436 F. App'x 175
4th Cir.2011Background
- David, Jr. filed Chapter 7; two spendthrift trusts (1976 Trust and Will Trust) fund his remainder interests.
- 1976 Trust (pa) grants trustee discretion to distribute income/principal; spendthrift clause protects beneficiary interests.
- Will Trust (pa) requires quarterly net income distributions; contains a Protective Provision shielding principal/income from claims.
- Debtor’s share in 1976 Trust principal valued at ~$684,286; Will Trust remainder valued at ~$299,581 as of 1/6/2009.
- Bankruptcy court previously held the debtor’s remainder interests in both trusts are estate property; district court reversed concluding they are protected by spendthrift provisions.
- This court affirms district court, holding remainder interests are excluded from the bankruptcy estate under 11 U.S.C. § 541(c)(2) and Pennsylvania law.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether spendthrift provisions exclude remainder interests | Levin: remainder interests not protected by spendthrift clause | Wachovia: futures interests protected under spendthrift provision | Remainder interests are protected; excluded from estate |
| Whether Pennsylvania law governs protection of remainder interests | Creditors-diverse authorities apply differently; state law controls | Nonbankruptcy law governs under 11 U.S.C. § 541(c)(2) | Pennsylvania law applies; intention of settlor controls protection |
| Whether the 1976 and Will Trusts explicitly cover principal at termination | Ginsburg-like reasoning limits protection to income only | Protections explicitly extend to corpus/principal in language | Protections cover both income and principal, including remainder interests |
| Whether authority cases supporting estate inclusion conflict with state-law spendthrift | Britton, Crandall, Strasma support inclusion of remainder | Apply applicable nonbankruptcy law rather than extend estate reach | Apply PA law; remainder interests excluded |
Key Cases Cited
- Patterson v. Shumate, 504 U.S. 753 (1992) (spendthrift restrictions exclude from estate under nonbankruptcy law)
- In re Blanchard, 201 B.R. 108 (Bankr. E.D. Pa. 1996) (spendthrift protections apply to debtor’s remainder interests)
- Riverside Trust Co. v. Twitchell, 342 Pa. 558, 20 A.2d 768 (Pa. 1941) (spendthrift provisions can protect both income and principal)
- Clark v. Clark, 411 Pa. 251, 191 A.2d 417 (Pa. 1963) (settlor's intent governs spendthrift protection)
- In re Katz, 220 B.R. 556 (Bankr. E.D. Pa. 1998) (when entire trust interest is protected, cannot attach income or principal)