+1 212 318 2000
Europe, Middle East, & Africa
+44 20 7330 7500
+65 6212 1000
Roberts v. McConnell (In re Hoff), No. 10-50462, 2011 BL 173369 (5th Cir. June 29, 2011) The United States Court of Appeals for the Fifth Circuit affirmed a district court’s judgment authorizing a chapter 7 trustee (“Trustee”) to recover for the benefit of the bankruptcy estate the portion of trust assets that a chapter 7 debtor-beneficiary was entitled to withdraw from the trust at the time of his bankruptcy filing. At the same time, however, the Fifth Circuit remanded with directions indicating that the district court should correct and calculate the value of the trust’s assets to which the Trustee was entitled.
Establishment of TrustIn 1990, Mary McConnell (“Mary”) established an inter vivos spendthrift trust (“Trust”) for the benefit of her grandson, Terry Hoff (“Hoff” or “Debtor”), who was 22 years old at the time. Mary funded the Trust with $100 and designated her daughter, Peggy McConnell (“Peggy”), who subsequently made all of the other Trust contributions, as the sole trustee. Notably, Hoff’s entitlement to withdraw assets from the Trust was subject to two conditions precedent, including that: (1) the “Settlor” of the Trust must have died; and (2) Hoff must have reached certain specific ages that were referenced in the Trust. The Trust did not precisely define the term “Settlor” but identified only Mary as the “Settlor.” Additionally, the Trust’s withdrawal provision (“Provision”) provided that Hoff could withdraw one-third of the value of the Trust’s assets on the date on which he reached the age of 30, one-half of the value of the remaining assets on the date on which he reached the age of 35, and all of the remaining assets on the date on which he reached the age of 40 and from time to time thereafter. Mary subsequently died between Hoff’s 30th and 35th birthdays, but Peggy was still alive.
Lower Courts’ RulingsWhen Hoff was 37 years old, he filed a voluntary petition for chapter 7 bankruptcy protection, having never made any withdrawals from the Trust. Thereafter, the Trustee moved to recover for the benefit of the estate the amount of the Trust’s principal equal in value to the amount that Debtor could have potentially withdrawn at the time at which he filed his chapter 7 petition. Debtor objected, arguing that Mary was not the sole settlor under the Trust and that, as a result, the first condition precedent to his right to make withdrawals had not occurred. In the alternative, Debtor contended that the Trust allowed him to make withdrawals only on specific dates and that because those dates had passed before he had filed for bankruptcy, the Trustee could not reach the Trust assets. Ultimately, the bankruptcy court decided that both Mary and Peggy were settlors of the Trust because both of them had contributed to the Trust and thus, as a result, neither Debtor nor the Trustee could withdraw from the Trust. On appeal, the district court issued a judgment (“Judgment”) reversing the bankruptcy court’s decision and authorizing the Trustee to exercise Debtor’s right to withdraw a portion of the Trust’s principal. In so ruling, the district court held that Mary was the Trust’s sole settlor and that because she had died before Debtor’s 30th birthday (which was actually erroneous), Debtor, who was currently age 37, had the vested right to withdraw assets equal to one-third of the Trust’s principal valued as of his 30th birthday and one-half of the Trust’s remaining principal valued as of his 35th birthday. Furthermore, the district court held that the “from time to time” reference in the Provision modified each of Debtor’s three sequential withdrawal rights, thereby authorizing Debtor to withdraw on and after the precise dates on which he reached the ages of 30, 35, and 40. Debtor then appealed the district court’s Judgment to the Fifth Circuit. Issuing its decision on appeal, the Fifth Circuit discussed the Trustee’s attempt to exercise Debtor’s withdrawal rights to reach the Trust assets for the benefit of the estate. To this end, the Fifth Circuit analyzed whether the two conditions precedent required in order for Debtor to exercise his withdrawal rights under the Trust had occurred before the chapter 7 filing. First, the Fifth Circuit pointed out that the Trust specifically referenced just one single settlor, who had died, and did not suggest that future contributors would also be deemed settlors, which would have restricted Debtor’s right to make withdrawals until after every contributor had died. Next, the Fifth Circuit clarified that the age references provided for in the Trust did not modify Debtor’s right to withdraw, which had no temporal restrictions once Debtor had successfully reached the specified ages but instead merely defined the value of the Trust corpus that Debtor could withdraw upon reaching those ages. In ruling that both conditions precedent had occurred and that the Trustee could withdraw one-half of the Trust’s remaining principal, calculated as of Debtor’s 35th birthday, the Fifth Circuit demonstrated the importance of applying a reasonable interpretation to trust agreements in order to carry out their intended purpose.
Sole Settlor of TrustConducting its analysis, the Fifth Circuit explained that a trust agreement must be interpreted as a whole, with each provision being given effect. See Aubris Resources LP v. St. Paul Fire and Marine Ins. Co., 566 F.3d 483, 486 (5th Cir. 2009). Significantly, the Fifth Circuit observed that the Trust in the instant case explicitly specified only Mary as the “Settlor” and distinguished future potential contributors as “any other person.” Moreover, the Fifth Circuit remarked that if Peggy and others could become settlors simply by contributing to the Trust, Debtor’s right to make withdrawals once the settlor died would be triggered only when all of the Trust contributors had died, a result that would be contrary to the inherent goal of the Trust of protecting its beneficiary. As a result, the Fifth Circuit held that Mary was the sole settlor and that her death, after Debtor had reached the age of 30, therefore triggered Debtor’s withdrawal rights.
Amounts and Timing of Debtor’s Withdrawal RightsNext, the Fifth Circuit noted that after the settlor’s death, the Provision authorized Debtor to withdraw one-third of the Trust’s principal “at age 30,” one-third of the value of the Trust’s principal “at age 35,” and all of the remaining Trust property “at age 40 (or from time to time or at any time thereafter).” As the Fifth Circuit declared, the reference to Debtor’s 30th, 35th, and 40th birthdays merely reflected the dates on which the value of the amount of Trust assets that Debtor could withdraw were to be calculated. Nonetheless, however, the Fifth Circuit considered Debtor’s argument that these age references also set forth the only times at which Debtor could actually make withdrawals. Specifically, the Fifth Circuit examined Debtor’s assertion that because the Provision authorized Debtor to make withdrawals only “at” ages 30 and 35 rather than “from and after” ages 30 and 35, and since Debtor had not made any withdrawals before filing for bankruptcy at age 37, neither Debtor nor the Trustee could make any withdrawals from the Trust until the day on which Debtor turned 40. Rejecting this strained interpretation, the Fifth Circuit held that the reference to Debtor’s ages determined the exact days as of which the value of the Trust assets were to be calculated but did not restrict when Debtor could actually make the withdrawals once he had attained the specified ages. As such, the Fifth Circuit reasoned that the Provision did not permit Debtor to make withdrawals only on his 30th and 35th birthdays or only during the 365 day period when he was actually age 30 and 35. Instead, applying a reasonable interpretation of the Provision, the Fifth Circuit resolved that after calculating the value of Trust assets that could be withdrawn as of Debtor’s 30th and 35th birthdays, Debtor could then withdraw funds totaling those amounts, either in a lump sum or in several lesser amounts, at any time and from time to time after the specified birthdays, as long as the total withdrawals did not exceed the value limits provided for in the Trust. With respect to the Provision’s parenthetical phrase, the Fifth Circuit indicated that because more assets could be contributed to the Trust after Debtor reached the age of 40, the parenthetical ensured that Debtor could withdraw such post-40 assets. At the same time, however, the Fifth Circuit added that the parenthetical permitting withdrawals “from time to time or at anytime thereafter” also applied to Debtor’s withdrawal rights at each specified age, including age 30 and 35. Since nothing in the Trust limited Debtor’s ability to exercise his post-35 withdrawal rights at and after age 37 with respect to the assets totaling one-half of the value of the Trust’s property remaining as of Debtor’s 35th birthday, the Fifth Circuit decided that the Trustee could make such withdrawals as well. Quantum of Withdrawal Finally, the Fifth Circuit pointed out that because the district court had erroneously believed that Mary had died before Debtor’s 30th birthday, it had authorized the Trustee to withdraw one-third of the Trust property valued as of Debtor’s 30th birthday and one-half of the Trust property remaining on Debtor’s 35th birthday. Since Mary had actually died after Debtor’s 30th birthday and the condition precedent for Debtor’s withdrawal right at age 30 thus never occurred, the Fifth Circuit clarified that when Debtor filed his chapter 7 petition at the age of 37, he was entitled to withdraw only one-half of the Trust’s remaining principal valued as of his 35th birthday. Accordingly, the Fifth Circuit ordered that the district court’s Judgment be amended to authorize the Trustee’s withdrawal in that amount only.
Fifth Circuit Affirms District Court’s Judgment and RemandsThe Fifth Circuit thus affirmed the district court’s Judgment but remanded to allow the district court to calculate the amount of Trust assets to which the Trustee was entitled and amend its Judgment accordingly. Disclaimer This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy. ©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).