Soluri v. Rudkin,
2004.CA.0007950 (Cal.App. Dist.2 09/09/2004)
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT DIVISION FOUR
September 9, 2004
NANCY SOLURI, AS TRUSTEE, ETC., PLAINTIFF,
SVEN C. RUDKIN, DEFENDANT AND RESPONDENT; 21ST CENTURY INSURANCE COMPANY, CLAIMANT AND APPELLANT.
APPEAL from an order of the Superior Court of Los Angeles County, Coleman A. Swart, Judge. Affirmed. (Los Angeles County Super. Ct. No. GP007936)
David H. Loomis & Associates and David H. Loomis for Claimant and Appellant.
Law Office of Marla A. Martinez and Marla A. Martinez for Defendant and Respondent.
The opinion of the court was delivered by: Curry, J.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 977(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 977(b). This opinion has not been certified for publication or ordered published for purposes of rule 977.
21st Century Insurance Company *fn1 appeals from an order of the probate court in which it ruled that the trustee of a spendthrift trust is required to distribute the proceeds of the trust directly to the trust beneficiary Sven Rudkin (Rudkin). 21st Century argues the probate court's order was in error because Rudkin previously entered into a stipulated agreement which was entered as an order in a bankruptcy adversary proceeding (in which he was the judgment debtor and 21st Century the judgment creditor) by which he assigned his right to the trust proceeds. As we shall explain, we conclude that the challenged order must be affirmed.
Factual and procedural background
Marta Rudkin (hereafter Marta) is the trustor of the Marta E. Rudkin Revocable Trust (the Trust), created in 1986. Rudkin is Marta's son, and a former attorney. *fn2 Rudkin drafted the Trust documents, and is the sole beneficiary of the Trust. According to Rudkin, Marta "wanted to have a living trust because she heard it was a good way of avoiding probate, and she wanted to make sure that [he] was properly provided for."
The declaration creating the Trust provides that Marta is the trustee and retains complete control over the corpus and income of the Trust until her death, including the right to revoke the Trust. If Marta dies or is otherwise unable to act, Rudkin shall act as trustee. Each trustee has the right to resign upon delivery of written notice. Upon Marta's death, the residue of the Trust estate shall be distributed to Rudkin, unless he predeceases his half-sister Torun Almer. After Marta's death, the trustee shall annually render an account by submitting a copy of the income tax return for the Trust and a list of the assets on hand. The trustee retains the power, among other things, to invest and sell the Trust assets, until final distribution of the assets of the Trust is accomplished.
The declaration of trust also contains a spendthrift provision: "Each trust beneficiary other than the Trustor is expressly prohibited from encumbering, assigning, or in any other manner transferring the beneficiary's interest, whether of income or principal. The interest of a beneficiary other than the Trustor will not be subject to the beneficiary's liabilities or obligation or to legal process. Notwithstanding the foregoing, a beneficiary may disclaim an interest in a trust, in whole or in part, and the Trustee shall thereafter hold, administer and distribute the trust estate as if the disclaiming beneficiary had died on the date of the disclaimer."
In or about 1997, Marta became incompetent. Her daughter, Torun Almer, petitioned the probate court to institute a conservatorship. The court appointed a registered professional fiduciary, Nancy Soluri, as conservator of Marta's estate. In addition, Rudkin became the successor trustee of the Trust, pursuant to the terms of the Trust. However, he resigned as trustee on June 9, 2000, and Soluri was appointed successor trustee of the Trust on that date.
The Proceedings Involving Rudkin and 21st Century
Rudkin provided legal representation to 21st Century in numerous subrogated uninsured motorist claims. In 1998, 21st Century filed a fraud action against Rudkin, 20th Century Insurance Company v. Sven Charles Rudkin, etc., et al., Los Angeles Superior Court case number EC025444, alleging he embezzled over $1 million from 21st Century in connection with his legal representation. Rudkin had filed for Chapter 13 bankruptcy in 1997; in 1999 it was converted to a Chapter 7 proceeding. He petitioned the bankruptcy court to discharge his debts, thus staying 21st Century's fraud action. (In re Sven C. Rudkin, Debtor, United States Bankruptcy Court case number LA97-52242 LF.) On December 1, 1999, 21st Century filed an adversary proceeding seeking relief from the stay and a declaration that any judgment it secured against Rudkin in the state court fraud action would be non-dischargeable in bankruptcy.
Rudkin and 21st Century entered into a release and settlement agreement dated July 2, 2000, which was entered as a judgment by the bankruptcy court on August 21, 2000, whereby 21st Century was awarded a non-dischargeable judgment of $500,000 plus interest. 21st Century agreed, however, to stay enforcement of the judgment as long as Rudkin made monthly payments of $500. 21st Century agreed to dismiss its fraud action, and in fact did so. In addition, Rudkin agreed "to pay [21st] Century forthwith, any such proceeds, monies, or other assets which he receives from the [Trust], to the extent of the amount of the judgment remaining after deducting monthly payments made by [Rudkin]." *fn3 21st Century agreed to accept $250,000 as full satisfaction of the $500,000 debt, if, and only if, all of the following occurred: (1) Rudkin made all monthly payments in a timely manner; (2) Rudkin provided to 21st Century, concurrently with his receipt, any and all proceeds he received from the Trust; (3) 21st Century was paid a total of $250,000 from monthly payments and the balance of any proceeds it received pursuant to Rudkin's assignment of interest in the Trust; (4) Rudkin did not fail to fulfill his obligations set forth in the release and settlement agreement, and (5) Rudkin had made no misrepresentation of material fact upon which the release and settlement agreement was predicated.
The Probate Court Proceedings
Marta died in 2002. After Marta's death, on November 5, 2002, Soluri, as successor trustee of the Trust, filed a petition for instructions regarding distribution of the Trust estate.
Rudkin filed a response to the petition for instructions, contending that the spendthrift trust provision of the Trust rendered his interest in the trust unassignable, and therefore he is entitled to receive the entire residue of the Trust. He further argued that 21st Century was required to file a petition pursuant to Code of Civil Procedure section 709.010 seeking an order from the probate court to enforce its judgment against Rudkin, but failed to do so.
21st Century also filed a response, contending that the issues involved, including the effect of the spendthrift trust provision, were fully litigated in the bankruptcy court and the doctrine of res judicata required that Rudkin's assignment to 21st Century of his interest in the Trust be found valid. 21st Century further contended that the Trust and spendthrift provision terminated when Marta died, and the beneficial and legal titles to the Trust property merged in Rudkin.
On December 27, 2002, hearing was held in the probate court. The court ruled that the bankruptcy judgment made no specific findings or order regarding the spendthrift clause in the declaration of trust, that the spendthrift clause was valid, that Soluri was the successor trustee and Rudkin the beneficiary, and that the residue of the estate should be disbursed to Rudkin.
Motion for Reconsideration
On January 9, 2003, 21st Century filed a motion for reconsideration, contending it had new case law in support of its position. It again argued that the bankruptcy court order was binding upon the probate court and precluded the latter court's order, that federal bankruptcy court orders supersede and/or preempt state court orders and California trust law, and that the doctrine of res judicata applies because Rudkin could have brought up the validity of the spendthrift clause in the bankruptcy adversary proceeding. *fn4
Rudkin filed a response to the motion for reconsideration on January 29, 2003. Therein he did not challenge the validity of the bankruptcy judgment, but reasserted that the spendthrift clause was valid and enforceable, and accordingly he could not assign any potential interest he had in the Trust. Rudkin argued that the Trust was not an asset of his bankruptcy estate, and that the bankruptcy judgment states only that he owes 21st Century $500,000 plus interest.
At the hearing on the motion for reconsideration on February 7, 2003, the probate court stated that the bankruptcy order did not address the issue of the spendthrift clause in the Trust. The motion for reconsideration was denied. On February 21, 2003, the probate court entered an order on the petition for instructions, ordering the trustee to distribute the residue of the trust estate to Rudkin.
21st Century filed a notice of appeal from that order on March 21, 2003.
I. The Effect of the Spendthrift Clause
"So long as a trust is revocable, a beneficiary's rights are merely potential, rather than vested. The beneficiary's interest could evaporate in a moment at the whim of the trustor or, in the case of a conservatorship, at the discretion of the court. Giving a beneficiary with a contingent, non-vested interest all the rights of a vested beneficiary is untenable. We cannot confer on the contingent beneficiary rights that are illusory, which the beneficiary only hopes to have upon the death of the trustor, but only if the trust has not been previously revoked and the beneficiary has outlived the trustor." (Johnson v. Kotyck (1999) 76 Cal.App.4th 83, 88 [holding Prob. Code, § 15800 does not give contingent beneficiary right to a trust accounting while conservator retains authority to revoke trust].)
21st Century contends that contingent beneficiaries of trusts have the right to assign their contingent interests to creditors in bankruptcy proceedings, citing the federal Bankruptcy Code (11 U.S.C. § 541(c)(1)). That contention is correct as far as it goes, but does not extend to trusts containing valid spendthrift provisions. *fn5
The law of California has long recognized the validity of spendthrift trusts. (See, e.g., Canfield v. Security-First Nat. Bank (1939) 13 Cal.2d 1, 12; see also Prob. Code, §§ 15300, 15301 [if trust instrument provides that beneficiary's interest in income and principal is not subject to voluntary or involuntary transfer, such interest cannot be transferred and is not subject to enforcement of money judgment until paid to beneficiary].) As detailed above, the Trust at issue contained a spendthrift provision prohibiting beneficiaries from "encumbering, assigning, or in any other manner transferring the beneficiary's interest, whether of income or principal."
In Kelly v. Kelly (1938) 11 Cal.2d 356 (Kelly), the California Supreme Court held that a trust beneficiary cannot assign the anticipated proceeds of a spendthrift trust, such that the trustee may be required to distribute the trust proceeds directly to the assignee. "It is of the essence of a spendthrift trust that it is not subject to voluntary alienation by the cestui, nor subject to involuntary alienation through attachment or other process at the suit of his creditors. [Citations.] But it is everywhere agreed that after the beneficiary has actually received the trust property his creditors may reach it and he may dispose of it as he wishes. [Citations.] A voluntary assignment executed before payment to the beneficiary confers on the assignee no right to demand payment or delivery from the trustee as it becomes due to the beneficiary." (Id. at pp. 362-363.)
We note, however, that the Kelly court went on to hold that "although it cannot be held that the beneficiary, upon receipt of trust property, in turn holds said specific property, or its proceeds, in trust for his assignee under an assignment made prior to his receipt of the trust property without doing violence to the intent of the trustor to the effect that the beneficiary shall receive the property free of liens and charges, we are of the view that an assignment by the beneficiary, in the nature of a promise to pay or turn over trust property when received by him, is not wholly invalid. Although such an assignment or promise gives the promisee no right in specific trust property received by the beneficiary, or in its proceeds, such promisee has available to him the usual remedies for breach of contract and may sue to recover damages for breach of said contract, in which the damages will ordinarily be the value of the property the promisee would have received had the beneficiary performed his promise to turn over a fraction of the trust property upon its receipt. Having obtained a judgment for damages the promisee may levy upon property of the promisor not exempt from execution, including property received by him from the trust, since such property after receipt by the promisor-beneficiary is subject to attachment and execution for debts and engagements contracted before as well as after the receipt of the trust property by the beneficiary." (Kelly, supra, at pp. 363-364.) The Court continued: "There is no difficulty in construing the . . . settlement agreement as a contract to pay over . . . the trust benefits when received, although words of present assignment are used." (Id. at p. 364.) We give the same construction to the settlement agreement at issue here, as incorporated in the bankruptcy court's order: Rudkin agreed to pay over to 21st Century the proceeds of the Trust when received. *fn6
The petition before the probate court which resulted in the order from which the present appeal was taken was brought by the trustee for the purpose of receiving instructions regarding distribution of the Trust proceeds. As such, the probate court, following the law set forth in Kelly, properly ruled that the trustee was obliged to distribute the Trust proceeds directly to Rudkin.
II. Res Judicata
California courts give final orders from bankruptcy courts preclusive effect, such that all issues raised, as well as those that could have been raised, are given preclusive effect. "[T]he doctrine of res judicata prevents the readjudication of all matters (including jurisdiction) which were, or might have been, litigated in a prior proceeding between the same parties." (Levy v. Cohen (1977) 19 Cal.3d 165, 173.)
21st Century argues on appeal, as it did in the trial court, that the validity and effect of the Trust's spendthrift provision were matters encompassed within the previous orders entered by the bankruptcy court with regard to the parties' settlement of the bankruptcy adversary proceeding. It contends that by making the order that it did, which incorporated Rudkin's agreement to assign his potential interest in the Trust to 21st Century, in effect the bankruptcy court necessarily decided the spendthrift provision had no effect and Rudkin could validly assign his interest to 21st Century. It argues that although the bankruptcy court's order did not specifically address the issue of the spendthrift provision, because the validity of the spendthrift provision could have been litigated by Rudkin during the bankruptcy proceeding, the bankruptcy court's ruling has res judicata effect and barred the probate court from making the ruling it did. We disagree.
Under the federal Bankruptcy Code (11 U.S.C. § 541(c)(2)), *fn7 an anti-alienation provision in a valid spendthrift trust created under state law is an enforceable "`restriction on the transfer of a beneficial interest of the debtor,'" and thus serves to exclude the trust corpus from the bankruptcy estate. (In re Moses (9th Cir. 1999) 167 F.3d 470; Patterson v. Shumate (1992) 504 U.S. 753, 757-758 [112 S.Ct. 2242, 2246].) Thus, if a trust contains a valid spendthrift provision, the debtor's anticipated interest in trust proceeds does not become part of his or her bankruptcy estate and therefore is not subject to the jurisdiction of the bankruptcy court to distribute. Appellant 21st Century, which bears the burden of providing a record that adequately demonstrates error, has included nothing in the record before us that indicates the bankruptcy court considered Rudkin's interest in the Trust to be part of his bankruptcy estate.
21st Century essentially concedes that cases such as In re Moses, supra, 167 F.3d 470, provide that a debtor's bankruptcy estate does not include the debtor's interests in a spendthrift trust. It contends, however, that the bankruptcy court here did in fact include Rudkin's interest in the Trust as part of his bankruptcy estate, and that even though the bankruptcy court erred in doing so, the principle of res judicata applies such that Rudkin cannot collaterally attack the order of the bankruptcy court.
21st Century's argument fails because the bankruptcy court's order did not encompass a finding that the spendthrift provision was invalid or otherwise ineffectual. The bankruptcy court made no mention of the existence of the spendthrift provision, and its order does not imply any particular finding with respect to the spendthrift provision or its effect on Rudkin's assignment of his anticipated interest in the Trust. As stated in Kelly, a beneficiary's assignment of his anticipated interest in the proceeds of a spendthrift trust is not wholly invalid. Such an assignment may be treated as a valid "contract to assign." (Kelly, supra, 11 Cal.2d at pp. 364-365.) As such, the bankruptcy court could accept the stipulated agreement as reached by the parties without impliedly finding the Trust's spendthrift provision invalid, and without adopting a provision therein that was legally invalid.
21st Century is bound by the terms and effect of the stipulated agreement approved by the bankruptcy court, just as Rudkin is bound. We independently review the stipulated settlement agreement, as incorporated in the bankruptcy court's order, and conclude that the effect of the agreement is that Rudkin and 21st Century formed a contract to assign Rudkin's interest in the trust. That agreement remains valid, and our holding here does no violence to the order of the bankruptcy court. Our holding is simply that the trustee cannot be ordered to turn the Trust proceeds over to 21st Century directly.
In the cases relied upon by 21st Century, res judicata was held to bar a party from undoing or avoiding the effects of a confirmed bankruptcy plan, for example, by disregarding release provisions. (See, e.g., City of Atascadero v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1998) 68 Cal.App.4th 445; Trulis v. Barton (9th Cir. 1995) 107 F.3d 685; In re Pardee (9th Cir. 1999) 193 F.3d 1083.) Our holding here does not contradict the plan set forth in the bankruptcy court's order. We merely interpret the order as approving, as part of the broader stipulated agreement, the parties' contract that Rudkin would pay to 21st Century any proceeds he receives from the Trust upon receiving such proceeds. It is not necessary to find the spendthrift provision invalid in order to be in full accord with the plan approved by the bankruptcy court. The doctrine of res judicata does not apply to bar the order made by the probate court.
III. Validity of the Spendthrift Provision
21st Century argues that Marta's purpose to create a spendthrift trust was not adequately demonstrated. We agree, however, with the probate court's construction of the Trust as creating a valid spendthrift trust.
No set phraseology need be employed to create a spendthrift trust. It is sufficient if the attempt is reasonably plain upon a consideration of the whole of the instrument creating the trust. (Estate of DeLano (1944) 62 Cal.App.2d 808, 813.) Here, the trustor's purpose to place the trust corpus and income beyond the reach of the beneficiary's creditors was expressly stated. Courts will not inquire whether the restrictions upon the use of the trust property were necessary for the protection of the beneficiary. (Ibid.)
IV. Lack of Standing
21st Century argues that the assignee of a chose in action stands in the shoes of the assignor, and therefore Rudkin as assignor of his rights to the Trust had no standing to bring a claim in probate court regarding distribution of the Trust. This argument presupposes the validity of the assignment. As we have explained, the stipulated agreement did not create a valid, present assignment, but rather merely formed a contract to assign, the breach of which could occur only once Rudkin received the proceeds of the Trust and failed to turn them over to 21st Century. 21st Century's argument as to standing must therefore fail.
V. Merger of Trustee and Beneficiary
21st Century contends that under the terms of the Trust, Rudkin immediately succeeded Marta as trustee of the Trust upon her death, and thus there was a merger of trustee and beneficiary in Rudkin such that the Trust immediately terminated and the spendthrift provision became inoperative at that time. Rudkin counters that Soluri has been trustee since 2000. He contends that the Trust, and the court's jurisdiction over the Trust, did not terminate until the probate court entered orders regarding the division and distribution of Trust assets. (Prob. Code, § 17200.) Rudkin is correct.
Rudkin became the trustee when Marta was found to be incompetent but resigned as trustee in 2000, as was his right under the terms of the Trust instrument. At that time Soluri was appointed trustee (as well as conservator of Marta's estate). Soluri's role as trustee continued upon Marta's death, and thus 21st Century's merger argument must also fail.
We note also that the Trust instrument does not provide that the Trust was to terminate immediately upon Marta's death. Instead, it explicitly contemplates that the trustee is to continue to administer the Trust until final distribution of the Trust estate occurs.
VI. Judicial Estoppel
21st Century argues for the first time on appeal that Rudkin should be judicially estopped from resisting distribution of the Trust proceeds directly to 21st Century. Whether or not to apply the doctrine of judicial estoppel involves a question of law as applied to the specific facts. The issue could arguably be raised for the first time on appeal, but only where the relevant facts are undisputed. That is not the case here, and we therefore conclude that the issue has been waived.
The doctrine of judicial estoppel applies when (1) the same party has taken two positions; (2) the positions were taken in judicial or quasi-judicial administrative proceedings; (3) the party was successful in asserting the first position (i.e., the tribunal adopted the position or accepted it as true); (4) the two positions are totally inconsistent; and (5) the first position was not taken as a result of ignorance, fraud, or mistake. (Drain v. Betz Laboratories, Inc. (1999) 69 Cal.App.4th 950.)
It is a factual question whether the first position taken by Rudkin in settling the bankruptcy adversary proceeding--that his potential interest in the Trust was fully assignable--was taken as a result of ignorance, fraud, or mistake. Rudkin was the attorney who drafted the Trust documents and inserted the spendthrift trust language, but on appeal we cannot simply presume he was intentionally trying to dupe 21st Century. He claims he was mentally and physically disabled at the time of executing the stipulation and did not fully understand what he was signing. The trial court was not given the opportunity to decide this factual question, critical to determining whether judicial estoppel should be applied. In addition, we note that 21st Century knew or should have known when it entered into the stipulation that the Trust contained a spendthrift clause, and could have guarded against the present outcome by recognizing Rudkin's right to the Trust proceeds was not directly assignable.
The order of the probate court from which appeal is taken is affirmed.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
EPSTEIN, Acting P.J.
*fn1 At the outset of the relevant proceedings, appellant was known as 20th Century Insurance Company, but subsequently changed its name and is now known as 21st Century Insurance Company. We refer to it throughout this opinion as 21st Century.
*fn2 On our own motion, we take judicial notice of the fact that Rudkin resigned from the California State Bar in August 2000 with disciplinary charges pending against him.
*fn3 The language used in the stipulated settlement was that Rudkin "shall and hereby does agree to assign to [21st] Century any and all assets, proceeds or monies to which he is or may be entitled as beneficiary under the [Trust] and further agrees to pay to [21st] Century forthwith, within no later than three (3) days of his receipt, any and all proceeds received by him from the [Trust] to the extent of the amount of the judgment remaining after deducting monthly payments made by [Rudkin]."
*fn4 On January 27, 2003, a judgment was entered in the bankruptcy court in which the court recognized that the parties had stipulated to entry of a non-dischargeable judgment, and the bankruptcy court had ordered entry of judgment based on the parties' stipulation on August 21, 2000. Based thereon, the court ordered "that plaintiff [21st Century] recover from defendant [Rudkin] the sum of $500,000.00, plus interest thereon at the rate of 6.21% per annum from August 21, 2000, as stipulated by the parties."
*fn5 As we explain in the next section of our discussion, federal bankruptcy law recognizes that a contingent beneficiary's anticipated interest in a trust containing a valid spendthrift provision does not become part of the beneficiary/debtor's bankruptcy estate.
*fn6 Rudkin argues on appeal, as he did below, that 21st Century should have filed a petition under Code of Civil Procedure section 709.010 and Probate Code section 15306.5 to enforce its judgment, and that even if it had, it would only be entitled to collect 25 percent of the Trust property. Because it is not necessary to our resolution of this appeal, we do not decide what procedure is to be followed by 21st Century hereafter, or whether it will be limited to collecting a certain percentage of the Trust proceeds.
*fn7 11 United States Code section 541 of the Bankruptcy Code provides: "(a) The commencement of a case under section 301, 302, or 303 of this title creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held:  (1) Except as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case." (Italics added.) Subsection (c)(2) provides: "A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable non-bankruptcy law is enforceable in a case under this title." (11 U.S.C.A. § 541.)