is a
"restriction on the transfer of a beneficial interest." Nor do they dispute that Arkansas
law is "applicable nonbankruptcy law." Thus, if Trust C's spendthrift provision
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restricts the transfer of Cheryl's interest in the distributions of net income from Trust
C and the spendthrift provision is enforceable under Arkansas law, then Cheryl's
interest in the distributions of net income from Trust C is not property of her
bankruptcy estate.
The Bankruptcy Court reasoned that because Trust C's spendthrift provision
restricts both voluntary and involuntary transfers of Cheryl's interest in the
distributions of net income from Trust C, the restriction is valid and enforceable under
Arkansas law. See Ark. Code Ann. § 28-73-502(a) (Supp. 2009) ("A spendthrift
provision is valid only if it restrains both voluntary and involuntary transfer of a
beneficiary's interest."). And because the spendthrift provision is valid under
Arkansas law, the court held that the § 541(c)(2) exception applies and Cheryl's
interest in the distributions of net income from Trust C is not property of her
bankruptcy estate under that exception. Furthermore, the court concluded that because
Cheryl's interest in the distributions of net income from Trust C is not part of her
bankruptcy estate, the payments actually made on account of that interest are likewise
not part of her bankruptcy estate. Bankr. Ct. Op. of July 21, 2009, at 9–10 (holding
that "the distributions of net income are also not a part of the debtor's estate after they
are distributed to the debtor" because they "result from an interest this Court has
determined is not property of the estate").
On appeal, Appellants first argue that Cheryl's misconduct as executrix of
Ronald's estate invalidated the spendthrift provision. They contend that because
Cheryl improperly exercised control over trust assets, the spendthrift provision is
unenforceable under Arkansas law, Cheryl's interest is not subject to a "restriction on
. . . transfer" under "applicable nonbankruptcy law" as required for application of the
§ 541(c)(2) exception, and therefore Cheryl's interest should be included in her
bankruptcy estate. They cite Hartsfield v. Lescher, 721 F. Supp. 1052 (E.D. Ark.
1989), in support of this argument.
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In Hartsfield, the beneficiaries of a trust with a spendthrift provision extended
the trust's termination date, an action that was permissible under the terms of the trust
instrument at issue. Applying Arkansas law, the district court determined that the
extension of the trust's termination date by the trust beneficiaries caused them to lose
the protection of the trust's spendthrift provision. According to the court, the
beneficiaries were not entitled to "enjoy the protection of the spendthrift provision
while dictating when they should receive the corpus" of the trust. Id. at 1058. A
contrary ruling, the court reasoned, would allow the beneficiaries to purposely avoid
receiving property to which they were entitled in an effort to frustrate creditors.
In Hartsfield, the spendthrift provision was invalid under Arkansas law because
the beneficiaries of the trust retained—and in fact exercised—the power to revise the
terms of the trust. In contrast, the terms of Trust C give Cheryl no such authority.
Cheryl, as beneficiary of Trust C, retains no power to extend the trust's termination
date, to delay or prevent receipt of the net income distributions that are due her under
the terms of the trust, or to modify the terms of the trust or the spendthrift provision
in any way. Accordingly, the Hartsfield holding is not relevant to the facts in this
case.
To the extent Appellants argue that Cheryl, the beneficiary of Trust C, should
be denied the benefit of the spendthrift provision because as executrix of Ronald's
estate, she exercised control over probate assets that had been designated to become
trust assets but had not yet been transferred to the trust, we are not persuaded. As
discussed above, the court in Hartsfield held that a trust was invalid under Arkansas
law because the beneficiaries retained an impermissible degree of control over trust
assets. Appellants cite no federal or Arkansas case—and we have found none—in
support of extending that holding to address the circumstances of this case.6
6
Recognizing the novelty of their argument, Appellants concede that they
"cannot find precedent for the circumstances presented in this appeal." Br. of
Appellants at 25.
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In a related argument, Appellants cite the doctrine of estoppel in pais, or
equitable estoppel, to argue that Cheryl's misconduct as executrix under Ronald's will
should bar her from enjoying the protection of the spendthrift provision of the will as
the beneficiary of Trust C. The Arkansas Supreme Court has described the doctrine
of estoppel in pais as follows: "A party who by his acts . . . or by failure to act
. . . under circumstances where he should do so, either designedly, or with willful
disregard of the interests of others, induces or misleads another to conduct or dealings
which he would not have entered upon but for this misleading influence, will not be
allowed, afterwards, to come in and assert his right, to the detriment of the person so
misled." Rogers v. Hill, 232 S.W.2d 443, 444 (Ark. 1950) (citations to quoted cases
omitted) (emphasis added). To successfully raise an estoppel claim, Appellants must
establish that they relied in good faith and to their detriment on Cheryl's conduct. See
Bethell v. Bethell, 597 S.W.2d 576, 584 (Ark. 1980).
Appellants have not established that the estoppel in pais doctrine applies in this
case. Although Cheryl may have failed in her duties as executrix, Appellants cite to
no evidence that Cheryl attempted to induce or actually induced them—Wetzel, the
trustee of Cheryl's bankruptcy estate, and Bachelor, the personal representative of
Ronald's estate—to detrimentally rely on any misleading position or action taken by
her. As noted above, Bachelor holds a $1.5 million judgment against Cheryl that he
received by assignment when he settled a lawsuit against 1919M. Although 1919M
may have had an argument that it detrimentally relied on some misleading act of
Cheryl's such that estoppel in pais might arguably apply, attributing 1919M's
detrimental reliance to Bachelor, who simply accepted assignment of 1919M's
judgment in settlement of an unrelated lawsuit, is an expansion of the doctrine that we
are not willing to make. As noted by Regions, Bachelor's decision to settle his lawsuit
with 1919M and accept as "payment" an assignment of 1919M's judgment against
Cheryl was a business decision in which Cheryl was not involved. Neither Bachelor,
as the holder of 1919M's judgment against Cheryl, nor Wetzel, as Cheryl's bankruptcy
trustee, has presented evidence that he detrimentally relied on Cheryl's misleading
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acts. Appellants may have suffered financially from Cheryl's actions as executrix, but
they have not presented evidence that any such financial damage stemmed from their
detrimental reliance on actions taken by Cheryl as the beneficiary of Trust C with
intent to induce their reliance.
In sum, we reject Appellants' argument that Cheryl, acting as executrix of
Ronald's estate, exercised improper control over assets earmarked for Trust C and
thereby invalidated the spendthrift trust. Although Cheryl, acting as executrix,
retained control over the assets in Ronald's estate, and she may have improperly
exercised that control in her capacity as executrix, her conduct in that capacity did not
invalidate the spendthrift provision.7 Because the spendthrift provision is enforceable
under Arkansas law, Cheryl's interest in the net income from Trust C is subject to a
"restriction on . . . transfer" under "applicable nonbankruptcy law," the § 541(c)(2)
exception applies, and Cheryl's interest in the distributions of net income from Trust
C is not a part of her bankruptcy estate. And Appellants have failed to establish the
requisite inducement and detrimental reliance to successfully assert that Cheryl should
be estopped from claiming the benefit of the spendthrift trust.
Appellants next argue that the Bankruptcy Court misinterpreted the United
States Supreme Court's decision in Patterson v. Shumate, 504 U.S. 753 (1992), and
improperly concluded that trust income excepted from a beneficiary's bankruptcy
estate under § 541(c)(2) is forever protected from execution by the beneficiary's
creditors, a protection not enjoyed by a trust beneficiary who has not filed a
7
Addressing Bachelor's argument that Cheryl should not be permitted to profit
as a beneficiary under Ronald's will when she flouted her duties as executrix under the
same will, the court noted that Bachelor had pursued these claims against Cheryl in
the probate court, the parties had reached a settlement agreement in the liquidated
amount of almost $6 million, and Bachelor "could seek relief from the stay to proceed
with any remaining claims." Bankr. Ct. Op. of July 21, 2009, at 10. The court
concluded that Cheryl's "actions as Executrix do not defeat [the] net income interest
she is entitled to as a beneficiary." Id. As discussed above, we agree.
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bankruptcy petition. According to Appellants, Patterson dictates uniform treatment
of creditors regardless of bankruptcy status. And because Arkansas law allows a
creditor to execute on income paid from a spendthrift trust at the moment that income
is received by the debtor, Patterson requires that the same right to execute must exist
when the debtor has filed a bankruptcy petition. See Ark. Code Ann. § 28-73-502(c)
(Supp. 2009) (stating that a creditor "may not reach the interest or a distribution by the
trustee before its receipt by the beneficiary") (emphasis added). In other words,
because Arkansas law does not protect income distributions from a spendthrift trust
once they are distributed to the beneficiary, Patterson instructs that bankruptcy law
cannot provide such protection simply because the beneficiary is also a debtor in
bankruptcy.
The Appellants overstate the Bankruptcy Court's conclusion. Contrary to
Appellants' assertion, the Bankruptcy Court made no determination regarding the
rights of Cheryl's creditors to the distributions of net income from Trust C. As noted
above, the Bankruptcy Court was presented with a single issue for resolution:
"[W]hether [Cheryl] or her bankruptcy estate is entitled to the . . . net income of
Trust C." Bankr. Ct. Op. of July 21, 2009, at 2. And it held only that the distributions
of net income from Trust C were not part of Cheryl's bankruptcy estate. Whether
Cheryl's creditors—including Bachelor—are entitled to some other form of relief that
would permit access to those distributions was not an issue before the Bankruptcy
Court and was not an issue upon which that court rendered a decision. Like the
Bankruptcy Court, we decline to opine on the issue.
Finally, Appellants contend that the Bankruptcy Court's misinterpretation of
Patterson resulted in the court incorrectly applying § 541(c)(2) to a spendthrift trust
and improperly equating the status of payments from a spendthrift trust with the status
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of payments made under an ERISA benefits plan.8 In Patterson, the Court held that
the anti-alienation provision in a defined benefits plan that qualified as a pension plan
under ERISA was a "restriction on . . . transfer" under "applicable nonbankruptcy law"
sufficient to trigger application of the § 541(c)(2) exception. The debtor's interest in
his pension benefits was thus properly excluded from his bankruptcy estate. 504 U.S.
at 760. The Court stated that its decision "ensures that the treatment of pension
benefits will not vary based on the beneficiary's bankruptcy status." Id. at 764.
The ERISA benefits examined in Patterson were exempt from execution not
because the Court excluded the benefits from the beneficiary's bankruptcy estate under
§ 541(c)(2) but because those benefits simply retained their exempt status under
"applicable nonbankruptcy law" after the beneficiary filed his bankruptcy petition.
Application of § 541(c)(2) did not change the exempt status of the ERISA benefits at
issue; it simply maintained the status quo. Here, the Bankruptcy Court cited Patterson
for the unsurprising proposition that because Cheryl was the beneficiary of a valid
spendthrift trust under nonbankruptcy law, her interest in the distributions of net
income from that spendthrift trust was entitled to the same protections and restrictions
after she filed her bankruptcy petition as it enjoyed before she filed her bankruptcy
petition. Cf. Drewes v. Schonteich, 31 F.3d 674, 678 (8th Cir. 1994) (determining
that the agreements at issue created valid spendthrift trusts under Minnesota law,
applying the § 541(c)(2) exception, and holding that the "monthly payments"
distributed from those trusts to the debtor were "not part of the bankruptcy estate
under § 541").
For the foregoing reasons, we affirm.
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8
Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1056(d)
(prohibiting assignment or alienation of pension plan benefits).
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