Carmack v. Reynolds
215 Cal. Rptr. 3d 749
Cal.2017Background
- Rick Reynolds was a beneficiary of a spendthrift family trust created by his parents; the trust directed all distributions to be paid from principal (undeveloped real estate).
- Upon his father's death, Reynolds became entitled to a $250,000 lump sum (contingent on surviving 30 days), $100,000 per year for 10 years, then one-third of the remainder.
- Reynolds filed chapter 7 bankruptcy the day after his father died; the bankruptcy trustee sought to determine what portion of the trust the bankruptcy estate could reach.
- Probate Code provisions relevant to creditor access include §§15301(b) (payments “due and payable”), 15302 (support exception), 15306.5 (25% cap on creditor garnishment of payments), and 15307 (allowing creditors to reach amounts in excess of needs for education/support).
- Lower courts held the bankruptcy trustee could reach 25% of Reynolds’s trust interest; the Ninth Circuit certified the question to the California Supreme Court, which granted review.
Issues
| Issue | Plaintiff's Argument (Bankruptcy trustee) | Defendant's Argument (Reynolds / Trustees) | Held |
|---|---|---|---|
| Whether §15301(b) lets creditors reach principal that is not yet paid but is "due and payable" | "Due and payable" should be read broadly so creditors can reach principal designated for the beneficiary even while in trustee's hands | Spendthrift protection should prevent creditor access until beneficiary actually receives funds; "due and payable" should be limited | Court: §15301(b) permits creditors to reach amounts of principal that have become due and payable (i.e., distributions presently set to be paid) even if still in trustee's hands, except for amounts specified for support/education under §15302 |
| Whether §15307 or §15306.5 governs creditor access beyond support needs (i.e., whether creditors can reach more than 25%) | §15307 permits creditors to reach amounts beyond the 25% cap in appropriate cases (higher bar, equitable relief under §15307) | §15306.5 establishes a 25% cap for general creditors; §15307 should not be read to nullify that cap | Court: §15307 was likely enacted with a drafting oversight; Legislature intended §15306.5’s 25% limitation to apply to general creditors, and §15307 does not override the 25% cap |
| Whether §15306.5’s 25% aggregate cap applies to orders under §15301(b) (due-and-payable principal) | The 25% cap in §15306.5(f) should apply to all orders affecting trust payments, including §15301(b) | §15301(b) targets a distinct class (principal that has become due); §15306.5(f) cap was meant to limit ongoing periodic payments, not one-time due principal | Court: §15306.5’s 25% cap does NOT apply to distributions that have become due and payable under §15301(b); creditors may seek the full amount of any distribution currently due, subject to §15302 support protections |
Key Cases Cited
- Canfield v. Security-First Nat. Bank, 13 Cal.2d 1 (1939) (establishes donor’s prerogative to protect gifts via spendthrift clauses)
- Van Arsdale v. Hollinger, 68 Cal.2d 245 (1968) (treats Law Revision Commission reports as persuasive legislative history)
- Seymour v. McAvoy, 121 Cal. 438 (1898) (historical authority on spendthrift treatment of principal)
- San Diego Trust & Sav. Bank v. Heustis, 121 Cal.App. 675 (1932) (prior case law on spendthrift provisions and principal)
- Estate of Lawrence, 267 Cal.App.2d 77 (1968) (discusses treatment of accumulated income vs. beneficiary needs)
- Miller v. Superior Court, 21 Cal.4th 883 (1999) (specific statutory provisions govern particular subjects over general ones)
- McCarther v. Pacific Telesis Group, 48 Cal.4th 104 (2010) (statutory construction principles for ascertaining legislative intent)