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Frealy v. Reynolds

United States Court of Appeals, Ninth Circuit

March 9, 2015

TODD A. FREALY, Attorney, Chapter 7 Trustee of Estate of Rick Reynolds, Appellant,
v.
RICK H. REYNOLDS; JOHN M. CARMACK, Co-Trustee of the Reynolds Family Trust and Co-Trustee of the Reynolds Family Trust - Survivor's Trust, as amended; JOHN MORRIS, Co-Trustee of the Reynolds Family Trust and Co-Trustee of the Reynolds Family Trust - Survivor's Trust, as amended, Appellees

BAP No. 11-1433.

SUMMARY[**]

Bankruptcy

The panel certified to the California Supreme Court the following question:

Does section 15306.5 of the California Probate Code impose an absolute cap of 25 percent on a bankruptcy estate's access to a beneficiary's interest in a spendthrift trust that consists entirely of payments from principal, or may the bankruptcy estate reach more than 25 percent under other sections of the Probate Code?

Jesse S. Finlayson (argued), Finlayson Toffer Roosevelt & Lilly LLP, Irvine, California, for Appellant.

David W. Meadows (argued), Law Offices of David W. Meadows, Los Angeles, California, for Appellees.

Before: Alex Kozinski and Susan P. Graber, Circuit Judges, and Charles R. Breyer, Senior District Judge.[*]

Page 1029

ORDER CERTIFYING A QUESTION TO THE CALIFORNIA SUPREME COURT

ORDER

PER CURIAM:

This appeal requires us to determine the extent to which a bankruptcy estate may reach a beneficiary's interest in a spendthrift trust under the California Probate Code. The beneficiary claims that California Probate Code section 15306.5 caps the bankruptcy estate's access at 25 percent of his trust interest, which consists entirely of payments from principal. The bankruptcy trustee, on the other hand, seeks to reach more than 25 percent of the beneficiary's interest under Probate Code sections 15301(b) and 15307, which it reads as not subject to the section 15306.5 cap.

We find no controlling precedent in the decisions of the California Supreme Court or Courts of Appeal. See Cal. R. Ct. 8.548(a)(2) (permitting certification where there is " no controlling precedent" from the state court); Sullivan v. Oracle Corp., 557 F.3d 979, 983 (9th Cir. 2009) (order) (looking to decisions of California appellate courts). Nor has our court considered the interplay between section 15306.5 and other Probate Code sections governing creditors' access to spendthrift trusts. We held in Neuton v. Danning ( In re Neuton ), 922 F.2d 1379, 1383 (9th Cir. 1990), that section 15306.5 allows a bankruptcy estate to reach 25 percent of a spendthrift trust. But, unlike in the present case, the beneficiary in Neuton had argued that all of his interest in the spendthrift trust was protected from the bankruptcy estate, while the bankruptcy estate claimed only 25 percent under section 15306.5. Id. We therefore had no occasion to examine whether a bankruptcy estate could access more than 25 percent under other Probate Code sections.

A substantial sum of money hangs in the balance, as the beneficiary stands to lose--and the bankruptcy estate stands to gain--the entirety of his trust interest. Their fate, and the fates of future beneficiaries and their creditors, hinges on the interpretation of opaque sections of the Probate Code. Because the resolution of this appeal could transform the terrain of California

Page 1030

trust law, we respectfully request that the California Supreme Court exercise its discretion to accept and decide the certified question below.

I. Question Certified

Pursuant to Rule 8.548 of the California Rules of Court, we request that the California Supreme Court answer the following question:

Does section 15306.5 of the California Probate Code impose an absolute cap of 25 percent on a bankruptcy estate's access to a beneficiary's interest in a spendthrift trust that consists entirely of payments from principal, or may the bankruptcy estate reach more than 25 percent under other sections of the Probate Code?

We understand that the Court may reformulate our question, and we agree to accept and follow the Court's decision.

II. Background

A. Applicable California Statutes

The California Probate Code recognizes the validity of spendthrift provisions that restrict transfer of a beneficiary's interest in income and principal, so long as that interest hasn't yet been paid to the beneficiary. See Cal. Prob. Code § § 15300, 15301(a). Section 15301(a) permits the restraint against transfer of trust principal, subject to certain exceptions set forth in sections 15301(b) and 15304--07:

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 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 judgment until paid to the beneficiary.

Cal. Prob. Code § 15301(a).

One of these exceptions, section 15306.5(a), allows general creditors to satisfy money judgments out of payments to which the beneficiary is entitled. The section provides:

Notwithstanding a restraint on transfer of the beneficiary's interest in the trust under Section 15300 or 15301, 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 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 instrument or that the trustee, ...

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