Court Opinion

ID: 9463597
Source: CourtListenerOpinion
Date Created: 2023-08-04 23:10:31.410597+00
Date Added: 2024-06-11T17:38:10.821186
License: Public Domain

OAKES, Circuit Judge
(dissenting):
I agree with the majority that the decision of the Surrogate’s Court in this case is not binding on the federal courts, but I disagree with its conclusion that the district court, “sitting as a state court,” Commissioner of Internal Revenue v. Estate of Bosch, 387 U.S. 456, 465, 87 S.Ct. 1776, 18 L.Ed.2d 886 (1967), correctly construed the trust instrument in light of applicable New York law. I would therefore reverse.
The majority concludes, as did the court below, that “[t]he trustee is bound to distribute some trust income to each of the beneficiaries . . . Ante at 802 (emphasis added); see 415 F.Supp. at 220. This question is critical because, if the trustee were held not to be so bound, that is, if he could withhold payment from any beneficiary at his discretion, then Mr. Doran, the taxpayer beneficiary here, would concededly have no state property right in the trust *803income. Without such a right, there is nothing to which the Government tax lien may attach. See 26 U.S.C. §§ 6321, 6331; Aquilino v. United States, 363 U.S. 509, 512-14, 80 S.Ct. 1277, 4 L.Ed.2d 1365 (1960). Significantly, in reaching their respective conclusions, neither the majority nor the court below indicates how much trust income the trustee must distribute to any particular beneficiary, and indeed no one could do so, since the decision rests entirely with the trustee under the terms of the trust instrument. The key sentence directs the trustee to “pay . . . whatever part or all of the net income or principal . he shall deem proper or necessary . to the individual members of the said family group” (emphasis added).
If this court and the court below were faced with the problem of determining the amount of money to which Mr. Doran, the taxpayer, had a claim — and thus the amount the Government could take via its tax lien — I believe a different result would be reached from that the parties by stipulation in effect reached here, agreeing as they have upon the amount the trustee will pay to the Government if the Government succeeds on the legal issues. The stipulation, it can be seen, permits the majority opinion to avoid facing the fact that the amount due from the trustee to any particular beneficiary is utterly undefinable and thus to avoid wrestling with the really vital question whether, for example, the payment of one dollar to Mr. Doran, if that sum were deemed “proper or necessary” by the trustee, would satisfy the trustee’s obligation to convey, as the majority says, “some” funds from the trust to each beneficiary.
If it conceded — and nothing I can find in the majority opinion is to the contrary— that a good faith payment of one dollar would satisfy the trustee’s obligation to Mr. Doran, I am puzzled how a good faith “payment” of zero can be held not to satisfy that obligation. The difference between zero and one dollar is surely of no consequence either to Mr. Doran or the Government, and many of the beneficiaries of the trust here involved, including Mr. Doran himself for years prior to 1968, have accepted the trustee’s failure to give them any payments for several years without, so far as the record indicates, asking a court to compel him to give them “some” of the trust income. The trust instrument on its face certainly seems to give the trustee the option of deeming zero to be the “proper or necessary” level of funding for any particular beneficiary.
The construction suggested by the words of the instrument and by the inability of anyone to specify what is owed Mr. Doran is that this trust is what has been called a “blended trust.” G. G. Bogert & G. T. Bogert, The Law of Trusts and Trustees § 230 (2d ed. 1965). According to the Restatement (Second) of Trusts § 161 (1959) [hereinafter cited as Restatement]:
If a trust is created for a group of persons and the interest of one member of the group is inseparable from the interests of the others, he cannot transfer his interest and his creditors cannot reach it.
Courts in the twentieth century have apparently always followed the Restatement view that a creditor cannot reach interests of this sort, even in cases where, as the majority construes the trust here, the trustee has “no right . . . totally to exclude any one beneficiary from benefits . .” G. G. Bogert & G. T. Bogert, supra, § 230, at 731; see A. W. Scott, The Law of Trusts § 155, at 1184 (3d ed. 1967) (“Where a trust is created for the benefit of a person and the members of his family, . [ejven if he is entitled to receive part of the income from the trust or to have it applied to his use, his interest may be so inseparable from that of the members of his family that it cannot be assigned and his creditors cannot reach it.”) See also id. § 161.
The trust here, moreover, is one for “support, maintenance and/or education,” with regard to which a beneficiary has no right to compel payment by the trustee, see In re Martin’s Will, 269 N.Y. 305, 312-13, 199 N.E. 491, 494 (1936); In re Cuff’s Will, 118 N.Y.S.2d 619, 624 (Sur.Ct.1953); Restatement § 128, Comment e, and creditors can*804not reach the beneficiary’s interest, see Ellis v. Chapman, 165 App.Div. 79, 150 N.Y.S. 673 (1914); Restatement § 154. See also Restatement § 182, Comment c. While the claim of the Government for taxes might be enforceable against the interest of a sole beneficiary of a trust for support, see Restatement § 157(d); cf. In re Rosenberg, 269 N.Y. 247, 199 N.E. 206 (1935) (federal tax lien enforceable against beneficiary’s interest in spendthrift trust), cert. denied, 298 U.S. 669, 56 S.Ct. 834, 80 L.Ed. 1392 (1936), this rule does not apply when, as here, there are several beneficiaries with inseparable interests, see Herzog v. Commissioner of Internal Revenue, 116 F.2d 591, 594 (2d Cir. 1941) (A. Hand, J.).
The problem of determining what amount is due Mr. Doran illustrates the soundness of the well-settled New York rule that the courts will not interfere on behalf of a creditor of a beneficiary with the exercise of the discretion vested in the trustee. Sand v. Beach, 270 N.Y. 281, 284, 200 N.E. 821, 822 (1936); Hamilton v. Dro-go, 241 N.Y. 401, 404, 150 N.E. 496, 497 (1926); 26 Colum.L.Rev. 776, 776 (1926); see Restatement § 155(1). In the one case relied on in the majority and district court opinions for the conclusion that “some” income must be paid out here, Sand v. Beach, supra, there was no interference with the trustee’s discretion because the judgment debtor had a right “to require payment to him of the entire net income of the trust fund,” either directly or through “its application for his use and benefit.” 270 N.Y. at 286, 200 N.E. at 823 (emphasis added). A case in which the entire trust income must be paid to one beneficiary is manifestly different from the instant case, in which the most the majority can say is that “some” unspecified amount of trust income is due each of several beneficiaries. In the former or Sand v. Beach situation, it makes sense to require that the defined sum owed to a single, specific beneficiary be paid to his creditor. Here, where the trustee has virtually complete discretion to allocate funds among several beneficiaries, it makes no sense to impose a similar requirement, since the other beneficiaries, in favor of whom the trustee might otherwise exercise his discretion, will be the losers — the last result a settlor would wish.
The result reached by the majority thus violates the New York rule against interfering with a trustee’s discretion and is not supported by the principal case the majority relies upon. The practical result it seems to countenance, moreover, by which a one dollar payment would be sufficient but a zero “payment” would not, cannot be seriously intended by my brothers in the majority, who concededly are spared having to face the question by a stipulation that may have made this case appear simpler than it is, but that should not control the legal result reached. I would reverse the judgment.