Opinion ID: 1760309
Heading Depth: 2
Heading Rank: 2

Heading: whether the chancellor erred in failing to recognize and establish a public policy exception to the spendthrift trust doctrine in favor of the beneficiary's involuntary tort creditors.

Text: ¶ 10. The Slighs cite Miss. Code Ann. § 89-1-43 (1991), first enacted in 1824 and amended in 1857, which provides in part: Estates of any kind holden or possessed in trust for another, shall be subject to the like debts and charges of the person to whose use or for whose benefit they are holden or possessed as they would have been subject to them if the person had owned the like interest in the thing holden or possessed as he may own in the uses or trusts thereof, whether the trusts be fully executed or not. Although this statute initially appears to subject trust estates to any claims of the beneficiaries' creditors, the statute goes on to say that [s]aid estates may be sold under execution at law ... (emphasis added). This Court held long ago that this statute provides no aid to the creditor who proceeds in a court of equity, nor can it subject the trustee's estate to the debts of the beneficiary unless the beneficiary has an equitable estate in the property of which the trustee has legal title. Leigh v. Harrison, 69 Miss. 923, 11 So. 604 (1892). Therefore, this statute adds nothing to the Slighs' claim.
¶ 11. The spendthrift trust doctrine is codified by statute in some states and is a judicially created doctrine in others. In Mississippi, where the doctrine was judicially created, our main authority on point is the case of Leigh v. Harrison, 69 Miss. 923, 11 So. 604 (1892). ¶ 12. In that case, Regina Harrison left a testamentary trust for the support of her insolvent son, Thomas, whose judgment creditor filed a bill in chancery to reach Thomas' beneficial interest. Leigh, 69 Miss. at 927, 11 So. at 604. Although the trust contained no spendthrift language, the Court held that under the circumstances, it could only have been Mrs. Harrison's intent that the trust should be protected from her son's creditors, lest a devise to him would be, in effect, a devise to them. Id. at 937, 11 So. at 607. In holding the trust to be immune from the claims of Thomas' creditors, the Court discussed the rights of creditors as follows: [W]e confess our inability to perceive how a creditor can be said to be injured or defrauded by the recognition of power in a donor to limit his bounty according to his own will. The creditor has no right to the property in the hands of the donor, and no equity, that we can perceive, in any disposition which the owner may make of it. If Mrs. Harrison had given Thomas nothing, upon what principle could his creditors complain? How are their rights (if they had none) infringed by any limitations she chose to impose upon the bequest she did make? It must be admitted that the right to make a will is not a natural right, and that no unlawful disposition may be made of the property devised. But what law is violated by disposing of property with a limitation which confines its benefit to the person of the donee? It cannot be said that it is against public policy for a testator to provide a support for a spendthrift child, for the interest of the public is that such child shall not become a public burden. Our statutes upon the subject of exemptions indicate a clear public policy that exemption from personal pauperism is of greater concern than the rights of creditors. A donation by will or deed with limitation against liability to the debts of the donee, cannot invite to undue credit being given to the donee, for such instruments are required to be recorded, and third persons may, by examination of the public records, learn the terms on which the bounty is to be enjoyed. Id. at 933-34, 11 So. at 606. On the policy of enforcing the wishes of donors, the Court quoted the following passage by the U.S. Supreme Court: [W]e do not see ... that the power of alienation is a necessary incident to a life-estate in real property, or that the rents and profits of real property and the interest and dividends of personal property may not be enjoyed by an individual without liability for his debts being attached as a necessary incident to such enjoyment. The doctrine is one which the English chancery court has ingrafted upon the common law for the benefit of creditors, and is comparatively of modern origin. We concede that there are limitations which public policy or general statutes impose upon all dispositions of property  such as those designed to prevent perpetuities and accumulations of real estate in corporations and ecclesiastical bodies. We also admit that there is a just and sound policy, peculiarly appropriate to the jurisdiction of courts of equity, to protect creditors against frauds upon their rights, whether they be actual or constructive frauds. But the doctrine that the owner of property, in the free exercise of his will in disposing of it, cannot so dispose of it, but that the object of his bounty, who parts with nothing in return, must hold it subject to the debts due his creditors, though that may soon deprive him of all the benefits sought to be conferred by the testator's affection or generosity, is one which we are not prepared to announce as the doctrine of this court. Id. at 934-35, 11 So. at 606 (quoting Nichols v. Eaton, 91 U.S. 716, 725, 23 L.Ed. 254 (1875)). On another policy consideration favoring the enforcement of spendthrift trust provisions, the Court stated: We can perceive no reason why courts of equity, whose principles and administration give rise to and protect these estates, should not so mold and preserve the trusts declared, as to protect and give effect to trusts for improvident and spendthrift persons, who are objects of solicitude to their parents and friends. It is not more generally true that married women need the intervention of equity to protect their estates from the avarice or improvidence of husbands, than that the unfortunate class called spendthrifts require like restraint from the consequences of their own vices and extravagance. Leigh, 69 Miss. at 935-36, 11 So. at 606-607. ¶ 13. In the case of Calhoun v. Markow, 168 Miss. 556, 151 So. 547 (1933), the beneficiary's bankruptcy trustee filed a bill in chancery to attach the beneficiary's interest in a spendthrift trust in order to satisfy the claims of the beneficiary's creditors. On appeal after the chancery court denied the claim, this Court held: We think the chancellor was correct in his holding that neither the property nor the income were subject to [the beneficiary's] debts. The property covered by the trust instrument belonged to [the donor], and she could deal with it as she pleased, provided it did not infringe any of the provisions of law; and the decisions in this state show that a trust of this kind is lawful and that it is permissible for a parent to place property in the hands of a trustee to secure a child from poverty, want, or misfortune, and to provide for the necessities of life for such child. A creditor has no right to look to property in such a trust for the satisfaction of his demands. Creditors are charged with a knowledge of the law and the provisions of such trusts. Calhoun, 168 Miss. at 565-66, 151 So. at 549. ¶ 14. These two cases, standing for the broad principle that spendthrift trust assets are not subject to the claims of the beneficiary's creditors, comprise almost the entire extent of this Court's pronouncements on the matter. In another case, we held that the spendthrift trust doctrine does not protect the beneficiary's interest from his creditors where the trust is a self-settled trust, i.e., where the trust is for the benefit of the donor. Deposit Guaranty Nat'l Bank v. Walter E. Heller & Co., 204 So.2d 856, 859 (Miss. 1967). Although this Court has had no opportunity to establish any other exceptions to the doctrine, there are four other exceptions which have been recognized in other jurisdictions and are stated in the Restatement (Second) of Trusts § 157 (1959) as follows: Although a trust is a spendthrift trust or a trust for support, the interest of the beneficiary can be reached in satisfaction of an enforceable claim against the beneficiary, (a) by the wife or child of the beneficiary for support, or by the wife for alimony; (b) for necessary services rendered to the beneficiary or necessary supplies furnished to him; (c) for services rendered and materials furnished which preserve or benefit the interest of the beneficiary; (d) by the United States or a State to satisfy a claim against the beneficiary. Although the rule does not list an exception for involuntary tort creditors, the comment on the scope of the rule provides: The enumeration in this Section of situations in which the interest of the beneficiary of a spendthrift trust or of a trust for support can be reached is not necessarily exclusive. The interest of a beneficiary of a spendthrift trust or a trust for support may be reached in cases other than those herein enumerated, if considerations of public policy so require. Thus it is possible that a person who has a claim in tort against the beneficiary of a spendthrift trust may be able to reach his interest under the trust. Restatement (Second) of Trusts § 157 cmt. (a) (1959). ¶ 15. In The Law of Trusts, Austin W. Scott explained as follows: There is little authority on the question whether the interest of the beneficiary of a beneficiary of a spendthrift trust can be reached by persons against whom he has committed a tort. In the absence of authority it was felt by those who were responsible for preparation of the Restatement of Trusts that no categorical statement could be made on the question. It is believed, however, that there is a tendency to recognize that the language of the earlier cases to the effect that no creditor can reach the interest of a spendthrift trust is too broad, and that in view of the cases that have been cited in the previous sections allowing various classes of claimants to reach the interest of the beneficiary, the courts may well come to hold that the settlor cannot put the interest of the beneficiary beyond the reach of those to whom he has incurred liabilities in tort. Austin W. Scott, The Law of Trusts § 157.5 (4th ed. 1987). ¶ 16. Legal scholars for years have called for the recognition of a public policy exception to the spendthrift trust doctrine in favor of tort judgment creditors. [2] However, there is little case law on the matter. In Thackara v. Mintzer, 100 Pa. 151, 154-55 (1882), the Pennsylvania Supreme Court, in upholding the validity of a spendthrift trust, declared in dicta that [w]hether the judgment be for a breach of contract or for a tort, matters not. In Kirk v. Kirk, 254 Or. 44, 456 P.2d 1009 (1969), the Oregon Supreme Court held that the interest of a spendthrift trust created by the United States for the Klamath Tribe of American Indians was unreachable by the Indian beneficiary's tort judgment creditor. However, at least one state, Louisiana, has recognized an exception to the spendthrift trust doctrine in favor of tort judgment creditors, which doctrine and exception were codified by the Louisiana Legislature. [3]
¶ 17. Upon examination of the two Mississippi cases, Leigh and Calhoun, one can identify three public policy considerations observed by this Court when enforcing spendthrift trust provisions: (1) the right of donors to dispose of their property as they wish; (2) the public interest in protecting spendthrift individuals from personal pauperism, so that they do not become public burdens; and (3) the responsibility of creditors to make themselves aware of their debtors' spendthrift trust protections. Upon consideration of these public policy concerns in the present context, we find that they do not weigh in favor of enforcing spendthrift trust provisions as against the claims of tort creditors or those found liable for gross negligence. ¶ 18. Regarding the responsibility of creditors when entering into transactions with spendthrift trust beneficiaries, Austin W. Scott stated in The Law of Trusts: In many of the cases in which it has been held that by the terms of the trust the interest of a beneficiary may be put beyond the reach of his creditors, the courts have laid some stress on the fact that the creditors had only themselves to blame for extending credit to a person whose interest under the trust had been put beyond their reach. The courts have said that before extending credit they could have ascertained the extent and character of the debtor's resources. Certainly, the situation of a tort creditor is quite different from that of a contract creditor. A man who is about to be knocked down by an automobile has no opportunity to investigate the credit of the driver of the automobile and has no opportunity to avoid being injured no matter what the resources of the driver may be. Scott, supra. Likewise, George T. Bogert reasoned in Trusts and Trustees: It is true that a tort creditor has had no chance to choose his debtor and cannot be said to have assumed the risk of the collectibility of his claim. The argument for the validity of spendthrift trusts based on notice to the business world of the limited interest of the beneficiary does not apply. It may be argued that the beneficiary should not be permitted to circumvent the case and statute law as to liability for wrongs by taking advantage of the spendthrift clause. George T. Bogert, Trusts and Trustees § 224 (2d ed. Rev. 1992). As these scholars point out, it is plain to see that one of the main reasons for enforcing spendthrift trust provisions  the responsibility of creditors to be aware of the law and of the substance of such provisions  simply does not apply in the case of tort judgment creditors. ¶ 19. As for the public interest in protecting spendthrift individuals from personal pauperism, we believe that this interest is not as strong in the case of tort judgment creditors, where the inability to collect on their claims may well result in their own personal pauperism. While it is true that most contract creditors do not risk becoming insolvent if they do not collect on a particular claim, such is often not the case with tort judgment creditors, particularly those who have suffered such devastating and expensive injuries as did the Slighs. The public interest against individuals becoming public burdens would not be served by protecting a spendthrift tortfeasor from personal pauperism where such protection would result merely in the pauperism of his victim. If one must choose whom to reduce to personal pauperism in such a case, the spendthrift tortfeasor or the innocent tort judgment creditor, we are inclined to choose the party at fault, especially where that fault rises to the level of gross negligence or intentional conduct. ¶ 20. This limitation on the public interest in protecting individuals from personal pauperism is reflected in our federal bankruptcy laws, whose very purpose is to protect debtors from pauperism. Under the Federal Bankruptcy Act, debtors may not discharge their debts to tort victim creditors whose claims are based on willful and malicious injuries. 11 U.S.C.A. § 523(a)(6) (West 1993). Thus, it has been recognized that the rights of intentional tort creditors are greater than the public interest in protecting debtors from personal pauperism. ¶ 21. Perhaps the most important policy consideration in favor of enforcing spendthrift trust provisions is the right of donors to dispose of their property as they wish. On this subject, Austin W. Scott stated in The Law of Trusts: It may be argued that the settlor can properly impose such restrictions as he chooses on the property that he gives. But surely he cannot impose restrictions that are against public policy. It is true that the tortfeasor may have no other property than that which is given him under the trust, and that the victim of the tort is no worse off where the tortfeasor has property that cannot be reached than he would if the tortfeasor had no property at all. Nevertheless, there seems to be something rather shocking in the notion that a man should be allowed to continue in the enjoyment of property without satisfying the claims of persons whom he has injured. It may well be held that it is against public policy to permit the beneficiary of a spendthrift trust to enjoy an income under the trust without discharging his tort liabilities to others. Scott, supra. ¶ 22. Clearly, the right of donors to place restrictions on the disposition of their property is not absolute, for as discussed above, there are several generally recognized exceptions to the spendthrift trust doctrine. Rather, a donor may dispose of his property as he sees fit so long as such disposition does not violate the law or public policy. We find that it is indeed against public policy to dispose of property in such a way that the beneficiary may enjoy the income from such property without fear that his interest may be attached to satisfy the claims of his gross negligence or intentional torts. ¶ 23. Our tort doctrine has evolved into two types of torts, ordinary torts and intentional torts. Public policy deems it so important to deter the commission of intentional torts or acts of gross negligence, that we allow victims of gross negligence or intentional torts to recover damages above and beyond what is necessary to compensate them for their injuries, i.e., punitive damages. However, the intended deterrent effect would be completely lost upon individuals whose interests are immune from the satisfaction of such claims. ¶ 24. The Slighs have alleged facts to the effect that Lorance's mother intended that her son should be able to commit acts of gross negligence or intentional torts without fear that his beneficial interests would be attached as a result thereof. However, in cases such as this where the donor has died, such facts may often be difficult, if not impossible, to prove. We hold that plaintiffs need not prove such facts but that such intent shall be presumed where a party has obtained a judgment based upon facts evidencing gross negligence or an intentional tort against the beneficiary of a spendthrift trust. Furthermore, we state the natural corollary that when assessing punitive damages against a tortfeasor found to have committed gross negligence or an intentional tort who is a spendthrift trust beneficiary, the beneficiary's interest should be taken into account as a factor in determining his monetary worth. However, in order to uphold spendthrift trust provisions so much as is reasonably possible, we hold that the beneficiary's interest in a spendthrift trust should not be attached in satisfaction of a claim until all of his other available assets have first been exhausted.
¶ 25. The parties agree that the trusts' two remaindermen, Virginia Tate and William Bardin, have vested remainders. The trusts provide that First National Bank shall have full and complete authority to expend all or any part of the income or corpus of said trust property for the benefit of myself and my said son. (emphasis added). Therefore, the interests of Ms. Tate and Mr. Bardin are vested remainders subject to complete defeasance in the event that all of the trust assets are expended to satisfy the interest of Lorance. Put another way, Lorance has a beneficial interest in all of the trust assets. Accordingly, we hold that all of the trust assets should be subject to the Slighs' claim, thereby defeating the interests of the two remaindermen. ¶ 26. In Deposit Guaranty Nat'l Bank v. Walter E. Heller & Co., 204 So.2d 856 (Miss. 1967), the settlor of the trust created a lifetime beneficial interest in himself with a single remainderman. As a matter of public policy, we held the trust's spendthrift provisions invalid as against the claim of the donor/beneficiary's creditor, ruling that the remainderman would take subject to the claim of the creditor. Deposit Guaranty Nat'l Bank, 204 So.2d at 862-63. Likewise, the Slighs' claim shall take priority over the interests of the two remaindermen.