Todd Frealy v. Rick Reynolds

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
IN RE RICK H. REYNOLDS, No. 12-60068
Debtor.
BAP No.
11-1433
TODD A. FREALY, Attorney, Chapter
7 Trustee of Estate of Rick
Reynolds, OPINION
Appellant,
v.
RICK H. REYNOLDS; JOHN M.
CARMACK, Co-Trustee of the
Reynolds Family Trust and Co-
Trustee of The Reynolds Family
Trust - Survivor’s Trust, as
amended; JOHN MORRIS, Co-Trustee
of the Reynolds Family Trust and
Co-Trustee of The Reynolds Family
Trust - Survivor’s Trust, as
amended,
Appellees.
Appeal from the Ninth Circuit
Bankruptcy Appellate Panel
Hollowell, Pappas, and Dunn, Bankruptcy Judges,
Presiding
2 IN RE REYNOLDS
Argued and Submitted March 7, 2014
Pasadena, California
Filed August 15, 2017
Before: Alex Kozinski and Susan P. Graber, Circuit
Judges, and Charles R. Breyer,* District Judge.
Per Curiam Opinion
SUMMARY**
Bankruptcy
The panel reversed a decision of the Bankruptcy
Appellate Panel following the California Supreme Court’s
opinion answering a certified question regarding whether the
creditors of the beneficiary of a spendthrift trust may reach
the trust distributions.
The panel held that a bankruptcy estate is entitled to the
full amount of spendthrift trust distributions due to be paid as
of the date of the bankruptcy petition. But the estate may not
access any portion of that money the beneficiary needs for his
support or education, as long as the trust instrument specifies
that the funds are for that purpose. The estate may also reach
*
The Honorable Charles R. Breyer, United States District Judge for
the Northern District of California, sitting by designation.
**
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
IN RE REYNOLDS 3
25 percent of expected future payments from the spendthrift
trust, reduced by the amount the beneficiary needs to support
himself and his dependents.
COUNSEL
Jesse S. Finlayson (argued), Finlayson Williams Toffer
Roosevelt & Lilly LLP, Irvine, California, for Appellant.
David W. Meadows (argued), Law Offices of David W.
Meadows, Los Angeles, California, for Appellees.
OPINION
PER CURIAM:
Debtor is the beneficiary of a spendthrift trust. The trust
payments he receives come entirely from trust principal. The
California Probate Code is unclear as to whether and to what
extent his creditors may reach the trust distributions, so we
certified the question to the California Supreme Court.
Frealy v. Reynolds, 779 F.3d 1028, 1030 (9th Cir. 2015).
That court answers us in the attached opinion.
In our order certifying the question, we recounted the
facts of this case. Id. at 1031–32. Based on the California
Supreme Court opinion, we now hold that a bankruptcy estate
is entitled to the full amount of spendthrift trust distributions
due to be paid as of the petition date. See Carmack v.
Reynolds, 391 P.3d 625, 628 (Cal. 2017); Cal. Prob. Code
§ 15301(b). But the estate may not access any portion of that
money the beneficiary needs for his support or education, as
4 IN RE REYNOLDS
long as the trust instrument specifies that the funds are for
that purpose. See Carmack, 391 P.3d at 629; Cal. Prob. Code
§ 15302. The estate may also reach 25 percent of expected
future payments from the spendthrift trust, reduced by the
amount the beneficiary needs to support himself and his
dependents. See Carmack, 391 P.3d at 632; Cal. Prob. Code
§ 15306.5.
We remand so that the bankruptcy court can apply the
teachings of Carmack.
REVERSED and REMANDED.
IN RE REYNOLDS 5
APPENDIX
CARMACK v. REYNOLDS Cal. 625
Cite as 391 P.3d 625 (Cal. 2017)
215 Cal. Rptr. 3d 749 the trustee, even if they have secured a
John M. CARMACK, as Trustee, etc., et judgment against the beneficiary; rather,
al., Plaintiffs and Respondents, creditors must wait until the trustee makes
distributions to the beneficiary.
v.
Rick H. REYNOLDS, Defendant; 3. Trusts O12
The law permits spendthrift trusts be-
Todd A. Frealy, as Trustee in cause donors have the right to choose the
Bankruptcy, etc., Claimant object of their bounty and to protect their
and Appellant. gifts from the donees’ creditors.
S224985 4. Statutes O1076
Supreme Court of California. Court interpreting a statute seeks to
ascertain the intent of the lawmakers so as to
Filed 3/23/2017
effectuate the purpose of the statute.
Background: Chapter 7 trustee brought
adversary proceeding, seeking to compel 5. Statutes O1079
turnover of the undistributed principal to Court interpreting a statute begins by
which debtor was entitled under spend- looking to the statutory language.
thrift trust established by his late father. 6. Statutes O1091, 1151
The United States Bankruptcy Court for Court interpreting a statute must give
the Central District of California, Mere- the language its usual, ordinary import and
dith A. Jury, J., granted debtor’s motion accord significance, if possible, to every word,
for summary judgment, and trustee ap- phrase and sentence in pursuance of the
pealed. The Bankruptcy Appellate Panel legislative purpose.
(BAP), Hollowell, J., 479 B.R. 67, affirmed,
7. Statutes O1156
and trustee appealed, and the Court of
Appeals, 2017 WL 1131882, certified ques- A construction of a statute making some
words surplusage is to be avoided.
tion to the California Supreme Court as to
the extent to which a bankruptcy estate 8. Statutes O1153, 1155, 1216(2)
may reach a beneficiary’s interest in The words of the statute must be con-
spendthrift trust. strued in context, keeping in mind the statu-
Holding: The Supreme Court, Liu, J., tory purpose, and statutes or statutory sec-
held that creditor may petition for pending tions relating to the same subject must be
distribution of principal as well as up to 25 harmonized, both internally and with each
other, to the extent possible.
percent of future payments.
Question answered. 9. Statutes O1105, 1183, 1242
If the statutory language is susceptible
1. Trusts O141 of more than one reasonable interpretation,
court must look to additional canons of statu-
A ‘‘spendthrift trust’’ is a trust that pro-
tory construction to determine the Legisla-
vides that the beneficiary’s interest cannot be
ture’s purpose; both the legislative history of
alienated before it is distributed to the bene-
the statute and the wider historical circum-
ficiary.
stances of its enactment may be considered
See publication Words and Phrases for
other judicial constructions and defini- in ascertaining the legislative intent.
tions.
10. Trusts O152
2. Trusts O152 The general rule is that principal held in
Creditors of the beneficiary of a spend- a spendthrift trust may not be touched by
thrift trust generally cannot reach trust as- creditors until it is paid to the beneficiary.
sets while those assets are in the hands of Cal. Prob. Code § 15301(a).
626 Cal. 391 PACIFIC REPORTER, 3d SERIES
11. Trusts O152 visions are ‘‘opaque.’’ (Frealy v. Reynolds
Where trust assets are not protected by (9th Cir. 2015) 779 F.3d 1028, 1029 (Frealy).)
a spendthrift provision, the default rule is Probate Code section 15306.5 appears to lim-
that creditors may reach those assets. Cal. it the bankruptcy estate to 25 percent of the
Civ. Proc. Code § 709.010(b). beneficiary’s interest; other provisions of the
Probate Code suggest no such limitation. The
12. Trusts O152
Ninth Circuit asked us whether the Probate
After an amount of principal of a spend- Code limits a bankruptcy estate’s access to a
thrift trust has become due and payable, but spendthrift trust to 25 percent of the benefi-
has not yet been distributed, a creditor can ciary’s interest, where the trust pays the
petition to have the trustee pay directly to beneficiary entirely out of principal. We hold
the creditor a sum up to the full amount of that the Probate Code does not impose such
that distribution unless the trust instrument an absolute limit on a general creditor’s ac-
specifies that the distribution is for the bene- cess to the trust. With limited exceptions for
ficiary’s support or education and the benefi- distributions explicitly intended or actually
ciary needs the distribution for those pur- required for the beneficiary’s support, a gen-
poses; if no such distribution is pending or if eral creditor may reach a sum up to the full
the distribution is not adequate to satisfy a amount of any distributions that are current-
judgment, a general creditor can petition to ly due and payable to the beneficiary even
levy up to 25 percent of the payments expect- though they are still in the trustee’s hands,
ed to be made to the beneficiary, reduced by and separately may reach a sum up to 25
the amount other creditors have already ob- percent of any payments that are anticipated
tained and subject to the support needs of to be made to the beneficiary.
the beneficiary and any dependents. Cal.
Prob. Code §§ 15301(b), 15306.5, 15307.
See 13 Witkin, Summary of Cal. I.
Law (10th ed. 2005) Trusts, § 151 et Reynolds’s parents established the Reyn-
seq.
olds Family Trust in 2005. The trust contains
9th Cir. No. 12-60068, BAP No. CC-11- a spendthrift clause, providing that ‘‘no inter-
1433-HPaD, C.D. Cal. Bankr. Nos. 09-14039- est in the income or principal of any trust
MJ, 09-01205-MJ created under this instrument shall be volun-
Finlayson Toffer Roosevelt & Lilly, Jesse tarily or involuntarily anticipated, assigned,
S. Finlayson and Matthew E. Lilly, Irvine, encumbered, or subjected to creditor’s [sic]
for Claimant and Appellant. claim or legal process before actual receipt
by the beneficiary.’’ Reynolds’s mother Patsy
Law Offices of David W. Meadows and
died in 2007. Following her death, Reynolds’s
David W. Meadows, Los Angeles, for Defen-
father Freddie received all the trust’s distri-
dant.
butions until Freddie died in 2009.
The Eroen Law Firm and Robert C. Er-
oen for Plaintiffs and Respondents. The trust provides that at Freddie’s death,
Reynolds is entitled to $250,000 from the
Liu, J. trust if he survives Freddie by 30 days. In
addition, Reynolds is entitled to receive
Under the terms of a spendthrift trust
$100,000 a year for 10 years and then one-
established by his parents, defendant Rick H.
third of the remainder. All payments are
Reynolds is entitled to receive over a million
expected to be made from principal; the
dollars, all to be paid out of trust principal.
trust’s assets are in undeveloped real estate
Reynolds filed for bankruptcy before the
that do not produce income. Those assets are
trust’s first payment, and the bankruptcy
estimated to be worth several million dollars,
trustee seeks to determine what interest the
although their exact value will not be known
bankruptcy estate has in the trust. The trust
until the trust assets are liquidated.
is governed by California law, and as the
United States Court of Appeals for the Ninth The day after his father died, Reynolds
Circuit observed, the relevant statutory pro- filed for voluntary bankruptcy under chapter
CARMACK v. REYNOLDS Cal. 627
Cite as 391 P.3d 625 (Cal. 2017)
7 of the United States Bankruptcy Code. The (§ 15305) and those with restitution judg-
trustees of the Reynolds Family Trust ments (§ 15305.5). In addition, a state or
sought a declaratory judgment on the extent local public entity can reach trust assets
of the bankruptcy trustee’s interest in the when the beneficiary owes money for public
trust. The bankruptcy court held that under support (§ 15306, subd. (a)) unless distribu-
the California Probate Code, the bankruptcy tions from the trust are required to care for
trustee standing as a hypothetical lien credi- a disabled beneficiary (§ 15306, subd. (b)).
tor could reach 25 percent of Reynolds’s Even general creditors, including a bank-
interest in the trust. The bankruptcy appel- ruptcy trustee standing as a hypothetical lien
late panel affirmed. The bankruptcy trustee creditor, have some recourse under three
appealed to the Ninth Circuit, which asked provisions: section 15301, subdivision (b) (sec-
us to clarify if Probate Code section 15306.5 tion 15301(b)), section 15306.5, and section
caps a bankruptcy estate’s access to a spend- 15307. The question here is how much access
thrift trust at 25 percent of the beneficiary’s to trust principal a general creditor has un-
interest where the trust pays entirely from der these provisions.
principal. We granted the Ninth Circuit’s
[4–9] This is a question of statutory con-
request.
struction. We seek to ‘‘ascertain the intent of
the lawmakers so as to effectuate the pur-
II.
pose of the statute.’’ (Day v. City of Fontana
[1–3] A spendthrift trust is a trust that (2001) 25 Cal. 4th 268, 272, 105 Cal.Rptr.2d
provides that the beneficiary’s interest can- 457, 19 P.3d 1196.) ‘‘[W]e begin by looking to
not be alienated before it is distributed to the the statutory language. [Citation.] We must
beneficiary. Creditors of the beneficiary gen- give ‘the language its usual, ordinary import
erally cannot reach trust assets while those and accord[ ] significance, if possible, to ev-
assets are in the hands of the trustee, even if ery word, phrase and sentence in pursuance
they have secured a judgment against the of the legislative purpose. A construction
beneficiary. Rather, creditors must wait until making some words surplusage is to be
the trustee makes distributions to the benefi- avoided. The words of the statute must be
ciary. The law permits such trusts because construed in context, keeping in mind the
donors have ‘‘the right to choose the object of statutory purpose, and statutes or statutory
[their] bounty’’ and to protect their gifts from sections relating to the same subject must be
the donees’ creditors. (Canfield v. Security- harmonized, both internally and with each
First Nat. Bank (1939) 13 Cal. 2d 1, 11, 87 other, to the extent possible.’ [Citation.] If
P.2d 830 (Canfield).) Providing donors some the statutory language is susceptible of more
measure of control over their gifts encour- than one reasonable interpretation, we must
ages donors to make those gifts, to the bene- look to additional canons of statutory con-
fit of the donor, the beneficiary, and ulti- struction to determine the Legislature’s pur-
mately the beneficiary’s creditors. pose. [Citation.] ‘Both the legislative history
Under the Probate Code, spendthrift pro- of the statute and the wider historical cir-
visions are generally valid as to both trust cumstances of its enactment may be consid-
income and trust principal. (Prob. Code, ered in ascertaining the legislative intent.’ ’’
§§ 15300 [trust income], 15301, subd. (a) (McCarther v. Pacific Telesis Group (2010)
[trust principal]; all statutory references are 48 Cal. 4th 104, 110, 105 Cal. Rptr. 3d 404, 225
to the Probate Code unless otherwise noted.) P.3d 538.)
Yet creditors need not always wait for distri- In construing the provisions at issue, we
butions to reach the debtor’s hands. Spend- are mindful that the Reynolds Family Trust
thrift provisions are invalid when grantors is distinctive in directing all disbursements
name themselves beneficiaries. (§ 15304, to be made from principal. In other trusts,
subd. (a).) When a trust includes a valid productive assets produce periodic income
spendthrift provision, certain creditors may payments during the life of the trust, and
reach into the trust. Such creditors include preserving principal is one of the trustee’s
those with claims for spousal or child support paramount duties. (See 76 Am.Jur.2d (2016)
628 Cal. 391 PACIFIC REPORTER, 3d SERIES
Trusts, § 429.) It is common for trusts to Any disbursement from the trust would ap-
specify that the principal may not be distrib- pear to be due and payable in the sense the
uted for many years, and liquidating princi- phrase is used in section 15305. But, as the
pal may signal that the trust’s purpose has Ninth Circuit recognized, applying such a
been fulfilled. We are also mindful that this reading to section 15301(b) could mean that
case arises out of a bankruptcy proceeding. creditors have ‘‘immediate access to all of a
Ordinarily, a judgment creditor who is un- beneficiary’s trust principal,’’ which would
able to satisfy all of the judgment out of the eliminate spendthrift protections as to princi-
beneficiary’s trust interest may continue to pal entirely. (Frealy, at p. 1033.)
attempt to collect on the balance of the judg- We do not think the Legislature intended
ment from whatever other assets the benefi- to remove all protections from trust principal
ciary may have. Here, however, the amount immediately after specifying that spendthrift
Reynolds’s creditors will receive depends on provisions are generally valid as applied to
the reach of the bankruptcy trustee. Any principal. (§ 15301, subd. (a).) Instead, the
remaining debts after the bankruptcy pro- Legislature provided the limiting principle in
cess will be extinguished, and any further the introductory clause of section 15301(b):
distributions will be unencumbered. (11 ‘‘After an amount of principal has become due
U.S.C. § 541(c)(2).) That spendthrift provi- and payableTTTT’’ (Italics added.) This clause
sions can work to beneficiaries’ advantage in indicates that timing is critical: section
bankruptcy in this way has long been recog- 15301(b) reaches only those amounts which
nized as a characteristic of such provisions. are presently set to be paid to the beneficia-
(See Rest.3d Trusts, § 58, com. a [‘‘An im- ry. The provision thus requires an amount of
portant byproduct of the limited spendthrift principal to ‘‘ha[ve] become’’ due to the bene-
protection, however, is the again limited but ficiary, at which point upon a creditor’s peti-
nevertheless important insulation that may tion the court may enter an order ‘‘directing
result from a discharge in bankruptcy.’’].) the trustee to satisfy the money judgment
out of that principal amount.’’ (§ 15301(b),
A. italics added.) In other words, under this
We begin with section 15301(b), which pro- provision creditors may reach the principal
vides in pertinent part: ‘‘After an amount of already set to be distributed and only up to
principal has become due and payable to the the extent of that distribution. Such principal
beneficiary under the trust instrument, upon has served its trust purposes, and in many
petition to the court under Section 709.010 of (but not all) cases, the distribution may sig-
the Code of Civil Procedure by a judgment nal that the trust is ending. Section 15301(b)
creditor, the court may make an order direct- makes these assets, and these assets only,
ing the trustee to satisfy the money judg- fair game to creditors.
ment out of that principal amount.’’ Section [10] In this light, section 15301(b) is
709.010 of the Code of Civil Procedure (sec- properly viewed not as an exception to the
tion 709.010) sets forth the procedure for a general spendthrift protections but as a cor-
judgment creditor to petition a court to satis- ollary. The general rule is that principal held
fy the judgment out of the debtor’s trust in a spendthrift trust may not be touched by
interests. creditors until it is paid to the beneficiary.
As the Ninth Circuit observed, the statute (§ 15301, subd. (a).) Section 15301(b) adds
does not define ‘‘due and payable.’’ (Frealy, that once an amount of principal has become
supra, 779 F.3d at p. 1033.) The phrase is due and payable, the court can order the
used in other provisions such as section trustee to pay that amount directly to the
15305, which provides that creditors with beneficiary’s creditors instead. A distribution
judgments for child or spousal support may of principal is reasonably understood to sig-
petition a court to satisfy their judgments out nify that the amount distributed has satisfied
of disbursements of either income or princi- its trust purposes. Because the beneficiary’s
pal ‘‘as they become due and payable, pres- interest in those assets has effectively vested,
ently or in the future.’’ (§ 15305, subd. (b).) the law no longer has any interest in protect-
CARMACK v. REYNOLDS Cal. 629
Cite as 391 P.3d 625 (Cal. 2017)
ing them (except as provided in section tion 15302 thus provides limited continued
15302, as explained below). protection to former trust assets where the
The legislative history points the same donor specifically intended the distribution to
way. The provisions at issue date from the support the beneficiary. This protection en-
Law Revision Commission’s 1986 proposed courages donors to provide for beneficiaries’
revisions to the Probate Code. (See Selected support and helps to prevent beneficiaries
1986 Trust and Probate Legislation (Sep. from becoming public charges. (See Canfield,
1986) 18 Cal. Law Revision Com. Rep. (1986) supra, 13 Cal.2d at p. 11, 87 P.2d 830.)
pp. 1321–1479 (1986 Report); Stats. 1986, ch.
B.
820, § 40, as reenacted by Stats 1990, ch. 79,
§ 14.) The revisions were designed to reme- We now turn to sections 15306.5 and
dy the patchwork nature of the prior statuto- 15307. Both provisions are exceptions to the
ry framework while largely continuing exist- general validity of spendthrift provisions as
ing law. (1986 Report, supra, at pp. 1221– applied to trust principal established by sec-
1222, 1302–1306.) Prior California statutes tion 15301(a). Section 15306.5, subdivision (a)
had not made clear that spendthrift provi- (section 15306.5(a)) provides that any judg-
sions were valid as applied to principal, ment creditor can petition a court to order
though case law generally suggested they the trustee to satisfy the judgment out of
were. (Id. at p. 1302; see Seymour v. McAvoy payments to which the beneficiary is entitled.
(1898) 121 Cal. 438, 444, 53 P. 946; San Diego But those orders are limited to ‘‘25 percent
Trust etc. Bank v. Heustis (1932) 121 Cal. of the payment that otherwise would be
App. 675, 683–684, 10 P.2d 158.) The Com- made to, or for the benefit of, the beneficia-
mission’s report, to which we give ‘‘substan- ry’’ (§ 15306.5, subd. (b)), and they cannot
tial weight’’ (Van Arsdale v. Hollinger (1968) cut into any amount required to support the
68 Cal. 2d 245, 249, 66 Cal. Rptr. 20, 437 P.2d beneficiary or the beneficiary’s dependents
508, overruled on other grounds in Privette v. (§ 15306.5, subd. (c)). Section 15307, for its
Superior Court (1993) 5 Cal. 4th 689, 21 Cal. part, provides: ‘‘Notwithstanding a restraint
Rptr.2d 72, 854 P.2d 721), notes that the on transfer of a beneficiary’s interest in the
drafters sought to codify the validity of trust under Section 15300 or 15301, any
spendthrift provisions as applied to trust amount to which the beneficiary is entitled
principal in section 15301, subdivision (a) under the trust instrument TTT in excess of
(section 15301(a)). (1986 Report, supra, at p. the amount that is or will be necessary for
1302.) But the drafters also sought to clarify the education and support of the beneficiary
that once principal was due and payable, may be applied to the satisfaction of a money
creditors could reach it both ‘‘in the hands of judgment against the beneficiary. Upon the
the trustee and after payment to the benefi- judgment creditor’s petition under Section
ciary.’’ (Id. at pp. 1302–1303.) In other words, 709.010 of the Code of Civil Procedure, the
spendthrift protections do not apply to sec- court may make an order directing the trus-
tion 15301(b) assets. tee to satisfy all or part of the judgment out
of the beneficiary’s interest in the trust.’’
Importantly, creditors’ access under sec-
tion 15301(b) is not unlimited. Section 15302 Section 15307 thus appears to allow any
explains that where the trust instrument creditor to access all of a beneficiary’s inter-
specifies that a distribution, whether from est in a spendthrift trust besides what is
income or principal, is for the beneficiary’s necessary for the beneficiary’s education and
support or education, the amount the benefi- support, whereas section 15306.5 limits credi-
ciary actually needs for either purpose may tors to only 25 percent of the same interest.
not be reached by creditors until in the How are these two provisions to be recon-
hands of the beneficiary. Section 15302 ex- ciled?
plicitly provides that it does not apply where One possibility is that section 15307 is only
creditors seek access under sections 15304 meant to apply to income, not principal. It is
through 15307, but section 15302 does not true that the Law Revision Commission ti-
exclude orders under section 15301(b). Sec- tled this provision ‘‘Income in excess of
630 Cal. 391 PACIFIC REPORTER, 3d SERIES
amount for education and support subject to Prob. Code, supra, at p. 562.) However, noth-
creditors’ claims.’’ (1986 Report, supra, 18 ing in the statutes suggests that obtaining an
Cal. Law Revision Com. Rep. at p. 1340; see order under section 15307 involves any dif-
also Cal. Law Revision Com. com., 54 West’s ferent burden or standard of proof than ob-
Ann. Prob. Code (1991 ed.) foll. § 15307, p. taining an order under any other section. On
562 (West’s Annotated Code) [‘‘Section 15307 the contrary, section 15307 contains the same
permits an ordinary creditor to reach income reference to section 709.010 of the Code of
under limited circumstances.’’]; 13 Witkin, Civil Procedure as does section 15306.5(a).
Summary of Cal. Law (10th ed. 2005) Trusts, Section 709.010, for its part, does not specify
§ 155 [‘‘Under the Trust Law, surplus in- any special burdens or procedures for orders
come may be reached to satisfy creditors’ under section 15307. The bankruptcy trustee
claims.’’].) But this title was not part of the does not cite any authority in support of its
official legislative enactments (see Stats. theory.
1986, ch. 820, § 40) and therefore cannot
have any bearing on the interpretation of the Instead, the more likely answer is that
statute (58 Cal.Jur.3d (2017) Statutes, § 177). section 15307 reflects a drafting error. Be-
Moreover, section 15301(a), which applies fore the 1986 revisions, spendthrift trusts
only to principal, specifically refers to section were governed by three key provisions. The
15307, and section 15307 provides that it first was former section 867 of the Civil
applies ‘‘[n]otwithstanding TTT [section] Code, which generally permitted spendthrift
15301.’’ Both references would be unneces- provisions as applied to income. (Recommen-
sary if section 15307 only applied to income. dation Proposing the Trust Law (Dec. 1985)
(See also 1986 Report, supra, at p. 1305 18 Cal. Law Revision Com. Rep. (1985) p. 596
[§ 15307 applies ‘‘notwithstanding a restraint (1985 Report).) The second provision was
on transfer of income or principal in the former section 859 of the Civil Code, which
trust instrument’’ (italics added) ].) In any allowed creditors to reach the ‘‘ ‘surplus’ ’’
event, excluding principal from section 15307 beyond the beneficiary’s education and sup-
would not resolve the tension between sec- port in the limited instances where the trust
tions 15306.5 and 15307 for income. We thus instrument did not specify what to do with
conclude that section 15307 applies to both accumulating income. (1985 Report, supra, at
income and principal, as its text plainly says. p. 597, fn. 390, quoting Civ. Code, former
The bankruptcy trustee suggests that sec- § 859; see Estate of Lawrence (1968) 267
tion 15307 serves a different purpose from Cal.App.2d 77, 82, 72 Cal. Rptr. 851 [trust
section 15306.5 by setting a higher bar for provision specifying that ‘‘ ‘[a]ll unexpended
creditors than section 15306.5. Under this portions of the net income TTT shall be accu-
theory, general creditors have ‘‘automatic’’ mulated, added to, and become a part of the
access to 25 percent of beneficiaries’ trust principal’ ’’ is valid direction for the accumu-
interest under section 15306.5, with the bur- lation of income].) Moreover, former section
den on the beneficiaries to prove that this 859 said it applied ‘‘ ‘as provided in Section
should be reduced in light of their support 709.010 of the Code of Civil Procedure,’ ’’ the
needs and those of their dependents. But in third key provision governing spendthrift
exceptional circumstances, the argument trusts. (1985 Report, supra, at p. 597, fn.
goes, general creditors can turn to section 390.) At the time, former section 709.010
15307 to reach beyond the 25 percent cap if applied by reference the principles of the
they can show that exceeding the cap would wage garnishment statute to periodic trust
be equitable and would not cut into the bene- payments, capping payments at 25 percent
ficiaries’ support or education needs. for general creditors and 50 percent for sup-
The bankruptcy trustee’s theory might re- port creditors. (1985 Report, supra, at pp.
flect sensible policy and may find some sup- 597–599, fn. 392, quoting former § 709.010.)
port in the Law Revision Commission’s une- So, where former section 859 applied, general
laborated comment that section 15307 applies creditors were capped at 25 percent of peri-
‘‘under limited circumstances.’’ (West’s Ann. odic payments to beneficiaries.
CARMACK v. REYNOLDS Cal. 631
Cite as 391 P.3d 625 (Cal. 2017)
The Commission’s original proposal re- reestablishes that same cap. In light of this
worked those provisions into the current history, we decline to adopt an interpretation
framework. Former section 867 of the Civil of section 15307 that simply undoes the limi-
Code was the basis for proposed section tations on general creditors that section
15300. (1985 Report, supra, 18 Cal. Law Re- 15306.5 sets forth in a set of specific and
vision Com. Rep. at p. 625.) Former section carefully calibrated provisions. We conclude
859 of the Civil Code formed the basis for instead that the ultimate enactment of sec-
proposed section 15307, though section tion 15307 without apparent limitations on
15307’s scope is much broader as it seeming- the reach of general creditors was inadver-
ly applies to all trust assets and not just tent. The Legislature plainly intended gener-
undirected accumulations of income. (See al creditors to be limited to 25 percent of
1985 Report, supra, at p. 633.) And although distributions from the trust.
section 15307, like former section 859, re-
tained a reference to section 709.010 of the C.
Code of Civil Procedure, that reference
would have been to a much changed provi- The final issue we must address is whether
sion, for the proposal also contemplated the 25 percent limitation of section 15306.5
amending former section 709.010 to remove applies to section 15301(b). Section 15306.5,
its references to the wage garnishment stat- subdivision (f) (section 15306.5(f)) provides:
ute. (1985 Report, supra, at p. 766.) Some of ‘‘Subject to subdivision (d), the aggregate of
the removed provisions were given new all orders for satisfaction of money judg-
homes; for example, the provision giving pre- ments against the beneficiary’s interest in
ferred access to support creditors became the trust may not exceed 25 percent of the
proposed section 15305, which also removed payment that otherwise would be made to, or
the 50 percent cap. (1985 Report, supra, at for the benefit of, the beneficiary.’’ Unlike
pp. 630–631.) The 25 percent cap that had section 15306.5(b)’s reference to ‘‘[a]n order
applied to general creditors was not retained under this section,’’ the language of section
anywhere; if the 1985 proposal had been 15306.5(f)—‘‘all orders for satisfaction of
enacted as written, the new law would have money judgments’’—is not limited to orders
dramatically increased the reach of general under section 15306.5. One possibility, there-
creditors. fore, is that section 15306.5(f)’s cap extends
to all orders under any provision of the Pro-
But the revised draft of the Trust Law in
bate Code.
1986, which was ultimately enacted, included
for the first time section 15306.5. (1986 Re- We need not decide the full reach of the 25
port, supra, 18 Cal. Law Revision Com. Rep. percent cap under 15306.5(f) as this case
at p. 1339; see Stats. 1986, ch. 820, § 40.) involves only the scope of sections 15301(b)
This new section drew on former section and 15306.5. Whatever other orders may be
709.010 and the wage garnishment statute to subject to section 15306.5(f)’s cap, we con-
create an explicit 25 percent cap on trust clude that the cap does not apply to orders
interests comparable to the cap protecting under section 15301(b). As explained above,
wages. (1986 Report, supra, at p. 1339.) In section 15306.5 was modeled on the wage
the process, the Commission did not mean- garnishment statute then in force (Code Civ.
ingfully revise its proposal for section 15307 Proc., former § 706.050 et seq., as enacted by
(compare 1985 Report, supra, 18 Cal. Law Stats. 1982, ch. 1364, § 2) and provides credi-
Revision Com. Rep. at p. 633, with 1986 tors a limited exception to spendthrift protec-
Report, supra, at p. 1340), nor did the Com- tions on the beneficiary’s continuing interest
mission clarify the role of section 15307 in in the trust. As the use of the conditional in
light of section 15306.5. The result is that section 15306.5(f) suggests, ‘‘the payment
unlike Civil Code former section 859, which it that otherwise would be made to’’ the benefi-
purportedly replaced, section 15307 refers to ciary is best understood as referring to ongo-
a version of section 709.010 that no longer ing payments the beneficiary stands to re-
imposes a cap on general creditors, even as it ceive. (Italics added.) The cap thus operates
follows a new provision, section 15306.5, that to limit the sum of orders subject to section
632 Cal. 391 PACIFIC REPORTER, 3d SERIES
15306.5(f)’s cap to 25 percent of any individu- and that the trust distributions are neither
al expected distribution. specifically intended nor required for the
beneficiary’s support. On March 1 of the first
[11] By contrast, section 15301(b) makes
year, upon the creditor’s petition a court
clear that spendthrift protections do not ap-
could order the trustee to remit the full
ply to distributions of principal that have
distribution of $10,000 for that year to the
become due and payable. Where trust assets
creditor directly if it has not already been
are not protected by a spendthrift provision,
paid to the beneficiary, as well as $2,500 from
the default rule is that creditors may reach
each of the nine anticipated payments (a total
those assets. (See § 709.010, subd. (b).) By
of $22,500) as they are paid out. If the credi-
crafting a specific rule for this narrow class
tor were not otherwise able to satisfy the
of assets, the Legislature indicated its intent
remaining $17,500 balance on the judgment,
that those assets be treated differently. (See
then on March 1 of the following years, upon
Miller v. Superior Court (1999) 21 Cal.4th
the general creditor’s petition the court could
883, 895, 89 Cal. Rptr. 2d 834, 986 P.2d 170
order the trustee to pay directly to the credi-
[‘‘ ‘ ‘‘A specific provision relating to a particu-
tor a sum up to the remainder of that year’s
lar subject will govern in respect to that
principal distribution ($7,500), as the court in
subject, as against a general provision, al-
its discretion finds appropriate, until the
though the latter, standing alone, would be
judgment is satisfied.
broad enough to include the subject to which
the more particular provision relates.’’ ’ [Ci-
CONCLUSION
tation.]’’].) Applying section 15306.5(f)’s cap
to section 15301(b) assets would defeat the We conclude that a bankruptcy trustee,
Legislature’s specific intent to treat due and standing as a hypothetical judgment creditor,
payable principal ‘‘in the hands of the trus- can reach a beneficiary’s interest in a trust
tee’’ on par with such principal ‘‘after pay- that pays entirely out of principal in two
ment to the beneficiary.’’ (See 1986 Report, ways. It may reach up to the full amount of
supra, 18 Cal. Law Revision Com. Rep. at any distributions of principal that are cur-
pp. 1302–1303.) rently due and payable to the beneficiary,
unless the trust instrument specifies that
[12] In sum, after an amount of principal those distributions are for the beneficiary’s
has become due and payable (but has not yet support or education and the beneficiary
been distributed), a creditor can petition to needs those distributions for either purpose.
have the trustee pay directly to the creditor Separately, the bankruptcy trustee can reach
a sum up to the full amount of that distribu- up to 25 percent of any anticipated payments
tion (§ 15301(b)) unless the trust instrument made to, or for the benefit of, the beneficiary,
specifies that the distribution is for the bene- reduced to the extent necessary by the sup-
ficiary’s support or education and the benefi- port needs of the beneficiary and any depen-
ciary needs the distribution for those pur- dents.
poses (§ 15302). If no such distribution is
pending or if the distribution is not adequate We Concur:
to satisfy a judgment, a general creditor can
petition to levy up to 25 percent of the pay- Cantil-Sakauye, C.J.
ments expected to be made to the beneficia- Werdegar, J.
ry, reduced by the amount other creditors
Chin, J.
have already obtained and subject to the
support needs of the beneficiary and any Corrigan, J.
dependents. (§ 15306.5.)
Cu´
ellar, J.
As an illustration, suppose a trust instru-
ment specified that a beneficiary was to re- Kruger, J.
ceive distributions of principal of $10,000 on
March 1 of each year for 10 years. Suppose
further that a general creditor had a money
,
judgment of $50,000 against the beneficiary