Todd Frealy v. Rick Reynolds
2015 U.S. App. LEXIS 3665
9th Cir.2015Background
- This Ninth Circuit order concerns the extent to which a bankruptcy estate may reach a beneficiary’s spendthrift-trust interest under the California Probate Code.
- Reynolds is a beneficiary of the Reynolds Family Trust, which pays primarily from principal and includes a spendthrift provision.
- The trust’s distributions are largely principal-based, with payments due over years, including annual principal payments and a substantial residue share.
- Frealy (the Chapter 7 trustee) argues section 15306.5 imposes an absolute 25% cap, while Reynolds argues sections 15301(b) and 15307 may allow greater access.
- The court certifies to the California Supreme Court a single question about the interaction of 15306.5 with other Probate Code sections, seeking authoritative guidance.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does 15306.5 cap creditors at 25% or may they reach more under other provisions? | Frealy argues 15306.5 imposes an absolute 25% cap. | Reynolds contends other sections (15301(b), 15307) permit greater access. | Certified question to California Supreme Court; no controlling California authority resolved. |
| How do 15301(b) and 15307 interact with 15306.5 in permitting access to principal? | Frealy argues 15301(b)/15307 could reach more than 25% of principal. | Reynolds argues these provisions may allow broader access, beyond 25%. | Court seeks Supreme Court guidance; no settled interpretation in this circuit. |
Key Cases Cited
- Neuton v. Danning (In re Neuton), 922 F.2d 1379 (9th Cir. 1990) (discusses 15306.5’s 25% cap applicability)
- Sullivan v. Oracle Corp., 557 F.3d 979 (9th Cir. 2009) (order informing approach to state-law questions)
- Chatard v. Oveross, 101 Cal. Rptr. 3d 883 (Cal. Ct. App. 2009) (discusses spendthrift protections of principal/income)
- Kelly v. Kelly, 79 P.2d 1059 (Cal. 1938) (distinguishes income vs. principal exposure for creditors)
- In re Estate of Lawrence, 72 Cal. Rptr. 851 (Cal. Ct. App. 1968) (precedent related to income vs. principal under probate law)