The opinion
1
2
POSTED ON WEBSITE
3 NOT FOR PUBLICATION
4
5 UNITED STATES BANKRUPTCY COURT
6 EASTERN DISTRICT OF CALIFORNIA
7
8
In re ) Case No. 10-27435-E-7
9 )
THOMAS A. GASSNER, )
10 )
Debtor. )
11 ___)
)
12 | KIMBERLY J. HUSTED, inher capacity ) Adv. Proc. No. 19-2006
as Trustee for the Bankruptcy Estateof =) Docket Control No. SGB-2
13 Thomas A. Gassner, )
)
14 Plaintiff, )
)
15 |] v. )
)
16 | MEPCO LABEL SYSTEMS, a California )
Corporation, et al., )
17 )
Defendants. )
Wyo)
19
This Memorandum Decision is not appropriate for publication.
20 || It may be cited for persuasive value on the matters addressed.
21 MEMORANDUM OPINION AND DECISION
22 This Adversary Proceeding and related adversary proceeding Gassner v. Gassner, 19-2038
23 (“Related Adversary Proceeding”), arise out of the Chapter 7 bankruptcy case filed by Thomas A.
24 || Gassner (“Debtor”), E.D. Cal, Case No. 10-27435 (“Bankruptcy Case”). A Notice of Death of
25 || Debtor was filed on November 7, 2017 in the Bankruptcy Case. 10-27435; Notice, Dckt. 123. The
26 || date of Debtor’s death is stated in the Notice to be October 5, 2017. Id.; Notice 95. A copy of
27 || Debtor’s death certificate is filed as Exhibit A with the Notice. Jd.; Dckt. 126.
28 This Adversary Proceeding, the Related Adversary Proceeding concern assets of the
1 || Thomas A. Gassner Trust (“TAG Trust”), which consists primarily of 2,000 shares of Mepco Label,
2 | LLC stock (““MEPCO Stock”) or any portion thereof, and whether such shares are property of the
3 || Bankruptcy Estate in Debtor’s Bankruptcy Case.
4 Mepco Label Systems (“Defendant MEPCO”) AND Carol and Alfred Gassner (““Defendant-
5 || Trust Settlors”), collectively Defendant-Movants, have filed a Motion for Summary Judgment
6 || seeking asummary determination that Kimberly Husted, the Chapter 7 Trustee (“Plaintiff-Trustee”’)
7 || of the Thomas Gassner bankruptcy estates (“Bankruptcy Estate’) is not entitled to the assets of the
8 || Thomas A. Gassner Trust (“TAG Trust”), which consists primarily of 2,000 shares of MEPCO
9 |] Stock. Further, that at most (but not agreed to) the Plaintiff-Trustee could claim not more than 25%
10 }| of the value of the TAG Trust, not 25% of the MEPCO Stock. The Plaintiff-Trustee is the Chapter 7
11 Trustee in the voluntary Chapter 7 case filed by Debtor.
12 The other defendant to this Adversary Proceeding is Laura Strombom, Trustee of the TAG
13 }| Trust (“Defendant-Strombom Trustee”). Defendant-Strombom Trustee is not a party to the present
14 Motion.
15 As addressed below, the Motion is denied without prejudice.
16 SUMMARY OF COMPLAINT
17 The Plaintiff-Trustee commenced this Adversary Proceeding on January 7, 2019, in which
18 the Plaintiff states three causes of action (denominated as “Counts) “Counts.” The allegations in the
19 || Complaint are summarized by the court as follows (identified by paragraph number of the
20 Complaint, Dckt. 1):
21 6. On or about December 30, 1992, the Trust Settlors created an
irrevocable trust, the TAG Trust, for which the Debtor was a beneficiary.
7. The TAG Trust provides that upon Debtor reaching the age of 50
23 years old, the TAG Trust terminates and all assets of the TAG Trust are to be
disbursed to Debtor. The assets of the TAG Trust include 2,000 shares of MEPCO
24 Stock, which is 33 1/3% of all outstanding MEPCO Stock.
25 The Debtor turned 50 years of age on July 2, 2016.
26 8. Defendant-Strombom Trustee is the trustee of the TAG Trust.
27 9. Debtor commenced his voluntary Chapter 7 case on March 25, 2010.
Debtor was granted his discharge on July 12, 2010, and the case was subsequently
28 closed.
1 10... After the Bankruptcy Case closed, Debtor sought counsel to
commence litigation asserting his right to distribution of all of the TAG Trust assets.
2 The Trust Settlors commenced litigation in the California Superior Court, Probate
Division on May 10, 2016, (“State Court Action”) to: (1) modify the TAG Trust, (2)
3 suspend distribution of the TAG Trust Assets, and (3) requested authorization to
approve a sale of the TAG Trust assets, which the Debtor opposed, asserting to be
4 the sole beneficiary of the TAG Trust.
5 11. Debtor’s counsel in connection with the State Court Action informed
Debtor that Debtor had failed to list his interests in the TAG Trust in his Bankruptcy
6 Case. On February 2, 2017, Debtor had his Chapter7 bankruptcy case reopened and
the Plaintiff-Trustee was appointed as Chapter 7 trustee.
7
12. On February 10, 2017, Debtor filed an amended Schedule identifying
8 his interest in the TAG Trust.
9 A review of the file in Debtor’s Chapter 7 case includes the Amended Schedule B, which
10 lists the following previously not scheduled assets:
i 19. Equitable or future Rights as beneficiary of Thomas A. Gassner Trust, an irrevocable
12 interests life estates, and | spendthrift trust dated December 30, 1992. (Bankruptcy estate property
rights or powers limited to 25% of interest pursuant to Cal. Probate Code section 15300 et.
13 exercisable for the seq and particularly section 15306.5.)
benefit of the debtor
14 other than those listed in
Schedule A - Real
15 Property.
17 21. Other contingent and | Claim for legal malpractice against Richard A. Chan , his original
unliquidated claims of bankruptcy attorney from 2010, for the failure to provide proper advice
18 every nature, including | with regard to scheduling the right to receive distributions from the
tax refunds, Thomas A. Gassner irrevocable trust as an asset of bankruptcy estate.
19 counterclaims of the
debtor, and rights to Claim for violation of discharge injunction of 11 U.S.C. section 524
20 setoff claims. Give against Scott Beattie, Jeremy Rutledge, Carol Gassner and Alfred
estimated value of each. | Gassner. (acquired post-petition)
21
Claim for violation of the automatic stay of 11 U.S.C. section 362 against
22 Scott Beattie, Jeremy Rutledge, Laura Strombom , Carol Gassner and
Alfred Gassner. (acquired post-petition)
23
Claim for reimbursement of monies expended to preserve trust
24 distribution as an asset of the bankruptcy estate by defending against
probate petition. (acquired post-petition)
25
Claim for breach of fiduciary duty as trustee of the Thomas A . Gassner
26 irrevocable spendthrift trust against correct trustee Laura Strombom and
former trustee Jeffery Bertlesen nominating Laura Strombom as
27 successor trustee. (acquired postpetition)
28
1 || 10-27435; Amended Schedule B, Questions 19, 21, Dckt. 68.
2 13. All of Debtor’s legal and equity interests in the TAG Trust became property
of the Debtor’s Bankruptcy Estate.
° 14. The shareholders of MEPCO are the Trust-Settlors, Debtor’s sister, and
4 Debtor.
5 The relief sought by Plaintiff-Trustee is stated in three causes of action, identified as
6 |} Counts 1, 2, and 3 in the Complaint, which the court summarizes as follows:
7 Count 1 -
8 For the First Count, the Plaintiff-Trustee asserts that all legal and equitable rights and
9 || interests of the Debtor in the TAG Trust are property of the Bankruptcy Estate. Plaintiff-Trustee
10 }| assets that Defendant-Strombom Trustee had actual notice knowledge of the commencement of
11 |] Debtor’s Bankruptcy Case. Plaintiff-Trustee asserts the right to an accounting by Defendant-
12 |] Strombom Trustee and delivery to Plaintiff-Trustee the trust assets or the value thereof which are
13 }| property of the Bankruptcy Estate.
14 Count 2 -
15 In Count 2, the Plaintiff-Trustee asserts that Defendant-Strombom Trustee has violated the
16 || automatic stay by suspending distribution of the TAG Trust assets that are property of the
17 bankruptcy estate. Further, that by commencing a proceeding in the California Superior Court,
18 Probate Division, for an order authorizing the sale of TAG Trust assets.
19 Count 3 -
20 In Count 3, Plaintiff-Trustee seeks the involuntary dissolution of MEPCO, asserting to hold
21 33 1/3% of the total outstanding sales of MEPCO. The involuntary dissolution is sought pursuant
22 || to California Corporations Code § 1800(a)(2) and (b)(5).
23
SUMMARY JUDGMENT REQUESTED BY DEFENDANT MEPCO
24 AND DEFENDANT-TRUST SETTLORS FOR COUNT 1 AND COUNT 3
25 Defendant-Movants seek partial summary judgment on Count 1, which seeks a judgment
26 || against Defendant-Strombom Trustee for an accounting and to distribute the TAG Trust assets to
27 |} the Plaintiff-Trustee as the sole beneficiary (those interests being property of the Bankruptcy Estate).
28 || Defendant-Movants seek to defend Defendant-Strombom Trustee by asserting that the TAG Trust
|| is a “spendthrift trust, subject to the provisions of California Probate Code §§ 15300 to 15309.
2 Defendant-Movants specifically direct the court to California Probate Code § 15306.5, which
3 || governs rights of creditors to enforce obligations against the rights of a beneficiary in a trust which
4 prohibits the voluntary or involuntary transfer of the beneficiary’s interest (commonly called a
5 || spendthrift trust) to not more than twenty-five percent (25%) of the payment that would otherwise
6 || be made to or for the benefit of the beneficiary of the spendthrift trust.
7 Defendant-Movants also direct the court to the Supreme Court decision Patterson v.
8 || Shumate, 504 U.S. 753,760 (1992) in support of the Motion for Summary Judgment.
9 For Count 3, Defendant-Movants assert that summary judgment in their favor is mandated
10 }| because the Bankruptcy Estate does not have the right to seek the turnover of the TAG Trust assets.
11 |] Therefore, since the Trustee-Plaintiff cannot demand the turnover of the TAG Trust assets, the
12 |) Plaintiff-Trustee cannot seek an involuntary dissolution of MEPCO.
13 It is asserted that at best the Plaintiff-Trustee can seek only the twenty-five percent (25%)
14 |] of the value of the TAG Trust assets as a creditor could under applicable California trust law.
15 Additionally, even if the court should determine that the Plaintiff-Trustee could get her hands on
16 || twenty-five percent of the TAG Trust’s thirty-three percent of the MEPCO Stock (rather than merely
17 the value of such stock), that would be only 666 shares, such would not be a sufficient for Plaintiff-
18 }| Trustee to seek an involuntary dissolution pursuant to California Corporations Code § 1800(a)(2).
19 REVIEW OF TRUST DOCUMENTS
20 A copy of the TAG Trust Agreement which is dated December 30, 1992 (“TAG Trust
21 || Agreement”) has been provided as Exhibit A in support of the Motion for Summary Judgment.
22 |} Dckt. 52. This court summaries relevant terms of the TAG Trust Agreement which include the
23 |) following:
24 A. In the “Whereas” statements made in the TAG Trust Agreement, it is stated by
Alfred Gassner and Carol Gassner (the Defendant-Trust Settlors) stated:
1. “WHEREAS, it is the intention of the Settlers to create an irrevocable trust
26 for the primary benefit of THOMAS A. GASSNER, which trust shall be
known as the THOMAS A. GASSNER TRUST (hereinafter sometimes
27 referred to as the "Trust");” TAG Trust Agreement, p. 1.
28 2. “WHEREAS, for that purpose, the Settlers make an absolute and irrevocable
1 gift of two thousand (2,000) shares of the class “B” non-voting common
stock of MEPCO LABEL SYSTEMS, A CALIFORNIA CORPORATION.”
2 Td.
3 B. The TAG Trust Agreement then makes the following affirmative statement:
4 NOW, THEREFORE, in consideration of the premises and by
the Settlors'’ execution of this Agreement, the Settlors declare and
5 establish the Trust, to be held by the Trustee in trust for the purposes
and subject to all the terms, conditions and provisions of this
6 Agreement; by the Trustee's execution of this Agreement, the
Trustee acknowledges receipt from the Settlers of the gift and
7 agree to hold and administer it, together with any other property of
any kind which the Trustee may at any time hereafter receive from
8 the Settlors, for the uses and purposes and subject to all of the terms,
conditions and provisions of this Agreement.
9
Id. (Emphasis added)
10
11 C. The sole beneficiary of the TAG Trust is the Debtor. /d., § 2.1.
12 D. Until the Debtor attains 50 years of age, the Trustee of the TAG Trust is authorized
to distribute all the net income to Debtor monthly (or other convenient periodic
13 payment but not less than once a year) such amounts as the Trustee deems necessary
for Debtor’s health, education, support, and maintenance. Id. § 3.1.
14
E. When the Debtor attains 50 years of age, the TAG Trust “shall terminate and all
15 of the assets shall be distribute to [Debtor] free of trust.” [d. § 3.2. (Emphasis
added)
16
F. If the Debtor dies before attaining the age of 50, then “the trust shall be distributed
17 to [Debtor’s] then living issue, if any, and if not, then to the living issue of
Settlors....” Id.
18
G. The Trust is “irrevocable,” with the TAG Trust Agreement stating:
19
This Trust is irrevocable. Neither the Trustee, nor the Settlers,
20 nor any other person shall have the right to revoke, alter or
amend this Agreement or any of its terms. The Settlers do
21 hereby renounce, relinquish and disclaim any reversionary or
remainder interest in the Trust estate.
22
Id. Article V.
23
H. The Powers of the trustee of the TAG Trust are to be exercised for the “sole benefit
24 of the beneficiary,” here the Debtor. Id. § 6.1.
25 I. The term “beneficiary,” unless otherwise express stated, when used in the TAG Trust
Agreement means the Debtor. Id. ¥ 9.1.
26
J. Paragraph 9.3 contains the spendthrift provision for the TAG Trust Agreement. The
27 language of this provision states (Emphasis added).
28 9.3 Spendthrift Provision. No income or _ principal
1 distributable or to become distributable with respect to a
separate trust shall be transferable, assignable, or subject to
2 being in any manner whatsoever anticipated, charged or
encumbered by any person beneficially interested in such
3 separate trust, or subject to interference or control by any
creditors of said person, or subject to any claim for alimony
4 or for the support of a spouse pursuant to a decree of separate
maintenance or separation agreement, or to being taken or
5 reached by any legal or equitable process in satisfaction of
any debt, liability or obligation of said person prior to its
6 receipt by said person; provided, that the provisions of this
Section shall not prevent the exercise of, or transfer pursuant
7 to the exercise of, any power of appointment granted
hereunder.
8
9 In preceding paragraph 9.2 of the TAG Trust Agreement titled “Disclaimer,” it makes
10 reference to a person who is a beneficiary or a person who is otherwise interested in any separate
11 |] trust. The reference to a “separate trust” is made in Article I of the TAG Trust Agreement, which
12 || states:
13 ARTICLE I
Designation of Successor Trustees
14
The Trustee, or Co-Trustees acting unanimously, of each separate trust, shall
15 have the power to designate successor Trustees or Co-Trustees with respect to such
trust while serving as Trustee; provided, however, that neither the Settlers nor any
16 person deemed to be the Settlers shall serve as successor Trustee. In default of such
exercise, and in .the event that GEORGE V. HARTMANN fails to qualify or ceases
17 to act as Trustee, then JOHN DEGREGORI shall serve as Trustee.
18 This reference to “each separate trust” does not appear to be a reference that includes the
19 || Debtor, as the beneficiary of the trust. A word search of the TAG Trust Agreement for “separate
20 || trust” makes reference to other trusts, not the Debtor, who is the “beneficiary.”
21 STATE COURT PETITION ACTION COMMENCED
BY DEFENDANT-TRUST SETTLORS FOR
22 MODIFICATION OF IRREVOCABLE TRUST
23 Filed as Exhibit C in support of the Motion is a copy of the Petition (“State Court Petition”)
24 || filed by Defendant-Trust Settlors in the California Superior Court (“State Court Petition Action”)
25 | for Modification of the TAG Trust. Dckt. 52 at 38. The State Court Petition has a filed date of
26 |] June 7, 2016. The State Court Petition states the following grounds and relief, as summarized by
27 |} this court, identified by paragraph number of the State Court Petition:
28 4.1. |The TAG Trust was intended to benefit Defendant-Trust Settlors’ son, the Debtor.
1
42. The TAG Trust and a similar one for Debtor’s sister were set up for estate planning
2 and business succession purposes, including:
3 (1) making gifts for estate planning purposes;
4 (2) to provide benefits for Defendant-Trust Settlor’s son on the
“understanding” that he would continue as a “key employee of MEPCO” until
5 Debtor reached 50 years of age;
6 (3) to benefit Defendant-Trust Settlors and employees of MEPCO by
maintaining strong management for MEPCO; and
7
(4) to provide a means for retaining and building Debtor’s skills as an offer
8 and key employee of MEPCO.
9 43. That on or around June 2010, Debtor abandoned his position with MEPCO to pursue
speculative pursuits, thereby “breaching the understanding he reached with
10 [Defendant-Trust Settlors], MEPCO, and other Interested Persons [who are not
identified]... .”
1]
44. Defendant-Trust Settlors assert, based on information and belief, that Debtor
12 committed various wrongful acts to MEPCO, including:
13 (1) Debtor’s departure from and abandonment of his position with MEPCO;
14 (2) Debtor’s misappropriation of proprietary customer information;
15 (3) Debtor’s use of such proprietary customer information to interfere with
MEPCO’s business and benefit a competitor where Debtor was subsequently
16 employed;
17 (4) Debtor failed to disclose his interest in the TAG Trust when he filed
bankruptcy in 2010; and
18
(5) Other changes that will subsequently presented.
19
4.5. Debtor seeks to inequitably requesting benefits from the TAG Trust despite his
20 failure to carry out his terms of the “agreement” concerning the TAG Trust.
21 46. Defendant-Trust Settlors seek to modify the TAG Trust to better conform with the
“agreement” to fulfill the intent of setting up the irrevocable trust and to protect the
22 interests of other members of the family.
23 47. Defendant-Trust Settlors would never have established the irrevocable TAG Trust
on the agreement of Debtor to remain with MEPCO.
24
4.14. Around 2004 Debtor was named as president of MEPCO and his sister named as vice
25 president.
26 4.15. As Debtor’s sister became more involved in MEPCO, Defendant-Trust Settlors state
that Debtor came more hostile toward “family members.”
27
416. In the 2000's Debtor began speculating in “flipping homes,” which negatively
28 impacted his work ethic and devotion of time at MEPCO. Debtor cut his hours
1 working at MEPCO.
2 4.17. Debtor demanded an ownership interest in MEPCO around 2005-2007, threatening
to leave if he was not given such an interest. There were oral agreements which led
3 to giving such interests in the TAG Trust, on the “understanding” that Debtor would
remain at MEPCO.
4
5 Though stating that this ownership interest was being done in 2005-2007 by putting such
6 |] interests in the TAG Trust, the TAG Trust Agreement is dated December 30, 1992 (more than two
7 || decades earlier) and was originally funded with 2,000 shares of MEPCO Stock.
8
418. On or about January 1, 2007, 2,000 shares of MEPCO stock and then on April 12,
9 2007 1,000 shares of MEPCO stock were transferred into the TAG Trust.
10 420. During 2008 to 2010 Debtor’s time working at MEPCO continued to decrease, and
in 2009 Debtor’s sister was made co-president of MEPCO.
1]
421. Debtor’s wife was employed at MEPCO and paid for full time work, while not
12 working full time and then stopping work altogether. However, Debtor’s wife
continued to be paid commissions “in substantial part upon [Debtor’s] increased
13 sales activity.”
14 4,22. Debtor and his wife quit, without notice, their positions at MEPCO in June 2010.
Then, several months later, Debtor began working for a competitor of MEPCO and
15 solicited MEPCO’s customers to move to the competitor.
16 The Defendant-Trust Settlors continue in the State Court Petition that the purpose of making
17 the gifts of the MEPCO Stock and setting up the irrevocable trust, to maintain the family business,
18 would not be served if the TAG Trust is not modified.
19 Further, Defendant-Trust Settlors alleged that they made such desires known to their attorney
20 |] at the time but “their attorney did not execute the Trust in a manner which fully achieved their intent
21 |] and desires.” Further, though represented by an attorney, Defendant-Trust Settlors state that “they
22 || were not advised, nor did they understand, that they could put conditional language in the [TAG
23 | Trust] which would fully condition their gift on [Debtor’s] completion of the desired period of
24 |i service.” Id. ¥ 30.
25 Defendant-Trust Settlors assert that evidence of the oral agreements and understandings can
26 || be demonstrated by Defendant-Trust Settlors family trust also created in 1992, which they amended
27 2007 with the assistance of another attorney, with such amendment showing this intent. Id. § 32.
28 The MEPCO Stock in the TAG Trust had a value, as of the filing of the State Court Petition,
1 |] of $416.67 per share. Id. ¥ 35.
2 When Defendant-Trust Settlors filed the State Court Petition and commenced the State
3 || Court Petition Action, they knew of Debtor’s bankruptcy case, but assert that there were not notified
4 || of the bankruptcy case when it was filed in 2010. Jd. 937. Further, that Defendant-Trust Settlors
5 || had knowledge when the State Court Petition Action was commenced that the Debtor’s interests in
6 || the TAG Trust were not disclosed on the Schedules filed in Debtor’s Bankruptcy case. Id.
7 Defendant-Trust Settlors then state they have learned of the bankruptcy and knowing that
8 || Debtor had not disclosed his interest in the TAG Trust on his bankruptcy schedules, that Defendant-
9 || Trust Settlors assert that judicial estoppel prevents Debtor from asserting that he had an interest in
10 the TAG Trust. They further argue that his failure to disclose this asset is an admission that he had
11 no interest in the TAG Trust. Id. § 38.
12 STANDING TO SEEK RELIEF AS TO COUNT 1
13 The federal courts are not a forum for the theoretical or one in which parties who do not have
14 |] rights attempt to litigate on behalf of others who are not before the court (with limited exceptions
15 to this rule, such as class action and other special representative proceedings authorized by
16 || Congress). Standing must be determined to exist before the court can proceed with the case. Sacks
17 || v. Office of Foreign Assets Control, 466 F.3d 764, 771. (9th Cir. 2006)
18 One of the first things that a law student learns about American Jurisprudence is that the law
19 does not condone the “officious intermeddler.” One is not allowed to assert claims or rights in
20 || which he or she has no interest. In the federal courts, this is the Constitutional requirement of
21 || “standing.” Article III of the Constitution confines federal courts to decisions of
“Cases” or “Controversies.” Standing to sue or defend is an aspect
22 of the case-or-controversy requirement. (Citations omitted.) To
qualify as a party with standing to litigate, a person must show, first
23 and foremost, “an invasion of a legally protected interest” that is
“concrete and particularized” and “actual or imminent.’ (Citations
24 omitted.)...Standing to defend on appeal in the place of an original
defendant, no less than standing to sue, demands that the litigant
25 possess ‘a direct state in the outcome.’ (Citations omitted.)
26 || Arizonans for Official English y. Arizona, 520 U.S. 43, 64, 117 S.Ct. 1055 (1997).
27 Though neither party has identified the issue of standing, the court may raise it sua sponte,
28
10
1 |] Rule 12(h)(3), Federal Rules of Civil Procedure’. A person must have a legally protected interest,
2 for which there is a direct stake in the outcome. Arizonans for Official English v. Arizona, 520 US.
3 |] 43, 64, 117 S.Ct. 1055 (1997).
4 The standing requirement is not merely a “procedural issue,” but a fundamental requirement
5 |] arising under the Constitution.
6 In Count 1, Plaintiff-Trustee seeks relief against Defendant-Strombom Trustee for an
7 || accounting of the TAG Trust assets and then distribution of the assets, the Plaintiff-Trustee asserting
8 || that the Bankruptcy Estate is the sold beneficiary of the TAG Trust. No relief is sought from either
9 || Defendant-MEPCO or Defendant-Trust Settlors.
10 At the hearing, Defendant-Movants made it clear that they were not purporting to litigate on
11 |] behalf of Defendant-Strombom Trustee, but that the Plaintiff-Trustee could not seek the turnover
12 |] of the TAG Trust without including the Defendant-Movants because the Defendant-Movants also
13 }| asserted an interest in the TAG Trust assets - the 2,000 shares of MEPCO stock.
14 In making this assertion, the Defendant-Movants highlight the substantive defect in the State
15 | Court Petition Action in which they seek a judgment that purports to state that no one other than the
16 Defendant-Trust Settlors or the purchaser they desire (the limited liability company owned by their
17 }| other son and daughter) have a right to the corpus of the TAG Trust - the 2,000 shares of MEPCO
18 stock. But in the State Court Petition Action, even though they were aware of the Debtor’s
19 Bankruptcy Case, that Debtor had not disclosed his interest in the TAG Trust in the Bankruptcy
20 |} Case, and that whatever interest he had was, at least in party, property of the Bankruptcy Estate,
21 || Defendant-Movants have sought to obtain either by settlement or adjudication against just the
22 || Debtor a judgment which would purport to state that there were no interests of the Bankruptcy
23 || Estate in the TAG Trust or trust assets.
25
26
QTY
' As made applicable to this Adversary Proceeding by Rule 7012, Federal Rules of Bankruptcy
28 Procedure.
11
1 RELEVANT CALIFORNIA LAW
PERTAINING TO SPENDTHRIFT TRUST
2 The disputes between the Parties to this Adversary Proceeding and the related proceeding
3 || being prosecuted by Georgina Gassner, the late Debtor’s spouse (“Debtor’s Spouse”), centers on
4 || three specific statutes relating to spendthrift trusts and the abilities of creditor to get to the
5 || distributions of a beneficiary of a spendthrift trust. These are the California code sections recently
6 || addressed by the California Supreme Court in Carmack v. Frealy establishing the rights and interests
7 || of a bankruptcy trustee and estate in a debtor’s interest in a spendthrift trust. (This court’s review
8 || of that California Supreme Court decision is discussed below.)
9 The three statutory provisions limiting the protections provided by a spendthrift trust relevant
10 }] to the issues now before this court are California Probate Code Sections 15301, 15306.5, and 15307,
11 || which provide (emphasis added):
12 |] § 15301. Restraint on transfer of principal
13 (a) Except as provided in subdivision (b) and in Sections 15304 to 15307,
inclusive, if the trust instrument provides that a beneficiary's interest in principal
14 is not subject to voluntary or involuntary transfer, the beneficiary's interest in
principal may not be transferred and is not subject to enforcement of a money
15 judgment until paid to the beneficiary.
16 (b) After an amount of principal has become due and payable to the beneficiary
under the trust instrument, upon petition to the court under Section 709.010 of the
17 Code of Civil Procedure by a judgment creditor, the court may make an order
directing the trustee to satisfy the money judgment out of that principal
18 amount. The court in its discretion may issue an order directing the trustee to satisfy
all or part of the judgment out of that principal amount.
19
20 | § 15306.5. Court order directing trustee to satisfy judgments; payment to which beneficiary
entitled; limitations
21
22 (a) Notwithstanding a restraint on transfer of the beneficiary's interest in the
trust under Section 15300 [restraint on transfer of income] or 15301 [restraint on
23 transfer of principal], and subject to the limitations of this section, upon a judgment
creditor's petition under Section 709.010 of the Code of Civil Procedure, the court
24 may make an order directing the trustee to satisfy all or part of the judgment
out of the payments to which the beneficiary is entitled under the trust
25 instrument or that the trustee, in the exercise of the trustee's discretion, has
determined or determines in the future to pay to the beneficiary.
26
(b) An order under this section may not require that the trustee pay in satisfaction
27 of the judgment an amount exceeding 25 percent of the payment that otherwise
would be made to, or for the benefit of, the beneficiary.
28 Lee
12
1 (e) If the trust gives the trustee discretion over the payment of either principal or
income of a trust, or both, nothing in this section affects or limits that discretion in
2 any manner. The trustee has no duty to oppose a petition to satisfy a judgment under
this section or to make any claim for exemption on behalf of the beneficiary. The
3 trustee is not liable for any action taken, or omitted to be taken, in compliance with
any court order made under this section.
4
(f) Subject to subdivision (d), the aggregate of all orders for satisfaction of money
5 judgments against the beneficiary's interest in the trust may not exceed 25 percent
of the payment that otherwise would be made to, or for the benefit of, the
6 beneficiary.
7 | § 15307. Income in excess of amount for education and support; application to creditors’ claim
8 Notwithstanding a restraint on transfer of a beneficiary's interest in the trust
under Section 15300 or 15301, any amount to which the beneficiary is entitled
9 under the trust instrument or that the trustee, in the exercise of the trustee's
discretion, has determined to pay to the beneficiary in excess of the amount that is
10 or will be necessary for the education and support of the beneficiary may be applied
to the satisfaction of a money judgment against the beneficiary. Upon the judgment
11 creditor's petition under Section 709.010 of the Code of Civil Procedure, the
court may make an order directing the trustee to satisfy all or part of the
12 judgment out of the beneficiary's interest in the trust.
13 California Code of Civil Procedure § 709.010 provides that a judgment creditor may petition
14 |] the court having jurisdiction over the administration of a trust to have a judgment debtor
15 }| beneficiary’s interest in the trust applied to satisfaction of a money judgment. The application of
16 | a judgment debtor’s beneficiary’s interest is expressly subject to the limitations provided in
17 }| California Probate Code §§ 15300 et seq. (relevant provisions to this Adversary Proceeding and
18 || Motion stated above).
19
PROPERTY OF THE BANKRUPTCY ESTATE
20 INTEREST IN TRUSTS
21 Consideration of what constitutes property of a bankruptcy estate begins with federal law -
22 11 U.S.C. § 541 (which incorporates state law). Congress first provides in 11 U.S.C. § 541(a) a
23 || broad definition of property of the bankruptcy estate:
24 § 541. Property of the estate
25 (a) The commencement of a case under section 301, 302, or 303 of this title creates
an estate. Such estate is comprised of all the following property, wherever located
26 and by whomever held:
27 (1) Except as provided in subsections (b) and (c)(2) of this section, all legal
or equitable interests of the debtor in property as of the commencement of the
28 case.
13
1 (2) All interests of the debtor and the debtor’s spouse in community property
as of the commencement of the case that is—
2
(A) under the sole, equal, or joint management and control of the
3 debtor; or
4 (B) liable for an allowable claim against the debtor, or for both an
allowable claim against the debtor and an allowable claim against the
5 debtor’s spouse, to the extent that such interest is so liable.
6 (3) Any interest in property that the trustee recovers under section 329(b),
363(n), 543, 550, 553, or 723 of this title.
7
(4) Any interest in property preserved for the benefit of or ordered transferred
8 to the estate under section 510(c) or 551 of this title.
9 (5) Any interest in property that would have been property of the estate if
such interest had been an interest of the debtor on the date of the filing of the
10 petition, and that the debtor acquires or becomes entitled to acquire within
180 days after such date—
1]
(A) by bequest, devise, or inheritance;
12
(B) as a result of a property settlement agreement with the debtor’s
13 spouse, or of an interlocutory or final divorce decree; or
14 (C) as a beneficiary of a life insurance policy or of a death benefit
plan.
15
(6) Proceeds, product, offspring, rents, or profits of or from property of the
16 estate, except such as are earnings from services performed by an individual
debtor after the commencement of the case.
17
(7) Any interest in property that the estate acquires after the commencement
18 of the case.
19 Congress then pares back this broad reach for property of the Bankruptcy Estate, providing
20 in 11 U.S.C. § 541, as pertinent to the interest in the TAG Trust:
21 (c)
(1) Except as provided in paragraph (2) of this subsection, an interest of the
22 debtor in property becomes property of the estate under subsection (a)(1), (a)(2),
or (a)(5) of this section notwithstanding any provision in an agreement, transfer
23 instrument, or applicable nonbankruptcy law—
24 (A) that restricts or conditions transfer of such interest by the debtor; or
25 (B) that is conditioned on the insolvency or financial condition of the debtor,
on the commencement of a case under this title, or on the appointment of or taking
26 possession by a trustee in a case under this title or a custodian before such
commencement, and that effects or gives an option to effect a forfeiture,
27 modification, or termination of the debtor’s interest in property.
28 (2) A restriction on the transfer of a beneficial interest of the debtor in a trust
14
1 that is enforceable under applicable nonbankruptcy law is enforceable in a case
under this title.
2
3 The U.S. Supreme Court has held that the term “property,” as used in the former Bankruptcy
4 | Act, must be "construed most generously and an interest is not outside its reach because it 1s novel
5 |] or contingent or because enjoyment must be postponed." Segal v. Rochelle, 382 U.S. 375, 379
6 || (1966). "Every conceivable interest of the debtor, future, nonpossessory, contingent, speculative,
7 || and derivative, is within the reach of § 541." In re Yonikus, 996 F.2d 866, 869 (7th Cir. 1993).
8 The Ninth Circuit Court of Appeals repeated this broad scope of property of the bankruptcy
9 || estate, including contingent interests, in In re Neuton, 922 F.2d 1379 (9th Cir. 1990). The facts in
10 |] Neuton were:
11 A. The debtor filed bankruptcy on November 12, 1987.
12 B. The scheduled assets included a beneficial interest in a trust, for which the debtor did
not have a current right to receive distributions (it being contingent on the death of
13 the senior beneficiary receiving distributions at the time the case was filed).
14 C. On December 18, 1987 - thirty-six days after the bankruptcy case had been filed - the
senior beneficiary died and the debtor became entitled to receive distributions from
15 the trust.
16 D. The Chapter 7 trustee in the Neuton case objected to any exemption claimed in the
distributions by the debtor in any amounts in excess of the $1,135.00 exemption
17 claimed by that debtor.
E. The debtor responded that: (1) since it was a spendthrift trust, debtor’s interest was
18 excluded from the bankruptcy estate, and (2) since debtor’s interest was contingent
on the death of the senior beneficiary, then it could not be property of the bankruptcy
19 estate.
20 || In re Neuton, 922 F.2d 1379, 1381 (9th Cir. 1990)
21 The Ninth Circuit Court of Appeals first addressed the inclusion of contingent rights as
22 || property of a bankruptcy estate, including contingent interests 1n trusts.
23 We agree with the BAP's position. Whether a debtor's contingent interests
were acquired by the bankrupt estate was a thorny issue under the old Bankruptcy
24 Act. Ina landmark decision which largely inspired the new Code, the Supreme Court
held that "the term 'property' has been construed most generously and an interest is
25 not outside its reach because it is novel or contingent or because enjoyment must be
postponed." Segal v. Rochelle, 382 U.S. 375, 379, 15 L. Ed. 2d 428, 86 S. Ct. 511
26 (1966).
27 Accordingly, contingent interests of the type at issue in this case typically
have been held to be property of the bankrupt estate. For example, in In re Ryerson,
28 this court affirmed the BAP's holding that money to which the debtor became entitled
15
1 eight months after filing for bankruptcy should be included in the estate,
notwithstanding the fact that at the time of filing the debtor had an unvested,
2 contingent interest. 739 F.2d 1423, 1425 (9th Cir. 1984). Similarly, in Jn re Dias the
bankruptcy court found that "a beneficial interest in a trust is an equitable interest
3 under § 541(a)(1)" despite the fact that at the time of filing it was contingent. 37
Bankr. 584, 586-87 (Bankr. D. Idaho 1984). See also In re Bialac, 712 F.2d 426, 431
4 (9th Cir. 1983) ("The courts have consistently said that options or contingent
interests are property of the bankruptcy estate under section 541"); In re Young, 93
5 Bankr. 590 (Bankr. S.D. Ohio 1988) (unliquidated or contingent claims are property
of the estate); In re Turner, 29 Bankr. 628 (Bankr. D. Me. 1983) (contingent interest
6 in earnest money deposit in escrow account belongs to the estate). Cf. Restatement
(2d) of Trusts § 162 ("The mere fact that the interest of the beneficiary is contingent
7 and not vested does not preclude creditors of the beneficiary from reaching it").
8 |] In re Neuton, 922 F.2d at 1382-83
9 The Ninth Circuit Panel in Neuton then addressed the California law exception, Cal. Prob.
10 § 15306.5, for the twenty-five percent (25%) interest in a spendthrift trust which does not “enjoy”
11 |] the protection from creditor’s claims or exclusion from property of the bankruptcy estate.
12 Thus, the Probate Code provides that despite such restraints a creditor may obtain an
“order directing the trustee to satisfy all or part of the judgment out of the payment
13 to which the beneficiary is entitled under the trust instrument," so long as the
payment does not "exceed[] 25% of the payment that otherwise would be made to
14 .. . the beneficiary.” Cal. Prob. Code § 15306.5. In other words, the spendthrift
restriction fully protects only 75% of the interest in the trust. Because the trustee
15 enjoys the power of a hypothetical judgment creditor, 11 U.S.C. § 544(a)(1), we
agree with the BAP that the remaining one-fourth is not excluded from the estate
16 pursuant to 11 U.S.C. § 541(c)(2). In short, the bankruptcy estate possesses an
income interest in one-fourth of the payments due to Neuton (subject to further
17 applicable conditions, see infra.).
18 Id. at 1383.
19 The Ninth Circuit Court of Appeals revisited whether the twenty-five percent (25%) cap for
20 || creditors to reach a debtor’s interest in a spendthrift trust provided under California Probate
§ 15206.5 also constitutes the ability of a bankruptcy trustee to reach more than that twenty-five
22 || percent under California Probate § 15301(b) and § 15307 in Frealy v. Reynolds, 779 F.3d 1028 (9th
23 Cir. 2015). The Ninth Circuit, per curiam, certified this question to the California Supreme Court.
24 The California Supreme Court issued its decision on the certified question in Carmack v.
25 |! Frealy, 2 Cal.Sth 844 (2017). The California Supreme Court’s conclusion is stated as:
26 Conclusion
27 We conclude that a bankruptcy trustee, standing as a hypothetical judgment creditor,
can reach a beneficiary's interest in a trust that pays entirely out of principal in two
28 ways. It may reach up to the full amount of any distributions of principal that
16
1 are currently due and payable to the beneficiary, unless the trust instrument
specifies that those distributions are for the beneficiary's support or education and
2 the beneficiary needs those distributions for either purpose. Separately, the
bankruptcy trustee can reach up to 25 percent of any anticipated payments
3 made to, or for the benefit of, the beneficiary, reduced to the extent necessary by the
support needs of the beneficiary and any dependents.
4
5 || Carmack v. Frealy, 2 Cal.5th at 857. The “currently due and payable” means only those amounts
6 || at the time a creditor is petitioning a court pursuant to California Probate § 15301(b) to levy on the
7 || principal portion of a spendthrift trust.
8 “After an amount of principal has become due and payable....” (Italics added.) This
clause indicates that timing is critical: section 15301(b) reaches only those
9 amounts which are presently set to be paid to the beneficiary. The provision thus
requires an amount of principal to “ha[ve] become” due to the beneficiary, at which
10 point upon a creditor's petition the court may enter an order “directing the trustee to
satisfy the money Judgment out of that principal amount.” (§ 15301(b), italics
11 added.) In other words, under this provision creditors may reach the principal
already set to be distributed and only up to the extent of that distribution. Such
12 principal has served its trust purposes, and in many (but not all) cases, the
distribution may signal that the trust is ending. Section 15301(b) makes these
13 assets, and these assets only, fair game to creditors.
14 Id. at 851 (emphasis added). As discussed by the California Supreme Court, such interpretation
15 makes “fair game” for creditors amounts which the trust provides are presently disburseable, but the
16 trustee of the trust is withholding the money/assets to preclude creditors from validly executing
17 against them once they would be in the beneficiary’s hands. See discussion, Jd. at 856.
18 The California Supreme Court then concluded that the twenty-five percent (25%) limitation
19 }| also applied to what can be reached by a creditor pursuant to California Probate § 15307. Id. at 855.
20 |) The Supreme Court concluded that a perception that the twenty-five percent (25%) limitation applies
21 || to California Probate § 15307 and that the failure of it to be expressly stated in the statute,
22 [t]hat section 15307 reflects a drafting error. Before the 1986 revisions, spendthrift
trusts were governed by three key provisions [detailed discussion of prior statutes,
23 Law Revision Commission recommendations, and enactment of current statutes] .
[I]n light of this history, we decline to adopt an interpretation of section 15307 that
25 simply undoes the limitations on general creditors that section 15306.5 sets forth in
a set of specific and carefully calibrated provisions. We conclude instead that the
26 ultimate enactment of section 15307 without apparent limitations on the reach
of general creditors was inadvertent. The Legislature plainly intended general
27 creditors to be limited to 25 percent of distributions from the trust.
28 | Id. at 854-855 (emphasis added).
17
1 After receiving the California Supreme Court’s ruling in Carmack, the Ninth Circuit
2 || remanded Frealy v. Reynolds to the trial court, ordering:
3
Based on the California Supreme Court opinion, we now hold that a bankruptcy
4 estate is entitled to the full amount of spendthrift trust distributions due to be paid
as of the petition date. See Carmack v. Reynolds, 2 Cal. 5th 844, 215 Cal. Rptr. 3d
5 749, 391 P.3d 625, 628 (Cal. 2017); Cal. Prob. Code § 15301(b). But the estate may
not access any portion of that money the beneficiary needs for his support or
6 education, as long as the trust instrument specifies that the funds are for that purpose.
See Carmack, 391 P.3d at 629; Cal. Prob. Code § 15302. The estate may also reach
7 25 percent of expected future payments from the spendthrift trust, reduced by
the amount the beneficiary needs to support himself and his dependents. See
8 Carmack, 391 P.3d at 632; Cal. Prob. Code § 15306.5.
9 || Frealy v. Reynolds (In re Reynolds), 867 F.3d 1119, 1120 (9th Cir. 2017). Emphasis added.
10 The Plaintiff-Trustee argues that based on the California Supreme Court’s ruling in Carmack
11 || Defendant-Movants’ arguments fail and the bankruptcy estate includes all rights and interests based
12 }| upon the condition subsequent - Debtor achieving the age of 50 on July 2, 2016. Further, that any
13 }| actions taken by Defendant-Settlors to try and reduce the Debtor’s and Bankruptcy Estate’s interest
14 |] in the Trust is void as being in violation of the automatic stay.
15 The court restates the Plaintiff-Trustee’s analysis on this point as stated by the Plaintiff-
16 }| Trustee to insure that it is accurately and fully stated in this Decision:
17 It may be true that on the date of commencement of the Debtor's bankruptcy case the
reach of the Trustee might have been limited to 25 percent of expected distribution.
18 Id. at 857. But that changed upon the Debtor's reaching age fifty (50) on July 2,
2016. Payment in full to creditors is required under a spendthrift trust provision once
19 "principal has become due and payable (but has not yet been distributed)," so long
as the distribution is not specified for a beneficiary's support or education. Carmack
20 v. Reynolds, 2 Cal. Sth 844, 856 (2017). '
21 1. Footnote 1 in the Opposition addresses the application of the automatic
stay, which continues in full force and effect for undisclosed assets, which
22 undisclosed assets are not automatically abandoned upon the closing of the
bankruptcy case.
23
24 The Plaintiff-Trustee’s argument goes to the effect ofa condition subsequent occurring with
25 || respect to an interest that is property of the bankruptcy estate. Thus, if a debtor was a contingent
26 || beneficiary of a trust, say that the condition subsequent to the debtor being entitled to payment was
27 | the death of a senior beneficiary, that contingent right to distributions from trust is property of the
28 || bankruptcy estate. Ifthe condition subsequent 1s satisfied while the contingent right is property of
18
1 || the bankruptcy estate, then the bankruptcy estate has the right to receive the distributions.
2 The Plaintiff-Trustee further argues that if the Bankruptcy Estate only acquired the 25%
3 || interest, it has taken an assignment of the other 75% interest from Georgene Gassner, the Debtor’s
4 || spouse, (“Spouse”) with said spouse asserting she obtained those interests in the TAG Trust upon
5 || the Debtor’s passing. The court issued its order in the Debtor’s Bankruptcy Case approving the
6 || Settlement between the Trustee and Spouse on October 1, 2019. 10-27435; Order, Dckt. 175. The
7 || Settlement Agreement is filed as Exhibit A. /d.; Dckt. 164. Under the Settlement:
8 A. All legal and equitable rights of Spouse in the MEPCO Stock and rights to seek
dissolution of MEPCO are assigned to the Plaintiff-Trustee. The Settlement
9 Agreement provides for a 75% to Bankruptcy7 Estate and 25% to the Spouse
distribution of the net proceeds received in connection with the MEPCO Stock.
" B. The Plaintiff-Trustee has assigned all rights and claims for alleged violations of the
11 automatic stay relating to the MEPCO Stock are assigned to the Spouse. The
Settlement Agreement provides for a 75% to the Spouse and 25% to the Bankruptcy
12 Estate distribution of the net proceeds in connection with the stay violation claims.
13 Id.; Settlement Agreement paragraphs 2 and 3.
14
PROPERTY OF THE BANKRUPTCY ESTATE
15 IN DEBTOR’S BANKRUPTCY CASE
16 Beginning with federal law, 11 U.S.C. § 541(a) of the Bankruptcy Code provides that the
17 || commencement of a bankruptcy case creates the bankruptcy estate and that bankruptcy estate is
18 | comprised on all legal or equitable interests of the debtor, including community property interests,
19 }| as of the commencement of the case. Additionally, the bankruptcy estate includes: (1) transfers of
20 || property the trustee recovers post-petition; (2) inheritances, bequests, death benefit, life insurance
21 || benefits that the debtor acquires or becomes entitled to within 180 days of the commencement of
22 || the bankruptcy case; (3) proceeds, products, offspring, rents, or profits of or from property of the
23 || bankruptcy estate; and (7) any interest in property that the bankruptcy estate acquires after the
24 |} commencement of the case. 11 U.S.C. § 541(a)(3)-(7).
25 Debtor commenced his bankruptcy case on March 25, 2010, and the Bankruptcy Estate in
26 |} Debtor’s Case was created that day. All of the property described in 11 U.S.C. § 541(a) became
27 || property of the Bankruptcy Estate and no other assets subsequently acquired by the Debtor, except
28 || as provided in 11 U.S.C. § 541(a)(5) and (6).
19
1 Here, at issue is the interest of the Debtor in the TAG Trust. If the interest were “merely”
2 || acontingent trust interest for which distributions were subject to a later date event occurring, such
3 || as the death of a senior beneficiary or the debtor achieving a certain age, then that entire contingent
4 || right would be property of the bankruptcy estate for the bankruptcy trustee to administer. If the
5 |] contingency is satisfied while the trust interest is property of the bankruptcy estate, then the
6 || distribution comes into the bankruptcy estate. Or, a trustee could sell such contingent beneficial
7 || interest, allowing the purchase to value and take the risk of the contingency.
8 However, Debtor’s interest in the TAG Trust is asserted to not be a “mere” contingent
9 || interest. True, there is a contingency of 50 years of age for the TAG Trust to terminate
10 automatically and for the TAG Trust Assets to be distributed to Debtor. In addition, it is asserted
11 |] to be a spendthrift trust, for which the Debtor’s interests are partially protected from the claims of
12 }| creditors.
13 Congress has created special provisions concerning what is property of the bankruptcy estate
14 }| and what is excluded from becoming property of the bankruptcy estate. In 11 U.S.C. § 541(c)(2)
15 Congress provides that:
16 (2) A restriction on the transfer of a beneficial interest of the debtor in a trust that is
enforceable under applicable nonbankruptcy law is enforceable in a case under this
17 title.
18 This provision does not merely provide that all of a debtor’s interest in a spendthrift trust is
19 | property of the bankruptcy estate to be subsequently abandoned by the trustee and thereby removed
20 || from the bankruptcy estate. Rather, it provides that it never becomes property of the bankruptcy
21 | estate.? Thus, if the TAG Trust is a spendthrift trust as to the interests of Debtor, then to the extent
22 || that Debtor’s interest is protected from transfer, 11 U.S.C. § 541(c)(2) would preclude that protected
23 || interest from being included in the Bankruptcy Estate in this case. If not included in the Bankruptcy
24 || Estate, then the subsequent satisfaction of a contingency (here Debtor’s age) does not transfer it into
25
26 ° “ Spendthrift trusts are a particular type of express trust. They require specific focus because
Code section 541(c)(2) excludes the interest of the debtor-beneficiary in spendthrift trusts from property
27 |! of the estate by virtue of the following statutory language: ‘A restriction on the transfer of a beneficial
interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a
28 case under this title.’ ” 5 Collier on Bankruptcy P 541.27 (16th 2019)
20
1 || the Bankruptcy Estate.
2 || Property of this Bankruptcy Estate
3 In the Reply filed by Defendant-Movants, it is asserted that “Everyone is agreed that the
4 || [TAG Trust] is a spendthrift trust.” Reply, p. 19:7; Dckt. 67. Further, “Given that, the Trustee has
5 |] raised no grounds nor stated any triable issue of fact that 11 U.S.C. § 541(c)(2) should not apply,
6 || this Court should find that the [TAG Trust] is not an asset of the Thomas Gassner Bankruptcy
7 || Estate.” Id., p. 19:7-10.
8 First, the phraseology used by Defendant-Movants is not precise. Nobody is asserting that
9 || the TAG Trust is property of the Bankruptcy Estate, but the Plaintiff-Trustee asserts that all of
10 || Debtor’s interests as a beneficiary of the TAG Trust is property of the Bankruptcy Estate.
11 Second, the Plaintiff-Trustee has asserted that the TAG Trust is not a spendthrift trust as it
12 |] applies to the Debtor’s interest in the TAG Trust. As the court discusses above in reading the TAG
13 }| Trust Agreement that was executed in 1992, and Plaintiff-Trustee asserts in the Opposition, the plain
14 || language of the spendthrift provision of the Trust Agreement does not state that it is the interests of
15 }| Debtor as a beneficiary are subject to transfer limitations. Paragraph 9.3 of the Trust Agreement
16 |] states:
17 9.3 Spendthrift Provision. No income or principal distributable or to become
distributable with respect to a separate trust shall be transferable, assignable, or
18 subject to being in any manner whatsoever anticipated, charged or encumbered
by any person beneficially interested in such separate trust, or subject to interference
19 or control by any creditors of said person, or subject to any claim for alimony or for
the support of a spouse pursuant to a decree of separate maintenance or separation
20 agreement, or to being taken or reached by any legal or equitable process in
satisfaction of any debt, liability or obligation of said person prior to its receipt by
21 said person; provided, that the provisions of this Section shall not prevent the
exercise of, or transfer pursuant to the exercise of, any power of appointment granted
22 hereunder.
23 |} Exhibit A, Dckt. 52 (emphasis added). This language discusses distributions with respect to a
24 || “separate trust.” That term is not defined in the Trust Agreement. The term “separate trust” is used
25 || in several other provisions of the Trust Agreement, appearing to referencing a trust different than
26 || the TAG Trust.
27 The Plaintiff-Trustee has put squarely in the lap of the Defendants and the court whether
28 |] there are limitations on the transfer of Debtor’s interests as a beneficiary of the TAG Trust. The
21
1 | court has not been provided with evidence and a legal explanation of the language to state that
2 || Paragraph 9.3 is a spendthrift provision as to Debtor’s interests in the TAG Trust. Nor has the
3 || Plaintiff-Trustee provided the court with evidence and a legal explanation that the language in
4 | Paragraph could not be read, or properly reformed as discussed by the California Supreme Court in
5 | Carmack v. Reynolds.
6 || Property of the Bankruptcy Estate if
The TAG Trust is a Spendthrift Trust
7 || As to the Beneficial Interest of Debtor
8 Plaintiff-Trustee argues that the California Supreme Court in Carmack v. Reynolds holds that
9 || there is no “absolute cap” of twenty-five percent (25%) on a bankruptcy estate’s access to a the
10 }| interests of a beneficiary under a spendthrift trust, but merely that the limit applies each time the
11 |] creditor has the right to hit the beneficiary’s interest. Therefore, the Plaintiff-Trustee argues that all
12 || of the Debtor’s interest in the TAG Trust is in the Bankruptcy Estate and upon the Debtor reaching
13 }| the 50 years of age contingency, the TAG Trust terminated as provided in Paragraph 3.2 of the Trust
14 || Agreement (Exhibit A, Dckt. 52), all of the assets were to be distributed to the beneficiary, and since
15 the Debtor’s interest in the TAG Trust were property of the Bankruptcy Estate, the Bankruptcy
16 Estate gets all of the TAG Trust assets.
17 The court does not concur in the Plaintiff-Trustee’s reading of federal law, California law,
18 | and the Supreme Court ruling in Carmack v. Reynolds.
19 First, as to federal law, 11 U.S.C. § 541(a) and (c)(2) clearly identify what becomes property
20 || of the bankruptcy estate. While 11 U.S.C. § 541(a) is very broad and includes contingent rights and
21 interests, 11 U.S.C. § 541(c)(2) precludes a beneficiary’s interest in a spendthrift trust from ever
22 || being part of the bankruptcy estate to the extent that such spendthrift provision is enforceable under
23 || applicable nonbankruptcy law.
24 The provisions of 11 U.S.C. § 541(c)(2) do not merely state that a trustee may not administer
25 |} a debtor’s interest in a spendthrift trust to the extent a creditor would under applicable
26 || nonbankruptcy law. Rather, it expressly excludes and prevents such protected spendthrift interests
27 || from ever becoming property of the bankruptcy estate. Since it never becomes property of the
28 || bankruptcy estate, the post-petition satisfaction of the condition subsequent does not result in it
22
1 || becoming property of the bankruptcy estate because the bankruptcy estate did not include the
2 || conditional interest.
3 As clearly stated by the California Supreme Court in Carmack v. Reynolds, California law
4 does not render all of the interests of the beneficiary of a spendthrift trust protected from claims of
5 || judgment creditors. In Carmack, the Supreme Court was addressing what property of a spendthrift
6 |] trust would become property of a bankruptcy estate. The California Supreme Court identified three
7 || specific California Probate law exceptions to the spendthrift trust protections, those being:
8 (1) Cal. Prob. § 15301, enforcement against any principal amount of the trust for distribution
9 || after it becomes due and payable,
10 (2) Cal. Prob. § 15306.5, allowing a court to order an amount not exceeding twenty-five
11 percent (25%) of a principal or income distribution, and
12 (3) Cal. Prob. § 15307
13 }| allowing a court to order the payment of any amount of distribution from the spendthrift trust to
14 || which the beneficiary is entitled, that is in excess of amounts necessary and support, to satisfy a
15 judgment obligation.
16 The California Supreme Court has concluded that twenty-five percent (25%) limitation
17 }| applies in context of California Probate Code § 15306.5 and § 15307, correcting the clerical drafting
18 error in Carmack. Further, the Supreme Court has clearly stated that these provisions are to be
19 interpreted consistent with the other provisions - applying to monies that have been disbursed to the
20 || beneficiary or are due to be distributed to the beneficiary but the trustee is holding on to the money
21 |] or assets.
22 If the TAG Trust is a spendthrift trust as to the Debtor’s interest, then the Plaintiff-Trustee
23 |} is asserting that due to California Probate Code § 15206.5 and § 15307, twenty-five percent (25%)
24 || of the Debtor’s interest is property of the bankruptcy estate as of the commencement of this case.
25 |) The age contingency was satisfied, the TAG Trust was terminated, and the 2,000 shares of MEPCO
26 || Stock and any other trust assets disbursed - with 25% to the Bankruptcy Estate (S00 shares of
27 MEPCO Stock and 25% of any other assets) and 75% to the Debtor or successor of Debtor.
28
23
1 || Debtor’s 75% Interest in
the TAG Trust
2
3 The Plaintiff-Trustee asserts that the Bankruptcy Estate has been assigned the other 75% of
4 | the MEPCO Stock and any other assets of the TAG Trust by the successor in interest to Debtor -
5 || Georgene Gassner, Debtor’s spouse at the time of his death. This assignment was made as part of
6 || a post-petition settlement with Georgene Gassner that has been approved by the court in the
7 || Debtor’s Bankruptcy Case.
8 In their Reply, Defendant-MEPCO and Defendant-Trust Settlors assert that such could not
9 || be property of the Bankruptcy Estate, stating:
10 Finally, the Trustee's claim that she has received an "assignment" of the
Debtor's rights under the TRUST in September 2019 do not alter the determination
11 of what is property of the estate in any way. As to the portion assigned, the Trustee
simply stands in Georgene Gassner's shoes, as an assignee of Debtor's rights as to
12 any portion of the Trust which is not property of the estate. To claim otherwise flies
in the face of this Court's statements in approving the Settlement, and is ineffective
13 as a matter of law.
14 Reply, p. 19:21-26; Dckt. 67.
15 The court cannot concur with this legal conclusion advance by the Defendant-Movants. The
16 Bankruptcy Code clearly provides that any assets obtained after the commencement of the case by
17 the bankruptcy estate are property of the bankruptcy estate. 11 U.S.C. § 541(a)(7). This is similar
18 }] to a trustee settling a dispute and having a third party make a monetary of property transfer to the
19 || bankruptcy estate as part of the settlement.
20 Here, Georgene Gassner has transferred whatever rights and interests she and the Debtor’s
21 }) family had in the 75% of the Debtor’s interest in the TAG Trust. In the Settlement Agreement,
22 || Georgene Gassner states that as the successor trustee of the Thomas Gassner and Georgene Gassner
23 |) Family Trust (“Debtor Family Trust), which held the Debtor’s 75% interest in the TAG Trust, she
24 || could and was transferring those rights to the Plaintiff-Trustee for the Bankruptcy Estate. Settlement
25 || Agreement, see Recital D and § 2; Exhibit A, Dckt. 164.
26 Any and all interests in the TAG Trust of the Debtor that were held by Georgene Gassner
27 || or the Debtor Family Trust are now property of the Bankruptcy Estate.
28
24
1 DETERMINATION OF FACTS NOT IN DISPUTE
2 FURTHER PROCEEDINGS
3 At this juncture, determination of the requests by MEPCO and Defendant-Trust Settlors that
4 || the Bankruptcy Estate is not the owner of the 2,000 MEPCO Stock and that the Bankruptcy Estate
5 |] 1s entitled to only the value of 15% of the MEPCO Stock cannot be summarily determined. That
6 |] 1s because there first must be a determination of the terms of the TAG Trust Agreement. As written,
7 || the Bankruptcy Estate has all 2,000 shares of the MEPCO Stock. As argued by the Defendant-Trust
8 || Settlors and MEPCO, the Bankruptcy Estate has no shares and no right to any value for any assets
9 |] of the TAG Trust.
10 There must be an adjudication of what the terms of the TAG Trust Agreement are and
11 |] whether Defendant-Trust Settlors can have the TAG Trust Agreement reformed under applicable
12 California law.
13 This federal court has the federal court jurisdiction to determine the interests of the
14 |] Bankruptcy Estate in the TAG Trust and the property to be distributed from the TAG Trust. It is
15 also possible for this federal court to allow the determination of property of the Bankruptcy Estate
16 || to be made by the State Court, but a key factor in consideration of such abstention is whether the
17 || necessary parties can diligently prosecute such state court action to a prompt conclusion. Will
18 reverting to a State Court proceeding unduly delay the administration of the bankruptcy estate.
19 If such abstention is timely requested, the court will address that in the context of such
20 || proceeding. However, the facts and evidence presented to the court in this Adversary Proceeding
21 || and Related Adversary Proceeding indicate that the State Court Petition Action is not able to be
22 || diligently prosecuted to a prompt conclusion. Defendant-Trust Settlors filed the State Court Petition
23 |} on June 7, 2016 - 3 years, 7 months, and 7 days before the hearing on this Summary Judgment
24 || Motion. The State Court Petition clearly disclosed Defendant-Trust Settlors’ knowledge of the
25 |} Bankruptcy Case and that the TAG Trust interests may be property the Bankruptcy Estate. The
26 |} Defendant-Trust Settlors did not seek relief from the stay, did not amend the State Court Petition
27 to include the Plaintiff-Trustee for the Bankruptcy Estate, and have not attempted to have
28 || determined the rights and interests (if any) of the Bankruptcy Estate in the TAG Trust. The
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1 || Defendant-Debtor are now before this court more than 3 and % years after the State Court Petition
2 || was filed only in response to the Complaint filed by the Plaintiff-Trustee.
3 It may be that this Complaint 1s in the nature of determining the respective that the Plaintiff-
4 || Trustee disputes the assertions that the TAG Trust Agreement may be reformed under applicable
5 || California Law, there is not an express cause of action for this court to determine the rights and
6 || interests of the Bankruptcy Estate over the claims of the Defendant-Trust Settlors.
7 Defendant-Trust Settlors have asserted an interest in the TAG Trust assets in Proof of Claim
8 || No. 3-1 filed in Debtor’s Bankruptcy Case in claiming a setoff of the claim against the 2,000 shares
9 || of MEPCO Stock. This claim and right of offset is based on the State Court Petition, which is an
10 Attachment to Proof of Claim No. 3-1. Possibly the issue of the TAG Trust Agreement is addressed
11 |] through a claim objection.
12 Alternatively, Defendant-Trust Settlors could file a counter-claim to reform the TAG Trust
13 Agreement which would then result in the contingent interests of the Debtor that became property
14 |] of the Bankruptcy Estate (whether at the filing of the case or subsequently assigned if it is a
15 spendthrift trust) to have terminated.
16 Until it is determined what are the actual terms of the TAG Trust Agreement and what
17 interests, if any, are property of the Bankruptcy Estate, summary judgment for the relief requested
18 }| is premature and cannot be granted.
19 The Motion is Denied without prejudice.
20 The court does not make a determination of facts for which there is no bona fide dispute at
21 || this time. The parties, if they are prosecuting their respective positions in good faith and consistent
22 |) with the certifications made pursuant to Federal Rule of Bankruptcy Procedure 9011, the parties
23 || themselves should be able to generate a joint statement of undisputed facts. (With the tentative
24 |! ruling, the court included a draft of such facts that appeared not in bona fide dispute.)
25 || Dated: January 22, 2020 By the Court
26
27 AL
Ronald H. Sargis, Jhdge
United’ States Bankrrpicy Gowtt
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2 Instructions to Clerk of Court
Service List - Not Part of Order/Judgment
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The Clerk of Court is instructed to send the Order/Judgment or other court generated
4 | document transmitted herewith to the parties below. The Clerk of Court will send the document
via the BNC or, if checked , via the U.S. mail.
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6 Debtor(s) Attorney(s) for the Debtor(s) (if any)
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Bankruptcy Trustee (if appointed in the Office of the U.S. Trustee
8 case) Robert T. Matsui United States Courthouse
501 I Street, Room 7-500
9 Sacramento, CA 95814
10 |] | J. Russell Cunningham, Esq. Scott G. Beattie, Esq.
Kristen Ditlevesen, Esq. 3443 Deer Park Drive, #A
11 1830 15" Street Stockton, CA 95219
Sacramento, CA 95811
12
Charles L. Hastings, Esq.
13 || | 4568 Feather River Drive, #A
Stockton, CA 95219
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