Court Opinion

ID: 4289190
Source: CourtListenerOpinion
Date Created: 2018-06-28 12:03:58.495587+00
Date Added: 2024-06-11T09:36:36.840329
License: Public Domain

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17-P-40                                              Appeals Court

    SHONNA CALHOUN & others1 vs. JASON M. RAWLINS, special
                   representative,2 & others.3

                             No. 17-P-40.

          Plymouth.       February 1, 2018. - June 27, 2018.

               Present:   Trainor, Blake, & Lemire, JJ.

Trust, Self-settled trust, Spendthrift provision, Irrevocable
     trust, Claim of creditor. Divorce and Separation,
     Separation agreement. Guardian, Incompetent person.

     Civil action commenced in the Superior Court Department on
November 7, 2014.

     The case was heard by Robert C. Cosgrove, J., on motions
for summary judgment, and entry of separate and final judgment
was ordered by him.

     1 William Calhoun, Jr., and Timothy Pink, Jr., by his father
and next friend, Timothy Pink.

     2   Of the estate of Brian K. McInerney.

     3 KeyBank National Association, trustee of the Brian K.
McInerney Irrevocable Trust; Jean E. McInerney, trustee of the
Brian K. McInerney Irrevocable Trust.
                                                                     2

     Richard B. Reiling (Richard C. Woods, Jr., also present)
for the plaintiffs.
     Stephen M. LaRose (Charles Dell’Anno & Edward M. Joyce,
Jr., also present) for the defendants.

    BLAKE, J.   At issue in this case is whether the assets of

an irrevocable spendthrift trust, established in 2007 on behalf

of a disabled husband upon divorce from his wife, are available

to satisfy any damages awarded in a subsequent personal injury

action against the former husband.   Resolution of the issue

requires us to consider whether the trust was self-settled.     We

conclude that successful plaintiffs in this action may recover

damages from the trust.

    Background.   A.   The Probate and Family Court proceedings.

Before the motor vehicle accident at issue in this case, Brian

K. McInerney was involved in a motor vehicle accident in 2001,

in which he sustained a severe traumatic brain injury.   In

September of 2004, a judge of the Probate and Family Court
                                                                     3

appointed coguardians for him due to his inability to make

medical and other important decisions.4,5

     Having married in 1987, McInerney and his former wife,

Susan J. Stone, separated in January of 2004.    McInerney filed a

complaint for divorce on March 8, 2005, requesting an equitable

division of the marital assets under G. L. c. 208, § 34.6

Throughout the marriage, Stone held significant assets in her

own name, including accounts at KeyBank National Association

(KeyBank), at least some of which derived from a trust created

for Stone's benefit by her grandfather.     McInerney worked for

only one year during the marriage; Stone worked as an artist and

then as a mental health counselor, making a modest salary.

During the marriage, the family was supported primarily, if not

exclusively, by Stone's income from her employment and her

assets.

     4 The medical certificate filed in support of the
guardianship petition stated that McInerney was unable to make
or to communicate informed decisions due to physical incapacity.
Specifically, he had residual cognitive impairment in attention,
memory, and executive functioning and was unable to make complex
decisions involving legal matters.

     5 Jean E. McInerney, appointed as coguardian, subsequently
was appointed sole guardian.

     6 Three children were born of the marriage. Elise was born
in 1989 and Dru was born in 1992. The couple's youngest child,
Lia, died from injuries sustained in the 2001 motor vehicle
accident. She was two years old at that time.
                                                                    4

     McInerney, by his guardian, and Stone executed a separation

agreement, which was incorporated into the judgment of divorce

nisi.    The separation agreement was later amended by stipulation

and approved by a judge of the Probate and Family Court.   The

amended separation agreement (ASA), dated January 26, 2007,

settled McInerney's and Stone's rights and obligations to one

another upon dissolution of their marriage.7   In pertinent part,

the ASA provided that Stone would transfer approximately thirty-

five percent of the funds in her KeyBank accounts to a

spendthrift trust to be created for McInerney.8   In addition, the

     7 The ASA states, "The Husband and the Wife desire by this
Agreement to confirm their separation, . . . and to settle
between themselves all questions pertaining to their respective
property and estate rights, the support and maintenance of the
Husband and the Wife, and all other rights and obligations
arising from their marital relationship." They agreed that the
provisions set forth in the ASA were in full satisfaction and
discharge of, among other things, "all property claims, past and
present, which either may have against the other party,
including all such rights as either party may have, or claim to
have, to property under the terms and provisions of [G. L.
c. 208, § 34]." They also agreed that they would not seek from
any court "any order or judgment" that would "vary or increase
the equitable division of property or any other obligations of
the other party as set forth in the" ASA.

     8 Specifically, the ASA provided, "In light of the
circumstances of the Husband . . . , it is an essential
condition of the assignment and transfer of any and all assets
from the Wife to the Husband under this Agreement that said
assets be transferred to a trust conforming to the requirements
set forth in Article III, subsection C, below and to be approved
by the Court for the benefit of Husband, as well as [his
children, Elise and Dru,] as the contingent beneficiaries. No
such assets shall be transferred unless such condition is met."
Article III(C)(4) expressly provides that the trust shall
                                                                    5

ASA contained provisions regarding the marital home, a vacation

home in Maine, the purchase of a home in Plymouth for McInerney,

and other assets, including assets inherited by Stone.    The ASA

provided that the division of assets would survive entry of the

judgment of divorce nisi and would have independent legal

significance.    By approving the ASA and incorporating it into

the judgment of divorce nisi, the Probate and Family Court judge

found that the terms were fair and reasonable.

     B.   Creation of the Brian K. McInerney Irrevocable Trust.

The Brian K. McInerney Irrevocable Trust (trust) was created on

March 23, 2007, and, though irrevocable, the trustees were given

complete discretion to distribute as much of the income and

principal of the assets in the trust as they felt were necessary

to meet the reasonable needs of McInerney.    The terms of the

trust identified Stone as the settlor, McInerney as the

beneficiary, and their children, Elise and Dru, as the remainder

beneficiaries.    The trustees at that time were McInerney's

sister and guardian (Jean E. McInerney9), and Bank of America as

the corporate trustee.   The trust provides that the "interest of

contain spendthrift provisions "to protect the trust from any
creditors of the Husband so that the trust is not liable to pay
any of the creditors of the Husband."

     9 Hereinafter, we will refer to McInerney's sister as "Jean"
to avoid confusion.
                                                                   6

any beneficiary created herein, either as to income or

principal, shall not be alienated, anticipated or in any other

manner assigned by such beneficiary and shall not be subject to

legal process, bankruptcy proceedings, or the interference or

control of creditors."

    Pursuant to the ASA, on May 7, 2007, Stone transferred

$3,538,402.34 of stocks and bonds to the trust.    She also

transferred the Plymouth home valued at $538,400 into the trust.

In addition, McInerney transferred assets standing in his own

name, totaling more than $120,000, into the trust.

    C.   The motor vehicle accident at issue.     On April 30,

2014, plaintiffs Shonna Calhoun and her minor child, Timothy

Pink, Jr., were involved in a motor vehicle accident with

McInerney.   It is alleged that McInerney was traveling seventy-

six miles per hour in a thirty-five miles per hour zone, crossed

the yellow line to pass a vehicle, and collided head on with a

vehicle being driven by Calhoun.   The crash caused serious

injuries to Calhoun and her minor child, and McInerney died from

his injuries.

    The plaintiffs10 commenced this action in Superior Court

seeking damages for McInerney's negligence and a judgment

    10 William Calhoun, Jr., brought a loss of consortium claim
regarding his wife.
                                                                     7

declaring that the assets of the trust are available to them to

satisfy any damages award.    The parties filed cross motions for

summary judgment solely on the issue whether the trust's assets

are available to the plaintiffs.    A judge (motion judge)

determined that only the assets that McInerney contributed to

the trust are reachable.    The motion judge found that the assets

contributed by Stone are not reachable because Stone was the

sole owner of the assets until they entered the trust and

McInerney never had any prior legal or equitable interest in

them.   A separate and final judgment entered on the declaratory

judgment claim.   See Mass.R.Civ.P. 54(b), 365 Mass. 820 (1974).

The plaintiffs appeal.

    Discussion.    A.    Spendthrift trusts.   When faced with the

question whether creditors may reach the assets of spendthrift

trusts, our cases distinguish between spendthrift trusts that

are created by third parties, such as parents, and spendthrift

trusts that are self-settled by an individual who is both

settlor and beneficiary.    It has long been the law in this

Commonwealth that a trust created by a third-party settlor may

protect a beneficiary's interest in the trust from creditors

through spendthrift provisions.    See Broadway Natl. Bank v.

Adams, 133 Mass. 170, 173-174 (1882); Pacific Natl. Bank v.

Windram, 133 Mass. 175, 176 (1882).    Even in the face of public

policy arguments favoring access, a third-party settlor's intent
                                                                    8

to deny creditors of a beneficiary recovery against trust assets

has been enforced.    Pemberton v. Pemberton, 9 Mass. App. Ct. 9,

20 (1980).    The theory behind the enforcement of these

spendthrift trusts is that the settlor of a trust is the

absolute owner of his property and, in giving a gift, has "the

entire right to dispose of it, either by an absolute gift . . .

or by a gift with such restrictions or limitations, not

repugnant to law, as he [sees] fit to impose."    Adams, supra at

173.

       Self-settled trusts, where the beneficiary is also the

settlor, however, cannot be used to protect one's assets from

creditors.   "The established policy of this Commonwealth long

has been that a settlor cannot place property in trust for his

own benefit and keep it beyond the reach of creditors."      Ware v.

Gulda, 331 Mass. 68, 70 (1954), quoting from Merchants Natl.

Bank v. Morrissey, 329 Mass. 601, 605 (1953).    "To permit a man

. . . to attach to a valuable interest in property retained by

himself the quality of inalienability and of exemption from his

debts, seems to us to be going further than a sound public

policy will justify."    Windram, 133 Mass. at 176-177.    Thus,

"[w]hen a person creates for his own benefit a trust for support

or a discretionary trust, his creditors can reach the maximum

amount which the trustee, under the terms of the trust, could

pay to him or apply for his benefit."    State St. Bank & Trust
                                                                     9

Co. v. Reiser, 7 Mass. App. Ct. 633, 636 (1979).    "This is so

even if the trust contains spendthrift provisions."    Ibid.   See

Ware, supra.   This concept also has been codified in the

Massachusetts Uniform Trust Code.    General Laws c. 203E,

§ 505(a)(2), inserted by St. 2012, c. 140, § 56, provides that

notwithstanding the presence of a spendthrift provision, "[w]ith

respect to an irrevocable trust, a creditor or assignee of the

settlor may reach the maximum amount that can be distributed to

or for the settlor's benefit."11    See Restatement (Second) of

Trusts § 156(2) (1959) ("Where a person creates for his own

benefit a trust for support or a discretionary trust, his

transferee or creditors can reach the maximum amount which the

trustee under the terms of the trust could pay to him or apply

for his benefit").   See also Restatement (Third) of Trusts § 58

(2003).

     11There is some discussion in Reiser, supra at 637,
pointing to the settlor's retention of a power of appointment as
part of the reason creditors may reach the assets of the trust.
When the settlor retains some control over the disbursement of
the assets of an irrevocable trust, creditors may reach the
maximum amount of the funds that can be distributed to the
settlor. See G. L. c. 203E, § 505(a)(2); Reiser, supra. "The
Eleventh Circuit [has] stated that '[t]he issue of self-
settlement is separate from the issue of control, and either can
serve as an independent ground for invalidating a spendthrift
provision.'" In re Raymond, 529 B.R. 455, 479 (Bankr. D. Mass.
2015), quoting from In re Brown, 303 F.3d 1261, 1267 n.9 (11th
Cir. 2002).
                                                                    10

    In Cohen v. Commissioner of the Div. of Med. Assistance,

423 Mass. 399, 414 (1996), cert. denied sub nom. Kokoska v.

Bullen, 519 U.S. 1057 (1997), the Supreme Judicial Court

described self-settled spendthrift trusts as created "for the

purpose of having your cake and eating it too."     "Under such a

trust, a grantor puts his assets in a trust of which he is the

beneficiary, giving his trustee discretion to pay out monies to

gratify his needs but limiting that discretion so that the

trustee may not pay the grantor's debts."   Ibid.     The court

noted that this jurisdiction and others have long followed the

Restatement principle for self-settled trusts.      Ibid.

    On appeal, KeyBank and Jean "do not quibble with this well-

established principle" applicable to self-settled trusts, and

even agree that the motion judge correctly applied G. L.

c. 203E, § 505(a)(2), in concluding that the funds contributed

to the trust by McInerney from his own accounts are available to

the plaintiffs.   KeyBank and Jean contend only that the rule

does not apply to the trust assets supplied by Stone.       Thus,

determination of whether the trust is self-settled or settled by

Stone is at the heart of this dispute.

    B.   Self-settled.   In order for creditors to reach trust

assets where a person created a trust for support or a

discretionary trust for his own benefit, it is not necessary

that the beneficiary shall have himself conveyed the property
                                                                    11

held in trust.    Restatement (Third) of Trusts § 58 comment f

(2003).   It is enough that the beneficiary provide

consideration.    Ibid.   "A trust is established by the person who

provides the consideration for the trust even though in form it

is created by someone else."    Romo v. Kirschner, 181 Ariz. 239,

241-242 (Ct. App. 1995), quoting from Forsyth v. Rowe, 226 Conn.
818, 826 (1993).    "[I]t is the beneficiary's entitlement to the

settlement proceeds, not whether they were literally paid into

his hands, that indicates whether the beneficiary funded the

trust."   Id. at 242.

    Whether the trust was self-settled by McInerney for the

purpose of the plaintiffs' claims regarding the trust property

requires us to look beyond the labels adopted in the trust

instrument and the ASA.    Cf. In re Village Green Realty Trust,

113 B.R. 105, 114 (Bankr. D. Mass. 1990), quoting from In re

Dolton Lodge Trust No. 35188, 22 B.R. 918, 925 (Bankr. N.D. Ill.

1982) (In determining whether trust is eligible for bankruptcy

even though labeled nominee trust, focus is not on label but "on

what the debtor actually is and the purpose it has been created

to carry out").    Thus, the terms identifying the settlor as

Stone or the accounts held by Stone as her individual assets

rather than as marital assets were not binding on the motion

judge or on the plaintiffs for determining whether the

plaintiffs may reach the trust.    It would be anomalous indeed if
                                                                   12

a settlor could avoid the well-settled principle that one cannot

avoid creditors through a self-settled trust by the simple

expedient of identifying another person in the trust instrument

as the settlor.   Rather, in determining whether the trust was

self-settled, we look to the facts surrounding the creation of

the trust.

    Here, the proper focus is on the reason Stone funded the

trust.   The motion judge's focus on the source of the funds was

misplaced because it ignored the fact that assets previously

held in Stone's name were transferred to the trust in settlement

of her obligations to McInerney upon dissolution of the

marriage, not as a gift.    An agreement that settles the rights

of divorcing spouses with regard to property, maintenance, and

support is based on valuable consideration.    See Handrahan v.

Moore, 332 Mass. 300, 303 (1955).    McInerney's agreement to

settle his rights and obligations pursuant to the dissolution of

the marriage was the consideration for the creation of the

trust.   Stone was not gifting her money to McInerney; she was

satisfying her obligations arising from the dissolution of the

marriage.    Accordingly, McInerney had a legal right to the

monies that funded the trust.   That he agreed through his

guardian to have the funds deposited into the trust does not

alter the fact that these funds represented the agreed-upon

equitable division due him incident to the divorce.
                                                                   13

    Even though there are no Massachusetts cases directly on

point, our reasoning finds support in the case law.    In Cohen,
423 Mass. at 422-423, a beneficiary of a trust argued that, for

the purpose of qualifying for Medicaid, she was not the settlor

of a trust but, rather, her conservator established the trust

with proceeds of a medical malpractice settlement and pursuant

to a decree of the Probate and Family Court.   In rejecting that

argument, the court cited cases from other jurisdictions where

trusts were considered self-funded by beneficiaries even though

they were created by conservators and guardians of the

beneficiaries, sometimes with court approval, and funded with

settlement proceeds from the beneficiaries' personal injury

actions and workers' compensation claims.   See id. at 422, and

cases cited.   The court reasoned that "[a] conservator, like a

guardian, has only the care and management of the ward's estate,

and title to it . . . never vests in him but remains in the

ward."   Id. at 423, quoting from Minnehan v. Minnehan, 336 Mass.
668, 670 (1958).

    In In re Tosi, 383 B.R. 1, 4 (Bankr. D. Mass. 2008), the

debtor's portion of his father's estate was placed into a

discretionary trust.   The debtor argued that the trust was not

self-settled because the trust property passed directly from the

executors to the trustees of the trust.   Id. at 13.   The court

rejected the argument because the monies that funded the trust
                                                                      14

"were monies that [the debtor] was legally entitled to receive

and did receive from the settlement of his father's estate.      In

other words, there can be no dispute that the monies that funded

[the trust] were attributable to the [d]ebtor's share of his

father's estate."   Ibid.

     We see no meaningful distinction between the facts

considered in Cohen, those considered in In re Tosi, and the

facts here.   McInerney's legal and equitable rights in the

settlement of the parties' rights and obligations upon

dissolution of the marriage was the impetus behind the creation

of the trust and, therefore, he properly is considered the

settlor.   Compare Miller v. Ibarra, 746 F. Supp. 19, 30 (D.

Colo. 1990) (trust created by courts for incompetent person

pursuant to State statute not self-settled).   That the monies

that funded the trust came from Stone's individual accounts is

not controlling where she contributed the funds in satisfaction

of her obligations related to the dissolution of the marriage.

     We reject the premise adopted by the motion judge that

because certain accounts that funded the trust were in Stone's

name during the marriage and may have derived from trusts of

which she was the sole beneficiary, they could not be considered

to be part of the marital estate.12   "Inherited assets, including

     12General Laws c. 203E, § 34 "is intended 'to provide a
mechanism whereby no matter how the property has been acquired
                                                                   15

an interest in trust property established by one spouse's

parents," or, as in this case, a grandparent, "may comprise part

of a marital estate for purposes of possible division under

G. L. c. 208, § 34."    Ruml v. Ruml, 50 Mass. App. Ct. 500, 511

(2000).   While the parties chose to define in the ASA certain

bank accounts held solely by Stone as Stone's assets,13 there is

nothing in the record to suggest that accounts held in Stone's

name were not available to satisfy Stone's obligations to

McInerney at the time of the divorce.   To the contrary, the

parties mutually agreed that McInerney was entitled to thirty-

five percent of the funds in these accounts to be paid into the

trust.    Accordingly, the parties, when they executed the ASA,

and the Probate and Family Court judge when he approved it,

determined that the assets were properly divided between the

parties.14   The suggestion that the trust could not have been

or how it is held, the court can distribute it between the
parties in such a way as to provide for a balanced disposition
and economic justice.'" Denninger v. Denninger, 34 Mass. App.
Ct. 429, 434-435 (1993), quoting from Hay v. Cloutier, 389 Mass.
248, 254 (1983).

     13As required by rule 401 of the Rules of the Probate Court
(2012), Stone disclosed these assets on her financial statement
filed in connection with the divorce proceedings.

     14We have recognized the validity of such agreements, and
have "encouraged divorcing parties to enter into written
separation agreements," that "secure with finality the parties'
respective rights and obligations concerning the division of
marital assets, among other things, according to established
contract principles." DeMarco v. DeMarco, 89 Mass. App. Ct.
16

self-settled because McInerney's name was not on the accounts

during the marriage, particularly in these circumstances, is

unavailing.

     C.   Intention of the parties.   It appears to have been the

intent of the parties to the ASA to create a valid spendthrift

trust that would protect the trust's assets from McInerney's

creditors.15   As between the parties, the terms of the ASA are

enforceable.   The role of the Probate and Family Court judge in

approving the ASA was to ensure it was free of fraud and

coercion, and fair and reasonable in the circumstances.    See

Dominick v. Dominick, 18 Mass. App. Ct. 85, 91 (1984).     While

the ASA set forth the terms of the trust, including the

618, 623 (2016), quoting from Krapf v. Krapf, 439 Mass. 97, 103
(2003). Indeed, "[t]he public policy of Massachusetts 'favors
settlement of property disputes resulting from a divorce through
equitable, enforceable separation agreements, freely entered
into by the parties.'" Ratchford v. Ratchford, 397 Mass. 114,
116 (1986), quoting from Moore v. Moore, 389 Mass. 21, 24
(1983). See Pavluvcik v. Sullivan, 22 Mass. App. Ct. 581, 584
(1986). "[A] separation agreement is a 'judicially sanctioned
contract' that is valid and enforceable only if and as approved
by the judge" upon a finding that the division of the marital
estate is fair, reasonable, and equitable in the circumstances.
Krapf, supra at 104, quoting from Bell v. Bell, 393 Mass. 20, 26
(1984), cert. denied, 470 U.S. 1027 (1985) (Abrams, J.,
dissenting).

     15 The parties to the ASA filed a joint motion to amend the
prior separation agreement in order to clarify that the
provision requiring McInerney's assets to be placed into a trust
is an integral and essential part of the separation agreement
and that an interpretation that the trust established for
McInerney is self-settled would be contrary to the parties'
intent.
                                                                    17

spendthrift provision, there was no evidence that the Probate

and Family Court judge was asked to decide whether the trust

instrument would in fact protect McInerney's portion of the

marital estate from creditors.

    McInerney and Stone were free to settle the rights and

obligations between them in an enforceable contract.    However,

by the terms agreed upon in the ASA, they were not free to

except the trust from G. L. c. 203E, § 505(a)(2), with regard to

a creditor's effort to reach the trust to satisfy any judgment

against McInerney.   If, as it would appear, their intent was to

keep McInerney's funds out of the hands of his creditors, they

could not do so by transferring his share of the marital estate

into a spendthrift trust over which the trustees had discretion

to pay to him both the principal and the interest of the trust

during his lifetime.    Cf. Guerriero v. Commissioner of the Div.

of Med. Assistance, 433 Mass. 628, 633, 635 (2001).    Here, the

proper application of G. L. c. 203E, § 505(a)(2), allows the

plaintiffs to access the trust in the circumstances presented.

    Finally, we have considered whether McInerney's cognitive

impairments, which caused him to be placed under guardianship,

give him a special status in terms of self-settled spendthrift

trusts that are approved by a judge in the course of approving a

separation agreement.   The parties have pointed us to no statute

or common-law principle that confers such a status.    Cases
                                                                     18

considered in Cohen, too, involved trusts created by

conservators and guardians for incompetent adults.    In a case

with remarkably similar facts insofar as a husband involved in a

motor vehicle accident causing serious injuries placed proceeds

of his personal injury action into a spendthrift trust, the

Georgia Supreme Court said "no settlor, disabled or otherwise,

should be permitted to put his own assets in a trust, of which

he is the sole beneficiary, and shield those assets with a

spendthrift clause, because to do so is 'merely shift[ing] the

settlor's assets form one pocket to another, [in an attempt to

avoid creditors].'"   Speed v. Speed, 263 Ga. 166, 168 (1993),

quoting from 76 Am. Jur. 2d 164, Trusts, § 129.     In the absence

of public policy or other argument to the contrary, we agree.

    Conclusion.   We conclude that the trust was self-settled.

The funds transferred to the trust by Stone were transferred for

the purpose of satisfying her obligations to McInerney related

to the dissolution of the marriage.    The principal and the

interest of the trust were available to McInerney during his

lifetime and the same amounts are available to the plaintiffs to

satisfy any judgment in their personal injury action.     See

Reiser, 7 Mass. App. Ct. at 638-639.    The judgment is reversed

and a new judgment is to enter declaring that the plaintiffs may

reach the assets of the Brian K. McInerney Irrevocable Trust.

                                      So ordered.