NELSON v. CALIFORNIA TRUST CO (1948)

District Court of Appeal, Second District, Division 1, California.

NELSON v. CALIFORNIA TRUST CO. et al.

Civ. 16361.

Decided: October 15, 1948

Swanwick, Donnelly & Proudfit and Donald O. Welton, all of Los Angeles, for appellant. Hahn, Ross, Goldstone & Saunders, of Los Angeles, for respondent.

This is an appeal by defendant, California Trust Company from the judgment in an action for declaratory relief.

The record reveals that plaintiff recovered a judgment against defendant Bixby on November 7, 1946, in the sum of $6,826.69; that theretofore to-wit, on February 16, 1937, defendant Bixby had created a trust, ‘to defeat then existing and subsequent claims of the creditors of said Fred H. Bixby, Jr.’; that defendant California Trust Company is the trustee of said trust which at the time of its creation consisted of $75,000 delivered to said trustee by said Bixby; ‘That garnishment was levied on said California Trust Company upon said judgment, under execution issued on or about November 16, 1946, and that said California Trust Company failed and refused, and still fails and refuses to make any return or answer to said execution.’ It is also alleged that, ‘said failure and refusal of said California Trust Company to make a return or answer was for the purpose of evading collection of said judgment by plaintiff.’ A copy of the so-called declaration of trust is part of plaintiff's complaint. The complaint also alleges that trust property is sufficient to satisfy the judgment.

Defendant Bixby's answer contains the following: ‘Answering Paragraph V of plaintiff's First Cause of Action said defendant alleges that said defendant executed without consideration said Declaration of Trust in plaintiff's complaint referred to for the purpose of conserving for himself as sole beneficiary of said trust the funds transferred to the trustee upon the execution thereof and in accordance with the provisions thereof sought to render said funds constituting the corpus of said trust immune from the claims of any subsequent creditors of said defendant; this defendant further alleges that at the time of the execution of said trust instrument said defendant had income from other sources more than sufficient to pay his then expenses and obligations but that subsequent to the execution of said declaration of Trust said other income became and is now insufficient to meet the claims of said defendant's presently existing creditors; that in accordance with defendant's general intent and purpose to meet the claims of his creditors and his lawful obligations as the same become due and to preserve said defendant's good credit rating in the community this defendant alleges that it is his desire that the judgment of plaintiff herein be satisfied by California Trust Company, one of the defendants herein, out of income from the principal of said trust and if the same be not sufficient, out of the corpus thereof and this defendant joins with plaintiff in seeking a decree of this Court that the corpus and income of said trust be declared subject to the judgment of this plaintiff and to all lawful claims of this defendant's creditors.’

Defendant trust company's answer denies that its refusal to make a return to the execution levied by plaintiff ‘was for the purpose of evading collection’ of plaintiff's judgment and alleges that no return was made because to do so would disclose ‘confidential information which it was defendant's duty, by the terms of its trust agreement and section 103 of the Bank Act [Gen.Laws, Act 652, § 103], not to divulge.’ The answer also alleges that defendant Bixby ‘has a wife, Jane Bixby, a father, Fred H. Bixby, and a mother, Florence G. Bixby, now living who would constitute his heirs at law if he were now deceased; that the said Fred H. Bixby, Jr., also has sisters living and may at the time of his death leave children surviving him who may constitute his heirs at law,’ and that, ‘by the terms of said declaration of trust the beneficiaries of said trust for whom the principal is held by this defendant are the heirs at law of said Fred H. Bixby, Jr., as determined by the laws of succession of the State of California, in effect at the time of his death.’ ‘The terms of said declaration of trust’ as noted in defendant trust company's answer, refers to the following provision of the trust agreement; ‘Upon the death of said trustor and beneficiary Fred H. Bixby, Jr., * * * all of the residue and remainder of said Trust Estate shall be by said Trustee, or its successor, distributed and delivered to the heirs at law of said Fred Bixby, Jr., in accordance with the laws of succession of the State of California then in effect, and income accrued and/or undistributed at the time of the death of said Fred H. Bixby, Jr., shall belong and go to the Beneficiaries entitled to the next eventual estate in the same proportion or proportions as the principal thereof.’

It is contended by appellant that ‘The trust corpus may not be used to satisfy judgment against Bixby’ and that ‘As a creditor of Bixby, the Respondent has no greater rights than Bixby has to reach the corpus of the Bixby trust.’ It is also contended that ‘Bixby can only receive the income and under no circumstances any part of the principal.’

It should be emphasized at the outset that under the terms of the trust agreement, Bixby is the only named beneficiary; the single reference to any one else in the trust agreement is confined to the above quoted provision providing for the disposition of the ‘residue’ upon the death of the trustor. And in that connection appellant argues, ‘appellant has contested this action only for the purpose of protecting the contingent remaindermen and not for the purpose of protecting the interest of Bixby.’

It is evident from the foregoing that the trust in question was created for Bixby's sole benefit; the clause referring to the ‘residue’ is merely incidental. Indeed, if such provision were eliminated, the property of the estate upon Bixby's death would be distributed ‘to the heirs at law’ in the same manner. In other words the clause simply means that upon Bixby's death the trust property shall be distributed according to law. And until Bixby dies there are no heirs, hence, until then Bixby is the only individual who, under the terms of the trust agreement, can lawfully claim any interest in the estate. Who the heirs maye be is purely problematical; until the testator dies their identity is unknown. Indeed, it is possible that upon the death of the testator there may be no ‘contingent remaindermen.’ Hence appellant, to adopt appellant's language in part, is contesting ‘this action only for the purpose of protecting the contingent remaindermen,’ to-wit, an uncertainty.

That plaintiff and respondent has a valid claim and is entitled to collect the judgment from the trust estate there can be no question. The trust agreement specifically provides that, ‘No interest of Fred H. Bixby, Jr., beneficiary hereunder in this trust, nor any part of such interest, shall in any event * * * be liable for any debt of his, or subject to any judgment rendered against him, or to the process of the court in aid of execution of any judgment so rendered.’ The law is well settled that such a trust for such a purpose is inoperative. In McColgan v. Walter Magee, Inc., 172 Cal. 182, at page 186, 155 P. 995, 997, Ann.Cas.1917D, 1050, appears the following:

‘For this reason and upon grounds of public policy, it is further held that one cannot by any disposition of his own property put the same or the income thereof beyond the reach of his creditors, so long as he himself retains the right to receive and use it. * * * In Pacific Nat. Bank v. Windram, 133 Mass. 175, the court said: ‘Creditors of the beneficiary have no right to complain that the founder did not give his property for their benefit, or that they cannot reach a greater interest in the property than the debtor has, or ever had. But when a man settles his property upon a trust in his own favor, with a clause restraining his power of alienating the income, he undertakes to put his own property out of the reach of his creditors, while he retains the beneficial use of it. The practical operation of the transaction is that he transfers a portion only of his interest, retaining in himself a beneficial interest, which he attempts by his own act to render inalienable by himself and exempt from liability for his debts. To permit a man thus 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.’'

And in Sheean v. Michel, 6 Cal.2d 324, 57 P.2d 127, 130, the court declares:

‘This court should not be expected to grant a certificate of approval to a plan the result of which is to tie up property for the benefit of the trustor and his family free from any application thereof to the payment of the trustor's just obligations. This view is sustained by the sound public policy, stated in the following cited authorities, that a person may not be permitted to have absolute and uncontrolled ownership of property for his own purposes and at the same time be able to keep it from his creditors.’ (See cases cited.)

Although the trust agreement provides that the trustee has a ‘first lien on the trust estate’ ‘for its own services as such trustee,’ there is no showing that there is not sufficient to satisfy plaintiff's judgment in addition to such charges.

For the foregoing reasons, the judgment is affirmed.

DORAN, Justice.

YORK, P. J., and WHITE, J., concur.