Calhoun v. Rawlins

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17-P-40 Appeals Court
SHONNA CALHOUN & others1 vs. JASON M. RAWLINS, special
representative,2 & others.3
No. 17-P-40.
Plymouth. February 1, 2018. - June 27, 2018.
Present: Trainor, Blake, & Lemire, JJ.
Trust, Self-settled trust, Spendthrift provision, Irrevocable
trust, Claim of creditor. Divorce and Separation,
Separation agreement. Guardian, Incompetent person.
Civil action commenced in the Superior Court Department on
November 7, 2014.
The case was heard by Robert C. Cosgrove, J., on motions
for summary judgment, and entry of separate and final judgment
was ordered by him.
1 William Calhoun, Jr., and Timothy Pink, Jr., by his father
and next friend, Timothy Pink.
2 Of the estate of Brian K. McInerney.
3 KeyBank National Association, trustee of the Brian K.
McInerney Irrevocable Trust; Jean E. McInerney, trustee of the
Brian K. McInerney Irrevocable Trust.
2
Richard B. Reiling (Richard C. Woods, Jr., also present)
for the plaintiffs.
Stephen M. LaRose (Charles Dell’Anno & Edward M. Joyce,
Jr., also present) for the defendants.
BLAKE, J. At issue in this case is whether the assets of
an irrevocable spendthrift trust, established in 2007 on behalf
of a disabled husband upon divorce from his wife, are available
to satisfy any damages awarded in a subsequent personal injury
action against the former husband. Resolution of the issue
requires us to consider whether the trust was self-settled. We
conclude that successful plaintiffs in this action may recover
damages from the trust.
Background. A. The Probate and Family Court proceedings.
Before the motor vehicle accident at issue in this case, Brian
K. McInerney was involved in a motor vehicle accident in 2001,
in which he sustained a severe traumatic brain injury. In
September of 2004, a judge of the Probate and Family Court
3
appointed coguardians for him due to his inability to make
medical and other important decisions.4,5
Having married in 1987, McInerney and his former wife,
Susan J. Stone, separated in January of 2004. McInerney filed a
complaint for divorce on March 8, 2005, requesting an equitable
division of the marital assets under G. L. c. 208, § 34.6
Throughout the marriage, Stone held significant assets in her
own name, including accounts at KeyBank National Association
(KeyBank), at least some of which derived from a trust created
for Stone's benefit by her grandfather. McInerney worked for
only one year during the marriage; Stone worked as an artist and
then as a mental health counselor, making a modest salary.
During the marriage, the family was supported primarily, if not
exclusively, by Stone's income from her employment and her
assets.
4 The medical certificate filed in support of the
guardianship petition stated that McInerney was unable to make
or to communicate informed decisions due to physical incapacity.
Specifically, he had residual cognitive impairment in attention,
memory, and executive functioning and was unable to make complex
decisions involving legal matters.
5 Jean E. McInerney, appointed as coguardian, subsequently
was appointed sole guardian.
6 Three children were born of the marriage. Elise was born
in 1989 and Dru was born in 1992. The couple's youngest child,
Lia, died from injuries sustained in the 2001 motor vehicle
accident. She was two years old at that time.
4
McInerney, by his guardian, and Stone executed a separation
agreement, which was incorporated into the judgment of divorce
nisi. The separation agreement was later amended by stipulation
and approved by a judge of the Probate and Family Court. The
amended separation agreement (ASA), dated January 26, 2007,
settled McInerney's and Stone's rights and obligations to one
another upon dissolution of their marriage.7 In pertinent part,
the ASA provided that Stone would transfer approximately thirty-
five percent of the funds in her KeyBank accounts to a
spendthrift trust to be created for McInerney.8 In addition, the
7 The ASA states, "The Husband and the Wife desire by this
Agreement to confirm their separation, . . . and to settle
between themselves all questions pertaining to their respective
property and estate rights, the support and maintenance of the
Husband and the Wife, and all other rights and obligations
arising from their marital relationship." They agreed that the
provisions set forth in the ASA were in full satisfaction and
discharge of, among other things, "all property claims, past and
present, which either may have against the other party,
including all such rights as either party may have, or claim to
have, to property under the terms and provisions of [G. L.
c. 208, § 34]." They also agreed that they would not seek from
any court "any order or judgment" that would "vary or increase
the equitable division of property or any other obligations of
the other party as set forth in the" ASA.
8 Specifically, the ASA provided, "In light of the
circumstances of the Husband . . . , it is an essential
condition of the assignment and transfer of any and all assets
from the Wife to the Husband under this Agreement that said
assets be transferred to a trust conforming to the requirements
set forth in Article III, subsection C, below and to be approved
by the Court for the benefit of Husband, as well as [his
children, Elise and Dru,] as the contingent beneficiaries. No
such assets shall be transferred unless such condition is met."
Article III(C)(4) expressly provides that the trust shall
5
ASA contained provisions regarding the marital home, a vacation
home in Maine, the purchase of a home in Plymouth for McInerney,
and other assets, including assets inherited by Stone. The ASA
provided that the division of assets would survive entry of the
judgment of divorce nisi and would have independent legal
significance. By approving the ASA and incorporating it into
the judgment of divorce nisi, the Probate and Family Court judge
found that the terms were fair and reasonable.
B. Creation of the Brian K. McInerney Irrevocable Trust.
The Brian K. McInerney Irrevocable Trust (trust) was created on
March 23, 2007, and, though irrevocable, the trustees were given
complete discretion to distribute as much of the income and
principal of the assets in the trust as they felt were necessary
to meet the reasonable needs of McInerney. The terms of the
trust identified Stone as the settlor, McInerney as the
beneficiary, and their children, Elise and Dru, as the remainder
beneficiaries. The trustees at that time were McInerney's
sister and guardian (Jean E. McInerney9), and Bank of America as
the corporate trustee. The trust provides that the "interest of
contain spendthrift provisions "to protect the trust from any
creditors of the Husband so that the trust is not liable to pay
any of the creditors of the Husband."
9 Hereinafter, we will refer to McInerney's sister as "Jean"
to avoid confusion.
6
any beneficiary created herein, either as to income or
principal, shall not be alienated, anticipated or in any other
manner assigned by such beneficiary and shall not be subject to
legal process, bankruptcy proceedings, or the interference or
control of creditors."
Pursuant to the ASA, on May 7, 2007, Stone transferred
$3,538,402.34 of stocks and bonds to the trust. She also
transferred the Plymouth home valued at $538,400 into the trust.
In addition, McInerney transferred assets standing in his own
name, totaling more than $120,000, into the trust.
C. The motor vehicle accident at issue. On April 30,
2014, plaintiffs Shonna Calhoun and her minor child, Timothy
Pink, Jr., were involved in a motor vehicle accident with
McInerney. It is alleged that McInerney was traveling seventy-
six miles per hour in a thirty-five miles per hour zone, crossed
the yellow line to pass a vehicle, and collided head on with a
vehicle being driven by Calhoun. The crash caused serious
injuries to Calhoun and her minor child, and McInerney died from
his injuries.
The plaintiffs10 commenced this action in Superior Court
seeking damages for McInerney's negligence and a judgment
10 William Calhoun, Jr., brought a loss of consortium claim
regarding his wife.
7
declaring that the assets of the trust are available to them to
satisfy any damages award. The parties filed cross motions for
summary judgment solely on the issue whether the trust's assets
are available to the plaintiffs. A judge (motion judge)
determined that only the assets that McInerney contributed to
the trust are reachable. The motion judge found that the assets
contributed by Stone are not reachable because Stone was the
sole owner of the assets until they entered the trust and
McInerney never had any prior legal or equitable interest in
them. A separate and final judgment entered on the declaratory
judgment claim. See Mass.R.Civ.P. 54(b), 365 Mass. 820 (1974).
The plaintiffs appeal.
Discussion. A. Spendthrift trusts. When faced with the
question whether creditors may reach the assets of spendthrift
trusts, our cases distinguish between spendthrift trusts that
are created by third parties, such as parents, and spendthrift
trusts that are self-settled by an individual who is both
settlor and beneficiary. It has long been the law in this
Commonwealth that a trust created by a third-party settlor may
protect a beneficiary's interest in the trust from creditors
through spendthrift provisions. See Broadway Natl. Bank v.
Adams, 133 Mass. 170, 173-174 (1882); Pacific Natl. Bank v.
Windram, 133 Mass. 175, 176 (1882). Even in the face of public
policy arguments favoring access, a third-party settlor's intent
8
to deny creditors of a beneficiary recovery against trust assets
has been enforced. Pemberton v. Pemberton, 9 Mass. App. Ct. 9,
20 (1980). The theory behind the enforcement of these
spendthrift trusts is that the settlor of a trust is the
absolute owner of his property and, in giving a gift, has "the
entire right to dispose of it, either by an absolute gift . . .
or by a gift with such restrictions or limitations, not
repugnant to law, as he [sees] fit to impose." Adams, supra at
173.
Self-settled trusts, where the beneficiary is also the
settlor, however, cannot be used to protect one's assets from
creditors. "The established policy of this Commonwealth long
has been that a settlor cannot place property in trust for his
own benefit and keep it beyond the reach of creditors." Ware v.
Gulda, 331 Mass. 68, 70 (1954), quoting from Merchants Natl.
Bank v. Morrissey, 329 Mass. 601, 605 (1953). "To permit a man
. . . to attach to a valuable interest in property retained by
himself the quality of inalienability and of exemption from his
debts, seems to us to be going further than a sound public
policy will justify." Windram, 133 Mass. at 176-177. Thus,
"[w]hen a person creates for his own benefit a trust for support
or a discretionary trust, his creditors can reach the maximum
amount which the trustee, under the terms of the trust, could
pay to him or apply for his benefit." State St. Bank & Trust
9
Co. v. Reiser, 7 Mass. App. Ct. 633, 636 (1979). "This is so
even if the trust contains spendthrift provisions." Ibid. See
Ware, supra. This concept also has been codified in the
Massachusetts Uniform Trust Code. General Laws c. 203E,
§ 505(a)(2), inserted by St. 2012, c. 140, § 56, provides that
notwithstanding the presence of a spendthrift provision, "[w]ith
respect to an irrevocable trust, a creditor or assignee of the
settlor may reach the maximum amount that can be distributed to
or for the settlor's benefit."11 See Restatement (Second) of
Trusts § 156(2) (1959) ("Where a person creates for his own
benefit a trust for support or a discretionary trust, his
transferee or creditors can reach the maximum amount which the
trustee under the terms of the trust could pay to him or apply
for his benefit"). See also Restatement (Third) of Trusts § 58
(2003).
11There is some discussion in Reiser, supra at 637,
pointing to the settlor's retention of a power of appointment as
part of the reason creditors may reach the assets of the trust.
When the settlor retains some control over the disbursement of
the assets of an irrevocable trust, creditors may reach the
maximum amount of the funds that can be distributed to the
settlor. See G. L. c. 203E, § 505(a)(2); Reiser, supra. "The
Eleventh Circuit [has] stated that '[t]he issue of self-
settlement is separate from the issue of control, and either can
serve as an independent ground for invalidating a spendthrift
provision.'" In re Raymond, 529 B.R. 455, 479 (Bankr. D. Mass.
2015), quoting from In re Brown, 303 F.3d 1261, 1267 n.9 (11th
Cir. 2002).
10
In Cohen v. Commissioner of the Div. of Med. Assistance,
423 Mass. 399, 414 (1996), cert. denied sub nom. Kokoska v.
Bullen, 519 U.S. 1057 (1997), the Supreme Judicial Court
described self-settled spendthrift trusts as created "for the
purpose of having your cake and eating it too." "Under such a
trust, a grantor puts his assets in a trust of which he is the
beneficiary, giving his trustee discretion to pay out monies to
gratify his needs but limiting that discretion so that the
trustee may not pay the grantor's debts." Ibid. The court
noted that this jurisdiction and others have long followed the
Restatement principle for self-settled trusts. Ibid.
On appeal, KeyBank and Jean "do not quibble with this well-
established principle" applicable to self-settled trusts, and
even agree that the motion judge correctly applied G. L.
c. 203E, § 505(a)(2), in concluding that the funds contributed
to the trust by McInerney from his own accounts are available to
the plaintiffs. KeyBank and Jean contend only that the rule
does not apply to the trust assets supplied by Stone. Thus,
determination of whether the trust is self-settled or settled by
Stone is at the heart of this dispute.
B. Self-settled. In order for creditors to reach trust
assets where a person created a trust for support or a
discretionary trust for his own benefit, it is not necessary
that the beneficiary shall have himself conveyed the property
11
held in trust. Restatement (Third) of Trusts § 58 comment f
(2003). It is enough that the beneficiary provide
consideration. Ibid. "A trust is established by the person who
provides the consideration for the trust even though in form it
is created by someone else." Romo v. Kirschner, 181 Ariz. 239,
241-242 (Ct. App. 1995), quoting from Forsyth v. Rowe, 226 Conn.
818, 826 (1993). "[I]t is the beneficiary's entitlement to the
settlement proceeds, not whether they were literally paid into
his hands, that indicates whether the beneficiary funded the
trust." Id. at 242.
Whether the trust was self-settled by McInerney for the
purpose of the plaintiffs' claims regarding the trust property
requires us to look beyond the labels adopted in the trust
instrument and the ASA. Cf. In re Village Green Realty Trust,
113 B.R. 105, 114 (Bankr. D. Mass. 1990), quoting from In re
Dolton Lodge Trust No. 35188, 22 B.R. 918, 925 (Bankr. N.D. Ill.
1982) (In determining whether trust is eligible for bankruptcy
even though labeled nominee trust, focus is not on label but "on
what the debtor actually is and the purpose it has been created
to carry out"). Thus, the terms identifying the settlor as
Stone or the accounts held by Stone as her individual assets
rather than as marital assets were not binding on the motion
judge or on the plaintiffs for determining whether the
plaintiffs may reach the trust. It would be anomalous indeed if
12
a settlor could avoid the well-settled principle that one cannot
avoid creditors through a self-settled trust by the simple
expedient of identifying another person in the trust instrument
as the settlor. Rather, in determining whether the trust was
self-settled, we look to the facts surrounding the creation of
the trust.
Here, the proper focus is on the reason Stone funded the
trust. The motion judge's focus on the source of the funds was
misplaced because it ignored the fact that assets previously
held in Stone's name were transferred to the trust in settlement
of her obligations to McInerney upon dissolution of the
marriage, not as a gift. An agreement that settles the rights
of divorcing spouses with regard to property, maintenance, and
support is based on valuable consideration. See Handrahan v.
Moore, 332 Mass. 300, 303 (1955). McInerney's agreement to
settle his rights and obligations pursuant to the dissolution of
the marriage was the consideration for the creation of the
trust. Stone was not gifting her money to McInerney; she was
satisfying her obligations arising from the dissolution of the
marriage. Accordingly, McInerney had a legal right to the
monies that funded the trust. That he agreed through his
guardian to have the funds deposited into the trust does not
alter the fact that these funds represented the agreed-upon
equitable division due him incident to the divorce.
13
Even though there are no Massachusetts cases directly on
point, our reasoning finds support in the case law. In Cohen,
423 Mass. at 422-423, a beneficiary of a trust argued that, for
the purpose of qualifying for Medicaid, she was not the settlor
of a trust but, rather, her conservator established the trust
with proceeds of a medical malpractice settlement and pursuant
to a decree of the Probate and Family Court. In rejecting that
argument, the court cited cases from other jurisdictions where
trusts were considered self-funded by beneficiaries even though
they were created by conservators and guardians of the
beneficiaries, sometimes with court approval, and funded with
settlement proceeds from the beneficiaries' personal injury
actions and workers' compensation claims. See id. at 422, and
cases cited. The court reasoned that "[a] conservator, like a
guardian, has only the care and management of the ward's estate,
and title to it . . . never vests in him but remains in the
ward." Id. at 423, quoting from Minnehan v. Minnehan, 336 Mass.
668, 670 (1958).
In In re Tosi, 383 B.R. 1, 4 (Bankr. D. Mass. 2008), the
debtor's portion of his father's estate was placed into a
discretionary trust. The debtor argued that the trust was not
self-settled because the trust property passed directly from the
executors to the trustees of the trust. Id. at 13. The court
rejected the argument because the monies that funded the trust
14
"were monies that [the debtor] was legally entitled to receive
and did receive from the settlement of his father's estate. In
other words, there can be no dispute that the monies that funded
[the trust] were attributable to the [d]ebtor's share of his
father's estate." Ibid.
We see no meaningful distinction between the facts
considered in Cohen, those considered in In re Tosi, and the
facts here. McInerney's legal and equitable rights in the
settlement of the parties' rights and obligations upon
dissolution of the marriage was the impetus behind the creation
of the trust and, therefore, he properly is considered the
settlor. Compare Miller v. Ibarra, 746 F. Supp. 19, 30 (D.
Colo. 1990) (trust created by courts for incompetent person
pursuant to State statute not self-settled). That the monies
that funded the trust came from Stone's individual accounts is
not controlling where she contributed the funds in satisfaction
of her obligations related to the dissolution of the marriage.
We reject the premise adopted by the motion judge that
because certain accounts that funded the trust were in Stone's
name during the marriage and may have derived from trusts of
which she was the sole beneficiary, they could not be considered
to be part of the marital estate.12 "Inherited assets, including
12General Laws c. 203E, § 34 "is intended 'to provide a
mechanism whereby no matter how the property has been acquired
15
an interest in trust property established by one spouse's
parents," or, as in this case, a grandparent, "may comprise part
of a marital estate for purposes of possible division under
G. L. c. 208, § 34." Ruml v. Ruml, 50 Mass. App. Ct. 500, 511
(2000). While the parties chose to define in the ASA certain
bank accounts held solely by Stone as Stone's assets,13 there is
nothing in the record to suggest that accounts held in Stone's
name were not available to satisfy Stone's obligations to
McInerney at the time of the divorce. To the contrary, the
parties mutually agreed that McInerney was entitled to thirty-
five percent of the funds in these accounts to be paid into the
trust. Accordingly, the parties, when they executed the ASA,
and the Probate and Family Court judge when he approved it,
determined that the assets were properly divided between the
parties.14 The suggestion that the trust could not have been
or how it is held, the court can distribute it between the
parties in such a way as to provide for a balanced disposition
and economic justice.'" Denninger v. Denninger, 34 Mass. App.
Ct. 429, 434-435 (1993), quoting from Hay v. Cloutier, 389 Mass.
248, 254 (1983).
13As required by rule 401 of the Rules of the Probate Court
(2012), Stone disclosed these assets on her financial statement
filed in connection with the divorce proceedings.
14We have recognized the validity of such agreements, and
have "encouraged divorcing parties to enter into written
separation agreements," that "secure with finality the parties'
respective rights and obligations concerning the division of
marital assets, among other things, according to established
contract principles." DeMarco v. DeMarco, 89 Mass. App. Ct.
16
self-settled because McInerney's name was not on the accounts
during the marriage, particularly in these circumstances, is
unavailing.
C. Intention of the parties. It appears to have been the
intent of the parties to the ASA to create a valid spendthrift
trust that would protect the trust's assets from McInerney's
creditors.15 As between the parties, the terms of the ASA are
enforceable. The role of the Probate and Family Court judge in
approving the ASA was to ensure it was free of fraud and
coercion, and fair and reasonable in the circumstances. See
Dominick v. Dominick, 18 Mass. App. Ct. 85, 91 (1984). While
the ASA set forth the terms of the trust, including the
618, 623 (2016), quoting from Krapf v. Krapf, 439 Mass. 97, 103
(2003). Indeed, "[t]he public policy of Massachusetts 'favors
settlement of property disputes resulting from a divorce through
equitable, enforceable separation agreements, freely entered
into by the parties.'" Ratchford v. Ratchford, 397 Mass. 114,
116 (1986), quoting from Moore v. Moore, 389 Mass. 21, 24
(1983). See Pavluvcik v. Sullivan, 22 Mass. App. Ct. 581, 584
(1986). "[A] separation agreement is a 'judicially sanctioned
contract' that is valid and enforceable only if and as approved
by the judge" upon a finding that the division of the marital
estate is fair, reasonable, and equitable in the circumstances.
Krapf, supra at 104, quoting from Bell v. Bell, 393 Mass. 20, 26
(1984), cert. denied, 470 U.S. 1027 (1985) (Abrams, J.,
dissenting).
15 The parties to the ASA filed a joint motion to amend the
prior separation agreement in order to clarify that the
provision requiring McInerney's assets to be placed into a trust
is an integral and essential part of the separation agreement
and that an interpretation that the trust established for
McInerney is self-settled would be contrary to the parties'
intent.
17
spendthrift provision, there was no evidence that the Probate
and Family Court judge was asked to decide whether the trust
instrument would in fact protect McInerney's portion of the
marital estate from creditors.
McInerney and Stone were free to settle the rights and
obligations between them in an enforceable contract. However,
by the terms agreed upon in the ASA, they were not free to
except the trust from G. L. c. 203E, § 505(a)(2), with regard to
a creditor's effort to reach the trust to satisfy any judgment
against McInerney. If, as it would appear, their intent was to
keep McInerney's funds out of the hands of his creditors, they
could not do so by transferring his share of the marital estate
into a spendthrift trust over which the trustees had discretion
to pay to him both the principal and the interest of the trust
during his lifetime. Cf. Guerriero v. Commissioner of the Div.
of Med. Assistance, 433 Mass. 628, 633, 635 (2001). Here, the
proper application of G. L. c. 203E, § 505(a)(2), allows the
plaintiffs to access the trust in the circumstances presented.
Finally, we have considered whether McInerney's cognitive
impairments, which caused him to be placed under guardianship,
give him a special status in terms of self-settled spendthrift
trusts that are approved by a judge in the course of approving a
separation agreement. The parties have pointed us to no statute
or common-law principle that confers such a status. Cases
18
considered in Cohen, too, involved trusts created by
conservators and guardians for incompetent adults. In a case
with remarkably similar facts insofar as a husband involved in a
motor vehicle accident causing serious injuries placed proceeds
of his personal injury action into a spendthrift trust, the
Georgia Supreme Court said "no settlor, disabled or otherwise,
should be permitted to put his own assets in a trust, of which
he is the sole beneficiary, and shield those assets with a
spendthrift clause, because to do so is 'merely shift[ing] the
settlor's assets form one pocket to another, [in an attempt to
avoid creditors].'" Speed v. Speed, 263 Ga. 166, 168 (1993),
quoting from 76 Am. Jur. 2d 164, Trusts, § 129. In the absence
of public policy or other argument to the contrary, we agree.
Conclusion. We conclude that the trust was self-settled.
The funds transferred to the trust by Stone were transferred for
the purpose of satisfying her obligations to McInerney related
to the dissolution of the marriage. The principal and the
interest of the trust were available to McInerney during his
lifetime and the same amounts are available to the plaintiffs to
satisfy any judgment in their personal injury action. See
Reiser, 7 Mass. App. Ct. at 638-639. The judgment is reversed
and a new judgment is to enter declaring that the plaintiffs may
reach the assets of the Brian K. McInerney Irrevocable Trust.
So ordered.