* Concurring in section IIB and the judgment only. UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 98-10213

IN THE MATTER OF: R. DANIEL BASS, JR.,

Debtor,

RICHARD D. BASS; HARRY W. BASS, JR.; HARRY

M. WHITTINGTON; FRED R. DEATON, JR., Trustee,

On Behalf of Richard D. Bass Trust No. 2;

Corporate & Trustee Services, Inc.,

Appellants,

versus

GEORGE DENNEY; JOYCE DENNEY,

Appellees.

- - - - - - - - - -

Appeal from the United States District Court

for the Northern District of Texas

- - - - - - - - - - April 15, 1999

Before HIGGINBOTHAM, JONES, * and WIENER, Circuit Judges

WIENER, Circuit Judge.

This appea l arises from the efforts of Appellees George and

Joyce Denney (“the Denneys”) to collect an agreed non-dischargeable

judgment that they obtained against R. Daniel Bass, Jr. (“the

Debtor”) in his Chapter 7 bankruptcy proceedings in Utah. After

the Debtor’s Utah bankruptcy proceeding was completed, the Denneys

filed the instant garnishment and injunction suit against the2

Appellants (collectively, “the Trustees”) in the Bankruptcy Court

for the Northern District of Texas, where the Denneys had

registered their Utah judgment. The Trustees ask us to vacate a

mandatory injunction entered against them by the Bankruptcy Court

in Texas which commands the Trustees henceforth to furnish the

Denneys and their counsel written and oral notice 72 hours in

advance of each intended discretionary distribution to the Debtor,

who is the primary beneficiary of the Trust. The Trustees attack

that ruling on two fronts: (1) The bankruptcy court in Texas does

not have jurisdic tion to enforce collection of the subject

judgment; and (2) the injunction is inval id as a matter of law.

Agreeing with both contentions, we reverse the bankruptcy court and

render judgment in favor of the Trustees, vacating the injunction.

I.

Facts and Proceedings

In the 1950s, the Debtor’s grandparents (“Settlors”) created

several irrevocable, fully discretionary “spendthrift trusts”

pursuant to Texas law, one for the primary benefit of each of their

grandchildren. One of those trusts (“the Trust”) was created for

the primary benefit of the Debtor. Decades later, the Denneys made

loans on the strength of the Debtor’s guaranty, which loans were

never repaid. Financial representations made by the Debtor at the

time of his guaranties proved to have been materially false and

misleading.1 11 U.S.C. § 101 e t seq. (“the Bankrupt cy Code” or “the

Code”).

2 11 U.S.C. § 523.

3 The Denneys’ appellate brief states that the judgment was

registered “in compliance with 28 U.S.C. § 1738," a statutory

provision that specifies how legislative acts and judicial

proceedings of s tates, territories, or possessions of the United

States are to be authenticated, proved, or admitted into evidence

for purposes of full faith and credit. C f

. Fed. R. Civ. P. 44.

Neither the authenticity nor the registry of the Denneys’ judgment

3 In 1992, the Debtor filed a voluntary petition in bankruptcy

in the District of Utah, seeking protection under Chapter 7 of the

United States Bankruptcy Code. 1 The Denneys initiated an adversary

proceeding seeking to recover the amounts owed by the Debtor and to

have these obligations excepted from discharge pursuant to § 523 of

the Code. 2 The Trustees were never parties to the Utah bankruptcy

proceedings.

The Denneys eventually obtained a stipulated non-dischargeable

judgment against the Debtor in the principal amount of $734,096.60.

Their collection efforts proved fruitless, demonstrating that the

Debtor was difficult to find. So, when they learned that the

Debtor had been receiving approximately $300,000.00 in

distributions from t he Trust each year, the Denneys sought to

obtain satisfaction of their judgment from the Debtor’s interest in

the Trust. They set the stage for this effort when, in October,

1995, they “registered” an authenticated copy of their judgment

with the Bankruptcy Court for the Northern District of Texas

“pursuant to 28 U.S.C. § 1738.” 3 After the Debtor’s bankruptcyis at issue in this appeal.

4 837 F.2d 719 (5 th Cir. 1988).

5 The Denneys originally sought to garnish the Trustees as

well but voluntarily withdrew this demand early in the proceedings.

4 case in Utah was completed in early 1996, the Denneys filed suit

against the Trustees in the bankruptcy co urt serving the Greater

Dallas area where one or more of the Trustees are domiciled. Aware

that, in Smith v. Moody (In re Moody)

, 4 we had affirmed a ruling of

the Bankruptcy Court for the Southern Distr ict of Texas that

imposed a 72-hour notice requirement on the trustee of a

spendthrift trust of which the debtor in that proceeding was the

beneficiary, the Denneys sought such an injunction against the

Trustees in the bankruptcy court in Dallas.

Initially, the bankruptcy court granted the Trustees’ motion

to dismiss the Denneys’ adversary proceeding in which they sought

such a court-ordered advance notice from the Trustees. 5 On appeal,

however, the district court reversed

—— largely in reliance on its

reading of our opinion in Moody and § 105 of the Code —— and

remanded th e matter to the bankruptcy court for a hearing on the

Denneys’ requested injunction.

On remand, the bankruptcy court obediently followed the legal

c onclusions of the district court and ordered the Trustees to

furnish the Denneys and their counsel “at least 72 hours prior

written and oral notice of an y distribution to be made to or for

the benefit of” the Debtor from income, principal, or other assets5

of the Trust. This mandatory injunction specified that such notice

must include the date and time of any intended distribution, the

method, the name and address of the person or entities to receive

the distribution, including account numbers in financial

institutions, as well as the “source of instructions authorizing

distributions if other than those contained in” the Trust, and, of

course, the amount of the intended distribution. The bankruptcy

court did not, however, require the Denneys to meet this court’s

usual prerequisites for obtaining a mandatory injunction.

The second time around it was the Trustees who appealed the

bankruptcy court’s decision to the district court. Inasmuch as, on

reman d, the bankruptcy court had simply applied the district

court’s interpretation of the law to the largely uncontested facts

of the case, the district court affirmed the bankruptcy court on

that subsequent appeal. Both the bankruptcy court and the district

court con tinued to rely largely on M oody and § 105, plus the

d istrict court’s perception that the bankruptcy court h a s

“inherent” jurisdiction to enforce such a judgment. The Trustees

timely filed a notice of appeal to this court.

II.

Analysis

A. Standard of Review

F ederal courts must be assured of their subject matter

jurisdiction at all times and may question it sua spo nte at any6 13 C harles A. Wright & Arthur R. Miller et al., F ederal

Practice and Procedure § 3522, at 66-72 (2d ed. 1984).

7 S ee Calhoun Coun ty v. United States , 132 F.3d 1100, 1103

(5 th Cir. 1998).

8 Texas Lottery Comm’n v. Tran (In re Tran) , 151 F.3d 339,

342 (5 th Cir. 1998).

9 S ee Shurley v. Texas Co mmerce Bank (In re Shurley) , 115

F.3d 333, 336 (5 th Cir. 1997).

10 S outhmark Corp. v. Marley (In re Southmark Corp.)

, 62 F.3d

104, 106 (5 th Cir. 1995), cert

. denied 516 U.S. 1093 (1996); United

States v. Blakeman

, 997 F.2d 1 084, 1089 (5 t h Cir. 1992), cert

. denied 510 U.S. 1042 (1994).

6 stage of judicial proceedings. 6 The holding of a bankruptcy court

(or a district court hearing an appeal from the bankruptcy court)

that it has jurisdiction is a legal determination which we review

de novo

. 7 More generally, we review appeals from rulings and

decisions of the bankruptcy court under the same standards employed

by the district court when it hears an appeal from bankruptcy

court. 8 Thus, we review the bankruptcy court’s conclusions of law

de novo and its findings of fact for clear error. 9 Mixed questions

of fact and law, and questions concerning the application of law to

the facts, are reviewed de novo

. 10

B. Bankruptcy Court Jurisdiction

In response to the Trustees’ challenge to the jurisdiction of

the bankruptcy court in Texas to aid in the collection of the

judgment obtained by the Denneys in the bankruptcy proceedings in

Utah, the Denneys have advanced no less than five theories for

sustainin g such jurisdiction. We consider those contentions11 Celotex Corp. v. Edwards , 514 U.S. 300, 307 (1995).

12 W alke r v. Cadle Co. (In re Walker) , 51 F.3d 562, 569 (5 t h

Cir. 1995)(quoting Wood v. Wood (In re Wood) , 825 F.2d 90, 93 (5 th

Cir. 1987)).

13 I d. ; see also Celotex

, 514 U.S. at 308 n.6 (noting that the

First, Fourth, Fifth, Sixth, Eighth, Ninth, Tenth, an d Eleventh

Circuits have adopted this test, which originated in Pacor, Inc. v.

Higgins , 743 F.2d 984 (3d Cir. 1984)).

7 seriatim.

1. “Related to” jurisdiction

All federal courts are courts of limited jurisdiction which,

for the most part, derives from statutory grants of the Congress.

A bankruptcy court’s jurisdiction is even more circumscribed and is

wholly “grounded in and limited by statute.” 11 Specifically, 28

U.S.C. § 1334(b) grants jurisdiction to district courts and adjunct

bankruptcy courts to entertain proceedings “arising under,”

“arising in a case under,” or “related to” a case under Title 11 of

the United States Code, i.e., proceedings “related to” bankruptcy.

To determine whether such jurisdict ion exists, “‘it is necessary

only to determine whether a matter is at least “related to” the

bankruptcy.’” 12 In each instance of challenged bankruptcy court

jurisdiction, then, the result turns on how broad or how narrow

“related to” should be construed under the circumstances.

A proceeding is “related to” a bankruptcy if “‘the outcome of

that proceeding could conceivably have any effect on the estate

being adm inistered in bankruptcy.’” 1 3 More specifically, “‘[a]n

action is related to bankruptcy if the outcome could alter the14 Walker 51 F.3d at 569 (citations omitted).

15 Wood , 825 F.2d at 94.

8 debtor’s rights, liabilities, options, or freedom of action (either

positively or negatively) and...in an y way impacts upon the

handling and administration of the bankruptcy estate.’” 14 This test

is obviously conjunctive: For jurisdiction to attach, the

anticipated outcome of the action must both (1) alter the rights,

obligations, and choices of action of the debtor, and (2) have an

effect on the administration of the estate.

The injunction sought by the Denneys doubtlessly passes the

first prong of that test: By assisting the Denneys in their efforts

to intercept discretionary distri butions from the Trust, the

advance notice mandated by the injunction would deprive the Debtor

of those funds and constrain his ability to spend them. The second

prong, however, is problematical. Although the injunction would

have an impact on the Debtor, it could not ha v e any effect

whatsoever on his estate in bankruptcy or its administration.

First and foremost, such an estate no longer exists. The Utah

bankruptcy proceedings were clo sed before the Denneys ever filed

suit agai nst the Trustees in the Bankruptcy Court in Texas. So,

from the beginning of this litigation, there has been no bankruptcy

estate to affect. “To fall within the court’s jurisdiction, the

plaintiffs’ claims must affect the estate, not just the debtor.” 15

The fact that the judgment was entered by the Bankruptcy Court in16 Recently, this court held that 11 U.S.C. § 522(c) does not

furnish a basis for a former wife to seek execution on a debtor’s

homestead, which has been claimed as exempt during his bankruptcy

proceeding. D avis v. Davis (In Re Davis) , No. 95-11112, 1999 WL

144113 (5 th Cir. (Tex.) March 17, 1999). Unlike the present case,

Davis questioned the facial applicability of the Bankruptcy Code to

the claim being made, and the courts accordingly had jurisdiction

to interpret the Code. Here, by contrast, the only question is

subject matter jurisdiction ov er a controversy not guided by any

Code provision.

17 62 F.3d 746 (5 th Cir. 1995).

9 Utah rather than another court is irrel evant for purposes of

“related to” jurisdiction.

“Related to” is a term of art in bankruptcy jurisdiction,

where its meaning is not as broad as it is in ordinary parlance

where it means “having some connection with.” The distinction is

that, for purposes of bankruptcy ju risdiction, there is a c ause

component in “related to.” The proceeding must be capable of

affecting the bankruptcy estate for it to be “related to” the

bankruptcy. The only causal relationship here is the obverse: The

bankruptcy proceedings in Utah affected the obligations owed by the

Debtor to the Denneys by reducing them to judgment and making them

non-dischargeable. Once that was done, the Denneys were simply

judgment creditors of the former debtor in bankruptcy, unrelated to

any extant bankruptcy proceeding or any bankruptcy court. 16

We and other courts have refrained from extending “related to”

jurisdiction to proceedings that would not affect the bankruptcy

estate. For example, in F eld v. Zale Corp. (In re Zale Corp.)

, 1718 I d. at 753 (footnote omitted); see also Walker

, 51 F.3d at

569 (finding that a third-party contribution claim does not relate

to the bankruptcy because the claim could not affect the

administration of the estate or the debtor).

19 62 F.3d at 755 ( quoting Elscint, Inc. v. First Wis. Fin.

Corp. (In Re Xonics) , 813 F.2d 127, 131 (7 th Cir. 1987)).

10 we revers ed a settlement that would have enjoined third parties

from filing various tort and contract actions. We stated that

“[t]hose cases in which co urts have upheld ‘related to’

jurisdiction over third-party actions do so because the subject of

the third-party dispute is property of the estate, or because the

dispute over the asset would have an effect on the estate.” 18 We

noted in Zale that “‘it is the relation of dispute to estate, and

not of party to estate, that establishes jurisdiction.’” 19 Although

the litigation between the Debtor and the Denneys that resulted in

their judgment was related to the Debtor’s bankruptcy est ate and

bankruptcy proceeding in Utah, the dispute between the Denneys and

the Tru stees over collection of the Debtor’s non-dischargeable

judgment debt to the Denneys is not related to his bankruptcy

estate. Again, by the time this dispute commenced, the Debtor had

no such estate anywhere.

Another feature of this case that eschews “related to”

bankruptcy court jurisdiction i s the fact that any recovery that

might result from the mandatorily enjoined adva nce notice of an

imminent Trust distribution would not accrue to the estate. In20 910 F.2d 784 (11 th Cir. 1990).

21 Id. at 789 (footnote omitted).

22 See, e.g.

, Peacock v. Thomas , 516 U.S. 349 (1996).

23 R oyal Ins. Co. v. Quinn-L Capital Corp.

, 3 F.3d 877, 881

n. 2 (5 th Cir. 1993).

24 Walker , 51 F.3d at 570-73.

11 Miller v. Kemira, Inc. (In re Lemco Gypsum, Inc.)

, 20 t he Eleventh

Circuit recognized the importance of the destination of the

proceeds from a lawsuit, noting that “there is no suggestion that

the proceeds, if recov ered, would be turned over to the

[ bankruptcy] trustee....[W]e fail to see how recovery could

conceivably have an effect on [the] debtor’s estate....There is no

reason for the bankruptcy court’s jurisd iction to linger.” 2 1 The

same holds true here, only more so. The Bankruptcy Court for the

Northern District of Texas has no “related to” jurisdiction to

entertain the Denneys’ injunction suit.

2. Inherent or Other Supplemental Jurisdiction

Agreeing with the district court, t he Denneys alternatively

insist that the bankruptcy court has inherent jurisdiction to

enforce the properly registered judgment. Unflawed logical

analysis dictates otherwise. Inherent jurisdiction is an aspect of

the kind of jurisdiction formerly known as “ancillary

jurisdiction.” 2 2 Ancillary jurisdiction is now one facet of

“supplemental jurisdiction,” 23 and we have held that bankruptcy

courts cannot exercise supplemental jurisdiction. 24 Even though in25 I d. at 573 (quoting Southtrust Bank v. Alpha Steel Co. (In

re Alpha Steel Co.)

, 142 B.R. 465, 471 (M.D.Ala. 1992) (emphasis

added)).

12 W alker we dealt specifically with the type of supplemental

jurisdiction previously labeled “pendent” jurisdiction, our

reasoning in Walker applie s equally to all supplemental

jurisdiction . “Congress has gone to great lengths to determine

what proceedings may be tried by bankruptcy courts, and ‘the

exercise of ancillary and pendent jurisdiction by bankruptcy courts

could subsume t he more restrictive “relate to” and “arising in”

jurisdiction, such that the latter would be rendered substantially,

if not entirely, superfluous.’” 25

Perhaps even more to the point is the recognition that the

particular “supplemental jurisdiction” action we review today is a

new and independent action . As noted earlier, the Denneys

instituted this case against the Trustees as a combined garnishment

and injunction proceeding pairing (1) current collection efforts to

seize interest of their judgment debtor in the hands of the third

party Tru stees with (2) enhanced ability to intercept future

distributions from the Trustees to the Debtor as the beneficiary of

the Trust. Even though the Denneys voluntarily non-suited the

garnishment, it and the mandatory injunction for advance notice are

analytically indistinguishable for purposes of classification as

new and independent actions.

In this we are bound by our holding in Berry v. McLemore and26 795 F.2d 452 (5 th Cir. 1986).

27 I d. at 455; see Riggs v. Johnson County

, 73 U.S. (6 Wall.)

166, 187 (1868)(“[T]he jurisdiction of a court is not exhausted by

the rendition of the judgment, but continues until that judgment

shall be satisfied....Process subsequent to judgment is as

essential to jurisdiction as process antecedent to judgment, else

the judicial power would be incomplete and entirely inadequate to

the purposes for which it was conferred by the Constitution.”).

28 Berry , 795 F.2d at 455.

29 592 F.2d 1293 (5 th Cir. 1979).

13 the reasoning behind it. 26 If anything, B erry was a c loser case:

It dealt with a money judgment previously rendered by the same

court in which the judgment creditor was seeking to garnish the

judgment debtor’s former employer. Moreover, the court in question

was a federal district court and thus a court of broader

jurisdiction than a bankruptcy court. As in the instant case, the

judicial proceeding in which the money judgment was rendere d had

been completed and was inactive, and the third party against whom

the garnishment was sought in the second proceeding had not been a

party to the first. The B erry court recognized the general

principle that prior termination of a proceeding does not

ordinarily prevent the court from aiding in collection, 27 but

determined that the general rule gives way to the more specific

exception when the subsequent act ion is new and independent from

the first. 28 Relying on our pronouncement in B utler v. Polk 29 that

garnishment actions against those who were not parties to the

original action “are generally construed as independent suits, at30 See id. at 1295.

31 795 F.2d at 455.

32 I d. (emphasis added). Although the question whether the

Utah Bankruptcy Court

—— or the district courts for the District of

Utah or the Northern Di strict of Texas for that matter —— would

have jurisdiction to entertain the Denneys’ action is not before

us, we sense that the holdings in Butler and Berry would

circumscribe the jurisdiction of those courts as well.

33 7 F.3d 1199 (5 th Cir. 1993).

14 least in relation to the primary action” 30 in which the judgment was

rend ered, we held in B erry that the district court lacked

jurisdiction to entertain the garnishment. 31

The Butler/Berry analysis is clearly applicable to the action

brought by the Denneys in the Bankruptcy Court in Texas and stymies

their effort to support jurisdiction of that court under the rules

of supplemental jurisdiction. As we stated in B erry

, “[w]e can

find no case where a court held that it had ancillary jurisdiction

to consider claims in a new and independent action merely because

the second action sought to satisfy or give additional meaning to

an earlier judgment.” 32 The bankruptcy court has no inherent

jurisdiction to hear this case.

3. Retained Jurisdiction

The Denneys’ reliance on Querner v. Querner (In re Querner) 33

to support their contention that the bankruptcy court has

“ r etained” jurisdiction is misplaced. Q uerner observed that,34 Id. at 1201.

35 Id. at 1202. Similar to a federal district court’s

decision regarding the retention of jurisdiction over pendent state

claims after federal claims have been dismissed, a bankruptcy court

must consider the factors of economy, convenience, fairness, and

comity in deciding whether to dismiss or retain jurisdiction over

related proceedings. Id.

15 because a court’s jurisdiction over related proceedings depends on

the nexus between the underlying bankrupt cy case and the related

proceeding, the dismissal or clo sing of a bankruptcy case will,

ordinarily, result in the dismissal of rel ated proceedings. 3 4

Notwithst anding this general rule, however, Q uerner noted that

“[t]he decision to retain jurisdict ion over related proceedings

rests within th e sound discretion of the bankruptcy court,” and

that the court’s decision should not be reversed absent clear abuse

of that discretion. 35

Implicit in the Querner analysis —— and missed or ignored by

the Denneys —— is an assumption that, before a court can exercise

its discretion to “retain” jurisdiction over a “related

proceeding,” the court must have had jurisdiction over that

proceeding in the first place. The Denneys did not file their suit

in Texas until after the bankruptcy case in Utah had been closed.

From a purely temporal s tandpoint, there was no proceeding over

which bankruptcy court jurisdiction could be “retained.” Moreover,

nothing in the Utah case suggests that the court contemplated or

ordered that it should retain jurisdiction. In any event, if it

had tried to do so, its order could not have extended beyond the36 Walker , 51 F.3d at 568-69.

37 28 U.S.C. § 157(b)(2)(O) provides:

Core proceedings include, but are not limited

to...other proceedings affecting...the

adjustment of the debtor-creditor...

relationship, except personal injury tort or

wrongful death claims.

38 28 U.S.C. § 1334; s ee Walker

, 51 F.3d at 569 (“Section 157

does not give bankruptcy courts power beyond that granted in 28

U.S.C. § 1334; rather, § 157 allows district courts to assign cases

to the bankruptcy courts.”).

16 scope of “related-to” jurisdi c tion. Retained jurisdiction is

unavailing here.

4. Core Bankruptcy Jurisdiction

In apparent disregard of the ruling in Walker that the court

need only assess whether the proceeding “relates to” the

bankruptcy, 36 the Denneys insist that their action is within the

core jurisdiction of the bankruptcy court. Under this proposition,

however, essentially any lawsuit that, if successful, could adjust

the debtor-creditor relationship in any way would be a core

bankruptcy proceeding. The Denneys’ reliance on 28 U.S.C. §

157(b)(2)(O) is unavailing. 37 We have never held that § 157 confers

jurisdiction separate and apart from that existing under § 1334. 38

Thus, the case must be “arising under” Title 11 or “arising in” a

case involving Title 11 to be a core proceeding. Albeit true that,

under Wood

, a proceeding is core if it “invokes a substantive right

provided by title 11” or “could arise only in the context of a39 Wood , 825 F.2d at 97.

40 C f. Perkins Coie v. Sadkin (In re Sadkin)

, 36 F.3d 473, 478

(5 th Cir. 1994)(explaining that 11 U.S.C. § 105 does not authorize

the bankruptcy courts to create substantive rights).

41 S ee Edwards v. Sieger (In re Sieger) , 200 B.R. 636, 639

(Bankr. N.D. Ind. 1996)(“Section 1334(b) does not confer the

jurisdiction needed to enforce a non-dischargeable money judgment

entered against a bankruptcy debtor.”).

17 bankruptcy case,” 39 we locate nothing in Title 11 that can be read

t o provide a statutory right to obtain the kind of third party

n otice sought by the Denneys. 40 This is confirmed by the

recognition that collection of money judgments emanating from a

bankruptcy case —— particularly non-dischargeable money judgments

—— can be resolved outside the bankruptcy case. The instant action

does not fall within a core bankruptcy provision. 41

5. Diversity or Federal Question Jurisdiction

In a final jurisdiction argument that approaches

frivolousness, the Denneys contend that their action falls within

both the diversity of cit i zenship and federal question

jurisdictions of the bankruptcy court. They appear to argue, with

flawed logic, that because the district court could entertain their

action under diversity jurisdicti on in a second lawsuit and then

refer the case to the bankruptcy court, requiring them to file

initially in the district court would be a waste of judicial

resources. The Denneys also argue, without citation, that the

collection of a federal judgment is a question of federal law.

Separate and apart from the insurmountable hurdle that these42 See 28 U.S.C. § 157(a).

43 As we hold that the bankruptcy court and district court

lacked ju risdiction, the analysis we conduct on the merits is

persuasi ve authority at best. We conduct this analysis

nonetheless, in the hope that it will be sufficiently persuasive to

help such cou rts avoid the misunderstanding that we believe our

precedent (or a creative reading thereof) caused here.

44 S ee Sm ith v. Moody (In re Moody) , 837 F.2d 719 (5 t h Cir.

1988).

18 arguments would encounter in the Butler/Berry doctrine, it is clear

that § 157 does not allow referral of a diversity or federal

question jurisdicti on case to the bankruptcy court when the case

d oes not otherwise meet the requirement for jurisdiction of t hat

court. 42 This effort to conjure up jurisdiction on theories of

diversity of citizenship or federal question is meritless.

B. Merits 43

Alternatively, the bankruptcy court’s mandatory injunction,

granted as instructed on remand from t he district court, cannot

stand even if we assume, arguendo, that the bankruptcy court had

jurisdiction to entertain the injunction action in the first place.

Essentially disregarding the long-established precepts of AngloA merican trust law in general and the subtopics of trus tee

discretion and spendthrift trusts in particular

—— from which Texas

does not deviate —— the bankruptcy court, like the district court

before it, relied almost entirely on our opinion in M oody 44 as

authority to override the absolute discretion vested in the

Trustees by the Settlors of the Trust by ordering, via a mandatory19

injunction, that the Trustees furnish the aforesaid 72-hour advance

notice. In addition to ignoring centuries of trust law, this

ruling failed to recognize significant differ ences between the

instant action and the Moody litigation that so clearly distinguish

the two cases: (1) The bankruptcy proceeding in Moody c ommenced

under Chapter 13 and was converted to a Chapter 11 reorganization;

the Bass bankruptcy was a Chapter 7 liquidation, (2) the Moody

bankruptcy proceeding was on-going; the Bass bankruptcy proceeding

was completed and quiescent before the instant litigation was

commenced, (3) the advance notice action in Moody took place in the

active bankruptcy proceeding of the debtor; the instant action is

separ ate and independent from the closed or at least dormant

bankruptcy proceeding in which the Denneys’ judgment was rendered,

(4) the basis of the action in Moody was the post-petition

misappropriation by the debtor of trust distributions he received

within 180 days after the filing of the bankruptcy petition; the

basis of the Denney judgment was a pre-petition loan guarantee, (5)

the trust ee bank in M oody was a party to the debtor’s bankruptcy

proceeding; the Trustees here were not parties to the Utah

bankruptcy litigation that produced the Denneys’ judgments, (6) the

claim of the trustee in bankruptcy in Moody was not sought in a

Butler/Berry “new and independent action” but was an integral part

of the efforts of the bankruptcy trustee to marshal the assets of

the b ankruptcy estate, i.e., to recoup the misappropriated postpetition trust distributions; the judgment on which collection is20

sought by the Denneys represents a pre-petition debt that had no

direct connection with the bankruptcy proceedings, (7) the

spendthrift trust distributions sought by the bankruptcy trustee in

Moody would inure directly to the estate; the distributions sought

in the instant case go directly to judgment creditors without even

passing through an estate or the hands of a trustee in bankruptcy,

and (8) —— most significantly from the standpoint of trust law ——

the future trust distributions that the complaining bankruptcy

trustee in Moody was seeking were not discretionary spendthrift

trust distributions but rather non -discretionary, mandatory

quarterly income distributions whic h under the provisions of the

trust agreement the bank trustee was required to make to its

beneficiary who just happened to be the debtor in bankruptcy; in

stark contrast, the disbursements that the De nneys seek to

intercept are entirely discretionary future trust distributions to

their judgment debtor who just happens to be a former bankruptcy

debtor.

Not only do the myriad differences in the two cases palpably

distinguish the instant cas e from M oody

, the discrete facts and

circumstances of Moody dictat e that its holding and reasoning be

limited to those unique and difficult facts for which its highly

imaginative solution was crafted. Most obviously, M oody cannot be

read as precedent for the Denneys’ proposition that the bankruptcy

court in Texas can enforce a non-dischargeable money judgment

against the Debtor

—— particularly a judgment obtained in a former21

Chapter 7 proceeding in a different bankruptcy court

—— against the

non-party trustee of a di scretionary, spendthrift trust, the

beneficiary of which is the judgment debtor.

To illustrate the sign ificance of these distinctions, a

h ypothetical situation is helpful. In addition to assuming

arguendo that the Texas bankruptcy court had jurisdiction, assume

further that (1) the Bass Chapter 7 bankruptcy petition was filed

in the Northern District of Texas rat her than in Utah, (2) those

p roceedings were still ongoing when the Denneys instituted th e

instant action, and (3) the Trustees were parties to that ongoing

Chapter 7 bankruptcy case in Texas. This hypothetical illustration

crystallizes the tension between, on the one hand, the equitable

powers of the bankruptcy court, under § 105 and other provisions,

to enforce its rulings, orders, and judgments, and, on the other

hand, the venerable tenets of Anglo-American trust law in general

and Texas trust law in particular that proscribe judicial tinkering

with provisions of a valid spendthrift trust that, inter alia, vest

the trust ees with unfettered discretion whether and when to make

distributions to the beneficiary of the trust. We cannot help but

note that the Denneys’ appellate brief is devoid of any

comprehensive discussion of subst antive trust law. As the

Trustees’ appellate brief treats this subject extensively, we

borrow from it in the following analysis.

As we acknowledged in Shurley

, the State of Texas has long

recognized the validity of discre tionary trusts and spendthrift45 115 F.3d at 338.

46 S ee Wilson v. United States (In re Wilson) , 140 B.R. 400,

405-06 (Bankr. N.D. Tex. 1992)(applying Texas law).

47 T exas Commerce Bank Nat’l Ass’ n v. United States , 908 F.

Supp. 453, 457 (S.D. Tex. 1995)(applying Texas law).

48 B ank of Dallas v. Republic Nat’l Bank of Dallas

, 540 S.W.2d

499, 501 (Tex. Civ. App.-Waco 1976, writ ref’d n.r.e.).

22 trusts. 45 It is here undisputed that the Trust is a spendthrift

trust and that the Trustees are vested with maximum discretion. By

voluntarily and irr evocably committing substantial assets to the

Trust for th e benefit of their grandson, the Settlors exercised

their prerogative to shield trust principal and future trust income

from the vulnerability of youth and the potential weaknesses of the

human condition of their then-young grandson

—— as well as from the

avarice (or even fraud) of his putative future creditors

—— to the

maximum extent permitted by law. 46 The embodiment of this

protection is found in the Trust’s anti-alienation and

discretionary distribution provisions.

When, as here, a Texas trust indenture contai ns express

prohibitions against voluntary and involuntary alienation, the

trust is a “spendthrift” trust fo r all purposes. 4 7 As such, “no

part of [a] spendthrift trust estate can be taken on execution or

garnishment by creditors of the beneficiary.” 48

Additionally, “[w]here by the terms of the trust a beneficiary

is entitled only to so much of the income or principal as the49 W ilson

, 140 B.R. at 404 (quoting 2 Austin W. Scott &

William F. Fratcher, The Law of Trusts § 155, at 152 (4 th ed.

1988)).

50 Id.

51 I d. ; Kolpack v. Torres

, 829 S.W.2d 913, 9 15 (Tex. App.-

Corpus Christi 1992, writ denied).

52 George G. Bogert & George T. Bogert, T he Law of Trusts and

Trustees § 228, at 524-25 (2d ed. 1979).

53 W ilson

, 140 B.R. at 404 (citing Commissioner v. Porter

, 148

F.2d 566 (5 th Cir. 1945)).

23 trustee in his uncontrolled discretion shall see fit to give him,” 49

the trust is denominated a “discretionary trust” by Texas law. It

follows that when “no standard or guide is affixed to the trustee’s

distribution power,” 50 a beneficiary has no authority to force a

trustee to distribute trust assets. 51 A universal canon of AngloAmerican trust law proclaims that when the trustee’s powers of

distribution are wholly discretionary, the beneficiary has no

ownership interest in the trust or its assets until the trustee

exercises discretion by electing to make a distribution to the

beneficiary. 52 Texas law is to the same effect: “Where

discretionary trusts are involved, the beneficiary has no right to

trust income [or assets] until the trustee elects to irrevocably

and unconditionally place it in the beneficiary’s control.” 5 3 It

follows that when such discretionary powers are granted to trustees

of a spendthrift trust, assets of the trust are immune from claims

of the beneficiary’s creditors, who can stand in his shoes but no

higher:54 I d. at 404; see also Texas Commerce Bank Nat’l Ass’n

, 908

F. Supp. at 457-58 (S.D. Tex. 1995)(prohibiting the IRS from

levyin g on present or future discretionary distributions under

spendthrift trust).

55 3 Austin W. Scott & William F. Fratcher, T he Law of Trusts

§ 187, at 14-15 (4 th ed. 1988).

56 Wilson , 140 B.R. at 405.

57 I d. Although our opinion in Moody does not contain such an

expression, the clear inference is that, were it not for the

evasive misconduct of t he debtor —— and possibly even the

complicity or cooperation of the bank (coincidentally the “Moody”

National Bank) with the miscreant debtor

—— in connection with

post-petition trus t distributions to the debtor, or to his

administrative assist ant, or directly into his account in a

Canadian bank, the bankruptcy court may well not have imposed the

not ice provision on the co-defendant trustee bank, even in

connection with non-discretionary quarterly distributions of trust

income.

24

Discretionary trusts are similar in effect to

a s pendthrift trust in that where a trustee

has been invested with a discretionary power

to give an interest in a trust fund to a named

benefic iary, the beneficiary cannot alienate

the funds nor can creditors reach the fund

until the trustee’s discretion has been

exercised. 54

A universally recognized corollary is that courts can neither

prevent or force the exercise of discretion by the trustee nor

specify a particular exercise or otherwise interfere with or

impinge on such discretion when it is expressly vested, without

condition or limitation, under the terms of the trust instrument. 55

Again, Texas is in accord: Texas courts “are limited in their

powers over the trustee of a discretionary trust,” 56 prohibited by

law from interfering with the discretion of the trustee absent a

clear showin g of fraud or other egregious conduct. 5 7 No such58 Hughes v. Jackson , 81 S.W.2d 656, 659 (Tex. Comm’n App.

1935, opinion adopted).

25 fraudulent or egregious misconduct by the Trustees is charged in

t he instant case, so court interference with the unconditional

discretion vested in the Trustees is prohibited by applicable trust

law.

Moreover, as rules of t rust interpretation mandate a

construction of the trust instrument that will best effectuate the

purposes of its settlor, any distribution of trust assets by a

trustee that would frustrate the purposes and intentions of the

settlor could constitute a breach of the trust. 58 Thus, were the

Trustees to be faced with the dilemma whether (1) to exercise their

discretion and make a distribution of income to the Debtor after

furnishing 72 hours advance notice to the Denneys or (2) to refrain

from making any distributions at all, the Trustees could well be

facing a breach of trust claim irrespective of which “horn” of that

dilemma they m ight choose. This well illustrates how the

imposition of such a notice provision substantially impinges on the

othe rwise unfettered discretion of the Trustees and goes to the

heart of spendthrift provisions that proscribe involuntary

alienation by the creditors of the beneficiary.

We recently confirmed that the United States bankruptcy court

is subject to the same strictures as are the courts of Texas when

it comes to honoring the provisions of a discretionary spendthrift

trust. In Shurley , we partially reversed the bankruptcy court to59 115 F.3d at 338.

60 Id.

61 I d. (quoting Hines v. Sands

, 312 S.W.2d 275, 279 (Tex. Civ.

App.-Fort Worth 1958, no writ)).

62 Wilson , 140 B.R. at 406-07.

26 the extent it had declared portions of a spendthrift trust funded

by the parents of the deb tor to be property of his Chapter 7

estate. 59 In so doing, we announced that we were following “the

longstanding rule of Texas law that a settlor should be allowed to

create a spendthrift trust that shields trust assets from the

beneficiary’s creditors.” 60 We emphasized that bankruptcy does not

free federal courts to ignore the clear public policy of a state

that makes sacrosanct the intentions of the settlor of a

spendthrift trust:

The bankruptcy court’s ruling ignores the

wishes of...the primary settlors of the trust,

and the state’s policy of respecting their

expectations. “Spendthrift trusts are not

sustained out of consideration for the

beneficiary. Their justification is found in

the right o f the donor to control his bounty

and secure its application according to his

pleasure.” 61

Eve n more closely on point was the recognition by the

bankruptcy court in Wilson that it could not compel the trustee of

a discretionary spendthrift trust to exercise discretionary

distribution powers for the benefit of the IRS (and, obviously, to

the d etriment of the beneficiary of the trust). 6 2 In implicit

recognition that our decision in Moody is inapt when an individual63 Id . at 407 n.6.

27

c reditor seeks to impose conditions or restrictions on the

discretion of the trustee of a spendthrift trust, the Wilson court

noted that “[t]he parties have not cited, nor has the court

located, any authority requiring the Trustee to notify [a creditor]

when it makes a distribution.” 63

In addition to placing the Trustees in the untenable position

of either refraining from making Trust distributions altogether or

doing so after giving notice to the Denneys and thereby risking

charges of breach of trust, the judicial engrafting of the advance

notice requirement mandated by the bankruptcy court’s inj unction

here undeniably defeats a principal feature of every spendthrift

trust, i.e., the dual proscription against both voluntary and

involuntary alienation, the latter of which is, as a practical

matter, rendered nugatory by such a notice requirement. A settlor

who intends to protect the property that he places in trust from

the potential profligacy of the beneficiary fi rst prohibits

voluntary alienation so that the b eneficiary himself cannot

anticipate future distributions by encumbering his interest in the

trust or f uture trust distributions. Prohibiting voluntary

alienat ion is supposed to chill a potential creditor who cannot

look to the assets of the trust as collateral for a loan to the

beneficiary. But, without the complementary prohibition against

involuntary alienation, the adventurous or inadvertent creditor

——28

or the fraudulently induced creditor, such as the Denneys

—— could

be converted from unsecured to secured creditors by the simple

expediency of seizing the interests of their debtor in his trust.

To be comple tely effective, therefore, a spendthrift trust must

prohibit both voluntary and involuntary alienation.

No sophistication is required to discern that superimposing on

the trustee of a discretionary spendthrift trust a requirement to

furnish advance notice to the trust b eneficiary’s creditor would

eliminate (or at least greatly reduce ) the efficacy of the

involuntary alienation facet of the spendthrift trust’s

prohibitions. For, given the knowledge that advance notice would

be forthcoming in time to allow the in terception of trust

distributions, an aggressive creditor could more comfortably afford

to risk making an otherwise unsecured loan to the beneficiary.

We are convinced beyond peradventure that, absent fraudulent

or egregious acts by the trustee of a wholly discretionary Texas

spendthrift tru st, federal courts are shackled by the same

constraints as are the courts of Texas: They can neither prohibit

nor command the exercise of such discretion, or otherwise interfere

— directly or indirectly — with the unfettered discretion of such

trustees. We therefore hold in the alternative that the Bankruptcy

Court for the Northern District of Texas, in duti fully following

the instructions of the district court on remand, erred as a matter

of law when it enjoined the Trustees to furnish to the Denneys and

their counsel 72 hours advance notice of any discre tionary29

distributions to be made by the Trustees to or for the benefit of

the Debtor as the Trust’s beneficiary.

III.

Conclusion

For the reasons explained above, the judgment of the

bankruptcy court must be reversed and its mandatory i njunction

vacated. Procedurally, the bankruptcy court in Texas lacks

jurisdiction to enjoin the Trustees, who had not been parties to

the Utah Chapter 7 bankruptcy proceeding of the Debtor, to furnish

to the Denneys adv ance notice of impending trust distributions.

Substantively, if we had jurisdiction to consider the merits of the

injun ction, we would conclude that the court violated firmly

established trust law by granting an injunction that indisputably

impinges on and interferes with the Trustees’ non-fraudulent free

exercise of their discretion. Either way, the rulings of the

bankruptcy court could not stand.

JUDGMENT REVERSED and INJUNCTION VACATED.