Title: LUNDGREN v HOGLUND

State: montana

Issuer: Montana Supreme Court

Document:

NO. 8 5 - 1 5 9 I N THE SUPREME COURT OF THE STATE OF MONTANA 1 9 8 5 DAN H. LUNDGREN, P l a i n t i f f and R e s p o n d e n t , WILLIAM S . HOGLUPJD , D e f e n d a n t . EVERETT M. LUNDGREN, P l a i n t i f f and R e s p o n d e n t , WILLIAM S. HOGLUND, D e f e n d a n t . J E S S E WHITNEY, P l a i n t i f f and R e s p o n d e n t , WILLIN4 S. HOGLUND, D e f e n d a n t . and F I R S T INTERSTATE BANK OF KALISPELL, N.A., T r u s t e e and A p p e l l a n t . APPEAL FROM: D i s t r i c t C o u r t of t h e E l e v e n t h J u d i c i a l D i s t r i c t , I n and for t h e C o u n t y of F l a t h e a d , T h e H o n o r a b l e E. G a r d n e r B r o w n l e e , Judge presiding. COUNSEL OF RECORD: F o r A p p e l l a n t : S t e v e n . E. C u m m i n g s ; M u r p h y , R o b i n s o n , H e c k a t h o r n and P h i l l i p s , K a l i s p e l l , Montana F o r R e s p o n d e n t s : R a n d a l l S. O g l e , K a l i s p e l l , Montana S u b m i t t e d on B r i e f s : Aug. 2 7 , 1 9 8 5 D e c i d e d : D e c e m b e r 31, 1985 F i l e d ~ ~ ~ 31 1985 f%% C l e r k Mr. Justice John C. Sheehy delivered the Opinion of the Court. In this case we Zecide t.hat spendthrift provisions in a trust are valid in Montana, an2 that judgment creditors of a beneficiary under a spendthrift trust may not execute upon the proceeds due from the spendthrift trust to the beneficiary before distribution by the trustee. First Interstate Bank appeals from a judgment of the District Court, Eleventh Judjcial District, Flathead County, which ordered the bank as trustee to pay to judgment creditcrs the income due to the beneficiary of a spendthrift trust. Me reverse. There are fcur issues on appeal. First, does the Eank have standing to appeal? Second, did the Oistrict Court have jurisdiction over the Eank? Third, can a judgment creditor reach income from a spendthrift trust before the income has been distributed to the beneficiary? Fourth, should the spendthrift provision be applied under the facts and circumstances of this case? The plaintiffs-respcndents in this case maze unsecured loans to William S. Hoglund in 1970. William Hoglundrs father, Stewart Hoglund, died testate in 1980. Four days after his father's death, VJilliam Foglund assigned his distributive share of his father's estate to the respondents. At the same time he confessed ju6gment to the respondents. Stewart Hogl-und ' s will established a testamentary trust with a spendthrift provision. The will named First Tnterstate Rank as trustee. The will provided that William was to receive twc-thirds of the trust income during his life. On William's death the trust principal would be divided among Stewart's grandchildren. Ey writs of execution, the respondents, as judgment creditors, ettempted to levy on the trust income due to William in the hands of the trustee, prior to the time it was paid. The trustee returned the writs of execution unsatisfied saying all the money was held in a trust under a spendthrift provision. The judgment creditors instituted supplemental proceedings and the chief trust officer of the was summoned to be examined regarding the trust- provision. After the hearing, the judgment creditors moved for an order d.irecting the Bank as trustee to pay the income f r o * . the trust to the judgment creditors. The Cistrict Court entered 2 judgment ordering the Eank as trustee to pay all income due to William Hoglund from the trust to the judgment creditors. The first issue on appeal is whether the First Interstate Eank has standing to appeal the order of the District Court directing it to pay the spendthrift trust income directly to the judgment creditors. The Montana Rules of Appellate Civil Procedure state: A party aggrieved may appeal from a judgment or order . . . in the following cases: . . (c) From a judgment or order . . . allowing . . . the payrent of a debt. Rule 1, h?.R.App.Civ.P. The respondents contend the Eank does not have standing to appeal because the Bank was neither a party nor an intervenor in the litigation below and the Bank has no individual interest in the outcome of the 1itiqs.ticn. Although the Fank was not a party below, it is the subject of an order by the District Court directi.ng it to pay trust income to the judgment creditors. Non-parties a r e allowed t o appeal i f the> are aggrieved by a c o u r t order. Hcl-ter v. F4oore and Co. (Co1.o. App. 1983), 6f31 P.2d 9 6 2 ; Fakani Cevelopn-.ent Co., Ltd. v. S t a h l (Hawaii App. 1983), 670 P.2d 1284; Tisdale v. \/.?heel-er Brothers Grain Co., Inc. (Okla. 1979), 599 P.2d 1 1 0 4 . Further, as t r u s t e e of t h e Stewart Hoglund t r u s t , t h e Bank has a fi-duciary duty t o preserve and p r o t e c t t h e t r u s t a s s e t s . The t r u s t e e has an appealable i n t e r e s t where it i s d i r e c t e d t o pay t r u s t a s s e t s t o c r e d i t o r s even though it has no personal s t a k e i n t h e s u i t . Clay v. Hamilton (1945), 116 1nd.App. 2 1 4 , 63 N.E.2d 20?; Pugh v. S t . Louis Police Relief Assoc. (19441, 237 P-:o.App. 9 2 2 , 179 S.Pi.2d 927; Cregg v. E l e c t r i - C r a f t Corp. (1944), 268 App.Div. 814, 4 9 N.Y.S.2d 1.74; Chinnis v. Cohb (1936), 210 N.C. 1 0 4 , 185 S.E. €38; Knettle v. Knettle (1931), 1 6 4 Wash. 468, 3 P.2d 133. The second i s s u e on appeal i s whether t h e C i s t r i c t Court had j u r i s d i c t i o n over t h e Bank. Thjs a c t i c n began a s supplemental proceedings tc discc-;ver t h e a s s e t s of William Hoglund. The Eank contends i t was not a p a r t y t o t h e proceedings and became involved only a f t e r t h e D i s t r i c t Court ordered it t o pay t h e income of t h e t r u s t i n v i o l a t i o n of t h e s p e n d t h r i f t provision. The Bank contends t h e v a l i d i t y of t h e s p e n d t h r i f t provision can be ac?dressed only i n a plenary proceeding a s provided hy S 25-14-104, MCA, which s t a t e s : 25-14-104. Procedure when debt t o o r ownership of judgment debtor denied. I f i t appear t h a t a person o r corporaticn a l l e g e d t o have property of t h e iudqnent debt-or o r t o be indebted t o him claims an - - i n t e r e s t i n t h e property adverse t o him o r d e n i e s - -- - - - t h e debt, t h e c o u r t o r judge may a u t h o r i z e , by an -- o r d e r made t o t h a t e f f e c t , t h e judqment c r e d i t o r t o i n s t i t u t e an acticr, a g a i n s t such person o r corporation f o r t h e recovery of such i n t e r e s t o r debt; and t h e c o u r t o r judge may, by o r d e r , f o r b i d a t r a n s f e r o r o t h e r d i s p o s i t i o n of such i n t e r e s t o r debt u n t i l an a c t i o n can be con-menced and prosecuted t o juZgr.ent. Such order may be rcodified o r vacated by t h o judge g r a n t i n g t h e same o r t h e c o u r t i n which t h e a c t i o n i s brought, a t any t i m e , upon such terms a s may be j u s t . (Emphasis added.) However, i n t h i s c a s e t h e r e i s no one who claims a n i n t e r e s t i n t h e t r u s t adverse t o t h e judgment d e b t o r s o r d e n i e s t h e d e b t . The i s s u e h e r e i s n o t whether William Iioglund owes t h e d e b t s o r whether t h e t r u s t e e has p r i o r c l a i m t-o t h e t r u s t a s s e t s cver t h e judgment c r e d i t o r s . The i s s u e i s t h e vn!.idlity and e f f e c t o f a s p e n d t h r i f t p r o v i s i o n i n a P l o ~ t a n a t r u s t . T h i s i s an i s s u e o f f i r s t impression. The v a s t v a j o r i t y o f s t a t e s which have considered t h e v a l i d i t y o f s p e n d t h r i f t - p r o v i s i o n s have f o u ~ d them val-ic?.. PTichols v. Eaton (1875), 91 U.S. 716, 1 O t t o 716, 23 Il.Ed.2d 254; I n re Rucklin's E s t a t e (1952), 243 Iowa 312, 51 N.W.2d 432; Preminger v. Union Fank & T r u s t Co. (1974), 54 ~ i c h . ~ p p . 361, 220 N.F:.c?d 795; In re I-Ieyl's E s t a t e (1945), 352 Penn. 407, 4 3 A.2d 130; H u e s t i s v. Manley (1939), 1 1 0 V t . 413, 8 A . 2 5 6 4 4 ; Eriekson v . Rank o f C a l i f o r n i a (1.981), 28 ~ a s h . ~ p p . 337, 623 P.2d 721. I n f a c t only t h r e e s t a t e s have found s p e n d t h r i f t t r u s t s i n v a l i d . Rogert, T r u s t s 222 [rev. 2di ed. 1979); Drahmey v. R o l l i n s (19351, 87 N.H. 290, 179 A. 186; Sherrow v. Erookover (1363), 174 Ohio S t . 310, 189 N.E.?d 9 0 ; P e t i t i o n o f Smyth !1927), 49 R . I . 27, 139 A. 657. Many o t h e r s t a t e s impose s t a t u t o r y Lj-nits on s p e n d t h r i f t c l a u s e s . Bcgert, T r u s t s S 222 (rev. 2d ed. 1979). Spendthrift p r o v i s i o n s i n t r u s t s a r e g e n e r a l l y upheld on one ot two p o l i c y grcunds. F i . r s t , t h e i n t e n t i o n o f t h e t e s t a t o r , c 3 . s f a r a s p o s s i b l e , should be given e f f e c t by t h e c c u r t s . T r a d i t i c n a l l y , a. t e s t a t o r who g i v e s without ar,y p e ~ u r ~ i a r y r e t u r n can a t t a c h c o n d i t i o n s t o t h e g i f t d u r i n g t h e life o f t h e donee. "Why a p a r e n t , o r one who loves a n o t h e r , and wishes t o use tis own p r o p e r t y i n s e c u r i n g t h e o b j e c t o f h i s a f f e c t i o n , a s far a s p r o p e r t y can do it, from t h e i l l s o f l i f e , t h e v i c i s s i t u d e s o f f o r t u n e , and even h i s own improvidence, o r i n c a p a c i t y of s e l f - p r o t e c t i ~ n , should n o t be p e r ~ n i t t e d t o do so, i s not r e a d i l y perceived-." Ni-chols v. Eaton (1875) 9 1 U.S. 716, 1 O t t o 716, 23 L,.E1!.2d 254. A r e c e n t Washington c a s e upheld t h e v a l i d i t y o f s p e n d t h r i f t t r u s t s on t h e grounds o f freedom o f a l i e n a t i o n . "The cwner an3 d-onor o f t h e p r o p e r t y should be f r e e t o s e l e c t t h e t r u s t b e n e f i c i a r y who w i l l enjoy h i s bounty, and should be a b l e t o p u t e n f c r c e a b l e provisi.ons i n t h e t r u s t which w i l l p r e v e n t h i s t r u s t b e n e f i c i a r y from v o l u n t a r i l y conveying o r a s s i g n i n g h i s i n t e r e s t , t h u s p r e c l u d i n g any c r e d i t o r s from t a k i n g t h a t i n t e r e s t away from t h e b e n e f i c i a r y . " Ericksor, v. Bank o f C a l i f o r n i a (Wash. 1 9 8 2 ) , 6 4 3 P.2d 670, 672. S e c o ~ d , s p e n d t h r i f t p r o v i s i o n s a r e upheld because t h e c r e d i t c r has no reason t o r e l y on a s s e t s o r income from a s p e n d t h r i f t t r u s t . "[I]nasmuch a s such a g i f t [ i n a s p e n d t h r i f t t r u s t ] t a k e s nothing from t h e p r i o r o r subsequent c r e d i t o r s of t h e b e n e f i c i a r y t o which t h e y p r e v i o u s l y had t h e r i g h t t o look f o r payment, they c a n r ~ o t complain t h a t t h e donor h a s provided t b z t t h e p r o p e r t y o r income s h a l l go o r be pa.id p e r s o n a l l y t o t h e b e n e f i c i a r y and s h a l l n o t be s u b j e c t t o t h e c l a i n s o f c r e d i t o r s . " Huestj-s v. Manley ( V t . 1939), 8 A.2d 644, 6 4 6 . W e hold s p e n d t h r i f t p r o v i s i c n s t o be v a l i d i n Mcntzna. T h e s p e n d t h r i f t p r o v i s i o n a t i s s u e h e r e s t a t e s : b?o i-nterest o f any b e n e f i c i a r y o f any t r u s t c r e a t e d hereunder s h a l l be s u b j e c t t o s a l e , a s s i g n ~ . e ~ t , pledge, o r t r a n s f e r by any b e n e f i c i a r y i n any form o r manner wha-tsoever, nor s h a l l t h e p r i ~ c i p a l o f t h e t r u s t o r t h e income a . r i s i n g therefrom be l i a b l e c *or any d e b t o f o r any judgrient a.gainst any b e n e f i c i a r y through t h e process o f any c o u r t . T h i s p r o v i s i o n makes t h e ettempte6 assignment by Wi!-li-am Boglunc; i-nval-id. However , t h e f udgment c r e d i t o r s can s t i l l execute on t h e i r judgment, a f t e r t-he t r u s t income h a s been paid t o t h e beneficia.ry. Restatement o f T r u s t s , 152, Respondent contends t h a t S 72-24-210, MCA, c o n t r o l s here. That s e c t i o n s t a t e s : 72-24-210. P r o f i t s o f land l i a b l e t o c r e d i t o r s i n c e r t a i n c a s e s . Khen a t r u s t i s c r e a t e d t o r e c e i v e t h e r e n t s an2 p r o f i t s o f r e a l p r o p e r t y and no v a l i d d i r e c t i o n f o r accumulation i s given, t h e s u r p l u s of such r e n t s and p r o f i t s , beyond t h e sum t h a t may be necessary f o r t h e educati.on and support o f t h e persons f o r whcse b e n e f i t s t h e t r u s t i s c r e a t e d , i s l i a b l e t o t h e claims o f t h e c r e d i t o r s of such person i n t h e same r e a s p e r s o p a l p r o p e r t y which cannot be reached by execution. S e c t i o n 72-24-210, MCA, has n o t been i n t e r p r e t e d i~ Montana . However, i n C a l i f o r n i a a s u b s t a n t i a l l y s i m i l a r s t a t u t e was i n t e r p r e t e d a s a s t a t u t o r y 1.irr.itation on t h e power t o c r e a t e s p e n d - t h r i f t t r u s t s . Canfie.1-c! v. S e c u r i t y F i r s t N a t i o n a l Bank (1939), 13 Cal.2d 1, 87 P.2d 830. I n C a n f i e l d , t h e C a l i f o r n i a c o u r t h e l d t h a t a judgment c r e d i t o r of a b e n e f i c i a r y o f a d i s c r e t i o n a r y s p e n d t h r i f t t r u s t can reach t h e s u r p l u s of t r u s t income i n t h e hands of t h e t r u s t e e beyond t h e amount necessary f o r t h e educa.ti.on and support o f t h e b e n e f i c i a r y . The C a l i f o r n i a c o u r t s developed a " s t a t i o n i n l i f e " test t o determine t h e amount necessary f o r support: H o w much i s necessary t o maintain t h e b e n e f i c i a r y i n t h e s t a t i o n i n l i f e t o which he i s and h a s been accustomed t o l i v e ? I n C a n f j e l d , t h e b e n e f i c i a r y arqued, "every c e n t he r e c e i v e d from t h e t r u s t has gone f o r ' n e c e s s i t i e s ' o f l i f e . " 8 7 P.2d a t 843. The C z l i f o r n i a c o u r t held reasonable needs do n o t i n c l u d e extravagances, l u x u r i e s , expenses f o r 1-avish e n t e r t a i n m e n t , nor gambling l o s s e s . Rut the Court s t a t e d evidence o f t h e c o s t of ljvi-ng, wages o f s e r v a n t s , ~ e d i c a l e::pcr;ses, reasonable e n t e r t a i n m e n t expenses and o t h e r reasonably necessary expenses i s p r c p e r t o f i x the amount cf n e c e s s i t i e s . F7e have long adhered t o t h e p r i n c i p l e t h a t where a sister s t a t e has a s t a t u t e s i m i l a r t o o u r s , w e should g i v e c o n s i d e r a t i o n t o t h e constructj.on it. r e c e i v e d i n t h e c o u r t s of t h e sister s t a t e . However, t h a t c o n s t r u c t i o n i s n o t b i n d i ~ g upoii t h i s Court. Cahi.l.1-Mooney Const. Co. v. Ayres (1962), 140 Mont. 464, 373 P.2d 703. I n c o n s t r u i n g S 72-24-210, KCA, w e begin w i t h t h e p l a i ~ laiiguage o f t h e s t a t u t e , "[wlllen a t r u s t i s c r e a t e d t c r e c e i v e t h e r e n t s and p r o f i t s o f r e a l p r o p e r t y and no v a l i d d i s c r e t i o n f o r accumulation i s given . . . " § 72-24-210, MCA. A number of s t a t e s hzve h e l d t h e language of t h i s sta-1:ute should be construed tc, neen what it says. Finnesota an2 Wisconsin c o u r t s have held s t a t u t e s s i m i l a r t-o S 72-24-210, MCA, apply only t o t r u s t s cf r e a l property. I n r e Schmidt's W i l l (Minn. 1959), 97 N.FJ.2d 4 4 1 ; I n re Moulton's E s t a t e (Yinn. 1951), 46 N.W.2d 667; Erickson v. Erickson (Minn. 1936), 267 N.W. 426; Lamberton v. P e r e l e s ( W i s . 1894), 58 N.W. 776. However C a l i f o r n i a and New York have held t h e i r s t a t u t e s which a r e s i m i l z r t o 72-24-210, MCA, apply t o t r u s t s o f persona.1 p r o p e r t y as w e l l a s r e a l p r o p e r t y . Canfield (1939), 13 Cal.2d 1, 87 P.2d 830; Wetmore v. Wetmore ( 1 8 9 6 ) , 149 N.Y. 520, 4 4 N.E. 169. The reason. f o r t h i s holding i s t h a t New York ha.s a s t a t u t e which makes f u t u r e , c o n t i ~ g e n t p e r s o n a l p r c p e r t y interests s u b j e c t t o a 11 r u l e s GI) r e a l property. I n re Schmidt' s W i l l (Minn. 1959) , 97 N.W.2d 4 4 1 . P-nd C a l i f o r n i a followed t h e New York r u l e . Wetmore, 149 N.Y. 5 2 0 , 4 4 K.E. 169. However, Montana does fiat have such a statute, and we decline to follow the New Ycrk decision. Instead, we follow Minnesota and in - n c~nstruing /A-24-210 to apply only to trusts of real property. The second phrase of the statute requires that "no valid direction for accumulation he given." This clause was construed in In re Estate of Lawrence (1968) , 267 Cal.App. 2d 77, 72 Cal. Rptr. 851 to nean that no direction for unexpended portions of income is given. Thus, in order for 5 72-24-210, FCA, to apply twc conditions must be met: (1) there must be a trust for real property and (2) no valid direction for the accunluiation of income may exist. TP the case at hand, the record shcvjs the trust is made up of persoral prcpcrty a i ~ c l three contracts for deed, which wider the doctrine of equitable conversion are persona1 property to the seller. In re Estate of Rickner (1974), 164 Font. 51, 518 F.2d 1160. Thus the trust in questicn is entirely a trust of perscnal property. And the trust contains the following language: Any inc~ne not so distributed. shall be accumulated and added to principa.1. This is a valid direction fcr accumulation, thus 5 72-24-210, MCA, does not apply to the Stewart Hoglund trust. The fourth issue is whether the spendthrift provisien should be applied under the facts and circumstances of this case. Respondents ccntend that they should be entitled to execute on the trust funds in the han6.s of the trustee because of four theories: waiver, renunciation, estoppel an6 equi-ty. Respondents contend that the assignments made by William Hoglund constitute waivers of the right to receive income from his father's trust. W e hold the assignments made by Vil.l.ierL IIoglund are v o i l under t h e terms o f t h e s p e n d t h r i f t t r u s t . An a.ttempted t r a n s f e r o f an i n t e r e s t i n a s p e r d t h r i f t t r u s t i s not bindin.g on t h e t r u s t e e : A n attempted t r a n s f e r of t h e i n t e r e s t o f t h e b e n e f i c i a r y under a s p e n d t h r i f t t r u s t i s g e n e r z l l y t r e a t e d a s v o i d , s u h j e c t t o t h e q u a l i f i c a t i o n s h e r e i n a f t e r d i s c u s s e d . It need n o t b e r e s p e c t e d by t h e t r u s t e e , t h e a s s i g n e e cannot e n f o r c e it, and t h e b e n e f i c i a r y i s n o t bound by it, although i f he has received c o n s i d e r a t i o n f o r it, be r a y be r e q u i r e d t o make r e s t o r a t i o n t c t h e attempted a s s j gnee. The c h a r a c t e r of t-he t r u s t does n o t prevent t h e b e n e f i ~ i ~ r y from c o n t r a c t i n g t o pay over t h o b e n e f i t s o f t h e t r u s t a f t e r t h e b e n e f i c i a r y h a s r e c e i v e d them. C-. Eogert, T r u s t s and T r u s t e e s , S 226 (2d ed. 1 9 6 6 ) . -- - ResponZents a l s o contend t h a t t h e essignments which William Ffoglund signed c o n s t i t u t e d r e n u n c i a t i o n o f h i s i n t e r e s t i n h i s f a t h e r ' s e s t a t e pursuant t o s e c t i o n 72-2-101, KCA. That s e c t i o n allows a person t o renounce t h e i r i n t e r e s t under a testamentary o r nontestamentary i n s t r u m e ~ t . William Fcqlund has n o t renounced h i s s h a r e of t h e testarrientary t r u s t under t h e requirements o f s e c t i o n 72-2-101, MCA. The s ~ ~ j g n n e n t s d i d n o t d e c l a r e t h e r e n u n c i a t i o n nor p r o p e r l y d e s c r i b e t h e i n t e r e s t renounced. The a s s i g ~ s e r - t s were n o t received by t h e t r u s t e e of t h e t r u s t w i t h i n n i n e nion.tl..s czfter t h e d a t e of t h e c r e a t i o n o f t h e t r u s t . I n a d d i t i o n , even i f William Hoglund had renounced h i s s h a r e o f t h e t r u s t , t h e p r o p e r t y would devolve a s though he had predeceased t h e t e s t a t o r . S e c t i o n 72-2-101, K C A . Thus t h e t r u s t income wculd go t o Stewart Hog1.und1s grandchildren n o t to t h e judgment c r e d i t o r s . Kext, recpondents argue t h e Bank and William Hoglund a r e estopy;ed! t o deny t h e assignments. They contend t h e y r e l i e d on t h e assignments made by William Hoglund t o t h e i - r d e t r i m e n t , t h e r e f o r e t h e y should he a b l e t o reach t h e income of the Stewart Hogl-und trust. This argument ignores the fact that the assignments were promi s e ~ rase by Vlilliam Hoglund, not by Stewart Hoglund. Stewart Koglunc?, nade no assignments or promises to tke judgnent creditors. Stewa-rt Hoglund ' s testamentary intent in setting up the trust should be fulfillei. We hold the trustee and the Ineneficiary are not estopped to deny the assignrents. Finally, respondents contend they should he pajd from the trust income because other dehts were paid by the estzte. The estate paid debts which Stewart personally guaranteed since they were a direct liability. Debts owed by Wjl-Liam to the estal:~: j.tself are being repaid by partial offsets against F7illiam1s share of the trust income. We find that neither of these kinds of payments has any effect on the applicaticn of the spendthrift clause in this case. Debts paid by Stewart Kcglund or guaranteed by Stewart Hoglund during his lifetime are not subject to the trust with the spendthrift clause. The repayment by William II~glund of the debt owed to the estate innures to the benefit of the grandchildren of Stewart Foqlund, and fulfills his testamentary intent. A beneficiary O L a spe~dthrift trust may oriler the trustee to pay trust income to ~r~cther for the benefit of the beneficiary. G. Bogert, Trusts and Trustees, § 226 (2d ed. 1966) . Thus, in this case, the trust income is protectec? by spe~dthrift clause and the judgment creditors may not reach the inc~me until after its distribution. We reverse the order of the District Court and remand with directions to dismiss with prejudice. - - Justice V ,,I Fie Concur: