Chapter 5 - Spendthrift Trusts and Creditors Creditors
5.3 Creditors
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generally available only to other beneficiaries, and not to third-party creditors, that is precisely the point of the creation of a spendthrift trust: the assets contained within it are not available to persons outside the trust relationship. Given these basic concepts of trust law, we conclude that it would be inappropriate to allow Doyle's judgment creditors to gain an attachment to the trust simply because Doyle, as trustee, may have abused his discretion in distributing trust funds.
Because we conclude that Lois Doyle, the settlor of the trust at issue, intended to create a spendthrift trust, we reverse the judgment of the court of appeals and hold that the instant trust is an implied spendthrift trust and, for that reason, the Morrisons cannot obtain an attachment to the trust.
Reversed.
NOTE
A person cannot shield his assets from creditors by placing them in a trust for his own benefit. Thus, the law gives creditors recourse against the entire interest in a self-settled trust. Thus, protection from creditors is available only to a recipient of inherited wealth, not a person who creates a self-settled trust using earned money. This rule has been codified in the majority of jurisdiction. For example, a California statute provides: “(a) If the settlor is a beneficiary of a trust created by the settlor and the settlor's interest is subject to a provision restraining the voluntary or involuntary transfer of the settlor's interest, the restraint is invalid against transferees or creditors of the settlor. The invalidity of the restraint on transfer does not affect the validity of the trust.” Cal. Probate Code §15304.
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involuntary creditors are precluded from receiving money from a spendthrift trust Child Support-Drevenik v. Nardone, 862 A.2d 635
OPINION BY POPOVICH, J.:
¶ 1 Appellant Dominick Nardone, Jr., trustee for John Nardone, his brother, appeals the order entered on April 12, 2004, in the Court of Common Pleas of Luzerne County, that directed Appellant to pay Mr. Nardone's child support arrears from the principal and income of the spendthrift trust established for Mr. Nardone's benefit by their mother's will. Upon review, we affirm.
¶ 2 The relevant facts and procedural history of this case are set forth in the trial court's opinion of June 14, 2004, as follows:
This matter originated on February 12, 1996, when the [c]omplainant, [Appellee]
Nicole Drevenik, filed a civil [c]omplaint for support against [Mr. Nardone] for the support of their two children, Joseph Drevenik, born September 18, 1986, and Jason Drevenik, born November 29, 1987. After a support conference and [hearing] before a [master in support], an [o]rder was entered for the support of the minor children on August 15, 1997, in the amount of $200.00 per month. Later modification petitions reduced this amount by [o]rder of March 16, 2000, to $140.00 per month in support and $20.00 per month on arrears.
Subsequently, because [Mr. Nardone] did not pay any child support for more than a year, a petition was filed to show cause why the assets of a trust held for [Mr. Nardone]
should not be used for support payments of his children. On March 3, 2004, Mr. Nardone appeared before [the trial court] owing child support in an amount just over $2,411.00. Mr.
Nardone acknowledged that he owed child support, that he wished to pay off this amount, and was willing to cooperate with the Commonwealth to the fullest extent. Counsel for [Appellant] explained that a [s]pendthrift [t]rust, of which [Mr. Nardone is the beneficiary]
was at the heart of the problem. Inez L. Nardone, [Mr. Nardone's mother (decedent) ], died on April 20, 2002, in Luzerne County. By her [l]ast [w]ill and [t]estament, she left fifty percent of her net estate to [Appellant] and fifty percent to [Appellant] in trust for [Mr.
Nardone]. Item III of decedent's will states in part:
[...] I give, devise, and bequeath my entire estate, whether real, personal, or mixed, of every kind, nature, and description whatsoever and wherever situated, as follows:
* * *
B. Fifty (50%) percent to my son, [Appellant], in trust for my son,
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[Mr. Nardone]. [Appellant] shall serve without bond. [Appellant] shall have total control over this [t]rust and apply such amount of income and principal as he, in his sole discretion, deems proper for the support, education, and welfare of my son, [Mr. Nardone]. I direct that this sum be invested safely and wisely in the sole discretion of [Appellant]. I further direct that my son, [Mr. Nardone] shall have no right to withdraw any funds from this trust.
Although the complete and total amount of the trust assets [has not been calculated and is, therefore, unknown], records from the Luzerne County Recorder of Deeds Office indicate that on August 19, 2000, [decedent's] home was sold for $94,900.00. Therefore, approximately half of this amount was placed in trust for [Mr. Nardone].
By order of April 12, 2004, [the trial court] found Mr. Nardone] in arrears of his child support obligation in the amount of $2,456.34. [Appellant] was directed to make immediate payment of all arrearages and to make continuing monthly payments of $140.00 by the 28th of each month. Furthermore, [Appellant] was ordered to provide a complete account of the assets and expenditures of the trust held by [Appellant] on behalf of [Mr.
Nardone].
¶ 3 Appellant filed a timely notice of appeal from the trial court's April 12, 2004 order. Thereafter, Appellant filed an ordered statement of matters complained of on appeal.
The trial court did not file a corresponding opinion after Appellant filed his statement of matters, but it did so upon the direction of this Court. See Drevenik v. Nardone, 644 MDA 2004 (Pa.Super. filed 6/16/2004) (unpublished order).
¶ 4 The sole issue Appellant present for our review is whether the principal of a trust may be invaded by a trial court in order to satisfy outstanding child support arrears.
¶ 5 Our review of Appellant's issue is governed by the following standard: In our appellate review of child support matters, we use an abuse of discretion standard. A support order will not be disturbed on appeal unless the trial court failed to consider properly the requirements of the Rules of Civil Procedure [g]overning [a]ctions for [s]upport ...or abused its discretion in applying these Rules. An abuse of discretion is not merely an error of judgment, but if in reaching a conclusion the law is overridden or misapplied, or the judgment exercised is manifestly unreasonable, or the result of partiality, prejudice, bias or ill-will ... discretion is abused. This is a limited role and, absent a clear abuse of discretion,
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the appellate court will defer to the order of the trial court. A finding of abuse is not lightly made but only upon a showing of clear and convincing evidence. Dennis v. Whitney, 844 A.2d 1267, 1269 (Pa.Super 2004) (citations omitted).
¶ 6 Appellant contends that the trial court abused its discretion when it ordered that the trust's principal and income be invaded to pay Mr. Nardone's child support arrears because the Pennsylvania Supreme Court's holdings in Humphreys v. DeRoss, 567 Pa. 614, 790 A.2d 281 (2002), and Maher v. Maher, 575 Pa. 181, 835 A.2d 1281 (2003), instruct that trust principal cannot be utilized as “income” for support purposes. We disagree.
¶ 7 It is clear that the holdings of Humphreys and Maher are inapplicable to the present case. Humphreys and Maher held that the corpus of an inheritance could not be included as
“income” by the trial court when it calculates a support obligation pursuant to the Support Guidelines. Humphreys, at 624, 790 A.2d 287-288 see also . Maher, 575 at 189-90, 835 A.2d at 1286-87. In the present case, as noted by the trial court, Appellee is not seeking a greater support award or a re-calculation of Mr. Nardone's income in light of his trust assets. Rather, Appellee seeks payment of accrued support arrears. Accordingly, neither Humphreys nor Maher offer guidance in this case. Therefore, Appellant's argument fails.
¶ 8 We acknowledge that the corpus of the inheritance in question is in the nature of a spendthrift trust, and, as such, the assets of the trust are insulated from incursions by creditors until such time those assets are delivered into the hands of the beneficiary, in this case, Mr. Nardone. 10 Summary of Pennsylvania Jurisprudence 2d. Probate, Estates and Trusts § 31:7. Nevertheless, we are satisfied that the trial court did not abuse its discretion when it ordered Appellant to distribute trust assets to pay Mr. Nardone's support arrears.
¶ 9 Reference to the testamentary language indicates that the spendthrift trust was established for the “support, welfare, and education” of Mr. Nardone. Clearly, the idea of providing support in the spendthrift trust, i.e., payment of daily living expenses, includes all reasonable living expenses that one would occur in the course of daily living, such as those involved in rearing children. Of course, children in our society can never be characterized as an “expense,” but the very existence of the Support Guidelines makes it clear that parenthood carries with it an obvious economic responsibility to care for a child's daily needs, which responsibility is coterminous with the parent's need to support himself or herself. As such, it becomes clear that the language of the trust permits the use of both trust principal and income to support Mr. Nardone's children, because, if they lived with him,
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trust assets would be used to meet their daily needs as well. Therefore, we are satisfied that the trial court did not abuse its discretion.
¶ 10 Our reasoning is buttressed by the seminal case of Moorehead’s Estate, 289 Pa.
542, 137 A. 802 (1927). In Moorehead’s Estate, Gertrude F. Moorehead (Gertrude) filed a petition in the Orphans' Court of Allegheny County seeking support for herself from the assets held for her estranged husband, H. Watt Moorehead (Watt), in the spendthrift trust established by Watt's grandmother, Mary Moorehead (the testatrix). Moorehead’s Estate, at 544, 137 A. at 803. The trial court ruled that the assets should be available for Gertrude's support, and both parties appealed.
¶ 11 Writing for a unanimous Court, Mr. Justice Frazer opined that, at the time of the writing of the testamentary trust, the testatrix's intent was to protect Watt from wasting his income by extravagance and dissipation but not to deliberately enable Watt to avoid the responsibility of support to his family placed on him by the law of this Commonwealth.
Moorehead’s Estate, at 547-48, 137 A. at 804-05. As support for his conclusion, Mr. Justice Frazer noted that the codicil that established the spendthrift trust was authored after Watt's marriage to Gertrude and that there was no indication of animosity toward Gertrude by the testatrix evident in her will and codicil or in the record. See Id., at 547-48, 137 A. at 804-05.
Moreover, even if a technical reading of the language of the spendthrift trust would permit Watt from avoiding his responsibilities to his family by virtue of the creation of the spendthrift trust, such a result was forbidden by the public policy of this Commonwealth.
Id., at 551, 137 A. at 806. Lastly, Mr. Justice Frazer reasoned that the nature of a support obligation was not a “debt” because it was not founded upon a legal contract but, rather, a societal obligation. Id., at 553, 137 A. at 806. Thus, an instrument that places a testamentary gift out of bounds from creditors for the collection of “debts” had no effect to preserve that property from the incursion of family members seeking payment of a support obligation. See Id., at 533, 137 A. at 806. Therefore, our Supreme Court affirmed the order of the Orphans' Court.
¶ 12 We observe that society places an even greater obligation on a parent to support his or her children than on a spouse to support another spouse. Therefore, the rationale of Moorehead’s Estate applies with even greater force to the present case. Inasmuch as our Supreme Court has concluded that the term “debt” does not encompass support obligations, the spendthrift trust cannot act to shield the assets of the trust from collection by Appellee
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for the benefit of Mr. Nardone's children. Moorehead’s Estate, at 553, 137 A. at 806. Further, similar to the facts in Moorehead’s Estate, the decedent lived long after the birth of Mr.
Nardone's children, and no animosity was evident toward them or their mother, Appellee, in the will that established the spendthrift trust. However, even if it was the decedent's intent to deprive her grandchildren of the assets within the trust, the public policy of this Commonwealth would forbid such a result. Cf. Moorehead’s Estate, at 551, 137 A. at 806. It is also evident from the record that Mr. Nardone recognizes his responsibility to his children and agrees that Appellant should release the assets held in trust for him to them for their support, which assets would, in any event, be available for the children's support were they to reside with Mr. Nardone. Accordingly, we are satisfied that the trial court did not abuse its discretion, and we affirm its order.
¶ 13 Order affirmed.
Tort Claim-Duvall v. McGee, 826 A.2d 416 BELL Chief Judge.
The issue presented for resolution by this case is whether a tort judgment may be satisfied by invading the principal of a spendthrift trust held for the benefit of the tortfeasor.
The Circuit Court for Anne Arundel County, recognizing that Maryland law only allows invasion of a spendthrift trust by a narrow class of creditors, and, only in limited circumstances, declined to expand the class or the circumstances. It opined that to hold that tort judgment creditors are among the class of creditors that have traditionally been allowed to invade a spendthrift trust in satisfaction of a judgment, would be to “rewrite” Maryland law. Such a revision of Maryland law, it pointed out, is properly addressed by the Maryland General Assembly or this Court. We shall affirm the judgment of the Circuit Court.
I
James Calvert McGee (“McGee”), one of the appellees in the case sub judice, was convicted of felony-murder for his participation in a robbery that resulted in the killing of Katherine Ryon. Robert Ryon Duvall,the appellant, is the Personal Representative of the Estate of Katherine Ryon. He brought suit, in that capacity, in the Circuit Court for Anne Arundel County against McGee, seeking both compensatory and punitive damages, plus costs of the suit, for the battery of Katherine Ryon and the conversion of her personal property. The parties settled this action, negotiating and executing an Agreement for Entry of Judgment/Partial Release of Claims (“Settlement Agreement”), pursuant to which, in
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satisfaction of the conversion count, the parties agreed to the entry of judgment against McGee, and in favor of the appellant, for $100,000.00 in compensatory damages and
$500,000.00 in punitive damages. The Settlement Agreement acknowledged that McGee is the beneficiary of a trust established by his deceased mother, which, at the time of the settlement, was valued at approximately $877,000.00, exclusive of early withdrawal penalties and taxes. Under the terms of the trust, periodic monetary payments are to be made to McGee, and to others on his behalf, by Frank B. Walsh, Jr., the Trustee of the trust (“the Trustee),” the other appellee in the case sub judice. Another provision of the trust established what is commonly referred to as a “Spendthrift” Trust. That provision prohibited McGee from alienating the trust principal (“corpus”) or any portion of the income from the trust while in the hands of the Trustee, and specifically shielded both the corpus and the income from claims of McGee's creditors. The trust instrument also gives broad discretion to the Trustee to terminate the Trust at any time and pay the trust assets and any undistributed income to McGee or to any of the remaindermen to which the trust referred. The Settlement Agreement also provided that:
“The [appellant] hereby forever releases, waives, relinquishes and abandons any rights he may have to satisfy or have paid any portion of the above-mentioned judgment by way of attachment, garnishment or any other post-judgment collection efforts directed against any periodic payments made by the Trustee of the Trust to [McGee] as the beneficiary of the Trust, or directed against any periodic payment made to any other person or entities for the benefit of [McGee].
The amount of any periodic payments which are immune to such post judgment collection efforts hereunder shall not exceed the amount of the periodic payment previously made during the preceding three (3) years, exclusive of payments made for legal fees. The parties understand and specifically agree that the Trustee will continue to pay the legal fees on behalf of [McGee] and such payment of legal fees shall be immune to any post-judgment collection efforts as outlined above.
[McGee] agrees that he shall provide an annual accounting in August of each year beginning in the year 2002 outlining the periodic payments received by him or made to others on his behalf (exclusive of legal fees) during the preceding year.”
Thus, it prohibited the appellant from attaching or garnishing any of the periodic payments the Trustee made to McGee from the Trust.
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Having surrendered all rights to attach McGee's periodic payment from the Trust, but armed with the judgment entered pursuant to the Settlement Agreement, the appellant sought to satisfy the judgment by invading the corpus of the trust. Thus, the appellant served a Writ of Garnishment on the Trustee. Answering the Writ, the Trustee defended on the grounds that the trust was a spendthrift trust; the Trustee was not indebted to McGee; and the Trustee was not in possession of any property belonging to McGee.
Both parties moved for summary judgment. Although acknowledging that this Court, in Smith v. Towers, 69 Md. 77, 14 497 (1888), upheld the validity of spendthrift trusts in Maryland and, thus, prohibited their invasion for the payment of debt, the appellant maintained that, over time, this Court has carved out, on public policy grounds, exceptions to the spendthrift doctrine, pursuant to which some classes of persons are permitted to invade spendthrift trusts. Noting one of the rationales of the Smith decision-that because
“[a]ll deeds and wills and other instruments by which [spendthrift] trusts are created are required by law to be recorded in the public offices ... creditors have notice of the terms and conditions on which the beneficiary is entitled to the income of the property,” 69 Md. 77, 14 499 the appellant argued that tort-judgment creditors should be included among those excepted, since such creditors had no opportunity to investigate the credit-worthiness of the tortfeasor prior to suffering from the tortious conduct giving rise to the claim. Furthermore, the appellant continued, the public policy of this State dictates that tort-judgment creditors be deemed a special class of creditors entitled to invade a spendthrift trust.
The trial court held: “Maryland law is what governs this case, however, and Maryland law is clear. A spendthrift trust may not be reached in order to satisfy the judgment in the case sub judice. Although the facts involving the murder of the late Ms. Ryon, and the further facts relating to the beneficiary status of the Defendant McGee, a felony murderer, are very tempting, this Court may not rewrite the law; the Maryland Legislature has the responsibility of that task, or the Appellate Courts of this State must further interpret the law.... This Court has a responsibility to apply and uphold the laws of the state as its interprets they now exist, not create new law.”
Thus, the appellant's motion for summary judgment was denied and the appellees' cross-motion, granted. The appellant noted a timely appeal to the Court of Special Appeals.
This Court, on its own initiative, issued the writ of certiorari to address this novel issue of Maryland law, prior to any proceedings in the intermediate court. Duvall v. McGee, 369 Md.
157 570, 801 A.2d 1031 (2002).
In this Court, the appellant argues that the public policy of this State favors a rule allowing a tort-judgment creditor's claim to be satisfied by invading the corpus of a spendthrift trust. He directs our attention to Maryland precedent, reflecting the recognition of spendthrift trusts, the rationale for that recognition and the development of exceptions to the spendthrift trust doctrine. More particularly, the appellant relies on Maryland's public policy against permitting criminals to benefit financially from their crimes. As to that, he relies on the Maryland statute, known as the “Son of Sam” statute, enacted to prevent criminals from profiting from their own crimes through “notoriety of crimes contracts,”
Curran v. Price, 334 Md. 149, 154, 638 A.2d 93, 96 (1994), and the like, see Md.Code (1957, 1992 Repl.Vol., 1993 Cum.Supp.), Article 27, § 854; this Court's creation in the common law of this State of a “slayer's rule,” pursuant to which a person who kills another is prohibited from being tangibly enriched by the death. (citations omitted)
By way of rebuttal, the appellees counter that accepting the appellant's argument would require and, thus, constitute a change in Maryland law and, in any event, the public policy goals argued by the appellant will not be advanced by allowing garnishment of a spendthrift trust by a tort-judgment creditor under the circumstances of the case sub judice.
As to the former, the appellees emphasize that the obligations, for the satisfaction of which this Court has allowed invasion of the corpus and income of a spendthrift trust have not been simple or ordinary contract debt; rather they have been “... dut [ies], not ... debt.” Safe Deposit & Trust Co. of Baltimore v. Robertson, 192 Md. 653, 662, 65 A.2d 292, 296 (1949). See Zouk v. Zouk, 204 Md. 285, 298, 104 A.2d 573, 579-80 (1954) (equating a contract for child support to “the decree of a court awarding support to the child or alimony to a wife.”). With respect to the latter, they argue that the public policy against a criminal benefitting from his or her crime is simply inapplicable to the case sub judice. The payments that McGee receives, they maintain, are in no way related to the crime that he committed. As important, the appellees point out, those payments are not even involved in the case, the parties, by their settlement agreement, having expressly exempted them from attachment.
II.
In Maryland, it is well settled that “spend-thrift trusts” may be created. (citations omitted). This Court first recognized the validity of “spendthrift” trusts, in Smith v. Towers, supra, concluding that the income from, and corpus of, such trusts are not subject to
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attachment or garnishment in the hands of the trustee. It is useful to review the rationale of that case.
In Smith, one of the judgment debtors was beneficiary of a trust, which provided for the trustee to collect the rents and the profits of the real estate that formed its corpus, for payment to him, “into his own hands, and not into another, whether claiming by his authority or otherwise,” Id. at 83, 14 A. at 497, and, upon his death, to convey the real estate to the beneficiary's surviving children. Id. The appellant, having obtained a judgment against the beneficiary of the trust and another, sought to satisfy the judgment by attaching the income from the trust.
Perceiving that the case presented two issues: whether the testator intended to give the income of the property to his son to the exclusion of his creditors and, if so, whether the terms and provisions of the will effected that intention, 69 Md. at 83, 14A. at 497, the Court had little difficulty resolving the first. As to that, we held:
“He not only gives the legal estate to the trustee, but he directs in express terms that he shall pay the income into the hands of his son and not into the hands of any other person, whether claiming by his authority, or in any other capacity.
Here then, is an express provision, that the income shall be paid to his son, and an express prohibition against paying it to any other person. If the income in the hands of the trustee is liable to the claims of creditors, the trustee it is plain could not carry out the trust. So construing this will as we do, and it is not we think susceptible of any other construction, the testator meant beyond all question that the income should be paid into the hands of his son, to the the [sic] exclusion of all other persons, whether claiming as alienees or as creditors.”
Id. at 84, 14 A. 497.
Turning to the next issue, we acknowledged that the English decisions and, indeed, those of a majority of the States deciding the issue, held that a necessary incident to the holding of an equitable estate, or an interest for life, was the right of alienation by the beneficiary, with the result that, without regard to provisions by way of limitation or otherwise, such estates are “liable for the payment of [the beneficiary's] debts.” Id. This Court rejected the two grounds on which those decisions rested, i.e., “that the right of alienation is a necessary incident to an equitable estate for life, and any restraint upon this right is against the policy of the law which favors the ready alienation of property; and ... that