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| Case No. A93-00005-HAR In Chapter 7 In re ALFRED J. FERRARA and GLORIA J. FERRARA, Debtor(s) |
ADV PROC NO A93-00005-001-HAR (BANCAP No. 94-3014)
MEMORANDUM DECISION FOR JULY 29, 1994, OMNIBUS HEARING |
| WILLIAM M. BARSTOW, III,
Trustee
Plaintiff(s) v. ALFRED J. FERRARA, GLORIA J. FERRARA, DENNIS FERRARA, individually and as Trustee of the KAE Family Housing Trust, THE KAE FAMILY HOUSING TRUST, and ALASKA VALUATION SERVICES, INC., Defendants(s) |
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INTRODUCTION - On July 29, 1994, I held a hearing on 13 motions in
this case. The following outline is a memorandum decision
regarding my ruling on all the matters. They are listed in the
same sequence in which they appeared on the calendar.
1. Motion by Barstow to Establish Restatement (2nd) of Trust 156
as Law of Case Regarding Self-Settled Trusts
1.1 Ruling -
1.2 Analysis -
The parties agree that the Supreme Court of the State of Alaska would adopt § 156 if a fact situation was presented involving these kinds of trusts.
3 ABR 474
I also agree, and will use § 156 as a governing principal in ruling in this case to the extent it applies. See In re Kirkland, 915 F2d 1236, 1238 (9th Cir 1990), which holds:
Most of the cases I have reviewed on this subject (some of which are discussed in part 2 of this memorandum) have adopted § 156 of the Restatement (2d) of Trusts or its predecessor when a question arose in the area of self-settled spendthrift or discretionary trusts. Alaska probably would, too. § 156 provides:When interpreting state law, a federal court is bound by the decision of the highest state court. Dimidowich v. Bell & Howell, 803 F.2d 1473, 1482 (9th Cir.1986), reh'g denied, op. modified, 810 F.2d 1517 (9th Cir.1987). In the absence of such a decision, a federal court must predict how the highest state court would decide the issue using intermediate appellate court decisions, decisions from other jurisdictions, statutes, treatises, and restatements as guidance. Id. at 1482; Molsbergen v. United States, 757 F.2d 1016, 1020 (9th Cir.1985), cert. dismissed, 473 U.S. 934, 106 S.Ct. 30, 87 L.Ed.2d 706 (1985). However, " 'in the absence of convincing evidence that the highest court of the state would decide differently,' " American Triticale, Inc. v. Nytco Services, Inc., 664 F.2d 1136, 1143 (9th Cir.1981) (quoting Stoner v. New York Life Ins. Co., 311 U.S. 464, 61 S.Ct. 336, 85 L.Ed. 284 (1940)), a federal court is obligated to follow the decisions of the state's intermediate courts. See id.
§ 156. WHERE THE SETTLOR IS A BENEFICIARY
(1) Where a person creates for his own benefit a trust with a provision restraining the voluntary or involuntary transfer of his interest, his transferee or creditors can reach his interest.
(2) 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.
Comment "a" to the Restatement provides:
Intention to defraud creditors not required. The rules stated in this Section are applicable
Comment "e" provides:
Discretionary trust for the settlor. Where by the terms of the trust a trustee is to pay the settlor or apply for his benefit as much of the income or principal as the trustee may in his discretion determine, his transferee or creditors can reach the maximum amount which the trustee could pay to him or apply for his benefit.
2. Motion by Barstow for Summary Judgment for All Assets of the
KAE Family Housing Trust
2.1 Ruling:
Despite any factual controversy about motive or intent with respect to the establishment of the trust, these are not material to the ruling. The trust agreement allows (although it certainly does not require) the trustee to distribute the trust assets entirely to the settlors, i.e. the debtors.
Therefore, Barstow is entitled to reach most of the assets of the KAE trust to the extent they could have been distributed to the debtors. Still unsettled is the precise identification of these assets; there has been no briefing on the effect of Kim Anthony's contribution, appreciation of the trust assets, etc.
2.2
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alternative would be bankruptcy.
On December 27, 1989, the Ferraras became the settlors of the "KAE Family Housing Trust". See, Docket Entry 18, Exhibit "A" for a copy of the trust agreement. The main stated purpose of the trust was to provide for housing for the Ferraras themselves, their three children, and the dependents of their three children.
At the time, the children were all adults. Kimberly Anthony was 33, Alfred J. Ferrara, Jr. was 31, and Elizabeth A. Strong was almost 28. The debtors have four grandchildren; both Ms. Anthony and Ms. Strong have two children. The trust is providing housing at the present time for all these people, who in turn pay rent to the trust.
Into the trust, the debtors transferred twelve different groups of assets. The assets included real property within and outside Alaska, the shares of stock in Alaska Valuation Services, Inc. (the Ferraras' appraisal business), stamp collections, cash, furnishings, and a promissory note. A table summarizing these items and their value appears below. The table is copied from the appendix to the December 27, 1989 trust agreement:
Alfred Ferrara's brother, Dennis Ferrara, was named as trustee. Dennis Ferrara is also involved in the appraisal business with Mr. Ferrara.
Some time after the trust was formed, Kim Anthony conveyed her residence to the trust and was provided housing in another residence owned by the trust. Also, the trust has bought and sold real estate since its inception.
Article V of the trust contains the dispositive
provisions. The purpose is to provide for the housing
needs of the beneficiaries. The trustee was to invest in
one or more housing units. Ownership by the trust was
preferred to
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supplying housing need with rented space.
Article V.3. provides for the discretionary provision for the settlors (the debtor) or any descendants of the settlors by using the principal and income of the trust in such manner as the trustee in his sole discretion determines. There are some general guidelines; the trustee is requested first to consider the housing needs of the older beneficiaries (the debtors) if all other factors are the same. The trustee also is to consider the financial needs of the beneficiaries, their standards of living, and their ability to provide for their own housing.
Under Article V.3.b., the trustee, in his discretion, can terminate the provision of housing for any of the beneficiaries, except the settlors who are entitled to retain their present house.
Article V.3.c. provides that the trustee, in his sole discretion, may distribute to any of the beneficiaries, other than settlors, the fee ownership of any housing unit or property owned by the trust. In other words, Dennis Ferrara could convey the entire trust away (except, possibly for the debtors' personal residence) to the Ferraras' children and grandchildren.
Under Article XII.E.5., beginning at page 15 of the trust, it provides that the trustee is absolved from any mistakes from errors in judgment except for recklessness, actual fraud, or willful misconduct.
Under the trustee's general powers article, Article
XIII.U., concerning "Termination of Trust", the trustee
may determine that the continuation of the trust would be
uneconomical or impractical, or would otherwise be
adverse to the best interest of the beneficiaries of the
trust, and, in his discretion, terminate the trust by
distribution of the remaining principal interest and
accumulated income of the trust to the income
beneficiaries of the trust at that time "in the same
proportion that the beneficiaries are entitled to receive
income when the trust terminates". If there is no
3 ABR 479
right to income fixed by the terms of the trust, distribution
shall be by right of representation to the persons
authorized in the trustee's discretion to receive
distributions from the trust.
Plaintiff submitted the affidavit of Carter Howard, an estate practitioner from Chicago, Illinois purporting to be an expert which says that all this boils down to the fact that, if he wants to, the trustee could in effect discontinue the trust and, under the terms of the trust agreement, pay everything to Alfred and Gloria Ferrara, the debtors, if they were alive then.
Barstow's opening memorandum on this subject is at Docket Entry 106. The KAE Family Housing Trust filed an opposition (Docket Entry 146) pointing out that there are restrictions in the trust. For example, the property cannot be distributed by the trustee to the settlors while the trust is still in operation. Article V.A.3.a. and b.
The trustee also points out that some of the assets, not identified in the table of twelve items, were put into the trust by other beneficiaries. For example, real property which was Kim Anthony's home was put into the trust, and she received the use of other housing assets in return.
Dennis Ferrara and the KAE Family Housing Trust basically argue that a fair reading of the trust agreement indicates that the interest of the settlors is relatively minimal.
2.3
The plaintiff's summary judgment argument does not
rely on his fraudulent transfer claim, but is restricted
to an application of § 156 of the Restatement (2nd) of
Trusts. Under that section, a transfer may be reached by
the creditors of the settlor of a self-settled trust when
it is for the benefit of the settlor or the trustee has
discretion to pay funds for the benefit of the settlor.
The amount reachable in the event of a discretionary
trust is the full amount which the trustee could have
paid to the settlor. In this case, according to
plaintiff's expert,
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Carter Howard, Dennis Ferrara could
have in effect paid the full amount over to the debtors
by using his discretion while still acting in compliance
with the terms of the trust. He could have terminated
the trust and paid everything to the Ferraras under their
right of representation.
The parties have cited few, if any, cases applying § 156, other than to refer to one or two in the annotations to the rule. Therefore, I have done may own research and set forth some of the cases I have found in parts 2.4 through 2.11 of this memorandum. Some of the quotes are perhaps overly long. All except the case at part 2.11 favor Barstow's thesis.
2.4
. . . the settlors here explicitly retained a substantial interest in the corpus of the trust. The trustee was authorized to invade the corpus for the support and care of the settlors. The trustee's discretion was unfettered, but surely the trustee would recognize that his discretion should be exercised in favor of invasion of the corpus when the needs of the settlors warranted it. At least, to the extent of their needs, the corpus of the trust was available for the maintenance, care and enjoyment of the settlors.The general rule is stated in Restatement (Second) of Trusts § 156(2) (1957). The creditors of a settlor may reach the assets of a spendthrift trust to the maximum extent that the trustee might apply them for the use and benefit of the settlors. Under the terms of this trust, the trustee was authorized to apply the entire corpus for the support and maintenance of the settlors, and thus the entire corpus is subject to the claim of their creditors.
One may wish to have one's cake and eat it, too, but the law need not bring the wish to fruition.
The district court correctly concluded that the debtors could not exempt their interest in either the income or the corpus of this trust.
2.5
Because Debtor died after she filed for bankruptcy, Appellants assert that she did not have a present right to the funds. See Matter of Lyons, 957 F.2d 444 (7th Cir.1992). Appellants argument, however, ignores the principle that if a settlor creates a spendthrift trust for her own benefit, it is void as to existing or future creditors, and they can reach her interests under the trust. Matter of Witlin, 640 F.2d 661, 663 (5th Cir.1981). Additionally, in the trust in the case at bar, the trustee had discretion to pay Debtor such amounts from the principal as necessary to maintain Debtor's standard of living. Because the trustee was entitled to apply the entire corpus for the support of Debtor, the entire corpus was subject to the claims of creditors. In re Robbins, 826 F.2d 293 (4th Cir.1987); Restatement (Second) of Trusts § 156(2). See Farmers State Bank v. Janish, 410 N.W.2d 188 (S.D.1987) (Where a settlor is the beneficiary of the spendthrift trust, the spendthrift provision is ineffective against creditors who may reach the trust funds.).
2. TRUST WAS SUBJECT TO GARNISHMENT BY CREDITOR OF SETTLOR-BENEFICIARY
[2] The trial court found the trust to be against public policy and the interest of Agnes in the trust to be garnishable. The validity of spendthrift trusts created by the settlor for the benefit of others has been recognized. In such cases, the trust is not open to garnishment by creditors of the beneficiary. But the majority rule is different where the settlor is also a beneficiary:
1) Where a person creates for his
own benefit a trust with a provision
restraining the voluntary or
involuntary transfer of his
interest,
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his transferee or creditors can reach his interest.
Restatement of Trusts 2d, § 156. This rule controls even though the trust is a trust for support or a discretionary trust. Restatement of Trusts 2d, § 156(2). See §§ 154, 155. See also Bank of Dallas v. Republic Nat. Bank of Dallas, 540 S.W.2d 499 (Tex.Ct.App.1976); Bogert, Trusts and Trustees, 2d ed. rev., § 223, p. 438.
[3] The funding of this trust came from the settlement proceeds which Agnes and her children received in satisfaction of their suits. The settlement agreement did not require that these proceeds be placed in trust. The creation of the trust, and the subsequent approval by the circuit court, was at the request of the Janish family. Although Agnes was only one of the settlors and beneficiaries, the trust agreement itself acknowledges that she holds a majority (81%) interest in the trust.
Agnes claims that the purpose of the trust was to support the entire family and that there was no intent to defraud creditors of Agnes. She confuses the denomination of the trust as being against public policy with a finding of intent to defraud. As Comment a. to Restatement of Trusts 2d, § 156 states: "[I]t is immaterial that the settlor-beneficiary had no intention to defraud his creditors." It was not necessary for the court to find that Agnes and her children created this trust with the intent of avoiding her creditors; nor was it necessary to conclude that the trust was against public policy. It was only necessary that Agnes be a settlor and a beneficiary of this trust to render its spendthrift provisions ineffective against creditors, and allow them to reach her trust funds. [FN2] Restatement of Trusts 2d, § 156(1) and (2).
FN2. Although not significant here because Agnes Janish's share in the trust is sufficient to satisfy this creditor's claim, it should be noted that only the interest of the debtor in the trust can be reached by her creditors.
2.7
3 ABR 483
income, did not preclude creditor from
obtaining payment out of trust property.
2.8
[13][14] The trust before us is not a spendthrift trust but, by reason of the discretion reposed in the trustee as to the use of the income, it is a 'discretionary' trust. If in such a trust the settlor is the sole person entitled to the income, that income can be reached by his creditors. Griswold, op.cit., 481; Restatement, 1 Trusts, § 156(2). A provision in the trust instrument that the trustee might in his discretion withhold the income from the settlor and accumulate it would not in itself place the income beyond the reach of his creditors. Petty v. Moores Brook Sanitarium, 110 Va. 815, 817, 67 S.E. 355, 27 L.R.A.,N.S., 800, 19 Ann.Cas. 271, and see Warner v. Rice, 66 Md. 436, 443, 8 A. 84. We are brought, then, to the question of the effect of the provision that the trustee in his 'absolute discretion' might expend any part of the income for the support and maintenance of the wife of the settlor or the support, education and maintenance of a named son and of other children who might be born to him.
The various situations which may be
presented where a creditor of a beneficiary of
such a trust is seeking to satisfy his claim
out of the income of the trust have been
collated and ably analyzed by Professor
Griswold in his work before referred to. See
particularly §§ 424 et seq., 436, 439 et seq.
and 484. He points out that there is
considerable conflict in the authorities in
cases where the settlor is not one of the
beneficiaries. § 439 et seq. He finds very
few cases, however, which deal with the
situation where the settlor is among the group
to whom the trustee may pay or for whose
benefit or support he may expend the income.
§§ 484, 485. Of these cases, only four deal
with the question without the qualification of
other distinguishing elements. In Holmes v.
Penney, 3 K. & J. 90, 103, 69 Eng.Rep.R. 1035,
Johnston v. Zane's Trustees, 11 Grat. 552, 52
Va. 552, 570, and Roanes v. Archer, 4 Leigh
550, 31 Va. 550, 568, the interest of the
settlor in the income was held in such a
situation not to be subject to be taken for
his debts, while in Bryan v. Knickerbacker, 1
Barb.Ch., N.Y., 409, 431, a contrary result
was reached. None of these cases discuss the
question at length, nor are they
3 ABR 484
particularly persuasive.
[15][16] The outstanding factor in the
situation is that, under a trust where the
trustee has absolute discretion to pay the
income or expend it for the settlor's benefit,
the trustee could, even though he had a like
discretion to expend it for others, still pay
it all to the settlor. Such a trust opens the
way to the evasion by the settlor of his just
debts, although he may still have the full
enjoyment of the income from his property. To
subject it to the claims of the settlor's
creditors does not deprive others to whom the
trustee might pay the income of anything to
which they are entitled of right; they could
not compel the trustee to use any of the
income for them. The public policy which
subjects to the demands of a settlor's
creditors the income of a trust which the
trustee in his discretion may pay to the
settlor applies no less to a case where the
trustee might in his discretion pay or use the
income for others. The trial court was
correct in holding that the plaintiff was
entitled to reach the income if necessary to
satisfy its judgment, but was in error in
holding that its rights were limited to so
much only of that income as the trustee in his
discretion deemed not to be required for the
support, maintenance or education of the
settlor's wife and children. [17][18] The
fact that the provisions of the trust
agreement are ineffective to protect the
income of the trust from the claims of Tyson's
creditors does not invalidate the trust as a
whole or in itself destroy the remainder
interests created. Egbert v. De Solms, 218
Pa. 207, 209, 67 A. 212; Mercantile Trust Co.
v. Bergdorf & Goodman Co., 167 Md. 158, 166,
173 A. 31, 93 A.L.R. 1205; Low v. Carter, 21
N.H. 433, 435. Under the trust instrument,
the rights of those designated to receive the
remainder interest in the half of the
principal continuing in the trust after the
expiration of the first ten-year period were
subject to two conditions. They would be
defeated should the settlor be living at the
expiration of that period and they might be
defeated by virtue of the reservation to the
settlor of the right, with the consent of the
trustee, to amend or amplify the instrument,
although not in such a manner as to change the
provisions for the disposition of the
principal or income prior to his death.
Whether, under a trust such as the one before
us, a creditor could reach the principal
during the life of the settlor, we have now no
occasion to decide. See Jones v. Clifton, 101
U.S. 225, 229, 25 L.Ed. 908; Fidelity
3 ABR 485
Trust
Co. v. New York Finance Co., 3 Cir., 125 F.
275, 60 C.C.A. 189; Benedict v. Benedict, 261
Pa. 117, 104 A. 581; Ward v. Marie, 73 N.J.Eq.
510, 68 Atl. 1084; Mercantile Trust Co. v.
Bergdorf & Goodman Co., supra; Crawford v.
Langmaid, 171 Mass. 309, 50 N.E. 606;
Griswold, op.cit., § 480; 19 Minn.L.Rev. 330;
48 Harv.L.Rev. 1197; Restatement, 1 Trusts,
§ 156, comment c. When Tyson died, the
contingencies which might defeat the remainder
interests could no longer happen, and those
interests then became indefeasibly vested.
Bates v. Spooner, 75 Conn. 501, 508, 54 A.
305; Thomas v. Castle, 76 Conn. 447, 451, 56
A. 854; Daskam v. Lockwood, 103 Conn. 54, 64,
130 A. 92. While we have found few cases
dealing with a situation where the settlor of
the trust, after reserving to himself the
income for life, creates vested indefeasible
interests, to take effect at his death, we
have found none which subjects such interests
to the demands of the settlor's creditors, and
on principle there is no question that the
creditors cannot reach those interests. Over
them the settlor has no dominion, and his
creditors have no more right to reach them
than they would any interests in property
formerly owned by him which has passed into
the ownership of another. Bryan v. Knicker-backer, supra, 1 Barb.Ch., N.Y., 425;
Griswold, op.cit., § 475; 1 Perry, Trusts, 7th
Ed., p. 654.
2.9
. . . The fact that the creator's interest is subject to the trustee's discretion does not affect this result. So, if the Trustee has absolute discretion to convey the fee or absolute interest to the creator of the trust, creditors of the creator can reach the entire interest. See, Griswold, Spendthrift Trusts Created in Whole or in Part for the Benefit of the settlor, 44 Harv.L.Rev. 203 (1930). The Restatement (Second) of Trusts § 156 incorporates this principle wherein it provides:Since the Trustee has the power to pay the trust income to the Debtor, and to invade the principal and pay it to the Debtor, then the creditors, present or future, have the right to reach the trust assets.(2) Where a person creates for his own benefit a trust for support or a discretionary trust, his transferee or
2.10
2.11
The case is In re Kincaid, 917 F2d 1162 (9th Cir 1990), in which the court held that the employee's share of 401(k)-ERISA plan was not property of the estate because it was a valid spendthrift trust under state law, even though the debtor had access to it by quitting, retirement, loans, etc. At that time, before Patterson v Shumate, 112 SCt 2242 (1992), the 9th Circuit and many other circuit courts believed only state spendthrift trust law was available to remove property from the estate pursuant to § 541((c)(2) of the Bankruptcy Code, and that the federal ERISA anti-alienation provisions were not available to remove the trust from the estate. Patterson v Shumate changed this.
In any event, the court said in Kincaid at page 1166-68:
B. The Plan is a Spendthrift Trust.[6] Some courts have held that a plan is self-settled if an employee voluntarily participates in the plan. See Cates, 73 B.R. at 876 n. 3 (the settlor is the "[o]ne who furnishes the consideration (res) necessary for the creation of the trust"); In re Sanders, 89 B.R. 266, 270 (Bankr.S.D.Ga.1988) (court found self-settled trust where employee "voluntarily chose to participate thereby adopting the plan as his own"). That per se rule elevates form over substance given the variety of plans that exist in this area.[5] It is well settled law in both Oregon and Massachusetts [FN2] that a settlor cannot create a spendthrift trust for his own benefit. See In re Cates, 73 B.R. 874, 875 (Bankr.D.Or.1987); State Street Bank and Trust Comp. v. Reiser, 7 Mass.App.
FN2. The Plan specifically provides that it is to be governed by the laws of Massachusetts. However, the BAP questioned whether Massachusetts had a substantial relationship to the parties or the transaction, and whether Oregon law should instead be applied. The BAP did not resolve this dispute, since it found that under either state's law, the Plan would not be considered a spendthrift trust. Kincaid, 96 B.R. at 1018. Similarly, we do not have to determine which law applies since there is no conflict between the two states' laws.
This is a case in point. Section 2.05 of
the Plan expressly defines a participant as
"an Employee who has made contributions to the
Plan...." The Plan also states that an
employee's participation in the Plan is
voluntary. However, it cannot be disputed
that a sine qua non of this type of plan is
that the employee does not have the right to
the funds contributed to the Plan at any time
prior to their contribution. That is to say,
the employee does not receive those funds and
then choose whether to contribute them to the
Plan. When the employee does agree to be a
part of the Plan, it is only future (not past
earned) compensation that is reduced.
Moreover, the amount contributed never belongs
to the employee; it comes directly from the
employer. Indeed, once Kincaid had contracted
with the Company for a lower salary, she had
no right to a greater amount. She could not
obtain the higher amount directly. It is true
that the employer agreed to contribute a like
amount to the trust. However, she was no more
entitled to immediate receipt of that money
than she would have been had she simply agreed to work
3 ABR 488
for less for other reasons. We, therefore, hold that the trust was not
self-settled.
The fact that the trust is not self-settled does not necessarily mean that it is a spendthrift trust. Courts also focus on "the amount of 'dominion and control' exercised by the debtor over the trust property" in deciding whether the plan sets up a spendthrift trust. [FN3] Kaplan, 97 B.R. at 577 (court found no spendthrift trust where employee was integrally involved in the decision-making process of the plan and was not restricted from drawing on the account). Cf. In re West, 81 B.R. 22, 25-26 (9th Cir. BAP 1987) (court found spendthrift trust where debtor had no direct control over any aspect of the plan and had very restricted access to the account). The administrator claims that this Plan is a spendthrift trust because it was created and is controlled by the Company, not the employee.
FN3. This is so because implicit in the term "spendthrift" is the notion that the distribution of the trust is controlled by someone other than the beneficiary of the trust. Compare Perabo v. Gallagher, 241 Mass. 207, 135 N.E. 113 (1922); West, 81 B.R. at 25-26, with State Street Trust Co. v. Kissel, 302 Mass. 328, 19 N.E.2d 25 (1939); Barnard v. Stone, 159 Mass. 224, 34 N.E. 272 (1893).
The Plan was clearly created by and is
administered by the Company. Kincaid's
control over her interest in the Plan is also
severely limited. Under the Plan, Kincaid is
entitled to distribution of her interest in
the Plan upon death, attainment of age 59 1/2,
disability, retirement, termination of
employment or termination of the plan.
Kincaid can only obtain funds from the Plan
prior to the occurrence of one of these events
pursuant to the loan or hardship provisions.
Kincaid's access to funds through those
provisions is solely within the discretion of
the administrator. [7] Courts have disagreed
as to whether the ability to gain access to an
entire vested interest by the termination of
employment is sufficient to destroy the
spendthrift character of a plan. Some courts
have determined that since the provision
enables a debtor, by voluntary action, to
invade the corpus of the trust, it is not a
true spendthrift trust. See, e.g., In re
Sildorff, 96 B.R. 859, 863 (C.D.Ill.1989);
Sanders, 89 B.R. at 270. Others have determined that the
3 ABR 489
ramifications of having to quit one's job in order to gain access to the
corpus of the trust are sufficient to prevent
the use and abuse of the access as a means of
sheltering assets. See, e.g., Goff, 706 F.2d
at 589; Hysick, 90 B.R. at 775; West, 81 B.R.
at 25. We adopt the latter position. While
it is true that termination of one's job is
often in one's own hands, it would be a rather
drastic step to take for the purpose of
obtaining funds in the Plan. Indeed, one
reason employers create these plans is to
offer employees incentives not to quit. Thus,
from the vantage point of the trust, this is
much more like other random or unpurposive
events which can affect the debtor. We find
that this provision is not, by itself,
sufficient to destroy the spendthrift
character of the trust.
[8] Courts are also divided on the question of whether the insertion of a loan provision, a hardship provision, or both in a trust destroys its spendthrift character. If the loan does not have to be repaid with interest, but is instead treated as a premature distribution of part of the corpus, then courts have been less willing to treat a plan as a spendthrift trust. See, e.g. Sildorff, 96 B.R. at 864. However, where the administrator is not obligated to make the loan and the loan has to be repaid with interest, courts have found that the fact that a plan contains a loan provision does not destroy its spendthrift character. See, e.g., Hysick, 90 B.R. at 776-77; West, 81 B.R. at 25.
In this case, the Plan allows Kincaid to borrow against her account. However, it requires that she repay the loan with interest, and specifically provides that "[t]his provision shall not be used as a means of distributing benefits before they otherwise become payable." Also, her ability to obtain the loan is solely within the discretion of the administrator. Thus, the Plan is easily distinguishable from plans in which the employee has unrestricted access to the corpus through use of a loan provision. See e.g., Alagna, 107 B.R. at 306; Kaplan, 97 B.R. at 578.
[9] In addition, Kincaid may gain access
to the corpus through the hardship provision.
Again, this provision is discretionary and
limited to specific sets of circumstances.
The restrictive nature of Kincaid's access to
the corpus through this provision is evidenced
by the administrator's denial of her hardship
petition in this case. Thus, this section does not destroy the spendthrift
3 ABR 490
character of the Plan.
[10] It is true that the Plan does not create the most restrictive spendthrift trust imaginable. However, the degree of the employee's control is far less than that of the employees in most of the cases where protection has not been found. The restrictions are sufficiently obstructive to create a spendthrift trust, and, therefore, we hold that the Plan is a spendthrift trust. We are confirmed in this position by the knowledge that it attenuates the clash between ERISA and bankruptcy law, and thus helps prevent our legal system from becoming a mere farrago of unrelated provisions.
Since the Plan is a spendthrift trust, Kincaid's interest in the Plan is not property of the estate.
I have criticized some of the reasoning in Kincaid in In re Jury, Case No. A89-00314-HAR, reported in 2 ABR 278, 281-283 (Bankr D AK 1992) (order dated February 20, 1992).
2.12
To my surprise, the parties cited no cases to me in their briefs dealing with the nuances of the application of § 156(2). If the KAE trust or Dennis Ferrara are aware of such case law, it is incumbent on them to bring it to the court's attention by a motion to reconsider. Otherwise, the ruling will stand.
3. Motion by Barstow for Dismissal of Affirmative Defense of
Statute of Limitations
3.2
3 ABR 491
bankruptcy trustee appointed in the debtors' case. He
brought this adversary proceeding within 2 years of his
appointment, and thus complies with § 546(a)(1) of the
Bankruptcy Code requiring such suits within 2 years of
appointment.
Nonetheless, Dennis Ferrara and the KAE trust allege that the trustee's fraudulent transfer actions are time barred because the time to sue expired prior to the filing of the bankruptcy case in 1993.
The fraudulent conveyance action by the trustee was brought under § 544(b) of the Bankruptcy Code, incorporating AS 34.40.010 et seq.
The court will follow the March 12, 1992, ruling of District Judge Singleton in Battley v Stanton, Case No. A91-0161-Civil, United States District Court for the District of Alaska, in which he indicated that the 6-year statute of limitations applied. A copy of the opinion is attached to Docket Entry 129, entitled Errata.
Judge Singleton ruled in Battley v Stanton, in which a bankruptcy trustee was alleging fraudulent transfer under the provisions of AS 34.40 and § 544(b) of the Bankruptcy Code, that the 6-year period provided by AS 09.10.050 was the appropriate statute of limitation, and rejected the use of the 2-year period provided by AS 09.10.070. Thus, the trustee's fraudulent transfer action is timely.
4. Motion by 's Dennis J. Ferrara and The KAE Family Housing
Trust for Partial Summary Judgment; and Request for Acceptance of
Late Filed Affidavit of Dennis Ferrara in Support of Dennis
Ferrara's and The KAE Family Housing Trust's Motion for Partial
Summary Judgment
4.2
5. Motion by Barstow for Summary Judgment for Trustee's Avoidance
of Preferential Transfers of Arizona Property
There is no dispute that the transfer was for an antecedent debt to AVSI, and that the transfer was perfected within 1 year of the bankruptcy in early 1993. There is also no dispute that AVSI was an "insider" in the bankruptcy sense pursuant to §101(31) of the bankruptcy code, thus allowing the trustee to avoid a transfer made within one year of the bankruptcy petition.
To show insolvency of the debtors at the time of the transfer, Barstow offers some letters Alfred Ferrara wrote to various creditors pleading grave financial pressure and some financial statements purported to be the Ferraras which show a negative net worth at about the time of the transfers.
The Ferraras (or, really, AVSI) counter that Alfred Ferrara's alleged admissions regarding his finanical condition do not bind AVSI. His financial statements were not admissible, according to AVSI, because no foundation was laid to show where they came from. The letters are attacked because they do not purport to be financial statements and could be viewed as Alfred's attempt to negotiate better deals with his creditors without accurately showing his financial condition.
Barstow has also filed an affidavit of a CPA, Fred Strand, indicating the debtor was insolvent, but offers little backup information on how he reached this conclusion. Also, it was filed just before the summary judgment argument and did not allow the other side sufficient time to review or rebut.
5.3
To establish insolvency under § 547(b)(3) of the
Bankruptcy Code, Barstow has presented copies of letters
and financial statements purportedly of the Ferraras
without specifically identifying where they came from and
that they were acknowledged by Alfred Ferrara as his own. I do not know
3 ABR 493
if they were acknowledged or explained by
the Ferraras. This information may have been addressed
in other motions or elsewhere in the record, but I should
not have to search it out if it exists. Thus, there is
a failure to present competent, admissible evidence.
FRCivP 56(e); Beyene v Coleman Securities Services, Inc.,
854 F2d 1179, 1181-82 (9th Cir 1988).
The Ferraras raised a legal argument which Barstow did not address. That is, can AVSI be stuck with the admissions of Alfred Ferrara (assuming they are admissions of insolvency for the sake of argument)? See Fed Rule Evid 801. Although this is a legal issue and summary judgment might be appropriate, I will not grant summary judgment until it is briefed for me by the movant.
There is only a cursory attempt by Barstow to show that AVSI would receive more because of the transfer than it would have under chapter 7 without it. § 547(b)5). Some cases say that this is a mechanical test, and if there is not going to be a 100% payoff to unsecured creditors, a preferential transfer to one of them would allow that person to automatically receive more than he or she would in a chapter 7 case. § 547(b)(5). On the other hand, other cases say that an analysis of the actual facts, hypothesizing a chapter 7 distribution, must be made. See In re Lewis W. Shurtleff, Inc., 778 F2d 1416, 1420-21 (9th Cir 1985) and In re LCO Enterprises, 12 F3d 938, 941 (9th Cir 1993) to appreciate some of the analytical complexities which can creep into what would seem like a simple mathematical exercise.
Barstow offered little analysis along these lines and so summary judgment is not warranted. When the movant does not establish the absence of a genuine issue of fact, summary judgment must be denied, even if no opposing evidentiary matter is presented. Luckett v. Bethlehem Steel Corp., 618 F.2d 1373, 1383 (10th Cir, 1980).
6. Motion by Barstow to Compel Debtors to Turnover 11116 Shady
Lane
3 ABR 494
GRANT it in the form of an order entered pursuant to
FRCivP 56(d) that the December 9, 1978, "codicil" of Roy
Russell is ineffective to vary Russell's October 12,
1972, last will.
The property in Russell's estate at the time of his death included the Shady Lane home. Under the will, a one-half share of that home devolved to Gloria Ferrara. Dennis Ferrara, her brother-in-law and Russell's step-son, got the other half. She quit-claimed her interest in Shady Lane to the KAE Family Housing Trust in about December, 1989.
Therefore, the court rules, pursuant to FRCivP 56(d) and FRBP 7056, that the material facts stated in the preceeding two paragraphs exist without substantial controversy. The exact extent of Gloria's property interest is more ambiguous, given the possible interest of Dennis Ferrara as an equal beneficiary under the Russell will and must be developed at trial and is in good faith controverted.
6.2
The debtors live at 11116 Shady Lane. The home was constructed by Roy Russell, Alfred Ferrara's stepfather and Gloria's father-in-law. The trustee alleges it is worth between $300,000.00 to $500,000.00.
In the will of Roy Russell dated October 17, 1972, he left his property to be divided between Dennis Ferrara and Gloria Ferrara. This would have included the Shady Lane house as it existed at the time of Roy's death on February 12, 1981.
There is the copy of a document dated December 9,
1978, which debtors argue is a codicil to the will,
however. The codicil has never been probated and was
apparently only recently remembered by the debtors. Only
a copy is available. It gives the debtors only a life
interest in the Shady Lane residence, with the remainder to the debtors' heirs. See,
3 ABR 495
Exhibits 4 and 5 to Docket
Entry 104 (KAE's motion for partial summary judgment) for
a copy of the will and codicil.
In December of 1989, the debtors established the KAE Family Housing Trust. The facts regarding this are more extensively discussed in Part 2.2 of the memorandum. I am uncertain why Gloria was able to convey the entire property to the KAE trust as opposed to one-half interest.
There apparently has been no formal distribution from the Roy Russell estate which was probated in Anchorage in 1981. Gloria is the personal representative of that estate.
The trustee argues that by right of devolution the property is equitably owned by Gloria and, when it ultimately is conveyed to her by the Roy Russell estate, it will become part of her bankruptcy estate, thus priming the KAE Family Housing Trust.
The trust and Dennis Ferrara, on the other hand, argue that the codicil prevails, and the property under the codicil gave a life estate to the debtors and the remainder to the heirs of the debtors. They argue, apparently, that the conveyance to the KAE Family Housing Trust is an appropriate implementation of this provision of the codicil.
6.3
The KAE Family Housing Trust argues that, notwithstanding the failure to probate the codicil in the existing probate of the Roy Russell estate, it can be used to establish title. The KAE trust cites AS 13.16.010 which provides:
Sec. 13.16.010 Necessity of order of probate for will.Except as provided in AS 13.16.680, to be effective to prove the transfer of any property or to nominate an executor, a will must be declared to be valid by an order of informal probate by the registrar, or an adjudication of probate by the court, except that a duly executed and unrevoked
(1) no court proceeding concerning the succession or administration of the estate has occurred, and
(2) either the devisee or the successors and assigns of the devisee possessed the property devised in accordance with the provisions of the will, or the property devised was not possessed or claimed by anyone by virtue of the decedent's title during the time period for testacy proceedings.
KAE argues that the property has been in the possession of the Ferraras for years, and therefore the codicil can be used to establish that ownership of the property should be a life estate for the debtors with the remainder interest to the heirs of the debtors. This alleged interest, apparently, has been passed to the KAE trust.
AS 13.16.010, however, is not available at this late date to vary the distribution set out in the probated will. The Official Comment to the Uniform Laws Annotated 1983 version of the Uniform Probated Code § 3-102 which is similar to AS 13.16.010 is:
The requirement of probate stated here and the limitations on probate provided in 3-108 mean that questions as to testacy may be eliminated simply by the running of time. Under these sections, an informally probated will cannot be questioned after the later of three years from the decedent's death or one year from the probate whether or not an executor was appointed, or, if an executor was appointed, without regard to whether the estate has been distributed. If the decedent is believed to have died without a will, the running of three years from death bars probate of a late-discovered will and so makes the assumption of intestacy conclusive.The exceptions to the section (other than the exception relevant to small estates) are not intended to accommodate cases of late-discovered wills. Rather, they are designed to make the probate requirement inapplicable where circumstances led survivors of a decedent to believe that there was no point to probating a will of which they may have had knowledge. If any will was probated within three years of death, or
Barstow argues that AS 13.16.040 is the controlling statute. There is a three-year statute of limitations on admitting a will to probate. The statute provides in pertinent part:
Sec. 13.16.040 Probate, testacy and appointment proceedings; ultimate time limit.No informal probate or appointment proceeding or formal testacy or appointment proceeding, other than a proceeding to probate a will previously probated at the testator's domicile and appointment proceedings relating to an estate in which there has been a prior appointment, may be commenced more than three years after the decedent's death, except (1) if a previous proceeding was dismissed because of doubt about the fact of the decedent's death, appropriate probate, appointment or testacy proceedings may be maintained at any time thereafter upon a finding that the decedent's death occurred before the initiation of the previous
The time to probate the codicil has expired. Thus, the will prevails and the codicil does not.
Even if the personal representative (Gloria) has not issued her personal representative's deed to the Shady Lane property, equitable title has devolved under the will. AS 13.16.005 provides, in part, that:
Upon the death of a person, that person's real and personal property devolves to the persons to whom it is devised by the last will
In any event, the turnover claim may be academic to some degree in light of my holding in sections 1 and 2 of this memorandum decision that the property conveyed to the KAE Family Housing Trust by the settlors, which includes the Shady Lane residence, is property of the estate reachable by the trustee.
3 ABR 499
7. Motion by Barstow to Compel Debtors to Turnover Cash, Personal
Property, and Insurance
7.2
7.3 Severance: It would be appropriate to sever this matter from the adversary proceeding and handle it in the main case.
8. Motion by Barstow to Compel Production of Files from the
Attorneys for the Estate of Roy Russell, filed 07/08/94
9. Motion by Barstow to Compel Alfred and Gloria Ferrara to Comply
with Discovery Requests, filed 07/08/94
10. Motion by Barstow to Compel Dennis Ferrara to Respond to
Second Requests for Production Propounded to Dennis
11. Joint Motion by 's The KAE Family Housing Trust, Dennis
Ferrara, Alfred & Gloria Ferrara, and Alaska Valuation Services to
Extend Time to File Expert Witness Reports (DE#135); and Motion by
Alfred & Gloria Ferrara for Extension of Time To File Expert
Witness Report (DE#138)
3 ABR 500
12. Motion by The KAE Family Housing Trust to Retain Accountant
Dan Laughlin, and Opposition by Barstow Thereto
13. Motion by Barstow to Amend 's Witness List; 's Dennis
Ferrara and The KAE Family Housing Trust's Statement of Limited
Opposition to Amend Witness List; and Dennis Ferrara's Cross-Motion
To Amend 's Witness List
CONCLUSION - Appropriate orders will be signed for each of the
motions. These will not be final orders since the trial is yet to
take place. I will prepare orders for the motions numbered 1, 2,
and 6, and the others have been assigned to Jon Givens to lodge.