Peggy Levin v. Wachovia Bank

Filing

UNPUBLISHED AUTHORED OPINION filed. Originating case number: 4:09-cv-00087-BO Copies to all parties and the district court/agency. [998620671].. [09-2344]

Appeal: 09-2344

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Date Filed: 06/28/2011

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UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT

No. 09-2344

PEGGY S. LEVIN, Trustee,
Plaintiff - Appellant,
v.
WACHOVIA BANK; DAVID STROEHMANN, SR.; SAM WOLCOTT,
Defendants - Appellees.

Appeal from the United States District Court for the Eastern
District of North Carolina, at Raleigh.
Terrence W. Boyle,
District Judge. (4:09-cv-00087-BO)

Argued:

March 23, 2011

Decided:

June 28, 2011

Before MOTZ and WYNN, Circuit Judges, and Ronald Lee GILMAN,
Senior Circuit Judge of the United States Court of Appeals for
the Sixth Circuit, sitting by designation.

Affirmed by unpublished opinion. Judge Wynn wrote the opinion,
in which Judge Motz and Senior Judge Gilman concurred.

ARGUED: William Peak Janvier, EVERETT, GASKINS, HANCOCK &
STEVENS, Raleigh, North Carolina, for Appellant.
Michael J.
Parrish, WARD & SMITH, PA, New Bern, North Carolina, for
Appellees. ON BRIEF: James M. Hash, EVERETT, GASKINS, HANCOCK &
STEVENS, Raleigh, North Carolina, for Appellant.
Paul A.
Fanning, WARD & SMITH, PA, Greenville, North Carolina, for
Appellees.

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Unpublished opinions are not binding precedent in this circuit.

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WYNN, Circuit Judge:
This

case

requires

us

to

determine

whether

a

debtor’s

remainder interests in the corpus of two spendthrift trusts are
property of his bankruptcy estate.

The bankruptcy court ruled

that they were; on appeal, the district court ruled that they
were

not.

For

the

reasons

explained

below,

we

believe

the

district court is correct that the debtor’s remainder interests
are

not

part

of

his

bankruptcy

estate,

and

consequently

we

affirm the judgment of the district court.

I.
By a trust instrument dated November 23, 1976, Gertrude S.
Stroehmann created a trust (the “1976 trust”) for the benefit of
her two children and their issue.

The corpus of the 1976 trust

was first divided into two equal shares: one for the benefit of
Harold Stroehmann, Jr. (“Harold, Jr.”) and his issue, and one
for the benefit of David Stroehmann, Sr. (“David, Sr.”), and his
issue.

The David, Sr. share was further divided into separate

shares

for

the

benefit

of

his

two

children,

J.

Kathryn

Stroehmann and David Stroehmann, Jr. (“David, Jr.”), the debtor
in this case.
Wachovia Bank, N.A. is the sole trustee of the 1976 trust.
The 1976 trust grants the trustee the power to distribute income
and principal in its “sole and absolute discretion.”
3

The only

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mandatory distribution occurs at the trust’s termination, when
the remaining principal and retained income are to be paid to
the named beneficiaries.

The instrument provides that the trust

shall continue until the death of the last to die of Harold, Jr.
and David, Sr..

Harold, Jr. has already died.

The 1976 trust contains a spendthrift provision.

Article

XII states that “[t]he interest of any beneficiary in the corpus
or

income

of

any

trust

shall

not

be

subject

to

assignment,

alienation, pledge, attachment, or claims of creditors and shall
not

otherwise

encumbered

by

be
such

voluntarily

or

alienated

The

beneficiary.”

involuntarily

the

value

of

or

debtor’s

share of the corpus of the 1976 trust was valued at $684,285.77
as of January 6, 2009.
A second trust (the “Will trust”) was created by the terms
of the Last Will and Testament of Gertrude S. Stroehmann, which
was executed on November 18, 1987.

A residuary clause in the

Will directed that the residue of the estate be divided into two
equal shares to be held in trust.

One of these shares was

divided further between David, Sr., and his children.

David,

Jr., the debtor in this case, is one of the children of David,
Sr., and therefore a beneficiary of the Will Trust.
Defendants David, Sr., Samuel Wolcott, and Wachovia Bank,
N.A.,

are

mandates

the

that

trustees
the

of

trustee

the
make
4

Will

Trust.

distributions

The
of

Will
all

trust

the

net

Appeal: 09-2344

income

Document: 27

of

a

installments.

Date Filed: 06/28/2011

grandchild’s
It

further

Page: 5 of 19

share

states

in

that

at

a

least

trustee

has

quarterly
absolute

discretion to invade the principal for the medical expenses,
support, and education of the beneficiaries.
The Will trust also contains a spendthrift provision.

The

“Protective Provision” of the Will Trust states:
I direct that all legacies and all shares and
interests in my estate and any property appointed
under this will, whether principal or income, while in
the hands of my personal representatives, trustees or
the guardians of property, shall not be subject to
attachment, execution, or sequestration for any tort,
debt, contract, obligation or liability of any legatee
or beneficiary and shall not be subject to pledge,
assignment, conveyance or anticipation.
The trustees of the Will trust are directed to pay out, in full,
a grandchild’s remaining share when that grandchild reaches the
age

of

forty-five

years

old.

If

a

grandchild

dies

before

reaching that age, the grandchild’s remaining interest passes to
other beneficiaries named in the Will trust.
A codicil to the Will, dated March 10, 1988, modifies this
last provision, making the grandchild’s interest pass to the
grandchild’s estate.

The codicil further provides that “[n]o

principal or income of any grandchild’s trust may be used for
any

person

other

than

the

grandchild

for

whom

held . . . .”

David, Jr. was born on March 2, 1965 and reached the age of

5

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forty-five on March 2, 2010. 1

Page: 6 of 19

The debtor’s interest in the

principal of the Will trust had a value of $299,581.31 as of
January 6, 2009.
David, Jr., filed a Chapter 7 petition for bankruptcy on
June 12, 2007.

Plaintiff Peggy S. Levin, the Chapter 7 Trustee

appointed to David, Jr.’s case, filed an adversary proceeding on
March 14, 2008.

Plaintiff asked the bankruptcy court to order

Defendants to turn over all amounts distributed to the debtor
under “the Stroehmann Trust” since the filing of the petition,
including the

principal

generated by the trust. 2

of

the

trust,

and

all

future

income

Defendants filed a motion to dismiss

the complaint on June 18, 2008.
The bankruptcy court conducted a hearing on July 10, 2008.
In a subsequent order, the bankruptcy court reasoned that the
1976 trust gives the debtor separate interests in the trust: (1)
an interest in the income from the trust during the life of the
trust, (2) an interest in the principal during the life of the
trust, and (3) a future interest in the principal that must be
paid to the debtor upon the termination of the trust.
the

order,

the

bankruptcy

court

recognized

the

Later in

latter

two

1

The Will trust therefore terminated, at least with regard
to the debtor’s share, during the pendency of this appeal.
2

The initial complaint does not distinguish between the two
trusts, but names all three Defendants as trustees.

6

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interests as two aspects of the same thing; the debtor’s right
to receive principal is divided into: (1) the present right to
receive

disbursements

trustees,

and

(2)

of
the

principal

the

right

future

at

discretion

to

receive

of

the

mandatory

distribution of principal upon termination of the trust.
Ultimately, the bankruptcy court granted Defendants’ motion
to

dismiss

principal

as

to

the

distributions

debtor’s
during

right
the

to

life

receive

of

the

income

trust. 3

and
The

bankruptcy court denied, however, the motion to dismiss “as to
the debtor’s future remainder interest in the trust principal,”
finding that such an interest “is a separate property interest
of

the

debtor

that

is

property

of

the

bankruptcy

estate.”

Defendants filed a motion for summary judgment on January 9,
2009.

Plaintiff filed a motion for summary judgment on January

12, 2009.
During

the

course

of

the

proceedings,

Plaintiff

learned

that the debtor was the beneficiary of another trust, the Will
trust (discussed above).
Plaintiff

filed

an

With leave of the bankruptcy court,

amended

complaint

on

February

2,

2009,

requesting an order that Defendants turn over all amounts paid
since the filing of the petition under the 1976 trust and the
3

Both the bankruptcy court and the district court found
these interests protected by a valid spendthrift provision.
Plaintiff does not challenge this ruling on appeal.

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Will trust, all future amounts to be paid under either trust,
and

declaring

that

the

debtor’s

interest

property of the bankruptcy estate.
the

amended

complaint

and

filed

in

both

trusts

is

Defendants filed answers to
another

motion

for

summary

judgment.
In an order entered on March 30, 2009, the bankruptcy court
referred to its previous order regarding only the 1976 trust and
recognized that “[t]his is the same issue previously determined
in

this

case,

agreement.”
court

only

with

relation

to

a

different

trust

Consistent with its previous order, the bankruptcy

granted

Plaintiff

summary

judgment

insofar

as

“the

debtor’s remainder interests in both trusts are property . . .
that belong[s] to the bankruptcy estate.”
granted

Defendants

summary

judgment

The bankruptcy court

“to

the

extent

that

the

income and principal distributions during the life of the trusts
are not property of the bankruptcy estate.”
Defendants appealed to the district court.
court

reversed

debtor’s

“future

the

bankruptcy

remainder

court,

interest

in

The district

concluding
the

that

principal

Trusts is protected by a valid spendthrift provision.”
Bank,

N.A.

v.

Levin,

419

B.R.

Plaintiff appealed to this Court.

8

297,

303

(E.D.N.C.

of

the
the

Wachovia
2009).

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II.
Initially we address a question of justiciability raised by
Defendants.
dismissed

Defendants
as

moot

since

argue

that

this

provisions

in

appeal
both

should

trusts

be

permit

distribution of the entire principal prior to termination.
This Court has recognized that “when, pending appeal, an
event occurs, without the fault of the defendant, that makes it
impossible

for

the

plaintiff,

should

court

the

to

grant

plaintiff

effective

prevail

on

relief

the

to

the

merits,

the

appeal should be dismissed and the court should not proceed to
judgment.”

Cent. States, Se. and Sw. Areas Pension Fund v.

Cent. Transp., Inc., 841 F.2d 92, 95-96 (4th Cir. 1988).

“The

mootness doctrine is a limit on our jurisdiction that originates
in

Article

III’s

case

or

controversy

language.”

Townes

v.

Jarvis, 577 F.3d 543, 554 (4th Cir. 2009) (quotation marks and
brackets omitted), cert. denied, 130 S. Ct. 1883 (2010).

A

claim

a

is

not

moot,

however,

as

long

as

the

parties

concrete interest in the outcome of the litigation.

have

In re Balt.

Emergency Servs. II, Corp., 432 F.3d 557, 560 n.* (4th Cir.
2005).
In the present case, Defendants argue that provisions of
the trusts permit the trustees to disburse the entire principal
prior to the termination of the trusts.

It follows, according

to Defendants, that a judgment for Plaintiff “would not lead to
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the recovery of any value for the benefit of [the debtor’s]
creditors.”

Brief of Appellees at 7-8.

Defendants conclude

from this that the harm allegedly suffered by Plaintiff cannot
be redressed by a favorable decision.
Defendants do not, however, assert that as trustees they
have distributed the entire principal of the trusts.

Indeed,

noticeably lacking from Defendants’ argument is any suggestion
that they have actually exercised their discretion under the
trust

provisions

that

obtaining redress.

they

claim

prevent

Plaintiff

from

Insofar as Plaintiff seeks to compel the

transfer of the debtor’s presently held remainder interests in
both

trusts,

the

case

is

not

rendered

moot

possibility that they may later have no value.

by

the

mere

See In re Smith,

71 F.2d 378, 380 (9th Cir. 1934) (subsequent payment of trust
principal did not render appeal moot where question raised was
whether

debtor’s

remainder

interest

was

transferable

in

bankruptcy).
Plaintiff observes in reply that the Will trust has already
terminated, and the debtor’s remainder interest in that trust is
now identifiable.

We do not believe this circumstance has any

bearing on the alleged mootness of this appeal.
parties

continue

to

dispute

the

debtor’s

Insofar as the

entitlement

to

his

remainder interests, the parties have a concrete interest in the
outcome of the litigation.

It follows that the case is not
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moot.

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See In re Balt. Emergency Servs. II, Corp., 432 F.3d at

560 n.*.

III.
We

turn

now

to

the

merits

of

Plaintiff’s

appeal.

“We

review the judgment of a district court sitting in review of a
bankruptcy court de novo, applying the same standards of review
that were applied in the district court.”

In re Merry-Go-Round

Enters., Inc., 400 F.3d 219, 224 (4th Cir. 2005).

Thus, we

review the bankruptcy court’s factual findings for clear error,
and we review questions of law, including summary judgment, de
novo.

Id.; see also In re French, 499 F.3d 345, 351 (4th Cir.

2007).

A.
The

bankruptcy

estate

includes

“all

legal

or

equitable

interests of the debtor in property as of the commencement of
the case,” with some exceptions.

11 U.S.C. § 541(a)(1).

One

such exception provides that “[a] restriction on the transfer of
a

beneficial

interest

of

the

debtor

in

a

trust

that

is

enforceable under applicable nonbankruptcy law is enforceable in
a

case

under

bankruptcy

this

court

title.”

and

the

11

U.S.C.

district

court

§

541(c)(2).
agreed

that

The
this

provision excludes from the property of the bankruptcy estate
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interests in trust that are protected under a spendthrift clause
that is enforceable under applicable state law.

See Patterson

v. Shumate, 504 U.S. 753, 758 (1992) (“The natural reading of
the provision entitles a debtor to exclude from property of the
estate any interest in a plan or trust that contains a transfer
restriction enforceable under any relevant nonbankruptcy law.”).
The parties do not dispute that the 1976 trust and the Will
trust are subject to Pennsylvania state law.

Pennsylvania law

recognizes that “[a] spendthrift provision is valid only if it
restrains

both

voluntary

and

Subject to certain exceptions not alleged to apply
or

assignee

of

Stat.

the

Ann.

§

a

(West 2006).

creditor

Cons.

of

interest.”

“a

Pa.

transfer

beneficiary’s

here,

20

involuntary

7742(a)

beneficiary

of

a

spendthrift trust may not reach the interest or a distribution
by the trustee before its receipt by the beneficiary.”
7742(c).

Id. at §

Both the bankruptcy court and the district court found

that both trusts here contained spendthrift provisions that are
valid under state law.
Pennsylvania
broadly.”
1996).

courts

“construe[]

spendthrift

provisions

In re Blanchard, 201 B.R. 108, 125 (Bankr. E.D. Pa.

“No principle in the law of wills and trusts is more

firmly and clearly established than that the intention of the
testator or settlor must prevail.”

Clark v. Clark, 411 Pa. 251,

255, 191 A.2d 417, 419-20 (1963).

“The law rests its protection

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of what is known as a spendthrift trust fundamentally on the
principle of cujus est dare, ejus est disponere. [He who has a
right to give, has the right to dispose of the gift.]

It allows

the donor to condition his bounty as suits himself so long as he
violates no law in so doing.”

In re Morgan’s Estate, 223 Pa.

228, 230, 72 A. 498, 499 (1909).

B.
In this case, Plaintiff argues that the bankruptcy court
correctly ruled that the debtor’s remainder interests in both
trusts

are

property

of

the

bankruptcy

estate.

Plaintiff

concedes that the debtor’s interests in income and principal
during the life of the trusts are protected by the spendthrift
provisions

and

therefore

Plaintiff

contends,

interests

in

the

not

part

however,

corpus

of

that

of

the

the
the

bankruptcy

estate.

debtor’s

remainder

are

similarly

trusts

not

protected.
Plaintiff relies on Ginsburg v. Hilsdorf, 30 Pa. D. & C.2d
384

(1962).

Pennsylvania
three

trusts

In

Ginsburg,

considered
might

be

the

Court

whether

the

attached

in

provisions the trusts contained.

of

Common

defendants’
light

of

Id. at 390.

Pleas

of

interests

in

the

spendthrift

The defendants in

Ginsburg were the vested remaindermen of the trusts’ corpus, but

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were not beneficiaries entitled to any of the income.
395-96.

Id. at

The spendthrift provision stated:

No sum payable by my Trustees under the provisions of
the foregoing trust shall be pledged, assigned,
transferred or sold, or in any manner whatsoever
anticipated,
charged
or
encumbered
by
the
beneficiaries thereunder, or any of them, or be in any
manner liable in the hands of my Trustees for the
debts, contracts and engagements of the beneficiaries
thereunder, or any of them.
Id. at 394-395.
that

the

The court found it clear from this provision

settlors

beneficiary.

intended

to

protect

only

the

income

“If they intended the spendthrift provision to

protect the vested remainderman they could have said so. . . .
In failing to include the remainder interests in the spendthrift
provisions, the testators have left the door open to the present
attachment proceedings.”
The

Ginsburg

court

Id. at 395.
distinguished

other,

more

expansive,

spendthrift provisions such as that which appeared in Riverside
Trust Co. v. Twitchell, 342 Pa. 558, 20 A.2d 768 (1941).

The

defendant in Riverside was the income beneficiary of a trust
established by her aunt.

Id. at 560, 20 A.2d at 769.

spendthrift provision there stated
that there shall be no power of anticipation or of
pledge or assignment either of the income or of the
principal of the Trust Fund, or of any interest
therein whatsoever; and the Trustee, its successors
and assigns, shall hold and administer the Trust and
pay over the income received by it as aforesaid, and
the principal sum upon the termination of the Trust,
as herein provided, free from any debts, liabilities,
14

The

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obligations or other engagements whatsoever of the
Grantor, or of any persons who, by the terms hereof,
may be or become beneficiaries hereunder.
Id. at 560-61, 20 A.2d at 769-70.

The Riverside court held that

the spendthrift provision was meant to protect both income and
principal. 4
The

Id. at 561-62, 20 A.2d at 770.

Ginsburg

court

also

distinguished

the

spendthrift

provision that appeared in Harder v. Follansbee, 102 Pitts. L.
J. 231 (Pa. C.P. 1954). 5

The trust instrument in Harder directed

the trustee to pay the income to the settlor’s widow for life,
and

thereafter

to

the

interest in the corpus.

defendant,

who

Id. at 231.

also

held

a

remainder

The trust contained a

spendthrift provision that stated, “neither the principal nor
income of this trust fund shall in any manner be liable to the
control or answerable for the debts, contracts or engagements of
the

beneficiaries

hereunder

or

conveyance

liable
or

to

any

anticipation

charge,

encumbrance,

assignment,

Id. at 232.

The Harder court held that the provision protected

the defendant’s interest in both income and principal. 6

by

them.”

Id.

4

The provision in Riverside, the Ginsburg court said, is “a
far cry from the one in the case at bar.” Ginsburg, 30 Pa. D. &
C.2d at 394.
5

This case is not available on Westlaw or Lexis but may be
obtained through public resources in the State of Pennsylvania.
6

The Ginsburg court stated simply that such a provision as
appeared in Harder did not appear in the instant case.
Ginsburg, 30 Pa. D. & C.2d at 393.
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Plaintiff notes that the spendthrift provisions here did
not explicitly cover the trust principal upon termination of the
trusts, as did the provision in Riverside.

Plaintiff asserts

that the language of the trusts here, particularly that of the
Will trust, is similar to the language of the trusts construed
in Ginsburg.

Plaintiff concludes that the debtor’s remainder

interests

the

in

trusts

are

therefore

not

subject

to

the

protection of the spendthrift provision.
The spendthrift provision of the 1976 trust protects “[t]he
interest

of

any

beneficiary

in

the

corpus

or

income

of

any

trust” and the spendthrift provision of the Will Trust protects
“all

shares

and

interests

in

my

estate

and

any

property

appointed under this will, whether principal or income.”
unlike

the

spendthrift

provision

in

Ginsburg,

the

Thus,

provisions

here explicitly mention both the income and the corpus/principal
of

the

trusts.

spendthrift

They

provisions

are

therefore

distinguished

more
by

analogous
Ginsburg

to

the

than

the

provisions at issue in that case.
Indeed, Harder is directly on point.

Like the debtor in

this case, the defendant in Harder held both an interest in the
income and a remainder interest in the principal of the trust.
Harder,

102

Pitts.

L.

J.

at

231.

The

court

held

that

the

spendthrift provision obviously applied to income but also to

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Id. at

the defendant’s remainder interest in the principal.
232.

The same reasoning applies here.

C.
Plaintiff next argues that this Court should join those
courts

that

have

held

a

debtor’s

remainder

interest

in

a

spendthrift trust upon termination of the trust is part of the
bankruptcy estate.
Conn.

2003);

In

See In re Britton, 300 B.R. 155 (Bankr. D.

re

173

Crandall,

B.R.

836

(Bankr.

D.

Conn.

1994); Matter of Strasma, 26 B.R. 449 (Bankr. W.D. Wis. 1983).
Plaintiff insists that if the debtor holds an interest in the
corpus of a spendthrift trust upon its termination, “then those
funds cannot, by the plain language of the trust, be subject to
the spendthrift clause which necessarily must terminate with the
trust.”
the

Brief of Appellant at 18.

district

contrary

to

court
her

Plaintiff recognizes that

relied

on

Pennsylvania

bankruptcy

position,

but

argues

the

that

courts

cases
that

decided those cases “failed to consider that they were expanding
the scope of spendthrift protection beyond that provided for by
state law.”

Brief of Appellant at 22.

The district court explained that the apparent split of
authority

does

not

support

the

bankruptcy

court’s

conclusion

that the principal here is unprotected because Pennsylvania law
alone controls this case.

As the district court recognized,
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Pennsylvania law protects remainder interests in the corpus of a
trust if the spendthrift provision of the trust instrument so
provides.

See Clark, 411 Pa. at 256, 191 A.2d at 420 (holding

that attempted conveyance of remainder interest in a trust was
invalid because the spendthrift provision prohibited beneficiary
from making any binding commitment of principal or income during
the

life

of

the

trust);

In

re

201

Blanchard,

B.R.

at

126

(applying Pennsylvania law to provide spendthrift protection to
debtor’s remainder interest in the corpus of a trust and to
exclude the debtor’s interest in the corpus from the bankruptcy
estate); In re Katz, 220 B.R. 556, 565 (Bankr. E.D. Pa. 1998)
(holding that when the debtor’s entire interest in a trust was
protected by a valid spendthrift provision, the debtor could not
assign his interest in either the principal or the income before
they were distributed); cf. In re Will of Rintz, 2007 Phila. Ct.
Com. Pl. LEXIS 254 (June 19, 2007) (approving the distribution
of

certain

beneficiary,
trustee,

income

and

despite

the

because

they

principal
claims

were

of

directly
his

protected

by

to

Chapter
a

the
7

valid

trust

bankruptcy
spendthrift

provision).
The issue is thus not whether we should choose to follow
one line of cases or another.

Rather, we are compelled to

follow applicable nonbankruptcy law.
this

case,

that

means

we

apply
18

11 U.S.C. § 541(c)(2).
Pennsylvania

law.

In

Under

Appeal: 09-2344

Document: 27

Date Filed: 06/28/2011

Page: 19 of 19

Pennsylvania law, “the intention of the testator or settlor must
prevail.”

Clark, 411 Pa. at 255, 191 A.2d at 419-20.

For the

reasons explained above, we believe that by explicitly invoking
the trusts’ principal, the settlor here intended the spendthrift
provisions to apply to the debtor’s remainder interests therein.
The spendthrift provisions here represent “[a] restriction
on the transfer of a beneficial interest of the debtor in a
trust that is enforceable under applicable nonbankruptcy law.”
11 U.S.C. § 541(c)(2).

The debtor’s remainder interests in the

trusts’ principal are therefore not included in his bankruptcy
estate.

Id.

The

determination

of

the

district

court

is

consequently
AFFIRMED.

19