Chapter 5—Spendthrift Trusts and Creditors
A spendthrift is a person who squanders money. If the testator wants to provide for a person who she knows is wasteful, her best option is to create a spendthrift trust or to place a spendthrift provision in any other type of private trust. The beneficiary of a spendthrift trust cannot voluntarily alienate his or her interest in the trust. In the case of a mandatory trust with a spendthrift clause, the beneficiary can waste the money that he receives from the trustee. However, the beneficiary cannot transfer his interest in the trust. Likewise, the beneficiary’s creditors cannot force the trustee to pay his debts from the funds in the trust. This type of trust is created by placing a disabling restraint upon the beneficiary and his creditors. No specific language is needed to create a spendthrift trust as long as the testator manifests an intent to create one. Thus, a spendthrift trust may be created by implication based upon the totality of the circumstances involved in the trust’s creation. All jurisdictions have enacted statutes permitting spendthrift trusts. Most of those statutes are similar to the Uniform Trust Code’s provision that is set out below.
Uniform Trust Code (2000)
§ 502. Spendthrift Provision
(a) A spendthrift provision is valid only if it restrains both voluntary and involuntary transfer of a beneficiary’s interest.
(b) A term of a trust providing that the interest of a beneficiary is held subject to a “spendthrift trust,” or words of similar import, is sufficient to restrain both voluntary and involuntary transfer of the beneficiary’s interest.
(c) A beneficiary may not transfer an interest in a trust in violation of a valid spendthrift provision and, except as otherwise provided in this [article], a creditor or assignee of the beneficiary may not reach the interest or a distribution by the trustee before its receipt by the beneficiary.
§ 503. Exceptions to Spendthrift Provision
(a) In this section, “child” includes any person for whom an order or judgment for child support has been entered in this or another State.
(b) Even if a trust contains a spendthrift provision, a beneficiary’s child, spouse, or former spouse who has a judgment or court order against the beneficiary for support or maintenance, or a judgment creditor who has provided services for the protection of a beneficiary’s interest in the trust, may obtain from a court an order attaching present or future distribution to or for the benefit of the beneficiary.
(c) A spendthrift provision is unenforceable against a claim of this State or the United States to the extent a statute of this State or federal law so provides.
Answer the following questions based upon the UTC.
1. Ryan, a compulsive gambler, borrowed $50,000 from his friend Mario to pay off his gambling debts. In exchange for the loan, Ryan signed a contract agreeing to repay him out of the funds in a spendthrift trust created for him by his mother. Ryan went to the trustee and ask for $50,000, so he could repay Mario. What result?
2. Nina established a spendthrift trust for the benefit of her son, Ivan. While he was married, Ivan had an affair with Jennifer. As a result of that affair, Jennifer gave birth to a son, Elliot. Ivan refused to provide financial support for Elliot. Elliot had to have emergency surgery that cost $150,000. Jennifer sued the trust seeking assistance to pay off the hospital bill. What result?
3. Sheldon created a spendthrift trust for the benefit of her daughter, Maria. Maria accumulated over $30,000 in credit card debt. One of the credit card companies obtained a $20,000 judgment against Maria. That company sued to attach the trust funds. The trustee hired Julius, an attorney, to defend the trust. After Julius successfully protected the trust assets, he submitted a $15,000 bill for attorney fees. The trustee thought that the attorney fees were too high, so he refused to pay it. Julius sued the trust to recover the attorney fees. What result?
4. Jessie established a spendthrift trust for the benefit of her niece, Paula. Paula did not pay income taxes on the income that she earned from a part-time job. As a result, the Internal Revenue Service obtained a $11,000 judgment against her. The IRS filed suit against the trust seeking to satisfy the judgment. What result?
5.1 Expressed Spendthrift Trust
The following is an example of the creation of an expressed spendthrift trust: Louise devises property to Samuel in trust to pay the income to James for life. The trust instrument contains a clause stating: “As beneficiary of this trust, James is hereby restrained from alienating, anticipating, encumbering, or in any manner assigning his or her interest or estate, either in principal or income, and is without the power so to do, nor shall such interest or estate be subject to his or her liabilities or obligations not to judgment or other legal process, bankruptcy proceedings or claims of creditors or others.” By inserting this language in the trust, Louise ensures that James’ creditors cannot obtain an interest in the trust.
5.2 Implied Spendthrift Trust
Morrison v. Doyle, 582 N.W. 2d 237
We are asked to determine whether the trust at issue in this case is a “spendthrift trust.” If so, the assets of the trust are protected from attachment by the primary beneficiary’s judgment creditors; if not, the creditors, whose judgment against the primary beneficiary William Doyle (appellant) arises from a business deal, are entitled to attach the assets in the trust, as the trial court and court of appeals have held. We reverse the court of appeals, holding that the settlor’s intent in creating the trust was to protect the trust funds from the primary beneficiary’s creditors and that the powers afforded to Doyle, as trustee, by the trust instrument do not defeat that intent.
The business relationship underlying this case began in 1977 when respondents Michael Morrison and others loaned substantial funds to a corporation, in which Doyle and his brother claimed to be the only shareholders. Doyle personally guaranteed the loans, but later defaulted on the guarantee. Respondents commenced suit against Doyle and his brother in 1979, alleging breach of contract; they received a judgment against Doyle in 1993 in the amount of $55,954.19 After various other attempts to enforce the judgment, in 1996 respondents sought a preliminary order of attachment of certain trust assets, for which Doyle was both the trustee and the beneficiary, and a temporary restraining order to prevent Doyle transferring any of the trust assets. The Morrisons alleged that Doyle had fraudulently transferred money and property from the trust to defraud the respondents. The trial court granted the Morrisons’ motion for an order of attachment, stating that “[d]ue to extraordinary circumstances, claimant’s interests cannot be protected pending hearing by an appropriate order of the court other than by directing a pre-hearing seizure of property.”
After a hearing on the issue, the trial court concluded that the trust at issue was not a spendthrift trust and was therefore subject to attachment by Doyle’s creditors. The trial court also found that the underlying claim against Doyle sounded in contract, but was premised on Doyle’s having committed an intentional fraud against the Morrisons, thereby providing a basis for the attachment under Minn. Stat. § 570.02, subd. 1(4) (1996). Pursuant to these findings, the trial court granted the Morrisons’ application for attachment and a temporary restraining order.
Doyle appealed to the court of appeals and it affirmed the judgment of the trial court, concluding that the trust was not an implied spendthrift trust because “Doyle, as trustee, * * * has the discretion to distribute both the income and the principal of the trust to himself as he sees fit.” Morrison v. Doyle, 570 N.W.2d 692, 697 (Minn. App., 1997). The court of appeals further held that there is ample evidence in the record to support the trial court finding that Doyle “assigned, secreted and disposed of non-exempt property with intent to delay and defraud his creditors, the Morrisons,” and that Doyle committed an intentional fraud against the Morrisons. Id. at 699. The court of appeals relied upon these findings of fact as the basis justifying the issuance of the order of attachment to provide security for satisfaction of the Morrisons’ judgment against Doyle. Id. at 699-700.
The facts regarding the creation of the trust at issue here are undisputed. Veronica Doyle, mother of appellant Doyle, died on February 12, 1988, and in her will she left one-sixth of her residual estate to her daughter-in law, Lois Doyle, Doyle’s wife. Veronica Doyle stated in the will that she intentionally did not provide for her son as she had otherwise provided for him in her lifetime. Lois Doyle died on May 14, 1988, and left a will in which she devised the residue and remainder of her estate into a trust that she had previously created on January 5, 1988. The probate court found that Lois Doyle’s will was a “pour-over” will. Therefore, the money inherited by Lois Doyle from Veronica Doyle was transferred into the trust at issue in this case.
The trust instrument itself named Lois Doyle as both the grantor and the trustee; Doyle was designated as “attorney-in-fact” and given the power to act for Lois Doyle for purposes of the trust agreement only. He was also named as the primary beneficiary. Doyle’s four children were named as residual beneficiaries. Upon Lois Doyle’s death, all of the beneficiaries of the trust signed a consent agreement and stipulation appointing Doyle as the successor trustee to the trust. This stipulation stated that “it was the intent of Lois M. Doyle, and all of the [beneficiaries] that upon Lois M. Doyle’s death that William G. Doyle would succeed her as Trustee of the Trust;” it was approved by the district court. Therefore, Doyle became both the primary beneficiary and the trustee of the Lois Doyle trust.
The trust instrument did not contain a specific “spendthrift clause,” but did contain the following provisions, which have a bearing on today’s decision:
3. The trust shall continue upon the death of the Grantor for the benefit of WILLIAM DOYLE lasting his lifetime. The trustee shall pay the income and such amounts of the principal as the Trustee in its discretion may determine for the beneficiary’s education, support, health, and maintenance.
* * * * * *
6. Early Termination of the Trust. If at any time the principal of the Trust should fall to a value which would make the Trust uneconomical in the opinion of the Trustee, the Trustee may in its sole discretion terminate the Trust and pay over the remaining principal and income to the Grantor if he is living (and in such event the Trustee will notify the other beneficiaries of the Trust’s early termination), and if not living, then to, or for the benefit of, any one or more of the income beneficiaries designated in Article 3 above, or, if there are none such to take, as provided in Article 4 above.
7. Powers and Duties of Trustee. The Trustee shall have the full power, subject to direction of Grantor, and without prior authority from any court to do everything necessary for the proper administration of this trust.
* * * * * *
12. Payment to Beneficiaries. The Trustee may make any payments of income or principal directed to be made to any beneficiary under any provision of this Agreement, including any distribution on termination, or resignation.
1. by paying the same directly to any beneficiary or to his spouse, parent, adult sibling, legally appointed guardian, committee, conservator, or custodian, or
2. by depositing same in any savings account in the name of any of the beneficiaries, whether alone or in joint names including any person designated by the Grantor in accordance with the provisions of Article 11.
and upon making any such payment or deposit the Trustee shall have no further responsibility with respect to the same or to the application or disposition of the moneys so deposited.
In order to resolve this matter, we must determine whether the language of this trust document and the manner in which it was implemented require its designation as a “spendthrift trust,” replete with all of the legal protections afforded to the beneficiary of such a trust.
The underlying legal principles are not novel. A spendthrift trust is a trust in which the power of alienation has been suspended. In re Moulton’s Estate, 233 Minn. 286, 290, 46 N.W.2d 667, 670 (1951). The validity of a spendthrift trust is upheld on the theory that the owner of property, in the free exercise of his will in disposing of it, may secure such benefits to the objects of his bounty as he sees fit and may, if he so desires, limit its benefits to persons of his choice, who part with nothing in return, to the exclusion of creditors and others. Id. Minn. at 290-91, 46 N.W.2d at 670 (citations omitted).
Generally, to create a spendthrift trust, the trust agreement must simply include a spendthrift clause. See, e.g., In re Trust Created Under Agreement with McLaughlin, 361 N.W.2d 43, 45 (Minn. 1985). The following is an example of a spendthrift clause:
Neither principal nor income of any trust nor any beneficiary’s interest therein, while undistributed in fact, shall be subject to alienation, assignment, encumbrance, appointment or anticipation by the beneficiary, nor to garnishment, attachment, execution or bankruptcy proceedings, nor to claims for alimony or support or any other claims of any creditor or other person against the beneficiary, nor to any other transfer, voluntary or involuntary, from the beneficiary.
Id. However, we have also provided the asset protections afforded in a spendthrift trust when the trust agreement did not include an express spendthrift provision. See Moulton’s Estate, 233 Minn. at 302-03, 46 N.W.2d at 675-76; see also First Nat’l Bank of Canby v. Olufson, 181 Minn. 289, 291, 232 N.w. 337, 338 (1930). “No particular form of words is necessary to create a spendthrift trust. It is sufficient if by the terms of the trust the settlor manifests an intention to impose the restrictions common to such trust.” Moulton’s Estate, 233 Minn. at 291, 46 N.W.2d at 670.
In cases such as this one, where the trust agreement does not contain a specific spendthrift clause, we look to the settlor’s intent as evidenced by the language used in the trust agreement. Id., 233 Minn. at 295, 46 N.W.2d at 672. In that determination we are to be guided by the well-known principle that the entire instrument must be considered, aided by the surrounding circumstances, due weight being given to all its language, with some meaning being given, if possible, to all parts, expressions and words used, discarding and disregarding no parts as meaningless, if any meaning can be given them consistently with the rest of the instrument. In re Watland, 211 Minn. 84, 91, 300 N.W. 195, 198 (1941) (quotation omitted).
What indications of the settlor’s intent are present in this case? We may begin with the death of Doyle’s mother and her decision to disinherit her son William, apparently in order to protect him from his creditors. The record here includes deposition testimony of William Seltz, who prepared Veronica Doyle’s will, to the effect that she intended for her estate to be equally divided between all six of her children, but that she wanted to protect Doyle’s share from his creditors. Therefore, according to Seltz, she asked him to structure her will so that William’s “share” passed instead to his wife. It is primarily this one-sixth portion of Doyle’s mother’s estate that became the corpus of the trust at issue here.
Next, we may look to the language of the trust document itself, because the settlor’s intent can be determined by looking to the restrictions placed upon the trustee as to distribution of income and principal to the beneficiaries of the trust. See Moulton’s Estate, 233 Minn. at 291, 46 N.W.2d at 670 (stating that intent can be inferred by looking to the terms of the trust to determine whether the settlor imposed the restrictions common to such trust). Here the settlor provided that the trustee “shall pay the income and such amounts of the principal as the Trustee in its discretion may determine for the beneficiary’s education, support, health, and maintenance.” While many spendthrift trusts contain more explicit limitations, we conclude that these restrictions represent the kind of ascertainable standards that are sufficient to guide the actions of the beneficiary and against which his conduct can be measured. Furthermore, the specific language at issue has been, since the time the trust was created, actually mirrored in the legislative scheme that governs distribution of trust assets:
No trustee may exercise or participate in the exercise of * * * any power of the trustee to make discretionary distributions of either principal or income to or for the benefit of the trustee as beneficiary, unless by the terms of the will or other written instrument those discretionary distributions are limited by an ascertainable standard relating to that trustee’s health, education, maintenance, or support * * *.
Minn. Stat. § 501B.14, subd. 1 (1996). The trust language also tracks the Internal Revenue Service’s statutory provisions on the creation of ascertainable standards that limit distribution of trust assets. See I.R.C. § 2041(b)(1)(A) (1994).
We also conclude that the type of language used in the trust document at issue here is consistent with language to which we have attached significant meaning in our older trust cases. See In re Tuthill’s Will, 247 Minn. 122, 76 N.W.2d 499 (1956); see also McNiff v. Olmsted County Welfare Dep’t. 287 Minn. 40, 176 N.W.2d 888 (1970). Thus, based upon the past cases that direct us to act on the manifest intent of the settlor, we hold that the trust at issue here is a spendthrift trust, thus defeating the claims of the Morrisons to attach the trust assets.
Further, although we disagree with the conclusions of the lower courts, we are not unmindful of the concerns they raise. The trial court and the court of appeals relied on three bases to conclude that the trust at issue here is not a spendthrift trust: (1) that there was a merger of Doyle’s legal interest as trustee and his beneficial interest; (2) that Doyle, as trustee, had the authority to distribute both income and amounts from the principal at his discretion pursuant to Paragraph 3 of the trust agreement, and that Doyle may have distributed trust funds in violation of the trust agreement; and (3) that Doyle, as trustee, has the authority to terminate the trust pursuant to Paragraph 6 of the trust agreement. See Doyle, 570 N.W. 2d at 697-98. In addition, the Morrisons rely heavily on their assertions that Doyle, as trustee, has violated the terms of the trust agreement by distributing trust monies to himself and the other beneficiaries and by attempting to conceal the fact that he has received money from the trust.
However, none of these bases defeats the critical provisions of the trust that make it a spendthrift trust. First, there is no merger of Doyle’s legal and beneficial interests simply because he is both the trustee and the primary beneficiary of the trust. The Minnesota legislature has spoken to this issue: “No trust is invalid or terminated, and title to trust assets is not merged, because the trustee or trustees are the same person or persons as the beneficiaries of the trust.” Minn. Stat. § 501B.13, subd. 1 (1996). And we assume that if the trust is not made utterly invalid by virtue of the trustee and the beneficiary being the same person, its “spendthrift” characteristics are not defeated either.
Further, the Restatement (Second) of Trusts § 99 discusses the ramifications of having a primary beneficiary also act as the trustee of a trust. It states:
There can be a trust in which one of several beneficiaries is the sole trustee. The trustee holds the legal title to the trust property, and the beneficiaries, including the beneficiary who is also the trustee, have equitable interests the extent of which is determined by the terms of the trust. There is no partial merger of the legal interest and the equitable interest. The beneficiary who is also trustee does not hold any part of the property free of trust. A creditor of this beneficiary can reach his interest only by a proceeding appropriate for reaching an equitable interest, and, if it is a spendthrift trust, a creditor cannot reach his interest.
Restatement (Second) of Trusts § 199 cmt. (2) (1959) (emphasis added). Thus, we attach no special importance to the fact that Doyle has been both trustee and primary beneficiary.
Second, although Doyle can make distributions from both the income and the principal of the trust, as noted above, the trust agreement does provide limitations on the purposes for which distributions from both income and principal can be made. Article 3 of the trust agreement limits distribution to the purposes of “education, support, health, and maintenance.” Therefore, there are limits to Doyle’s power of distribution, contrary to the court of appeals’ conclusion that Doyle “has the discretion to distribute both the income and the principal of the trust to himself as he sees fit.” Doyle, 570 N.W.2d at 697 (emphasis added). Similarly, the power to terminate the trust is not determinative because article 6 of the trust agreement limits that power to the occasion when the trust is uneconomical. Therefore, Doyle as trustee does not have unlimited authority.
Finally, the alleged improper actions of Doyle as trustee are irrelevant to the question of whether the trust is a spendthrift trust. There are five different ways that a court of law may remedy a trustee’s abuse of discretion, none of which include eliminating the spendthrift nature of the trust.
The beneficiary of a trust can maintain a suit for one of the following: (a) to compel the trustee to perform his duties as trustee; (b) to enjoin the trustee from committing a breach of trust; (c) to compel the trustee to redress a breach of trust; (d) to appoint a receiver to take possession of the trust property and administer the trust; [or] (e) to remove the trustee. Restatement (Second) of Trusts § 199. While it is true that these remedies are 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.
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.
Brian is the beneficiary of a spendthrift trust. Brian takes his American Express card to the mall and goes on a shopping spree to the tune of $80,000. If Brian does not pay his credit card bill, American Express cannot reach any of the money in the trust fund. American Express is considered to be a voluntary creditor because the company gave Brian a credit card. Nonetheless, a person who furnishes necessary services or support to the beneficiary can reach the beneficiary’s interest in a spendthrift trust. This exception applies to people like doctors and grocers. In the majority of jurisdictions, involuntary creditors like spouses and children are permitted to attach spendthrift trust funds to satisfy the beneficiary’s alimony and child support obligations. Nonetheless, tort victims who are 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, [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, 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, 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 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.
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 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.
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. 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.
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 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 public policy forbids that one should have the right to enjoy the income of property, to the exclusion of his creditors,” Id. at 84, 14 A. 498. and, concluding that “the gift of an equitable right to the income from property for the life of the beneficiary, to the exclusion of his alienee,” Id. at 84, 14 A. 499, is neither a restraint on the right of alienation nor against public policy, reached the opposite result.
Our reasoning is instructive on the issue sub judice. Acknowledging the rule favoring the free and ready alienation of property and that “the right to sell and dispose of property … is a necessary incident of course to the absolute ownership of … property,” Id. at 84, 14 A. 498, we pointed out that “the reasons on which the rule is founded do not apply to the transfer of property in trust,” Id. at 84, 14 A. 499, and that “[t]he law does not … forbid all and any restraints on the right to dispose of [trust property], but only such restraints as may be deemed against the best interests of the community.” Id. at 84, 14 A. 499. With regard to the policy issue, we said:
“Now common honesty requires, of course, that every one should pay his debts, and the policy of the law for centuries has been to subject the property of a debtor of every kind which he holds in his own right, to the payment of his debts. He has as owner of such property the right to dispose of it as he pleases, and his interest is, therefore, liable for the payment of his debts. But a cestui que trust does not hold the estate or interest in his own right; he has but an equitable and qualified right to the property or to its income, to be held and enjoyed by the beneficiary on certain terms and conditions prescribed by the founder of the trust. The legal title is in the trustee, and the cestui que trust derives his title to the income through the instrument by which the trust is created. The donor or devisor, as the absolute owner of the property, has the right to prescribe the terms on which his bounty shall be enjoyed, unless such terms be repugnant to the law. And it is no answer to say that the gift of an equitable right to income to the exclusion of creditors is against the policy of the law. This is begging the question. Why is it against the policy of the law? What sound principle does it violate? The creditors of the beneficiary have no right to complain, because the founder of the trust did not give his bounty to them. And if so, what grounds have they to complain because he has seen proper to give it in trust to be received by the trustee and to be paid to another, and not to be liable while in the hands of the trustee to the creditors of the cestui que trust. All deeds and wills and other instruments by which such trusts are created, are required by law to be recorded in the public offices, and creditors have notice of the terms and conditions on which the beneficiary is entitled to the income of the property. They know that the founder of the trust has declared that this income shall be paid to the object of his bounty to the exclusion of creditors, and if under such circumstances they see proper to give credit to one who has but an equitable and qualified right to the enjoyment of property, they do so with their eyes open. It cannot be said that credit was given upon such a qualified right to the enjoyment of the income of property, or that creditors have been deceived or mislead; and if the beneficiary is dishonest enough not to apply the income when received by him to the payment of his debts, creditors have no right to complain because they cannot subject it in the hands of the trustee to the payment of their claims, against the express terms of the trust.”
Id. at 88-89, 14 A. 499-500.
The appellant relies on that portion of the Court’s reasoning that indicates that the contract creditors are on notice, at least constructively, of the terms of the spendthrift trust prior to extending credit, along with the fact that this Court, on public policy grounds, has exempted certain obligations of the beneficiary of a spendthrift trust from the rule against attachment or garnishment of the corpus or of the income in the hands of the trustee. He also takes comfort from the position that treatise writers take with respect to the right of tort judgment creditors to satisfy their judgments from a spendthrift trust; they agree with him that it should be permitted.
In Scott on Trusts, Fourth Edition, § 157.5, while acknowledging the paucity of authority on the subject, it is stated:
“In many of the cases in which it has been held that by the terms of the trust the interest of a beneficiary may be put beyond the reach of his creditors, the courts have laid some stress on the fact that the creditors had only themselves to blame for extending credit to a person whose interest under the trust had been put beyond their reach. The courts have said that before extending credit they could have ascertained the extent and character of the debtor’s resources. Certainly, the situation of a tort creditor is quite different from that of a contract creditor. A man who is about to be knocked down by an automobile has no opportunity to investigate the credit of the driver of the automobile and has no opportunity to avoid being injured no matter what the resources of the driver may be. It may be argued that the settlor can properly impose such restrictions as he chooses on the property that he gives. But surely he cannot impose restrictions that are against public policy. It is true that the tortfeasor may have no other property than that which is given him under the trust, and that the victim of the tort is no worse off where the tortfeasor has property that cannot be reached than he would be if the tortfeasor had no property at all. Nevertheless, there seems to be something rather shocking in the notion that a man should be allowed to continue in the enjoyment of property without satisfying the claims of persons whom he has injured. It may well be held that it is against public policy to permit the beneficiary of a spendthrift trust to enjoy an income under the trust without discharging his tort liabilities to others.
“There is little authority on the question whether the interest of the beneficiary of a spendthrift trust can be reached by persons against whom he has committed a tort. In the absence of authority it was felt by those who were responsible for the preparation of the Restatement of Trusts that no categorical statement could be made on the question. It is believed, however, that there is a tendency to recognize that the language of the earlier cases to the effect that no creditor can reach the interest of a beneficiary of a spendthrift trust is too broad, and that in view of the cases that have been cited in the previous sections allowing various classes of claimants to reach the interest of the beneficiary, the courts may well come to hold that the settlor cannot put the interest of the beneficiary beyond the reach of those to whom he has incurred liabilities in tort.”
Bogert on Trusts and Trustees, Second Edition, Rev’d § 224, p. 478 to like effect:
“[A] person who has a claim for damages against a spendthrift trust beneficiary, based on the commission of a tort or other wrongful act (not including a mere breach of contract) should be allowed to secure satisfaction from the interest of the beneficiary, apparently on the ground that the contrary result would be against public policy. It is true that a tort creditor has no chance to choose his debtor and cannot be said to have assumed the risk of the collectability of his claim. The argument for the validity of spendthrift trusts, based on the notice to the business world of the limited interest of the beneficiary does not apply. It may be argued that the beneficiary should not be permitted to circumvent the case and statute law as to liability for wrongs by taking advantage of the spendthrift clause.”
A similar sentiment is expressed in Comment a to § 157 of the Restatement Second of Trusts, wherein it is said:
“The interest of the beneficiary of a spendthrift trust … may be reached in cases other than those herein enumerated [alimony, child support, taxes], if considerations of public policy so require. Thus, it is possible that a person who has a claim in tort against the beneficiary of a spendthrift trust may be able to reach his interest under the trust.”
Neither the argument advanced by the appellant, nor the support offered for it is persuasive.
To be sure, this Court has refused to hold, and on public policy grounds, spendthrift trusts inviolate against indebtedness for alimony arrearages, Safe Deposit & Trust Co., Robertson, supra. 192 Md. at 662-63, 65 A.2d at 296, and for child support. Zouck v. Zouck, supra. 204 Md. at 299, 104 A.2d at 579. Earlier, the United States District Court for the District of Maryland had reached the same result, permitting a spendthrift trust to be attached for the payment of United States income taxes. Mercantile Trust Co. v. Hofferbert, 58 F.Supp. 701, 705 (D.Md. 1944). Although decided on policy grounds, see, Article III, Section 38 of the Maryland Construction (providing that no person shall be imprisoned for failure to pay a debt, but expressly excluding from the definition of debt valid court decrees for the payment of support or alimony); Robertson, supra. 192 Md. at 663, 65 A.2d at 296 (“We rest our decision upon grounds of public policy, not upon any interpretation of the instruments in question, which are not broad enough to authorize payments by the trustee for the benefit of a divorced wife.”; Zouck, supra. 204 Md. at 299, 104 A.2d at 579 (noting that “a contract by a father to support a child, found by a court to be fair and reasonable, and so, judicially decreed to be enforced, is the equivalent of the decree of a court awarding support to the child or alimony to a wife, and as such, comes within the rule of public policy announced and followed in the Robertson case”); Hofferbert, 58 F.Supp. at 705 (observing that the public policy involved when claims of creditors are pitted against the validity of a spendthrift trust is “quite different” when the claim is by the government for taxes); none of these cases was premised on there having been a lack of notice given to the claimants as to the trust beneficiary’s limited interest in the trust. Rather, the courts recognized a fundamental difference between these obligations and those of ordinary contract creditors.
In Robertson, we, like 1 Scott, Trusts, § 157.1, recognized, and clearly stated, that the dependents of a spendthrift trust beneficiary “ ‘are not ‘creditors’ of the beneficiary, and the liability of the beneficiary to support them is not a debt.’ ” 192 Md. at 660, 65 A.2d at 295, quoting Scott. Scott explained that these dependents, the beneficiary’s wife and children, could enforce their claim for support against the trust estate, because “it is against public policy to permit the beneficiary to have the enjoyment of the income from the trust while he refuses to support his dependents whom it is his duty to support, Id. at 661, 65 A.2d at 295, their claim being “in quite different position from the ordinary creditors who have voluntarily extended credit.” Id. Focusing specifically on alimony, at issue in that case, the Court opined:
“We think the view expressed in the Restatement is sound. The reason for the rejection of the common law rule, that a condition restraining alienation by the beneficiary is repugnant to the nature of the estate granted, was simply that persons extending credit to the beneficiary on a voluntary basis are chargeable with notice of the conditions set forth in the instrument…. This reasoning is inapplicable to a claim for alimony which in Maryland at least, is ‘an award made by the court for food, clothing, habitation and other necessaries for the maintenance of the wife….’ The obligation continues during the joint lives of the parties, and is a duty, not a debt.”
Id. at 662, 65 A.2d at 296 (citations omitted). See, also McCabe v. McCabe, 210 Md. 308, 314, 123 A.2d 447, 450 (1956). (“This Court has held that alimony represents a duty and not a debt.”); Oles Envelop Corp. v. Oles, 193 Md. 79, 92, 65 A.2d 899, 905 (1949) (“The obligation to pay alimony in a divorce proceeding is regarded not as a debt, but as a duty growing out of the marital relation and resting upon sound public policy.”). Compare Hitchens v. Safe Deposit & Trust Co. of Baltimore, 193 Md. 62, 67, 66 A.2d 97, 99 (1949) (specifically declining to apply the rule announced in Robertson to claims for support that were not judicially-decreed alimony, but arose pursuant to a contractual agreement to pay money).
Similarly, in Zouck, the Court drew a distinction between the considerations underlying the balance when the monetary obligation sought to be satisfied is a contract or ordinary debt and when it is child support. It noted that the monetary claim in that case was “based, in essence, upon the statutory obligation of the father, declaratory of the common law, to support his child.” 204 Md. at 298, 104 A.2d at 579, See Walter v. Gunter, 367 Md. 386, 398, 788 A.2d 609, 616 (2002) (“This Court historically has recognized a distinction between a standard debt and a legal duty in domestic circumstances, specifically with respect to child support, and subscribes to the theory that child support is a duty not a debt.”); Middleton v. Middleton, 329 Md. 627, 629-33, 620 A.2d 1363, 1364-66 (1993) (analyzing the debt/duty distinction with respect to parental child support obligation). Moreover, pointing out that in this case, the father agreed to meet the parental obligation to support his child by the payment of $ 25.00 a week, and to this extent, exonerated the child’s mother from her obligation, the Court was emphatic:
“The fact that the father has recognized his obligation and has agreed in writing to meet it in a specified amount, does not change his duty to a debt nor does it create the relationship of ordinary contract debtor and creditor between the father and the child, or the father and the mother, as the representative of or trustee for the child…. His obligation remains the same whether it be calculated and required by original order of **426 court, by voluntary agreement, or by voluntary agreement specifically ordered to be performed by order of court. Nor is it significant that the mother for some years has met the obligation which the father violated, so that the money he promised to pay week by week, would now be paid, under court order, in a lump sum…. The fundamental nature of the support looked for by the agreement is not changed because the husband is now required to pay at one time what he should have paid week by week.”
Zouck, supra. 204 Md. at 298-99, 104 A.2d at 579 (citations omitted). We also made the point that, “[i]n the case of a child, the obligation of the father to support, imposed by law, cannot be bargained away or waived.” Id. The Court concluded, “the agreement by a parent to support a child, declared to be reasonable and proper, and so, enforceable by a court, constitutes an obligation which justifies the invasion of a spendthrift trust for its fulfillment.” Id. at 300, 104 A.2d at 580.
Similarly, the obligation to pay taxes and, thus, tax arrearages, is not to be considered debt, nor is the government to be viewed as a mere creditor. Addressing and resolving this very point, the Hofferbert court distinguished the public policy underlying the tax obligation and that underlying ordinary or contract debts:
“The reasons which have actuated some courts, as in Maryland, to uphold spendthrift trust against the claims of a creditors do not necessarily apply to tax claims of the government either federal or State. The public policy involved is quite different. In the one case the donor of the property has the right to protect the beneficiary against his own voluntary improvident or financial misfortune; but in the other the public interest is directly affected with respect to collection of taxes for the support of the government. The imposition of the tax burden is not voluntary by the beneficiary.”
Hofferbert, supra. 58 F.Supp. at 706 (emphasis added).
Ms. Ryon’s estate is a mere judgment creditor of McGee, the beneficiary. The Trust simply has no legal duty to Ms. Ryon’s estate and certainly no obligation to provide support. Thus the rationale underlying the decisions permitting the invasion of a spendthrift trust for the payment of alimony, child support or taxes have absolutely no applicability to the obligation in this case. Indeed, to permit the invasion of the Trust to pay the tort judgments of the beneficiary, in addition to thwarting the trust donor’s intent by, in effect, imposing liability on the Trust for the wrongful acts of the trust beneficiary, is, as the appellees argue, to create an exception for “tort victims” or “victims of crime.”
By equating, for purposes of determining whether to permit invasion of a spendthrift trust, the tort judgment creditor with the dependents of a trust beneficiary, to whom the beneficiary has a duty of support, or to the government, that is owed a duty to pay taxes, we would create a distinction between debts and creditors and a basis for exempting such creditors from the impediment to recovery that spendthrift trusts present. The appellant offers a rationale for drawing the distinction, whether the interests of the creditor are “great enough” to permit invasion of the trust. He relies on a portion of our discussion of the validity of spendthrift trusts in Hoffman Chevrolet Inc. v. Washington County Nat. Sav. Bank, 297 Md. 691, 467 A.2d 758 (1983). After acknowledging that Maryland generally recognizes the validity of spendthrift provisions, which prevent creditors from reaching trust funds and concluding that, by “logical extension … a spendthrift trust can effectively protect retirement benefits,” Id. at 706, 467 A.2d at 766, we commented: “The employer makes contributions to the trust to provide for the employee upon retirement. The creditor’s interests are not great enough to permit an invasion of this trust.” Id. From this comment, the appellant concludes: “… the Court accepted the concept that certain creditors’ interests can be great enough to ignore the ‘spendthrift’ terms of a trust.” (Appellant’s Brief at 7).
We are not convinced. This is a very slender reed on which to base such an important concept. Moreover, given the context of the Court’s comment, it is not at all inconsistent with Robertson or Zouck.
To be sure, the Supreme Court of Mississippi quite recently held that, “as a matter of public policy … a beneficiary’s interest in spendthrift trust assets is not immune from attachment to satisfy the claims of the beneficiary’s intentional or gross negligence tort creditors.” Sligh v. First National Bank of Holmes County, 704 So.2d 1020, 1029 (Miss. 1997). There, the plaintiff and his wife brought suit against an uninsured and intoxicated motorist/defendant for injuries arising from a traffic accident which resulted in the plaintiff’s paralysis. The defendant was the beneficiary under two spendthrift trust established by his late mother. Having obtained a default judgment for $5,000,000 in compensatory and punitive damages in their action alleging gross negligence, the plaintiffs sought to attach the defendant’s interest under the spendthrift trusts.
In arriving at its holding, the court acknowledged the four exceptions to the rule prohibiting the invasion of a spendthrift trust enumerated in the Restatement, i.e., claims: for support of child or wife; for necessaries; for “services rendered and materials furnished which preserve or benefit the interest of the beneficiary; for State or federal taxes, Id. at 1026, quoting Restatement (Second) of Torts § 157, and a fifth, when the trust is ‘a self-settled trust, i.e., where the trust is for the benefit of the donor,’ it had itself recognized Id., citing Deposit Guaranty Nat’l Bank v. Walter E. Heller & Co., 204 So.2d 856, 859 (Miss. 1967). Conceding that § 157 of the Restatement does not list an exception for involuntary tort creditors, the court found support for its position in Comment a to that section, which, as we have seen, admits of the possibility of a tort claimant with a claim against the beneficiary of a spendthrift trust being able to reach that beneficiary’s interest. Sligh, supra. 704 So.2d at 1026. It also was persuaded by those portions of Scott, The Law of Trusts and Bogert, Trusts and Trustees, quoted herein and to which the appellant referred us. Id. at 1027. Finally, the court rejected the three public policy considerations it identified from its own precedents upholding the validity of spendthrift trust provisions: “(1) the right of donors to dispose of their property as they wish; (2) the public interest in protecting spendthrift individuals from personal pauperism, so that they do not become public burdens; and (3) the responsibility of creditors to make themselves aware of their debtors’ spendthrift trust protections.” Id. at 1027.
This is the minority position, which the Sligh court admitted. (citations omitted). In Mintzer, the issue was whether a spendthrift trust could be attached for the payment of a judgment for alimony awarded to the wife of the trust beneficiary. 100 Pa. at 154. Answering in the negative, the court stated, broadly:
“The attachment issued on a debt of record fixed by judgment and decree. Whether the judgment be for a breach of contract or for a tort, matters not. The testator recognized no such distinction. He impressed on the fund exemption from all kinds of legal process against the trustee, not only for debts, but also for ‘all liabilities whatever’ of [the beneficiary].”
Id. at 154-55. In Kirk, the monies due to the beneficiary of a spendthrift trust were attached to enforce the payment of a tort judgment. Although recognizing exceptions for alimony and child support, the court held that the beneficiary’s income from the trust could not be attached prior to its receipt by him. 456 P.2d at 1010.
Other than language in Gibson v. Speegle, 494 A.2d 165, 1984 Del. Ch. Lexis 475, characterizing as sound the conclusion of the authors of several respected treatises on trusts, i.e., Scott, Bogert and Griswold, that “tort claimants should not be considered ‘creditors’ for purposes of a spendthrift trust provision” and an approving reference to Comment a to § 157 of the Restatement (Second) of Trusts in Helmsley-Spear, Inc. v. Winter, 101 Misc.2d 17, 20, 420 N.Y.S.2d 599, 601 (1979), and statutes codifying the result, Sligh is the only case we have found, and the only case that the appellant has cited, which holds expressly that a spendthrift trust may be invaded to pay the judgment of an intentional or gross negligence tort-judgment creditor. See also St. Paul & Marine Ins. Co. v. Cox, 583 F.Supp. 1221, 1228-29 (N.D. Ala. 1984), aff’d. 752 F.2d 550 (11th Cir. 1985), in which the insurer of an employer, who had been defrauded by his employee, a beneficiary under an ERISA trust, was permitted to reach that employee’s entire interest in the trust and, notwithstanding that the employee was entitled to only periodic payments, to receive payment immediately.
Sligh is no longer the law of Mississippi. A mere five months after the decision in Sligh, by ch. 460, § 2, Laws, 1998, effective March 23, 1998, the Mississippi Legislature passed the Family Trust Preservation Act of 1998. Miss Code Ann. § 91-9-503 (2003), relevant to this case, provides:
“Beneficiary’s Interest not subject to transfer; restrictions on transfers and enforcement of money judgments
“Except as provided in Section 91-9-509, if the trust instrument provides that a beneficiary’s interest in income or principal or both of a trust is not subject to voluntary or involuntary transfer, the beneficiary’s interest in income or principal or both under the trust may not be transferred and is not subject to the enforcement of a money judgment until paid to the beneficiary.”
In addition, while a New York State trial court in Helmsley-Spear, Inc. v. Winter, supra, 101 Misc.2d 20, 20, 420 N.Y.S.2d at 601, had held that, because of his disloyalty, the interest of a beneficiary, who had been convicted of stealing from his employer, in an employment trust, was not exempt from attachment, despite the spendthrift provision applicable to it, on appeal, the Appellate Division modified that decision, holding that the employee’s interest was exempt from the claims of tort creditors. 74 A.D.2d 195, 199, 426 N.Y.S.2d 778, 781 (1980), aff’d, 52 N.Y.2d 984, 438 N.Y.S.2d 79, 419 N.E.2d 11078 (1981). And in Speegle, despite the Chancellor’s favorable inclination toward tort-judgment creditors, a statute prevented him from adopting the view he clearly favored. 1984 Del. Ch. Lexis 475, *6-7.
We are not persuaded, in any event, by the reasoning of the Sligh court. It is true that the court acknowledged the exceptions for alimony and for child support. Missing from the court’s opinion, however, is any analysis of the basis for those exceptions. The Mississippi Supreme Court, although noting the donor’s intention as, perhaps, the most important public policy consideration it addressed, concluded that, because the law has generally recognized exceptions, i.e., for support, alimony, taxes, to the spendthrift doctrine, the rights of trust donors to dispose of property as they wish are not absolute. 704 So.2d at 1028. This statement, although accurate, does not analyze why the law carved out these particular exceptions, which, as the court recognized, effectively takes precedence over the trust donor’s intent.
To be sure, a contract creditor is on notice as to the terms of a spendthrift trust and, on that account, is able to regulate his or her conduct in light of that information. That is not the critical basis for the exception of alimony and support from the rule, however. Robertson and Zouck, as our opinions make clear, relied heavily on the fact that the obligation was a duty and not a debt. Robertson supra, 192 Md. at 660, 65 A.2d at 295; Zouck, supra. 204 Md. at 298-99, 104 A.2d at 579. That is also the theme that runs through Hofferbert, 58 F.Supp. at 705. In none of these cases was notice mentioned as a basis for the decision. That a tort-judgment creditor is not on notice that he or she will be injured and thereby will incur a loss goes without saying, but, with due respect to the near unanimous commentators, that fact alone does not make the claim he or she makes in respect of the loss anything other than a debt or make its exemption from the bar of a spendthrift trust, a matter of public policy.
There is another reason that we reject the appellant’s attempt to obtain an exemption from the bar of the spendthrift trust. Our case law reflects, as the appellant points out, that this Court has, over time, expanded the class of persons permitted to invade a spendthrift trust in satisfaction of obligations owed by beneficiaries, and, as a natural consequence of that expansion, frustrated, in some cases, the intent of the trust settlors. The exceptions to the spendthrift doctrine were recognized by this Court based on clear public policy considerations. The public policy that the appellant identifies and on which he relies is that of prohibiting criminals from benefitting financially from their crimes. As indicated, to establish the existence of the public policy, he points to the “Son of Sam” statute, the Slayer’s Rule and the Prisoners’ Litigation Act. Proceeding from that premise, he argues that McGee, a convicted felony murderer, should not be allowed to receive benefits from the trust to the exclusion of his creditors.
Certainly, the public policy of this State does not countenance a system wherein criminals are allowed to derive a financial benefit from their illegal activity, thus putting the lie to the oft stated admonition, “crime does not pay.” In fact, this State has announced, it is true, a clear public policy in that regard. We, however, agree with the appellees that the public policy goals on which the appellant’s arguments are based, as strong and clear as they are, have no applicability to the case sub judice and, thus, do not, and cannot, inform our decision. McGee is not, in any discernible manner, benefitting from the crime for which he was convicted and ultimately imprisoned. Clearly, any benefit McGee receives from the Trust vested prior to the commission of his criminal acts and is completely independent of, and separate from, his criminal conviction. As the appellees point out, “McGee’s situation is not in any way analogous to one where a criminal is ‘rewarded’ for his criminal acts by means of book, television, or movie royalties, or by inheriting from his victim’s estate.” Unlike the criminal at whom the “Son of Sam” legislation and the Slayer’s Rule are aimed, the benefit McGee derives from the Trust and the criminal acts he committed are not related at all. The technically and legally more accurate statement is that McGee is benefitting from his status as a life beneficiary under a trust established by his deceased mother. It is simply incorrect to say that McGee is, in any manner, benefitting from his crimes. Consequently, we decline to frame our analysis on the public policy goals set forth by the appellant.
Judgment Affirmed, With Costs.
BATTAGLIA, J., Dissenting.
Katherine Ryon was beaten to death during the course of a robbery that occurred in her home. After James Calvert McGee was convicted of felony-murder for his participation in the robbery and murder of Ms. Ryon, a money judgment was entered against him pursuant to a settlement agreement, in which McGee compromised civil claims brought against him by Robert Duvall, the Personal Representative of the Estate of Ms. Ryon. The majority today concludes that Ms. Ryon’s estate cannot enforce its judgment against McGee’s interest in an $877,000.00 spendthrift trust established for him by his deceased mother. The majority acknowledges that claimants seeking alimony, child support, and unpaid taxes may attach a beneficiary’s interest in a spendthrift trust, but concludes that the victim of a violent tort may not, reasoning that such a victim is only “a mere judgment creditor.” For the reasons expressed herein, I respectfully disagree.
A spendthrift trust is a trust that restrains the voluntary or involuntary transfer of a beneficiary’s interest in the trust. See Restatement (Second) of Trusts § 152(2)(1959). As the majority points out, this Court first acknowledged the validity of spendthrift trusts in Smith v. Towers, 69 Md. 77, 14 A. 497 (1888). In that case, our predecessors recognized that although “the right to sell and dispose of property … is a necessary incident … to the absolute ownership of … property,” the “law does not … forbid all and any restraints on the right to dispose of [trust property].” Id. at 87-88, 14 A. at 498-99. The law forbids, “only such restraints as may be deemed against the best interests of the community.” Id. at 88, 14 A. at 499. “The donor or devisor” of trust, the Smith court stated, is “the absolute owner of the property” and “has the right to prescribe the terms on which his bounty shall be enjoyed, unless such terms be repugnant to the law.” Id. at 88-89, 14 A. at 499. The Smith court reasoned that the gift of an equitable right to the exclusion of creditors is not “repugnant to the law” because “[a]ll deeds and wills and other instruments by which such trusts are created, are required by law to be recorded in the public offices, and creditors have notice of the terms and conditions on which the beneficiary is entitled to the income of the property.” Id. Thus, if creditors choose to extend credit to such debtors, “they do so with their eyes open.” Id.
Ms. Ryon, of course, did not have the luxury of assessing the extent and character of McGee’s financial resources before he robbed her and she died. For this reason, most legal scholars agree that tort creditors should not be precluded from recovering against a tortfeasor’s interest in a spendthrift trust. According to Scott on Trusts,
A man who is about to be knocked down by an automobile has no opportunity to investigate the credit of the driver of the automobile and has no opportunity to avoid being injured no matter what the resources of the driver may be…. [T]here seems to be something rather shocking in the notion that a man should be allowed to continue in the enjoyment of property without satisfying the claims of persons whom he has injured. It may well be held that it is against public policy to permit the beneficiary of a spendthrift trust to enjoy an income under the trust without discharging his tort liabilities to others.
Similarly, and significantly, in Bogert on Trusts and Trustees, it is emphasized that, “the validity of spendthrift trusts … does not apply” and that the beneficiary should not, therefore, “be permitted to circumvent the case and statute law as to liability for wrongs by taking advantage of the spendthrift clause.”
The majority concedes that tort creditors do not have the benefit of notice, which, as was discussed in Smith, supra, is a primary purpose for not allowing the invasion of spendthrift trusts. Despite this, the majority concludes that Ms. Ryon’s estate cannot reach the corpus of the spendthrift trust because its claim is nothing other “than a debt” and that “its exemption from the bar of a spendthrift trust” is not “a matter of public policy.” The majority, in my opinion, is wrong.
This Court has held that a beneficiary’s interest in a spendthrift trust may be attached to satisfy claims for alimony arrearages and for child support. (citations omitted) Also, a spendthrift trust was attached for the payment of federal income taxes in Mercentile Trust Co. v. Hofferbert, 58 F.Supp. 701, 705-06 (D.Md. 1944). “[N]one of these cases,” the majority states, “was premised on there having been a lack of notice…. Rather, the courts recognized a fundamental difference between these obligations and those of ordinary contract creditors.” The fundamental difference is essentially that these obligations were premised upon judicial intervention and determination of sound public policy.
Just as it is sound public policy to permit the attachment of a spendthrift trust for alimony, child support, and taxes, it is also as sound to permit invasion to make victims of tortious conduct whole. Indeed, a tortfeasor may be liable not only for compensatory damages, but also punitive damages, which we allow in order to “punish the wrongdoer and to deter such conduct by the wrongdoer and others in the future.” Caldor, Inc. v. Bouden, 330 Md. 632, 661, 625 A.2d 959, 972 (1993). Consequently, to equate victims of tortious conduct with contract creditors and distinguish them from recipients of alimony, child support, and tax claims, is without merit.
As the majority concedes, spendthrift trusts are considered valid in Maryland in large part because, by virtue of filing requirements, creditors are put on at least constructive notice of the limited interest of the beneficiary of such a trust. Such notice allows creditors to protect themselves, something that Ms. Ryon could not have done. Moreover, the “duty-debt” distinction set forth by the majority as the basis for its holding is unavailing. The obligation to restitute a wrong is commensurate with the obligations to pay alimony, child support, and taxes. I agree with the commentators that “it is against public policy to permit the beneficiary of a spendthrift trust to enjoy an income under the trust without discharging his tort liabilities to others.” See Scott on Trusts, supra. Consequently, I respectfully dissent.
Class Discussion Tool
Henry created a trust for the benefit of his son, Marvin. Henry told all of his friends that he was creating the trust because he was afraid that Marvin would end up living on the street. He told his friend, Maggie, “If I give that loser son of mine any money, he would be broke in a month. He never met a credit card he didn’t like.” The language of the trust stated, “I leave my entire estate in trust to Oscar for the benefit of my son, Marvin.” After Henry died, Oscar assumed his role as trustee. Marvin was depressed over his father’s death, so he went on a shopping spree for a week. As a result, he ended up owing $40,000 to American Express. American Express got a $40,000 judgment against Marvin. Oscar felt sorry for Marvin, so he gave him $10,000 in cash to go to a spa. Marvin placed the $10,000 in his checking account. Then, Susan, Marvin’s ex-wife agreed to lend Marvin the money to pay $15,000 of his American Express bill. Susan took the money from their son Kenneth’s college fund. When Kenneth found out about the loan, he sued his father’s trust to recover the money. American Express attempted to attach the money in Marvin’s checking account. Marvin also signed a contract to pay Dr. Roberts $80,000 to give his girlfriend, Peggy breast implants. After Marvin refused to pay him, Dr. Roberts sued the trust based upon the contract. Please analyze all of the relevant legal issues.