Court Opinion

ID: 2757061
Source: CourtListenerOpinion
Date Created: 2014-12-03 19:08:25.614815+00
Date Added: 2024-06-11T12:26:00.745972
License: Public Domain

FILED
 1                                                            AUG 24 2012
                                                          SUSAN M SPRAUL, CLERK
 2                        ORDERED PUBLISHED                 U.S. BKCY. APP. PANEL
                                                            O F TH E N IN TH C IR C U IT

 3                UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                          OF THE NINTH CIRCUIT
 5
 6   In re:                        )     BAP No.     CC-11-1433-HPaD
                                   )
 7   RICK H. REYNOLDS,             )     Bk. No.     09-14039
                                   )
 8                                 )     Adv. No.    09-01205
                    Debtor.        )
 9   ______________________________)
                                   )
10   SANDRA BENDON, Chapter 7      )
     Trustee,                      )
11                                 )
                    Appellant,     )
12                                 )
     v.                            )     O P I N I O N
13                                 )
     RICK H. REYNOLDS; JOHN M.     )
14   CARMACK, CO-TRUSTEE OF THE    )
     REYNOLDS FAMILY TRUST and CO- )
15   TRUSTEE OF THE REYNOLDS FAMILY)
     TRUST-SURVIVOR’S TRUST, as    )
16   amended; JOHN MORRIS, CO-     )
     TRUSTEE OF THE REYNOLDS       )
17   FAMILY TRUST and CO-TRUSTEE   )
     OF THE REYNOLDS FAMILY TRUST- )
18   SURVIVORS TRUST, as amended, )
                                   )
19                  Appellees.     )
     ______________________________)
20
                    Argued and Submitted on May 17, 2011
21                         at Pasadena, California
22                         Filed – August 24, 2012
                                ______________
23
               Appeal from the United States Bankruptcy Court
24                 for the Central District of California
25        Honorable Meredith A. Jury, Bankruptcy Judge, Presiding
26
          Appearances: Jesse S. Finlayson, of Finlayson Williams
27        Toffer Roosevelt & Lilly LLP, argued for the Appellant.
28
     Before:   HOLLOWELL, PAPPAS and DUNN, Bankruptcy Judges.
 1   HOLLOWELL, Bankruptcy Judge:
 2
 3        The bankruptcy court granted the debtor’s summary judgment
 4   motion, concluding that the bankruptcy estate was entitled to no
 5   more than 25% of the debtor’s beneficiary interest in a
 6   spendthrift trust.    The chapter 7 trustee appealed.    For the
 7   reasons explained below, we AFFIRM.
 8                                  I. FACTS
 9        In 2005, Rick Reynold’s (the Debtor’s) parents, Freddie Hugo
10   Reynolds (Freddie) and Patsy R. Reynolds (Patsy), established the
11   Reynolds Family Trust.    Patsy died in November 2007.    Upon her
12   death, the Reynolds Family Trust was split into three sub-trusts:
13   (a) the Bypass Trust; (b) the Marital Trust; and, (c) the
14   Survivor’s Trust.    Freddie retained the right during his lifetime
15   to receive all the income from each of the trusts.      While the
16   Bypass Trust and the Marital Trust (together, the Family Trust)
17   were vested and not subject to further amendment, the Survivor’s
18   Trust (Survivor’s Trust) was amended from time to time by
19   Freddie.    He died on March 3, 2009.
20        Once the Debtor survived Freddie by thirty days, he was
21   entitled to receive distributions from the Family Trust and the
22   Survivor’s Trust.    From the Family Trust, he was entitled to
23   $250,000.    Additionally, the Debtor was a one-third beneficiary
24   of the Survivor’s Trust, along with his sisters, entitled to
25   receive $100,000 per year for ten years.    The assets in the
26   Survivor’s Trust are interests of undeveloped real property,
27   which do not generate income.    Thus, the distributions to the
28   Debtor are expected to be paid from trust principal.      The terms

                                       2
 1   of the last amended Survivor’s Trust provided that after the
 2   Debtor survived Freddy for ten years, he would receive a final
 3   distribution of one-third of the remaining principal.    Although
 4   the exact amount of the Debtor’s interest in the Survivor’s Trust
 5   is unknown, the bankruptcy trustee believes it could be as much
 6   as several million dollars.
 7        The Family Trust and the Survivor’s Trust are “spendthrift”
 8   trusts, containing provisions that “[n]o interest in the income
 9   or principal of any trust created under this instrument shall be
10   voluntarily or involuntarily anticipated, assigned, encumbered,
11   or subjected to creditor’s [sic] claim or legal process before
12   actual receipt by the beneficiary.”
13        The Debtor filed a voluntary chapter 7 petition on March 4,
14   2009.1   Sandra L. Bendon was appointed the chapter 7 bankruptcy
15   trustee (the Trustee).    On April 28, 2009, John Carmack, sole
16   trustee of the Family Trust and co-trustee, with John Morris, of
17   the Survivor’s Trust, filed an adversary proceeding seeking a
18   declaratory judgment determining whether and to what extent the
19   bankruptcy estate held an interest in the Family Trust and the
20   Survivor’s Trust.
21        On January 14, 2010, the Debtor filed a motion for partial
22   summary judgment (MSJ).    The Debtor sought a partial summary
23   adjudication and judicial declaration that pursuant to California
24   Probate Code §§ 15300 et seq. (referred to herein as the Probate
25
          1
26           The Debtor was unaware of the trusts or that he was a
     beneficiary of the Trust. Thus, the Debtor did not list his
27   interest in the Trust on his bankruptcy schedules. On August 6,
     2009, the Debtor amended the bankruptcy schedules to list his
28   vested interest in the Survivor’s Trust.

                                       3
 1   Code or by the sections 15300-15307), particularly 15306.5, a
 2   maximum 25% of a beneficiary’s interest in a spendthrift trust is
 3   property of a bankruptcy estate.       Therefore, the Debtor argued
 4   that the estate was entitled to reach no more than 25% of the
 5   Debtor’s interest in the Family Trust and the Survivor’s Trust.
 6        The Trustee opposed the MSJ.       The Trustee acknowledged that
 7   Probate Code 15306.5 capped a judgment creditor’s2 recovery at
 8   25% of a beneficiary’s interest in a spendthrift trust.       However,
 9   she argued that distributions of principal amounts payable to a
10   beneficiary under a trust, even if the trust contains a
11   spendthrift provision, are not protected under Probate Code
12   15301(b).   Thus, the Trustee asserted that because the
13   distributions from the Family Trust and the Survivor’s Trust were
14   expected to be made from principal, the estate could potentially
15   reach all of the Debtor’s interests.       Alternatively, the Trustee
16   asserted that, under Probate Code 15307, the estate could reach
17   the Debtor’s interest in all amounts from the Family Trust and
18   the Survivor’s Trust over and above what he required for his
19   education and support.
20        At the hearing on the MSJ, the bankruptcy court disagreed
21   with the Trustee’s interpretation of the Probate Code.       It
22
23
          2
             A bankruptcy trustee may not “step into the shoes” of
24   individual creditors to seize a spendthrift trust’s assets.
     Garrett v. Finley (In re Finley), 286 B.R. 163, 166 (Bankr. W.D.
25   Wash. 2002). However, a bankruptcy trustee is considered a
26   hypothetical lien creditor and can recover assets of the estate
     for the benefit of general creditors under 11 U.S.C. § 544(a)(1).
27   Cutter v. Seror (In re Cutter), 398 B.R. 6, 21 (9th Cir. BAP
     2008); Neuton v. Danning (In re Neuton), 922 F.2d 1379, 1383 (9th
28   Cir. 1990).

                                        4
 1   interpreted the Probate Code as allowing the estate a maximum of
 2   25% of a debtor’s interest in a spendthrift trust, less any
 3   amount the debtor needed for his support or support of his
 4   dependents.       The bankruptcy court entered its order granting the
 5   MSJ on June 6, 2011.       A final judgment was entered on July 29,
 6   2011.       The Trustee timely appealed.
 7                                   II.   JURISDICTION
 8        The bankruptcy court had jurisdiction over this proceeding
 9   under 28 U.S.C. §§ 1334 and 157(b)(2)(A).            We have jurisdiction
10   under 28 U.S.C. § 158.3
11                                      III.   ISSUE
12        Did the bankruptcy court err in determining that the estate
13   was entitled to a maximum of 25% of the Debtor’s interests in the
14   Family Trust and the Survivor’s Trust?
15                             IV.    STANDARD OF REVIEW
16        We review orders granting summary judgment de novo.           Bamonte
17   v. City of Mesa, 598 F.3d 1217, 1220 (9th Cir. 2010).           We review
18   questions of California statutory construction de novo.
19   Ehrenberg v. S. Cal. Permanente Med. Group (In re Moses), 167
20
21           3
             On April 11, 2012, the Panel issued an order requesting
22   the Trustee to address whether the appeal was moot since it was
     unclear whether the proceeds from 25% of the Debtor’s interest in
23   the Family Trust and Survivor’s Trust were adequate to satisfy
     all allowed claims. The Trustee filed a response on April 18,
24   2012, stating that she estimates she needs $600,000 to pay
25   allowed claims in full. The 25% limitation on the Debtor’s
     interests would give the Trustee $62,500 and $25,000/year for 10
26   years, or $312,500 plus whatever unknown amount would be paid out
     after 10 years. If we were to reverse the bankruptcy court, the
27   Trustee could potentially satisfy creditor claims in full.
     Because we could provide the Trustee effective relief, the appeal
28
     is not moot and we have jurisdiction to reach its merits.

                                               5
 1   F.3d 470, 473 (9th Cir. 1999).     Whether property is included in a
 2   bankruptcy estate is a question of law reviewed de novo.
 3   Birdsell v. Coumbe (In re Coumbe), 304 B.R. 378, 381 (9th Cir.
 4   BAP 2003); Cisneros v. Kim (In re Kim), 257 B.R. 680, 684 (9th
 5   Cir. BAP 2000), aff’d, 35 Fed. Appx. 592 (9th Cir. 2002); see
 6   also Butner v. United States, 440 U.S. 48, 55 (1979) (“Property
 7   interests are created and defined by state law.”).
 8                              V.   DISCUSSION
 9          Summary judgment may be granted when the record shows that
10   “there is no genuine issue as to any material fact and the movant
11   is entitled to judgment as a matter of law.”     Fed. R. Civ.
12   P. 56(a)(made applicable by Rule 7056).      There is no issue as to
13   any material facts in this case, therefore, we address the legal
14   question of what portion of the Debtor’s beneficial interests in
15   the Family Trust and the Survivor’s Trust may be reached by the
16   Trustee.
17   A.     The Bankruptcy Estate
18          The bankruptcy estate includes “all legal or equitable
19   interests of the debtor in property as of the commencement of the
20   case.”    11 U.S.C. § 541(a)(1).   However, property containing “[a]
21   restriction on the transfer of a beneficial interest of the
22   debtor in a trust that is enforceable under applicable
23   nonbankruptcy law” is excluded from the estate.     11 U.S.C.
24   § 541(c)(2); In re Cutter, 398 B.R. at 19; In re Kim, 257 B.R. at
25   688.    There is no dispute in this case that the Family Trust and
26   the Survivor’s Trust were spendthrift trusts, which restricted
27   the transfer of the Debtor’s interests.
28          California law recognizes the validity of spendthrift

                                        6
 1   trusts.   In re Moses, 167 F.3d at 473; In re Neuton, 922 F.2d at
 2   1383.   The validity of a spendthrift provision is predicated on
 3   the consideration that a person is free to make any desired
 4   disposition of his property.      Crocker-Citizens Nat’l Bank v.
 5   Johnston (In re Estate of Johnston), 252 Cal. App. 2d 923, 925-26
 6   (Cal. Ct. App. 1967).    Nevertheless, California has imposed
 7   qualifications and restrictions on spendthrift trusts, which are
 8   set forth in the Probate Code.
 9        The Trustee asserts that the Probate Code allows her to
10   reach the Debtor’s full interest in the Family Trust and the
11   Survivor’s Trust in order to satisfy the claims of the estate’s
12   creditors.   Therefore, she argues that the bankruptcy court erred
13   in its conclusion that the Probate Code limited the estate to 25%
14   of the Debtor’s interests.      Our decision therefore depends on the
15   construction and interpretation of the Probate Code.
16   B.   Principles Of Statutory Construction
17        “When presented with a question of statutory construction,
18   our primary task is to ascertain legislative intent to effect the
19   purpose of the statute.”      Ventura Cnty. Dep’t Of Child Support
20   Servs. v. Brown, 117 Cal. App. 4th 144, 149-50 (Cal. Ct. App.
21   2004). We must ascertain the legislative intent starting with the
22   language of the statute itself.      Young v. McCoy, 147 Cal. App.
23   4th 1078, 1083 (Cal. Ct. App. 2007).      If the terms of the statute
24   are unambiguous, we presume the lawmakers meant what they said,
25   and the plain meaning of the language governs.      Doner-Griswold v.
26   See (Estate of Griswold), 25 Cal. 4th 904, 911 (2001).      Only if
27   the statute is ambiguous do we consult extrinsic sources such as
28   legislative history.    Id.

                                         7
 1          In reading a statute, we keep in mind that interpretations
 2   that render any part of a statute superfluous are to be avoided.
 3   Sonoma Cnty. Human Servs. Dep’t v. J.H. (In re S.H.), 197 Cal.
 4   App. 4th 1542, 1552 (Cal. Ct. App. 2011); Young, 147 Cal. App.
 5   4th at 1084.    Moreover, the various parts of a statute must be
 6   harmonized by considering the particular clause or section in the
 7   context of the statutory framework as a whole in order to
 8   determine the scope and purpose of the provision.        People v.
 9   Mendoza, 23 Cal. 4th 896, 907-08 (2000).        “We must promote,
10   rather than defeat, the general purpose of the statute.”        Ventura
11   Cnty., 117 Cal. App. 4th at 150.         Furthermore, we “must avoid a
12   construction that would produce absurd consequences, which we
13   presume the Legislature did not intend.”        Mendoza, 23 Cal. 4th at
14   908.
15   C.     The Probate Code
16          The Probate Code sets forth the rules regarding restrictions
17   on voluntary and involuntary transfers.        It was substantially
18   revised by the California Legislature in 1986 to improve and
19   coordinate the law relating to spendthrift trusts.        Ventura
20   Cnty., 117 Cal. App. 4th at 150-51.        “There were two objectives:
21   1) to reduce the ability of a general creditor to reach a
22   beneficiary’s interest in a trust; and 2) to give greater rights
23   to support creditors.”      Id. at 151.
24          The Probate Code first sets out California’s recognition
25   that a restraint on the transfer of trust income is valid.          Cal.
26   Prob. Code § 15300.       If so restrained, the beneficiary’s interest
27   in trust income “may not be transferred and is not subject to
28   enforcement of a money judgment until paid to the beneficiary.”

                                          8
 1   Id.   Probate Code 15301 provides identical protections to the
 2   principal of spendthrift trusts.          Cal. Prob. Code § 15301(a).
 3   Thus, in California, a beneficiary’s interest in the income and
 4   principal of a spendthrift trust is protected from the claims of
 5   creditors as long as the income and/or principal remains in the
 6   trust.     Once the income or principal of a spendthrift trust is
 7   distributed to a beneficiary, however, it can be reached by
 8   creditors.     Cal. Prob. Code §§ 15300, 15301.
 9         That said, there are stated exceptions that allow certain
10   creditors to reach trust income or principal that is payable, but
11   not yet paid, to a beneficiary.          The exceptions are listed in
12   15304-15307.     Cal. Prob. Code § 15300, 15301.
13         The Trustee asserts that each exception is independent and
14   provides alternate means for a creditor to seek the maximum
15   amount of a beneficiary’s interest in order to satisfy its claim.
16   She contends the first exception is actually contained in
17   15301(b) and allows a creditor to reach all principal amounts
18   that are due and payable to the beneficiary in order to satisfy a
19   money judgment.     The Trustee argues that “[t]here are no
20   limitations on creditors’ rights under section 15301(b).”          We
21   disagree.
22         1.     Probate Code 15301(b)
23         Probate Code 15301 states:
24         (a) Except as provided in subdivision (b) and in
           Sections 15304 to 15307, inclusive, if the trust
25         instrument provides that a beneficiary’s interest in
           principal is not subject to voluntary or involuntary
26         transfer, the beneficiary’s interest in principal may
           not be transferred and is not subject to enforcement of
27         a money judgment until paid to the beneficiary.
28         (b) After an amount of principal has become due and

                                          9
 1       payable to the beneficiary under the trust instrument,
         upon petition to the court under Section 709.010 of the
 2       Code of Civil Procedure by a judgment creditor, the
         court may make an order directing the trustee to
 3       satisfy the money judgment out of that principal
         amount. The court in its discretion may issue an order
 4       directing the trustee to satisfy all or part of the
         judgment out of that principal amount.
 5
 6   Cal. Prob. Code § 15301 (emphasis added).
 7        Probate Code 15301(a) references exceptions — those listed
 8   in 15301(b) and in 15304-15307 — to the general rule that trust
 9   principal enjoys spendthrift protection.    If, as the Trustee
10   contends, 15301(b) allows a creditor the ability to satisfy its
11   judgment in full from the principal amount that has become due
12   and payable to the beneficiary, then there is little reason for
13   15301 to reference any of the other exceptions in 15304-15307,
14   particularly because the other exceptions also provide that a
15   creditor can reach trust principal that is “due and payable.”
16   Any of the other exceptions would be inapplicable and superfluous
17   if 15301(b), by itself, provided a creditor the means to satisfy
18   her judgment in full.   Moreover, reading 15301(b) to mean that a
19   creditor can reach the entire principal amount of a trust
20   effectively eviscerates the spendthrift protection recognized by
21   15301(a).
22        Accordingly, a fair reading of 15301(b) is that it sets out
23   the procedure that a creditor must follow to satisfy her claim
24   from the principal of a spendthrift trust once it is payable but
25   not yet distributed to the beneficiary.    First, she must file a
26   petition with the court under Cal. Civ. Proc. Code (C.C.P.)
27   § 709.010 (procedure for enforcement of a money judgment against
28   interest in trust).   DeMille v. Ramsay, 207 Cal. App. 3d 116,

                                     10
 1   126-27 (Cal. App. 1989).    The court then has the discretion to
 2   order the trustee to satisfy the claim to the extent allowable
 3   under 15304-15307.    Id.
 4        C.C.P. § 709.010 emphasizes that the court’s discretion to
 5   order satisfaction of a judgment does not affect the limitations
 6   on the enforcement of a debtor’s interest in a trust under the
 7   Probate Code.   C.C.P. § 709.010(c).   Thus, Probate Code 15304-
 8   15307 “governs the rights of transferees and creditors of the
 9   beneficiary of a trust to reach the beneficial interest in the
10   trust.”   See Official Law Commission Comments, C.C.P.
11   § 709.010(c).   Consequently, whether and to what extent the
12   Trustee may reach the Debtor’s beneficial interests in the Family
13   Trust and the Survivor’s Trust is determined by the application
14   of 15304-15307, not 15301(b).
15        2.    Probate Code 15304-15306
16        The exceptions contained in 15304-15307 are important in
17   understanding the statutory framework and general purpose of the
18   Probate Code because they reflect a policy recognition that
19   certain creditors should have greater rights to a beneficiary’s
20   interest in order to satisfy their claims.    To that end, 15305
21   provides special rights for creditors who hold claims for child
22   or spousal support.    Support creditors are considered “preferred”
23   creditors “entitled to rights unavailable to a general creditor.”
24   Ventura Cnty., 117 Cal. App. 4th at 151.    A support creditor may
25   reach a beneficiary’s interest in a spendthrift trust and be paid
26   from payments (either from income or principal) “as they become
27   due and payable, presently or in the future” in an amount that
28   the court determines is equitable and reasonable.    Cal. Prob.

                                      11
 1   § 15305(b).   A court may even overcome a trustee’s discretion to
 2   make or withhold payments to the beneficiary if the trustee acts
 3   dishonestly or with an improper motive.
 4        The same is true for payment of restitution judgments.    Cal.
 5   Prob. Code § 15305.5; Young, 147 Cal. App. 4th at 1084-85.
 6   Similarly, if the beneficiary is liable for reimbursement to the
 7   state for public support benefits, the court may direct the
 8   trustee to satisfy all or part of the liability out of payments
 9   (from trust income or principal) due and payable, presently or in
10   the future.   Cal. Prob. Code 15306.
11        These exceptions reflect a clear policy position, which
12   permits particularly identified creditors to reach a
13   beneficiary’s interest in a spendthrift trust with little
14   restriction (the only limiting factor depends on what the court
15   finds to be reasonable and equitable).    Consequently, the
16   Trustee’s argument that any creditor should similarly be able to
17   satisfy its claim from trust principal under 15301(b) is
18   unavailing.
19        3.   Probate Code 15306.5 and 15307
20        Probate Code 15306.5 and 15307 address two other exceptions
21   to the anti-alienation provisions of a spendthrift trust, which
22   are central to this appeal.   Probate Code 15306.5 allows a money
23   judgment creditor to satisfy its judgment out of the payments to
24   which the beneficiary is entitled under the spendthrift trust “so
25   long as the payment does not ‘exceed[ ] 25% of the payment that
26   otherwise would be made to . . . the beneficiary.’”    In re
27   Neuton, 922 F.2d at 1383, citing Cal. Prob. Code § 15306.5(b).
28   However, “any amount that the court determines is necessary for

                                     12
 1   the support of the beneficiary and all the persons the
 2   beneficiary is required to support” is exempt from the payments
 3   to which a creditor would be entitled under 15306.5.      Cal. Prob.
 4   Code § 15306.5(c).
 5        The Ninth Circuit, in In re Neuton, held that because a
 6   bankruptcy trustee is a hypothetical judgment creditor under 11
 7   U.S.C. § 544(a)(1), a debtor/beneficiary’s bankruptcy estate was
 8   entitled to an interest in one-fourth of the payments due to the
 9   beneficiary.   Id. at 1383.   “The relevance of § 15306.5 is that
10   it removes 25% of the debtor’s interest in the trust from
11   traditional spendthrift status.”      Id.   Even though a bankruptcy
12   trustee may reach 25% of what the debtor/beneficiary is entitled
13   to receive, that amount may be reduced by whatever amount the
14   court determines is necessary for the beneficiary’s (and his
15   dependents’) support.   Cal. Prob. Code § 15306.5(c); In re
16   Neuton, 922 F.2d at 1384.
17        The Trustee agrees that 25% of the Debtor’s interest in the
18   Family Trust and the Survivor’s Trust constitutes property of the
19   bankruptcy estate.   Nevertheless, she argues that the estate’s
20   interest is not limited to what it can reach under 15306.5.      The
21   Trustee asserts that the estate may alternatively use 15307 to
22   reach any amount to which the beneficiary is entitled that is in
23   excess of what the beneficiary needs for his own education and
24   support.4
25
26        4
             The difference here would be that under 15306.5, the
     Trustee would be limited to 25% of the $250,000 distribution from
27
     the Family Trust and 25% of each 100,000 distribution from the
28   Survivor’s Trust, or $312,500 over 10 years (not considering the
                                                        (continued...)

                                      13
 1        Probate Code 15307 is titled “Income in excess of amount for
 2   education and support; application to creditors’ claim.”     It
 3   reads:
 4        Notwithstanding a restraint on transfer of a
          beneficiary’s interest in the trust under Section 15300
 5        or 15301, any amount to which the beneficiary is
          entitled under the trust instrument or that the
 6        trustee, in the exercise of the trustee’s discretion,
          has determined to pay to the beneficiary in excess of
 7        the amount that is or will be necessary for the
          education and support of the beneficiary may be applied
 8        to the satisfaction of a money judgment against the
          beneficiary. Upon the judgment creditor’s petition
 9        under Section 709.010 of the Code of Civil Procedure,
          the court may make an order directing the trustee to
10        satisfy all or part of the judgment out of the
          beneficiary’s interest in the trust.
11
12   Cal. Prob. Code § 15307.
13        This section lacks clarity.   For instance, its title
14   suggests that it provides creditors the ability to reach
15   trust income.   But the text of the statute states that it
16   applies notwithstanding restraints on both income and
17   principal by its reference to 15300 or 15301.    Thus, the
18   language of 15307 seems to allow a money judgment creditor
19   to satisfy its claim from any amount, either income or
20   principal, that is in excess of what the beneficiary needs
21   for his own education and support.
22        However, that reading is inconsistent with 15306.5,
23   which limits a money judgment creditor to 25% of the
24   beneficiary’s interest in a spendthrift trust.    Indeed, if
25
26        4
           (...continued)
     unknown potentially large final distribution from the Survivor’s
27
     Trust). Under the Trustee’s interpretation of 15307, she could
28   reach $1,250,000 (10 x 100,000 + 250,000) less any amounts
     necessary for the Debtor’s education and support.

                                   14
 1   the Probate Code sections are separate avenues for
 2   collection, 15306.5 would make no sense: Why would a
 3   judgment creditor ever choose to satisfy its claim under
 4   15306.5, which is limited not just by the 25% cap on the
 5   beneficiary’s interest but by the needs of the debtor and
 6   his or her dependents, when 15307 is only limited by the
 7   debtor’s own educational and support needs?
 8          The language of a statute should not be given a literal
 9   meaning if doing so would result in absurd consequences.
10   People v. Broussard, 5 Cal. 4th 1067, 1071 (1993) (internal
11   citation omitted); People v. Mendoza, 23 Cal. 4th at 912,
12   n.7.    In such circumstances, the “intent prevails over the
13   letter” and the statute is read to conform to the statute’s
14   intention.    Broussard, 5 Cal. 4th at 1071-72.    Interpreting
15   15307 as providing the Trustee the ability to satisfy
16   creditor’s claims with all trust income and principal over
17   what the Debtor requires for his education and support would
18   result in absurd consequences.      As noted, it would render
19   15306.5(a)-(f) meaningless.    It also would allow a general
20   creditor to satisfy its claim to nearly the same extent as a
21   preferred creditor.
22          The Trustee complains that the bankruptcy court’s
23   interpretation —– that 15306.5 caps the amount of trust
24   income or principal that a judgment creditor may reach —
25   makes 15307 superfluous.    But the Trustee’s interpretation
26   renders 15306.5 superfluous.    Therefore, because 15307 is
27   capable of differing interpretations, it is ambiguous, and
28   we may review legislative history or other extrinsic sources

                                    15
 1   to aid in our interpretation.
 2        The official Law Revision Commission Comments to 15307
 3   state that “[w]hile sections 15305 and 15306 permit only
 4   preferred creditors to reach the beneficiary’s interest in
 5   the trust, Section 15307 permits an ordinary creditor to
 6   reach income under limited circumstances.”    (Emphasis
 7   added).   Despite the language in 15307, “notwithstanding a
 8   restraint on transfer of a beneficiary’s interest in the
 9   trust under Section 15300 or 15301,” which refers to both
10   trust income and principal, it is more consistent with
11   legislative intent to read 15307 as limiting a non-preferred
12   creditor to only income payments that are in excess of what
13   is necessary for the beneficiary’s support.
14        This interpretation is bolstered by earlier versions of
15   the Probate Code.   In Canfield v. Sec.-First Nat’l Bank of
16   Los Angeles, 13 Cal. 2d 1, 11 (1939), the court explained
17   that spendthrift trusts were initially recognized under
18   California law without limitation.   Id.   In 1872, California
19   law imposed a singular limitation on spendthrift trusts:
20   where a trust was created to receive the rents and profits
21   of real property, the surplus of the rents and profits
22   (i.e., the income from the real property) over what was
23   necessary for the education and support of the beneficiary
24   was liable to claims of creditors.   Id. at 12.   The Probate
25   Code’s immediate predecessor, Cal. Civ. Code § 859, followed
26   the same principle.   It permitted creditors to reach a
27   beneficiary’s income distributions except for amounts
28   necessary for the beneficiary’s education and support.    Id.;

                                     16
 1   Estate of Johnston, 252 Cal. App. 2d at 926.
 2          The Probate Code replaced Cal. Civ. Code § 859 in 1986.
 3   Prior to 1986, even though there was a recognition that
 4   certain creditors, such as support creditors, should be
 5   preferred creditors, they could not reach a beneficiary’s
 6   interest in a spendthrift trust without a determination that
 7   there was income in excess of the amount needed by the
 8   beneficiary for his support and education.    Id. at 928.    The
 9   Probate Code codified public policy concerns and provided
10   certain creditors the ability to reach a greater amount of a
11   beneficiary’s interest in a spendthrift trust than general
12   creditors and coordinated a “patchwork” of existing law on
13   spendthrift trusts.    Ventura Cnty., 117 Cal. App. 4th at
14   151.    Based on this history, Probate Code 15307 appears to
15   be a vestige of the root limitation on a creditor’s reach
16   solely to income distributions.
17          The more plausible reading of 15307, which is
18   consistent with the legislative intent, is that it restricts
19   the reach of a non-preferred creditor to income payments,
20   notwithstanding its reference to 15301.    As with the
21   Trustee’s interpretation of 15301(b), an interpretation that
22   reads 15307 as an avenue for money judgment creditors to
23   satisfy claims from income and principal with the only
24   restriction being the educational and support needs of the
25   debtor would elevate “ordinary creditors” to “preferred”
26   status.    It would therefore render sections of the Probate
27   Code meaningless and superfluous and would not promote the
28   purpose of the Probate Code.

                                    17
 1        We have found no case law that reconciles 15306.5 and
 2   15307.    In re Neuton held that a Trustee was entitled to
 3   reach, as property of a bankruptcy estate, no more than 25%
 4   of the debtor’s beneficiary interest in a spendthrift trust.
 5   But the court in Neuton did not discuss the applicability of
 6   15307.    Indeed, it never mentioned 15307 in its analysis of
 7   what may be included in the bankruptcy estate.    Because the
 8   Ninth Circuit did not examine the applicability of 15307,
 9   Neuton does not assist us in determining what general
10   creditors can reach under 15307 or whether the Trustee may
11   assert a right to distributions under either 15306.5 or
12   15307 or both.
13        The Trustee also argued that she was entitled to use
14   15307 to seek any deficiency claims not paid from the 25%
15   cap of 15306.5.    However, here, because the Debtor’s
16   distributions are only from principal and not income, under
17   our interpretation of the Probate Code, 15307 does not apply
18   in this case.    Consequently, the Trustee may not receive
19   more than 25% of the Debtor’s interests in the Family Trust
20   and the Survivor’s Trust.
21                           VI.   CONCLUSION
22        For the foregoing reasons, we conclude that the Trustee
23   is entitled to reach only up to 25% of the Debtor’s
24   interests in the Family Trust and the Survivor’s Trust.      We
25   AFFIRM.
26
27
28

                                    18
 1   PAPPAS, Bankruptcy Judge, Dissenting:
 2
 3        I reluctantly decline to join my colleagues’ opinion
 4   because I do not believe the California legislature intended
 5   that a debtor, without exception, should have access to
 6   potentially large distributions of cash from a trust not
 7   needed for his support or education in preference to the
 8   legitimate claims of his creditors.
 9        The California Probate Code provisions dealing with the
10   rights of a spendthrift trust beneficiary’s creditor to
11   access income and principal distributions are opaque.
12   However, in this case, I do not think those statutes prevent
13   the Trustee from asserting a right to more than 25% of the
14   distributions to be made to the Debtor.   In coming to this
15   conclusion, and in contrast to the majority, I would
16   reconcile the Probate Code as follows.
17        Sections 15300 and 15301(a) generally validate the
18   inclusion of “spendthrift” provisions to protect trust
19   income and principal from the reach of a beneficiary’s
20   creditors while the assets remain in the trust.   As the
21   statutes note, there are the several exceptions to the
22   general rule authorizing spendthrift trusts, which are
23   codified in section 15301(b) and sections 15304 through
24   15307.
25        For example, section 15301(b) allows a California
26   court, upon petition of a beneficiary’s judgment creditor
27   (or in this case, the beneficiary’s bankruptcy trustee), in
28   the exercise of its discretion, to order the trustee of the

                                  19
 1   trust to pay an amount of the principal of the trust, which
 2   has become “due and payable” to the beneficiary, to the
 3   creditor.    Under sections 15305 and 15305.5, creditors
 4   holding support or restitution claims are, with an
 5   appropriate court order, not restricted by the spendthrift
 6   restrictions of a trust, and may reach either present or
 7   future distributions to a debtor of trust income or
 8   principal.
 9        The Probate Code contains other relevant provisions
10   concerning a court’s power to order that trust distributions
11   be made to a beneficiary’s creditors.     For example, section
12   15306.5, like section 15301(b), allows a court, upon a
13   creditor’s petition, to order the trustee to pay a creditor
14   instead of the beneficiary.    But unlike section 15301(b), a
15   court order under this section of the Probate Code may
16   impact amounts of both principal and income that “the
17   trustee, in the exercise of the trustee’s discretion, has
18   determined or determines in the future to pay to the
19   beneficiary.”
20        However, under section 15306.5(b), the court’s
21   authority under subsection (a) is limited, and a
22   beneficiary’s rights are protected.     This statute provides,
23   as a general rule, that the court may not order more than
24   25% of the payment that otherwise would go to the
25   beneficiary be paid to the creditor.     Section 15306(c) is
26   another beneficiary protection.     It prohibits any payment to
27   a creditor of amounts necessary for the support of the
28   beneficiary and his or her dependents.     In other words, via

                                    20
 1   this provision, an impecunious debtor may be able to
 2   persuade a court to prevent a creditor from reaching even
 3   the 25% of a distribution generally allowed under section
 4   15306.5(b).
 5        Finally, section 15307 plays a critical role in
 6   protecting creditors’ rights in this context.    It allows a
 7   court, “[n]otwithstanding” the general validity of
 8   spendthrift provisions allowed in sections “15300 or 15301,”
 9   upon petition of a judgment creditor, to order payment to
10   the judgment creditor from “any amount to which the
11   beneficiary is entitled under the trust or that the trustee,
12   in the exercise of trustee’s discretion, has determined to
13   pay the beneficiary” of amounts “in excess of the amount
14   that is or will be necessary for the education and support
15   of the beneficiary . . . .”
16        Viewed collectively, to me, the California statutory
17   scheme attempts to balance the rights of a beneficiary’s
18   creditors, the trustor, and a beneficiary’s needs for
19   financial support.   Under the Probate Code, a spendthrift
20   trust may be created by a trustor to protect the payments to
21   which the beneficiary may be entitled from the trust from
22   the reach of the beneficiary’s creditors.    While this is an
23   obviously valid legislative goal, absent exceptions to this
24   general rule, the use of such trusts could prove abusive
25   where beneficiaries with unpaid creditors have no legitimate
26   need for trust distributions.    To balance the scales, the
27   California legislature allows creditors, in some cases, to
28   reach some, or perhaps even all, of those distributions.

                                     21
 1   For most creditors (i.e., not those holding claims for
 2   support or restitution creditors), that amount will be 25%
 3   of the distribution.   However, the statutes allow either a
 4   creditor or the beneficiary to petition the state court and
 5   to perhaps persuade it, in the exercise of its discretion,
 6   to either increase or decrease the amount going to the
 7   creditor depending upon the beneficiary’s financial needs.
 8        Interpreting the statutes in this fashion makes good
 9   sense.   Spendthrift trusts are generally allowed, but they
10   are subject to the exercise of judicial discretion to
11   prevent them from being used to inequitably shield
12   financially independent beneficiaries from the legitimate
13   claims of creditors.   Putting this policy in context, why
14   would the California legislature favor a testator’s goal of
15   providing cash payments to a beneficiary over the rights of
16   a beneficiary’s creditors when the facts show that the
17   beneficiary does not need the money?   In particular, when
18   according to the trust instrument, or in the trustee’s
19   discretion, it is time to distribute principal to a
20   beneficiary, why insulate those distributions from the
21   claims of creditors of an affluent beneficiary?
22        Unlike my colleagues, I do not believe this reading of
23   section 15307 renders section 15306.5 superfluous.    On the
24   other hand, as my colleagues concede, the majority’s
25   interpretation does indeed render section 15307 surplusage
26   unless we take the extraordinary step of judicially limiting
27   section 15307's application solely to trust income
28   distributions.   As the majority acknowledges, to reach their

                                   22
 1   result, they must ignore the express language of section
 2   15307 which makes it applicable “[n]otwithstanding a
 3   restraint under . . . 15300 [income] or 15301 [principal].”
 4   (Emphasis added).   Doing so violates many of the same canons
 5   of statutory construction upon which the majority relies to
 6   support its interpretation.
 7        Because I decline to believe that the California
 8   legislature intended us to read the Probate Code in a manner
 9   implementing a bad, perhaps even an absurd policy, I
10   respectfully dissent.   We should vacate the bankruptcy
11   court’s order limiting the right of the Trustee to 25% of
12   the trust distribution, and remand for consideration by the
13   bankruptcy court of what amounts are truly necessary for the
14   education and support of the debtor as required by section
15   15307.
16
17
18
19
20
21
22
23
24
25
26
27
28

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