Andrews v. Hill

Filed 6/2/08 Andrews v. Hill CA5

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIFTH APPELLATE DISTRICT

APPEAL from a judgment of the Superior Court of Fresno County. Donald S. Black, Judge.

Law Offices of Melvin K. Rube and Melvin K. Rube for Defendant and Appellant.

Wild, Carter & Tipton and Gary L. Huss for Plaintiffs and Respondents.

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Applying Probate Code section 18200,^[1]the superior court allowed a judgment creditor to reach assets that the debtor, as trustor, had placed in a revocable spendthrift trust for her own benefit. The debtors primary argument on appeal is that section 15306.5 should have limited the amount available to satisfy the debt.

We hold that the court was correct in applying section 18200 without any limitation under section 15306.5. We also reject the debtors remaining arguments. At the same time, we reject the creditors claims that the appeal be dismissed and sanctions imposed. The judgment is affirmed.

FACTUAL AND PROCEDURAL HISTORIES

Michael McGranahan, a bankruptcy trustee, initiated the present matter on May 15, 2007, by filing in the superior court a petition pursuant to Code of Civil Procedure section 709.010. This statute requires a judgment creditor to file a petition in superior court before trust assets can be used to satisfy a judgment debt against a beneficiary of the trust.^[2]

The petition alleged that William Andrews obtained a money judgment in superior court against Floyd Hill. According to a declaration filed by Andrews in support of the bankruptcy trustees motion to dismiss the appeal, the amount of this judgment was $30,064.44. Floyd Hills other debts included $175,000 in back taxes.

Floyd Hill was an attorney with more than 20 years practice experience, specializing in bankruptcy. State Bar records indicate that he resigned from the bar with disciplinary charges pending on December 25, 2003. After this judgment was entered, Floyd Hill filed a chapter 7 bankruptcy petition. He also transferred $105,000, in the form of checks from his law practice, to his wife, Janet Hill, who is the defendant and appellant in this matter. Andrews and the bankruptcy trustee brought an adversary proceeding in the bankruptcy court seeking a determination that the transfer of assets to Janet Hill was a fraudulent conveyance within the meaning of the Bankruptcy Code and that the court should refuse to discharge Floyd Hills debts under Bankruptcy Code sections providing for denial of discharge in cases of improper transfers and failure to list assets on bankruptcy schedules. After a trial, the bankruptcy court agreed. It found the transfer to Janet Hill to be fraudulent, voided the transfer, and denied discharge of Floyd Hills debts. The bankruptcy court issued a judgment and a writ of execution in favor of the bankruptcy trustee, naming both Floyd and Janet Hill as debtors, for $111,134.24, consisting of the fraudulently transferred $105,000 plus $6,134.24 in costs.

When the United States Marshall attempted to use the writ of execution to levy upon the Hills property, the Hills returned a claim of exemption. The claim asserted that [a]ll checking and savings accounts, investment accounts, mutual fund accounts, reverse mortgage accounts, and all other financial accounts held by the Trustee of The Janet Maureen Hill Trust were exempt from enforcement of the judgment. The petition in the present case was the bankruptcy trustees response to this claim of exemption.

The Janet Maureen Hill Trust (Hill Trust) was created in 1994. The original trust instrument named Janet Hill as settlor, trustee, and principal beneficiary. It named Floyd Hill as alternate principal beneficiary and first alternate trustee. The instrument granted the trustor the power to revoke the trust in whole or in part during her lifetime. The trusts spendthrift provision stated: The interests of trust beneficiaries, under this Trust agreement shall not be transferable by voluntary assignment and to the extent permitted by law shall be free from execution, attachment, bankruptcy or other proceedings for the satisfaction of creditors[] claims.

After the bankruptcy court ruled against the Hills, the trust was amended to name Cynthia Hill as trustee and to delete Floyd Hill as an alternate beneficiary and alternate trustee. In the amended instrument, Janet Hill retained her power as settlor to revoke. The spendthrift provision was altered to read: No interest in the principal or income of any trust created under this instrument may be anticipated, assigned, encumbered, or subjected to creditors claim or legal process before actual receipt by the beneficiary.

The superior court prepared a tentative ruling on July 2, 2007. Among other things, it stated:

Under Probate Code  18200, if the settlor retains the power to revoke the trust in whole or in part, the trust property is subject to the claims of creditors of the settlor to the extent of the power of revocation during the lifetime of the settlor.

Here, the provisions of the trust instrument attached to Janets response to the petition confirm that she has retained such powers, and thus the court will issue an order confirming that Mr. McGranahan is entitled to enforce his judgment against the trust assets on that basis, subject to any applicable claim of exemption Janet may timely file. Mr. Huss [counsel for the bankruptcy trustee and Andrews] is directed to draft an appropriate order for the courts signature.

The court filed a minute order adopting the tentative ruling as its order the following day. The appellate record does not show whether oral argument took place. In any event, Janet Hill elected to proceed on appeal without any reporters transcript.

DISCUSSION

I. Bankruptcy trustees right to enforce judgment against trust assets

There are no disputed factual issues, and the parties ask us to resolve only a question of law, namely, whether the bankruptcy trustee has a right to enforce the bankruptcy courts judgment against the assets of the Hill Trust.^[3] Our review is de novo. (Ghirardo v. Antonioli (1994) 8 Cal.4th 791, 799; Topanga and Victory Partners v. Toghia (2002) 103 Cal.App.4th 775, 779-780; Hill v. City of Long Beach (1995) 33 Cal.App.4th 1684, 1687.)

Defendant relies on section 15306.5, which governs the enforcement of a judgment against a beneficiary out of the assets of a spendthrift trust, i.e., a trust containing provisions pursuant to sections 15300 and 15301 purporting to shield the trust assets from the beneficiarys creditors. Subdivision (a) of section 15306.5 provides:

Notwithstanding a restraint on transfer of the beneficiarys interest in the trust under Section 15300 or 15301, and subject to the limitations of this section, upon a judgment creditors 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, in the exercise of the trustees discretion, has determined or determines in the future to pay to the beneficiary.

Defendant argues that this provision should be understood to limit the bankruptcy trustees right to enforce the judgment against the trust assets under section 18200.

This contention is without merit. Section 18200 governs the satisfaction of debts of the settlor out of the assets of a trust revocable by the settlor. Section 15306.5 governs the satisfaction of debts of the beneficiary out of the assets of a spendthrift trust. Since Janet Hill was both the settlor and the beneficiary of the Hill Trust, the bankruptcy trustee theoretically could recover against the trust assets under both provisions. Section 18200 permits the creditor to ignore the trust to the extent it is revocable, however, so the bankruptcy trustee can enforce as much of the judgment as the trust assets will satisfy under that section. (Cal. Law Revision Com. com., 54A Wests Ann. Prob. Code (1991 ed.) foll.  18200, p. 252.) Consequently, it is unnecessary for him to rely on section 15306.5.

The argument that section 15306.5 limits the creditor despite his reliance on his more complete remedy under another statute has no basis in reason or authority. The amount the bankruptcy trustee would be entitled to recover as a creditor of Janet Hill as beneficiary simply has no bearing on the amount he is entitled to recover as a creditor of her as settlor.

The plain meaning of the two statutes settles the question. To the extent the underlying purposes of sections 15306.5 and 18200 are also relevant, however, they reinforce our holding. Section 15306.5 limits the application of a spendthrift provision, but still allows it some effect, striking a compromise between the interests of a beneficiarys creditors and those of a settlor who wishes to shield the trust property from those creditors until it is distributed to the beneficiary. Section 18200, by contrast, is analogous to the rule applicable to property subject to an unexercised power of appointment created by a donor in favor of himself or herself. (Cal. Law Revision Com. com., 54A Wests Ann. Prob. Code (1991 ed.) foll.  18200, p. 252.) It vindicates the interests of a creditor of one who, but for his own voluntary refusal to revoke, would be able to pay. The purpose of section 15306.5 is not a limitation upon that part of section 18200. The point of giving partial effect to spendthrift trusts is to allow a settlor to settle property on another person without subjecting the property to unlimited exposure to that persons creditors. The point is not to allow a person to avoid his own creditors by creating a trust the assets of which he can still enjoy merely by exercising his power of revocation.

If this conclusion was not apparent from sections 15306.5 and 18200 themselves, section 15304, subdivision (a), would render it unmistakable:

If the settlor is a beneficiary of a trust created by the settlor and the settlors interest is subject to a provision restraining the voluntary or involuntary transfer of the settlors interest, the restraint is invalid against transferees or creditors of the settlor. The invalidity of the restraint on transfer does not affect the validity of the trust.

As Witkin explains, this provision means [t]he settlor cannot create a spendthrift trust in his or her own favor. (13 Witkin, Summary of Cal. Law (10th ed. 2005) Trusts,  153, p. 718.) In a case cited by the California Law Revision Commission in its comment on section 15304 (Cal. Law Revision Com. com., 54 Wests Ann. Prob. Code (1991 ed.) foll.  15304, p. 554), our Supreme Court held that [i]t is against public policy to permit a man to tie up his property in such a way that he can enjoy it but prevent his creditors from reaching it, and where the settlor makes himself a beneficiary of a trust any restraints in the instrument on the involuntary alienation of his interest are invalid and ineffective . (Nelson v. California Trust Co. (1949) 33 Cal.2d 501, 501-502.) Just as the policy of section 15304 is that one who creates a spendthrift trust for his own benefit is not entitled to use the trust to avoid his creditors, the policy of section 18200 is that one who creates a revocable trust also is not entitled to use the trust to avoid his creditors.

Incidentally, since the Hill Trust was not only a revocable trust but also a spendthrift trust of which the trustor and beneficiary were the same person, it appears to us that this case could have been resolved on the basis of section 15304 alone. Apparently that basis was not presented to the superior court, however, so we also will not base our holding on it. Section 18200 suffices to affirm the judgment.

As a distinct claim of error, defendant contends the superior court wrongly held that a petition under Code of Civil Procedure section 709.010 was not necessary as a prerequisite to the bankruptcy trustees enforcement of the bankruptcy courts judgment against the trust assets. This claim is based on the statement in the courts order that it would grant the petition, though this procedure does not appear to the court to be necessary to the bankruptcy trustees right to enforce his judgment against Janet Hill as trustor of a revocable intervivos trust.

We need not decide whether the bankruptcy trustee could have enforced the judgment without filing his petition under Code of Civil Procedure section 709.010. The bankruptcy trustee did in fact file a petition under Code of Civil Procedure section 709.010, and the court sustained the petition. Therefore there is no possibility that the view the court incidentally expressed on this matterthat perhaps the petition was unnecessaryaffected the outcome in any way. There is no reversible error under these circumstances. (Code Civ. Proc.,  475; Cassim v. Allstate Ins. Co. (2004) 33 Cal.4th 780, 801.)

In her reply brief defendant argues that, if the court did apply Code of Civil Procedure section 709.010, it applied it incorrectly. She claims subdivision (c) of that statute, by providing that the provisions of this section are subject to the limitations of section 15300 and following, required the court to impose the limitations set forth in section 15306.5 on the bankruptcy trustees right to reach the trust assets. This contention is without merit. The statement in Code of Civil Procedure section 709.010, subdivision (c), means the relief available under section 709.010 is subject to the limitations of section 15300 and following to the extent that those limitations apply to the facts of the case. The limitations of section 15306.5 do not apply to the facts of this case because the debt was the settlors and the settlor had a power of revocation. As we have said, section 18200 allows the settlors creditors to ignore the trust under these circumstances.

Defendants reply brief contains a series of additional arguments that can only be described as very weak. She appears to contend that the superior court thought it did need to apply section 15306.5 to resolve the case but then, contrary to its own view, failed to apply it. The courts order stated that it could issue an order allowing the bankruptcy trustee to recover against Janet Hills interest as a beneficiary, though it would need to make a determination under Probate Code 15306.5 as to what amount Janet is entitled to as a beneficiary under the terms of the trust, and the order would be subject to the limitations of that section. The order then went on to say that [o]n the other hand petitioner has an independent right under Probate Code 18200 to enforce his judgment against Janet Hills interest as the trustor, and it directed the bankruptcy trustees counsel to prepare an order based on this independent right. (Italics added.) It is clear that the courts comment about what would happen under section 15306.5 was hypothetical: It would be necessary to make a determination under section 15306.5, if the court were granting relief under that section, which it was not doing.

Next, defendant asserts that sections 15300 through 15309 (which include section 15306.5) pertain to restraints against transfers of the beneficiarys interest and therefore have nothing to do with a creditors rights to enforce a judgment against the assets of a trust where the settlor retains a power to revoke a trust. We agree that the limitations of section 15306.5 have nothing to do with the rights of a settlors creditor to proceed against the assets of a revocable trust, but that hardly supports defendants position in this case. The superior courts order allowed a settlors creditor to enforce a judgment against the assets of a revocable trust. Consequently, defendants argument tends to support, not undermine, the view that section 15306.5 is irrelevant to this case.

Defendant then argues that section 15304the provision we have discussed that says a settlor cannot create a spendthrift trust in favor of himself or herself, as defendant attempted to do hereis limited by the provisions of section 15306.5. This is logically impossible. Section 15306.5 places a limitation on the effect, but does not totally abrogate, a spendthrift provision. Section 15304 invalidates a spendthrift provision. It is impossible to limit, but not completely abrogate, the effect of a provision that is invalid.

Finally, defendant asserts that the concern of the legislature in enacting section 18200 was only with a situation in which the trustor and beneficiary are different individuals, so section 18200 does not apply to this case. Defendant cites no authority in support of the claim that section 18200 does not apply if the trustor and beneficiary are the same person, and the claim is illogical. The fact that the creator of a revocable trust creates it for his or her own benefit rather than anothers makes it more sensible to allow the settlors creditor to reach the trust assets, not less so. The invalidation by section 15304 of a spendthrift provision in a trust of this kind shows that this was the Legislatures view.

For all these reasons, we reject defendants claim that the trial court erred. The court correctly applied section 18200 and properly declined to apply section 15306.5. In sum, its conclusion that the bankruptcy trustee was entitled to enforce the bankruptcy courts judgment against the trust assets as if the trust did not exist was correct.

II. Dismissal and sanctions

In his appellate brief and in two separate motions, the bankruptcy trustee argues that this appeal should be dismissed for several reasons.^[4] He also contends that sanctions should be imposed on defendant. We disagree.

Janet Hills standing and finality of order

In his motions, the bankruptcy trustee argues that this court lacks jurisdiction, that the appeal is frivolous and should be dismissed, and that sanctions should be imposed, all because Janet Hill does not have standing to bring this appeal since her legal rights or interests were not adversely affected. In his appellate brief, the bankruptcy trustee further argues that the appeal should be dismissed because the superior courts order is not final. These claims are based on the courts remark that it would need to make a determination under Probate Code 15306.5 if it were to order recovery against Janet Hills interest in the trust as beneficiary. The bankruptcy trustee says this means no order against defendant has yet been made.

The court ordered enforcement of the bankruptcy courts judgment against the trust assets on the ground that defendant had the power to revoke as settlor instead of ordering enforcement against her interest in the trust as beneficiary. There is no merit in the claim that defendants legal interests have not been affected adversely by the order or that there is no final decision about the bankruptcy trustees enforcement rights. The superior courts rulingthe ruling we are affirmingis that the bankruptcy trustee is entitled under section 18200 to ignore the trust and enforce the judgment against the trust assets as if they were held in the settlors own name. It would be pointless for the court to later determine that, in addition to this right, the bankruptcy trustee also has a lesser right to recover against some portion of the same assets under section 15306.5. We will not interpret the order as if it contemplated pointless future activity on the part of the court.

Finally, the bankruptcy trustee concedes that the orders appealability is not impaired by the fact that he has not yet prepared the additional order the court directed him to prepare and that a judgment has not been entered. He says these are procedural irregularities which do not necessarily preclude the finality of the lower courts order. Authority exists in support of this conclusion. (See, e.g., Estate of Lock (1981) 122 Cal.App.3d 892, 897; Martino v. Concord Community Hosp. Dist. (1965) 233 Cal.App.2d 51, 55-56 [a trial judges written statement of his views on the law and the proper decision may be treated as an order when it is signed and filed and when it constitutes his final judicial determination on the merits].) The order the court directed the bankruptcy trustee to prepare would merely have reiterated the ruling the court had made, i.e., the ruling that the bankruptcy trustee had a right to enforce the bankruptcy courts judgment against the trust assets as if the trust did not exist. As the bankruptcy trustee does not request dismissal on this ground, we will not pursue the point any further.

The parties motion papers also dispute whether Andrews has standing to be a respondent in this appeal. We agree with the bankruptcy trustees view that this question is academic. So far as the appellate record discloses, the bankruptcy court entered a money judgment in favor of the bankruptcy trustee alone. The petition discussed both Andrewss superior court judgment and the bankruptcy trustees bankruptcy court judgment, but the superior courts order in this case stated only that Mr. McGranahan is entitled to enforce his judgment against the trust assets . (Italics added.) Regardless of whether Andrews has been properly made a party to the appeal, there is no doubt that the order appealed from granted relief only to the bankruptcy trustee. We, of course, do no more than affirm the lower courts order.

The record shows that Andrews is a judgment creditor of Floyd Hill; that the bankruptcy court has refused to discharge Floyd Hills debts and has voided his transfer of $105,000 to Janet Hill; and that the superior court ruled that the Hill Trust provides no protection to the assets held in it from creditors of Janet Hill, the settlor. What this state of affairs means for Andrewss right to enforce his judgment is not a question presented in this appeal.

Probate Code section 1304

The bankruptcy trustee further contends that the appeal should be dismissed because the superior courts order was not one of those expressly made appealable by section 1304. This argument has no merit. Section 1304 is one of several provisions of the Probate Code dealing with the appealability of orders. Another is section 1300, which states: In all proceedings governed by this code, an appeal may be taken from the making of, or refusal to make, any of the following orders: [] [] (d) Directing or allowing payment of a debt, claim, or cost. The superior courts order allowed enforcement of a debt against trust assets. Therefore, assuming the proceedings on the bankruptcy trustees petition were proceedings governed by the Probate Code in the first place, the courts order was made appealable by section 1300, subdivision (d).

Frivolousness of appeal

An appeal may be dismissed and sanctions imposed if the appeal is frivolous or is taken solely for purposes of delay. (Code Civ. Proc.,  907; Cal. Rules of Court, rule 8.276; In re Marriage of Flaherty (1982) 31 Cal.3d 637, 645-646.) This means that dismissal and sanctions may be imposed under either an objective standardno reasonable attorney could have thought the claims made in the appeal were meritorious, or a subjective onethe appeal was brought for a bad-faith purpose, such as delaying a rightful recovery. (In re Marriage of Flaherty, supra, at p. 650.) The bankruptcy trustee contends that the present appeal should be dismissed and sanctions imposed on both grounds.

We disagree. Applying the objective standard, we acknowledge that the line between a claim that is frivolous and one that merely lacks merit is fine. (In re Marriage of Flaherty, supra, 31 Cal.3d at p. 650.) As we have said, some of defendants arguments are very weak. An attorney might reasonably see some merit in defendants primary claim that section 15306.5 limits section 18200, however. Applying the subjective standard, we acknowledge that it is difficult to see where the Hills improper efforts to shield their assets end and any legitimate efforts to do so might begin. The modicum of merit in defendants primary argument dissuades us from concluding that delay was defendants only motive, however, for the subjective and objective standards work together, with one providing evidence under the other. (In re Marriage of Flaherty, supra, 31 Cal.3d at p. 649.) Considering the two standards together, we decline to dismiss or impose sanctions. These measures should be used most sparingly to deter only the most egregious conduct. (Id. at pp. 650-651.)

It is significant, also, that some of the bankruptcy trustees arguments for dismissal are as weak as some of defendants arguments for reversal. The argument that the appeal should be dismissed and sanctions imposed because the court said it would have to determine the amount of trust assets exposed to enforcement of the bankruptcy courts judgment if it were, hypothetically, to apply section 15306.5 is particularly unpersuasive. The order makes it obvious that the court never had any intention of applying section 15306.5. A party urging sanctions because another partys meritless arguments have wasted time and resources should also refrain from making similarly meritless arguments.

A final consideration supporting denial of sanctions is that the bankruptcy trustee framed his case in a confusing manner in his petition, which helped give rise to the appearance that there were appeal-worthy issues. In his petition, he requested that the court order quarterly payments to him out of the trust income, apparently assuming that section 15306.5 was the controlling statute and that he could recover only as the creditor of a beneficiary, not the creditor of the settlor. It was the superior court that realized, on its own initiative, that section 18200 disposed of the case in a more straightforward and effective manner, allowing the trust simply to be ignored. Yet in this appeal even the bankruptcy trusteenot just defendanthas persisted in the belief that section 15306.5 is somehow relevant and that the superior court is going to make some determination pursuant to it in the future. This tends to demonstrate that defendants legal theory is not frivolous at least from the bankruptcy trustees point of view. These facts distinguish this case from Keitel v. Heubel (2002) 103 Cal.App.4th 324, 336, in which the Court of Appeal found frivolous an appeal from an order applying section 18200 to allow enforcement of a judgment against assets held in a revocable trust.

For all these reasons, we deny the bankruptcy trustees requests for dismissal and sanctions. For like reasons, we also deny defendants request for sanctions, which she makes in her papers opposing the bankruptcy trustees request.

DISPOSITION

The judgment is affirmed. The motions for dismissal and sanctions are denied. Respondent Michael McGranahan shall recover his costs on appeal.

_____________________

Wiseman, J.

WE CONCUR:

_____________________

Vartabedian, Acting P.J.

_____________________

Cornell, J.

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^[1]Subsequent statutory references are to the Probate Code unless noted otherwise.

^[2]Code of Civil Procedure section 709.010, subdivision (b), provides that [t]he judgment debtors interest as a beneficiary of a trust is subject to enforcement of a money judgment only upon petition under this section by a judgment creditor to a court having jurisdiction over administration of the trust as prescribed in Part 5 (commencing with Section 17000) of Division 9 of the Probate Code. The judgment debtors interest in the trust may be applied to the satisfaction of the money judgment by such means as the court, in its discretion, determines are proper, including but not limited to imposition of a lien on or sale of the judgment debtors interest, collection of trust income, and liquidation and transfer of the trust property by the trustee.

^[3]The bankruptcy trustee acknowledges that the superior courts challenged order did not pertain to Andrewss judgment or his right to enforce it.

^[4]One of the motions purports to be made not by the bankruptcy trustee but by Andrews, who is representing himself. This is puzzling, since (1) the order appealed from was in favor of the bankruptcy trustee alone; and (2) the cover sheet of this motion and of every other document filed on Andrewss side in this appeal states that he is represented by counsel. We will assume for the sake of argument that this motion has been filed properly by some party, however. We will address later in this opinion the parties related dispute about whether Andrews is a proper party to the appeal.