2002 WL 32104168 (11th
Cir.)
For opinion see 67 Fed.Appx. 590, 303 F.3d 1261
United States Court of Appeals,
Eleventh Circuit
In re: Jane McLean BROWN, Debtor.
Deborah C. Menotte, Appellant/Trustee in Bankruptcy,
v.
Jane McLean Brown, Appellee.
Court of Appeals Docket No. 01-16211A.
January 28, 2002.
APPEAL FROM ORDER OF THE UNITED STATES DISTRICT COURT FOR THE
SOUTHERN DISTRICT OF FLORIDA
Appellant's Reply Brief
Morris G. (Skip) Miller, Esq., Adorno & Zeder, P.A., 1551
Forum Place, Building 200, West Palm Beach FL 33401, (561) 640-8000, Attorneys
for Appellant/Trustee Deborah C. Menotte
TABLE OF CONTENTS
Cover Page ...
Table of Contents ...
Table of Citations ... i
Record References ... 1
Argument and Citations of Authority ... 1
1. The Trust is "Self- Settled." ... 2
2. The Spendthrift Provision of a Self-Settled Trust is not Valid,
at Least as to the Settlor's Interest in the Trust, Regardless of the Settlor's
Degree of Control over the Trust. ... 4
3. The Trustee did Appeal the Ruling in the Bankruptcy Court Order
that the Income of the Trust was Excluded from the Bankruptcy Estate. ... 8
4. Neither the Bankruptcy Court nor the District Court Held or
Found that the Trust is an Annuity as Defined in Fla. Stat. ch. 222.14 and in
Fact the Trust is not an Annuity. ... 9
5. The Trust is not a Support Trust. ... 11
Certificate of Service ... 14
*i TABLE OF CITATIONS AND AUTHORITIES
CASE LAW
In re Conner, 172 B.R. 119 (Bankr. M. D. Fla. 1994) ... 10
Deposit Guar. Nat'l. Bank v. Walter E. Heller & Co., 204 So.
2d 856 (Miss. 1967) ... 4
First Wisconsin Nat'l. Bank v. Schwab, 141 Fla. 748, 194 So. 307
(1940) ... 8
In re Kincaid, 917 F. 2d 1162 (11th Cir. 1990) ... 6-7
In re Mack, 269 B.R. 392 (Bankr. D. Minn. 2001) ... 4, 5-6
In re McCollam, 612 So. 2d 572 (Fla. 1993) ... 10
In Matter of McCoughlin, 507 F.2d 177 (5th Cir. 1975) ... 11
Phlip v. Trainor, 100 So. 2d 181 (Fla. 2d DCA 1958) ... 12-13
In re Shurley, 115 F.3d 333 (5th Cir. 1997) ... 3-4, 7
In re Solomon, 95 F. 3d 1076 (11th Cir. 1996) ... 10
In re Spenlinhauer, 182 B.R. 361 (Bankr. D. Me. 1995), aff'd., 195
B.R. 543 (D. Me. 1996) ... 4, 7
Waterbury v. Munn, 159 Fla. 754, 32 So. 2d 603 (1947) ... 5
In re Wheat, 149 B.R. 1003 (Bankr. S.D. Fla. 1992) ... 5, 7
Wenzel v. Powder, 59 A. 194 (Md. 1904) ... 7
In re Williams, 118 B.R. 812 (Bankr. N.D. Fla. 1990) ... 5, 7
*ii STATUTES
Fla. Stat. ch. 222.14 (2000) ... 2, 9-11
OTHER AUTHORITY
Restatement of the law, second, trusts, Section 154 (1959) ...
11-12
Restatement of the law, second, trusts, Section 156 (1959) ... 3,
6, 12
*1 RECORD REFERENCES
Note: As with Appellant's Initial Brief, the following citations
will be used to refer to the record:
BR# ___ - followed by a corresponding number refers to the
Document Number shown by the Bankruptcy Court Docket Sheet and, if applicable,
the page number of that document.
DC# ___ - followed by a corresponding number refers to the
document # shown by the District Court Docket Sheet and, if applicable, the
page number of that document.
RE# ___ - followed by a corresponding number refers to the exhibit
and page number of the Record Excerpts that have been provided to the Court
along with Appellant's Initial Brief.
The Appellant, Deborah C. Menotte, will be referred to as
Appellant or Trustee. The Appellee, Jane McLean Brown, will be referred to as
Appellee or Debtor. The Appellant will use the term "Trust" whenever
referring to the trust agreement that is the subject matter of this appeal.
ARGUMENT
Debtor makes several arguments in her Answer Brief. None of those
arguments have merit. With regard to at least two of those arguments, Debtor
has also misrepresented to this Court the proceedings held below. We have
identified the following as the arguments made in the Answer Brief:
1. The subject Trust is not a "self-settled" trust.
*2 2. Even if the Trust is self-settled, the spendthrift provision
is valid because of the limited control Debtor has over the Trust.
3. The Trustee never appealed the Bankruptcy Court's holding that
the income of the Trust is excluded from the bankruptcy estate of the Debtor.
4. The Trust should be excluded from the bankruptcy estate of the
Debtor because it is an "annuity" as defined in Fla. Stat. ch.
222.14.
5. The Trust should be excluded from the bankruptcy estate of the
Debtor because it is a "support trust."
Our reply to each of these arguments is as follows:
1. The Trust is "Self- Settled."
Debtor challenges this position on two bases. First, that
"the Bankruptcy Court already found that the trust was formed at the
behest of her family as part of an intervention relating to her chronic
alcoholism so it was not, in fact, self settled." (page x of Answer
Brief). And second, that because Debtor has no power of alienation over or
right to the trust corpus the Trust was not created for her own benefit (pages
x-xi and 5-6 of Answer Brief).
As to the first point, Debtor totally misrepresents the Bankruptcy
Court's Order Overruling Trustee's Objection to Claimed Exemption and Trustee's
Objection to Amended Schedule C (the "Bankruptcy Court Order"). As
the following passage from that order indicates, the Bankruptcy Court clearly
found that Debtor, not her family, created the Trust:
*3 After the intervention, Debtor established an Irrevocable
Charitable Remainder Unitrust Agreement (the "Trust") so that she
would not continue to squander her assets. . . . Debtor is both the settlor and
the trustee of the Trust
(BR# 27, RE# H-1 to 2).
As to the second point, it is clear that the Trust is
"self-settled", at least as to the Debtor's interest in the income of
the Trust, even though there is a remainder interest in favor of third parties.
This is identical to the illustration to Restatement of the law, second,
trusts, Section 156 (1959) cited at page 15 of Appellant's Initial Brief, which
provides that creditors can reach the settlor's interest in the income of a
trust created by the settlor, even though the principal goes to a remainder on
the death of the settlor. This legal tenet is also supported by the numerous
cases cited on pages 12-13 and 19 of Appellant's Initial Brief.
None of the cases cited by Debtor on page 6 of the Answer Brief
support her position that the trust is not self-settled because the Debtor only
has an income for life interest. Each of those cases applies the general rule
that a spendthrift provision is not valid as to the settlor's interest to a
trust where the settlor has some control over or ability to invade the
principal. However, Debtor makes no attempt to address Section 156 of the
RESTATEMENT, supra, or the numerous cases cited in Appellant's Initial Brief
where that general rule is applied even though there is a remainder or other
beneficial interest that the settlor has little or no ability to control or
invade. See, particularly, In *4 re Shurley, 115 F.3d 333 (5th Cir. 1997); In
re Mack, 269 B.R. 392 (Bankr. D. Minn. 2001); In re Spenlinhauer, 182 B.R. 361
(Bankr. D. Me. 1995), aff'd., 195 B.R. 543 (D. Me. 1996); Deposit Guar. Nat'l.
Bank v. Walter E. Heller & Co., 204 So. 2d 856 (Miss. 1967).
Debtor also argues, on page x of the Answer Brief, that a
self-settled trust may not be a trust at all, on the theory that the legal and
equitable ownership interests are merged. Her argument seems to be that either
the self-settled nature of a trust invalidates it entirely, or this Court
should ignore the fact that it is self-settled. However, the issue here is not,
and never has been, the legality or validity of the Trust as a whole, but
rather the legality or validity of the spendthrift provision.
2. The Spendthrift Provision of a Self-Settled Trust is not Valid,
at Least as to the Settlor's Interest in the Trust, Regardless of the Settlor's
Degree of Control over the Trust.
Debtor's second argument is that whether a trust is self-settled
is irrelevant to the question of whether a spendthrift provision is valid.
Rather, Debtor maintains, "This Court considers whether a spendthrift
trust is valid by analyzing the extent of the Debtor's powers of alienation as
determined by the dominion and control exercised by a debtor or trust
property." (page 4 of Answer Brief).
Debtor's position is incorrect. As in almost every other state,
the law in Florida is that a spendthrift trust by definition is a trust that is
created for the benefit of *5 another. Waterbury v. Munn, 159 Fla. 754, 32 So.
2d 603 (1947). True, as stated by Debtor on page 3 of the Answer Brief, that
part of Waterbury was dicta, but it remains unrebutted as the law in Florida on
spendthrift trusts. As discussed on page 17 of Appellant's Initial Brief, this
has been specifically recognized by federal courts interpreting Florida law.
For example, the court in In re Wheat, 149 B.R. 1003 (Bankr. S.D. Fla. 1992)
rejected the same argument as that advanced by Debtor here when it held
"[h]owever, the debtor's degree of control is irrelevant in this case
since one cannot create a spendthrift trust for oneself in Florida." 149
B.R. at 104. See, similarly, In re Williams, 118 B.R. 812 (Bankr. N.D. Fla.
1990).
The law in Florida on this question is no different that the law
elsewhere in the United States, as shown by the cases cited on pages 17-19 of
Appellant's Initial Brief. Control is not a factor if the trust is
self-settled.
The recent case of In re Mack, supra, is almost directly on point
on this issue. In fact, it is the only relevant case that either party has been
able to locate where, as here, the trust in question is a charitable remainder
unitrust. Mack was unfortunately not yet decided when this case was before the
Bankruptcy Court or the District Court.
The debtor in Mack was the settlor of a charitable remainder
unitrust. The trust named Mack and his lawyer as trustees, Mack as the income
beneficiary for his life, then to his spouse for her life, then to his two
children for their lives, with the *6 remainder to a charity called the
Minneapolis Foundation. Pursuant to Mack's income interest, he received 7% of
the net fair market value of the trust each year. This trust had a spendthrift
clause similar to that contained in the Trust, and Mack's control over the
governance and administration of the trust was similar to that contained in the
Trust.
The court held that under both Minnesota law and the common law,
the spendthrift clause would not be recognized because the trust was
self-settled, citing as authority Section 156 of the RESTATEMENT, supra, and
holding "The principle that a settlor cannot protect his property by
transfer to a trust, retaining an interest in the trust is, thus, well
settled." 269 B.R. at 400. The extent of control of Mack over the trust
was not mentioned as a factor in the court's decision.
This Court's decision in In re Kincaid, 917 F. 2d 1162 (11th Cir.
1990), cited by Debtor on page xi of the Answer Brief, does not support
Debtor's position that control, not the self-settled nature of a trust, is the
determining factor. In fact, Kincaid holds just the opposite. This Court, in
considering whether an ERISA plan was a spendthrift trust, stated as follows:
It is well settled law in both Oregon and Massachusetts that a
settlor cannot create a spendthrift trust for has own benefit. . . . Thus, the
threshold inquiry in determining whether a plan is a spendthrift trust is
whether the plan is self settled.
917 F. 2d at 1166-1167 (citations omitted).
*7 This Court only looked at the issue of control in Kincaid after
it determined that the plan was not self settled.
Likewise, the cases cited on page 2 of the Answer Brief support
Trustee's position more than they do Debtor's. The court in In re Spenlinhauer,
supra, specifically stated that it had no need to address the issue of control
because it found the trust in question to be self-settled. In In re Wheat, as
discussed at page 5, supra, the court held that the debtor's degree of control
was irrelevant since one cannot create a spendthrift trust for oneself in
Florida. In re Williams, supra, cites both control and the self-settled nature
of a trust as independent grounds for invalidating a spendthrift provision. In
In re Shurley, supra, which is discussed at pages 17-18 and 20-21 of
Appellant's Initial Brief, the 5th Circuit held that the portion of the trust
contributed by the daughter was subject to the claims of creditors solely
because that portion of the trust was self-settled, and specifically rejected
the argument that the spendthrift provision failed because the daughter
exercised too much control over the trust. The issue in Wenzel v. Powder, 59 A.
194 (Md. 1904), was not the settlor's control over the subject trust, but that
of his wife after his death. The other cases cited by Debtor may base their
ruling on the issue of control, but they all cite with approval to the general
law that for a spendthrift trust to be valid in Florida it must be created for
the benefit of another.
*8 With respect to whether the corpus of the Trust should be included
in the bankruptcy estate, the control of the Debtor over that corpus is far
more significant than the Debtor would lead this Court to believe. As discussed
on page 20 of Appellant's Initial Brief, the only true limitation on the
Debtor's power to appoint the remainder is that it has to be to charitable
organizations. In addition, as trustee, Debtor has full and absolute control
over all investment decisions for the Trust. This degree of control, combined
with the self-settled nature of the Trust, mandates that for public policy
reasons the corpus of the Trust should not be exempt. Otherwise, Debtor will be
able to thwart the valid claims of creditors through a tax avoidance and estate
planning device. See First Wisconsin Nat'l. Bank v. Schwab, 141 Fla. 748, 194
So. 307 (1940)
3. The Trustee did Appeal the Ruling in the Bankruptcy Court Order
that the Income of the Trust was Excluded from the Bankruptcy Estate.
On pages xi and 1 of the Answer Brief, Debtor claims that the
Trustee never appealed the ruling in the Bankruptcy Court Order that the income
as well as the corpus of the Trust is excluded from the bankruptcy estate. This
claim is totally baseless. When Trustee filed her Issues on Appeal for the
District Court, one of the issues was:
5. Whether the Bankruptcy Court erred in finding that the debtor's
right to receive the income from the trust would not constitute property of the
bankruptcy estate and would otherwise be an exempt asset.
*9 Each of Trustee's other issues set forth in her Issues on Appeal
refer to either the "interest in the Trust" or the "income from
the Trust." These issues were repeated in Appellant's Initial Brief before
the District Court (DC #-5, Table of Contents page). Trustee's entire argument
in the initial brief to the District Court relates to income as well as corpus,
and a separate section captioned "The Trust Income is Property of the
Bankruptcy Estate" contains three pages of argument addressed to just the
income of the Trust (DC #- 5, pages 12-15). There is therefore absolutely no
basis for Debtor's contention.
4. Neither the Bankruptcy Court nor the District Court Held or
Found that the Trust is an Annuity as Defined in Fla. Stat. ch. 222.14 and in
Fact the Trust is not an Annuity.
Debtor contends, on page vii of the Answer Brief, that while the
Bankruptcy Court held that the Trust corpus was not an annuity under Fla. Stat.
ch. 222.14, it had previously held that the Trust income was exempt from
creditor's claims as an annuity. This is a total misrepresentation of the rulings
of the Bankruptcy Court. Debtor submitted an Amended Schedule C- Property
Claimed as Exempt, which listed the Trust, stated "Debtor does not own,
nor has authority to take or distribute corpus under this estate planning
device established in 1994," and cited Fla. Stat. ch. 222.14 as the law
providing the exemption (RE# D-2). Contrary to Debtor's contention, and
consistent with the Amended Schedule C, the original Bankruptcy Court Order
only *10 considered whether the corpus was an annuity (RE# H-10). The
Bankruptcy Court then, in its subsequent Order Clarifying July 26, 2000 Order,
specifically ruled that the Trust was not an annuity, and therefore "there
is no entitlement to an exemption, as an annuity, pursuant to Fla. Stat. Sec.
222.14" (RE# I-2).
The issue of whether the Trust is an annuity was not addressed by
the District Court, which means that the ruling of the Bankruptcy Court stands
as the law of the case.
The Bankruptcy Court was eminently correct in its ruling on the
annuity issue. In order to create an annuity pursuant to Fla. Stat. ch. 222.14,
there must be an agreement, granted to another, providing for a fixed sum
payable periodically at stated intervals, either for life or for a period of
years. In re McCollam, 612 So. 2d 572 (Fla. 1993). To qualify for this
statutory exemption, the parties to the agreement must have intended to create
an "annuity contract." In re Solomon, 95 F. 3d 1076 (11th Cir. 1996).
This is accomplished by explicitly identifying the contract as an annuity. In
re Conner, 172 B.R. 119 (Bankr. MD Fla. 1994).
Debtor has provided no explanation of how the Trust meets the
definition of an annuity, and in fact the Trust does not contain the necessary
elements. The payments are not fixed, they vary based on the value of the corpus
of the Trust. The Trust is not an agreement granted to another, it is
self-settled. The Trust nowhere on its face uses *11 the term
"annuity," or otherwise evidences that it is intended to be an
annuity. For all of these reasons, the Bankruptcy Court correctly held that the
Trust is not an annuity for purposes of Fla. Stat. ch. 222.14 and therefore the
Trust is not exempt form the claims of creditors.
5. The Trust is not a Support Trust.
Debtor's final argument is that the Trust assets are exempt from the
claims of creditors because it is a "support trust." Again, Debtor
cites no authority to support this argument.
As part of its Order in this case, the District Court addressed
the issue of whether the Trust is a support trust and stated that "it
appears that the Trust is not a support trust." (RE# G-13). This ruling
was correct. As the predecessor to this Court held in In Matter of McCoughlin,
507 F. 2d 177 (5th Cir. 1975):
A support trust is one where the trustee is directed to pay to the
beneficiary only so much income or principal, or both, as is necessary for the
beneficiary's support and education. Under such a trust the payments are by
nature intended for a particular person to serve a particular purpose.
507 F. 2d at 185.
As noted by this Court in McCoughlin, Restatement of the law,
second, trusts, Section 154 (1959) provides that a support trust is exempt from
the claims of creditors except where the settlor is a beneficiary of the trust.
*12 Section 154 of the RESTATEMENT and the excerpt from comment
"e" thereto, set forth below, make it clear that the Trust is not a
support trust.
Section 154 Trusts for Support
Except as stated in Sections 156 and 157, if by the terms of a
trust it is provided that the trustee shall pay or apply only so much of the
income and principal or either as is necessary for the education or support of
the beneficiary, the beneficiary cannot transfer his interest and his creditors
cannot reach it.
COMMENTS & ILLUSTRATIONS: Comment:
* * *
e. Where amount not limited to education and support. The rule
stated in this Section is not applicable where the amount to be paid or applied
by the trustee is a specified sum or is not limited to what is necessary for
the education and support of the beneficiary, although by the terms of the
trust it appears that the settlor's motive in creating the trust is to provide
for the education and support of the beneficiary. . . .
It is important to note that by the reference in Section 154 to
Section 156, a self-settled support trust is not exempt from the claims of
creditors.
Section 154 of the RESTATEMENT, including the comments and
illustrations thereto, was cited by the court with approval in Phlip v.
Trainor, 100 So. 2d 181 (Fla. 2d DCA 1958), where the court affirmed the lower
court's finding that a trust was not a support trust, stating as follows:
It is clear from the language above quoted from the Trust
Indenture that the interest of the beneficiary, Mary Beeman, in the income of
the trust during her lifetime is not limited to her needs for support. The mere
expression of the motive of the Trustor to create a trust for her support *13
would not prevent the beneficiary from assigning her interest or her creditors
from reaching it.
100 So. 2d at 183
The Trust clearly does not meet the criteria for qualifying as a
support trust in at least two respects. First, the Trust is self- settled.
Second, as found by the District Court:
Although the intent of the Debtor in establishing the Trust may
well have been to secure income for her own support and maintenance, the terms
of the Trust do not indicate any such limitation. Rather, by the terms of the
Trust the Debtor is to receive a fixed amount of interest income without
restriction, irrespective of whether the income is necessary for her support and
maintenance.
(RE# G-14).
The cases cited by Debtor on page 7 of the Answer Brief merely
stand for the general proposition that "no particular words are required
to create a trust." However, as discussed above, for a trust to be a
support trust, the language of the trust instrument must be as above stated and
the trust cannot be self-settled.