Tuesday, September 26, 2023
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CA High Court Queried on Bankruptcy Issue

SAN FRANCISCO (CN) - California's high court should address the statutory cap on a bankruptcy estate's access to a spendthrift trust, the 9th Circuit said Monday.

A federal panel made the request in certifying a matter to the state Supreme Court. It asks whether the California Probate Code caps a bankruptcy estate's access to the beneficiary's interest at 25 percent if the trust consists entirely of principal payments, or if the estate can access more than 25 percent in such a situation.

In the case at issue, Rick Reynolds, beneficiary of the Reynolds Family Trust, argues that the 25 percent cap applied to his trust.

Todd Frealy, an attorney with Levene Neale in Los Angeles acting as the bankruptcy trustee, disagrees. He says that the estate is entitled to more than 25 percent because a section of the probate code "gives creditors unrestricted access to distributions of principal 'due and payable,' and all of Reynolds's distributions from the trust were expected to be made from principal."

The bankruptcy court favored Reynolds, determining that the cap exception did not apply to the case, and a divided 9th Circuit Bankruptcy Appellate Panel affirmed.

No judge on the panel signed Monday's certification order, which points to numerous ambiguities in the statute.

The probate code does not define "due and payable," for example, and it is unclear as to why the California Legislature would mandate a 25 percent cap if that cap could be easily bypassed, according to the 18-page order.

"The answers to these questions have significant ramifications, not just for the immediate parties, but for the administration of all spendthrift trusts in California," the opinion says.

"As it currently stands, the Probate Code is subject to two vastly different readings: one giving creditors unfettered access to a beneficiary's interest in the trust, and another restricting creditors' access to 25 percent."

The panel said that it was reluctant to make a decisive interpretation without the authoritative guidance of the California Supreme Court.

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