Brent v. State of Maryland Central Collection Unit

CHARLES E. ORTH, Jr., Judge, Specially Assigned. We are called upon in this case to determine the sanctity of the spendthrift provisions of a trust agreement. The agreement was executed over 50 years ago by Dr. Hugh Warren Brent as the “settlor” and Safe Deposit and Trust Company of Baltimore (now Mercantile Safe Deposit and Trust Co.) as the “Trustee.” I The trust agreement called for the income from the corpus to be paid to settlor’s surviving widow for her natural life. At her death, the fund was to be divided into three parts, one for each of settlor’s children.

In 1950, Laura Brent, one of the settlor’s children, then 29 years of age, became a patient at Springfield State Hospital. The settlor died in 1933, and his widow, Laura’s mother, who was receiving the income from the trust, paid for Laura’s care at the institution. The mother died in 1952. Laura was judicially declared incompetent and her brother, Raleigh, was appointed her Committee.

The Department of Health and Mental Hygiene investigated the ability of Laura and her Committee to pay for her care in the Springfield State Hospital Center. A rate was established to cover those costs. The income from her trust was sufficient to ⁶²⁸ pay for Laura’s maintenance at the rate established and the State was paid therefrom. In 1973 Laura’s financial status was reviewed and the rate of payment for her care was increased.

The increased rate was upheld on an administrative appeal and there was no judicial appeal. In the latter part of 1982 the State of Maryland, Central Collection Unit, filed suit in the Circuit Court for Carroll County against Laura, as an incompetent, and her Committee (hereinafter referred to as “Brent”). The State sought a judgment to cover the unpaid balance for Laura’s care at Springfield for some years past—through February 28, 1980. A judgment was entered by consent in favor of the State against Brent for $59,793.55 plus interest and costs.

Since the mother’s death, the State had been receiving the income from Laura’s share of the trust and applying it to the costs of her care. There is no dispute concerning those payments. The judgment, however, could not be satisfied without invading the corpus. The State filed suit in the Circuit Court for Baltimore County against Brent and joined the Trustee as garnishee.

The judgment was therein recorded and the State obtained a writ of garnishment. The Trustee took the position that the trust property was not subject to garnishment. Upon hearing, the court agreed with the Trustee. The State appealed to the Court of Special Appeals.

The court reversed the circuit court. State, Cent. Collection Unit v. Brent, 71 Md.App. 265 , 525 A.2d 241 (1987). We granted a petition by Brent and the Trustee and a conditional cross petition by the State for the issuance of a writ of certiorari.

II The trust agreement provided that the trust fund be equally divided at the death of settlor’s wife among the then surviving children. The income from each share was to be paid to each beneficiary for life. With respect to the corpus, it provided that at any time after the attainment by him or her of the age of thirty-five (35) years and prior to the attainment by ⁶²⁹ him or her of the age of forty (40) years, he or she shall have the absolute right and option in writing to the Trustee to request and direct the Trustee to convey, deliver and pay over unto him or her, free and clear of any and all further trust, any portion of the principal of his or her respective share of the trust fund up to but not to exceed, however, one-half of the principal of his or her respective share thereof as constituted at the time of the division thereof into equal shares as hereinbefore provided ____ The agreement further provided that after the attainment by him or her of the age of forty (40) years, he or she shall have the absolute right and option at any time and from time to time to request and direct the Trustee to convey, deliver and pay over unto him or her, free and clear of any and all further trust, the whole or any portion of his or her respective share thereof remaining in the hands of the Trustee, and upon the receipt by the Trustee of such written request and direction as hereinbefore provided, the Trustee shall convey, deliver and pay over unto him or her the whole or such portion of the principal of his or her respective share of the trust fund as he or she may in such writing so request and direct to be paid over unto him or her within the limitations as hereinbefore expressed and set forth as in the case of any child between the ages of thirty-five (35) and forty (40) years____ The agreement stated: [T]he trust as to such portion or the whole thereof so conveyed, delivered and paid over unto him or her by reason of such request and direction shall cease and determine. Subject to an exception applicable to payments made for the maintenance, education and support of a minor beneficiary, the agreement commanded: The Trustee shall make all payments provided for hereunder directly into the hands of the beneficiary or beneficiaries hereunder entitled to receive the same and not into ⁶³⁰ the hands of another howsoever claiming ... and no assignment or order by any beneficiary of any part of the payments provided for him or her hereunder shall be valid nor shall the same be subject to attachment by garnishment or any other legal proceeding whatsoever while remaining in the hands of the Trustee hereunder.

This last mandate served as the basis of the Trustee’s refusal to honor the writ of garnishment. Ill As a general rule, creditors of the beneficiary of a trust can by appropriate proceedings reach his interest and thereby subject it to the satisfaction of their claims against him. Restatement (Second) of Trusts § 147 (1959). Early on this Court declared: It is wholly against the policy of the law to allow property, whether legal or equitable, to be fettered by restraints upon alienation, and generally whenever property is subject to alienation by the owner it is subject to his debts.

Warner v. Rice, 66 Md. 436, 440 , 8 A. 84 (1887). This was quoted with approval in Baker v. Keiser, 75 Md. 332, 338 , 23 A. 735 (1892), and has not been eroded in Maryland over the years. See Real Estate Co. v. Serio, 156 Md. 229, 233 , 144 A. 245 (1929); Gischell v. Ballman, 131 Md. 260, 264 , 101 A. 698 (1917). One hundred years ago, however, this Court had before it a clause in a will whereby the testator devised certain real estate to a friend in trust with the duty to collect the rents and profits, and pay them to the testator’s son.

The income was to be paid “into [the son’s] own hands, and not into another, whether claiming by his authority or otherwise ____” Upon the death of the son, the property was to be conveyed to the then living children of the son. Smith v. Towers, 69 Md. 77, 83 , 14 A. 497 (1888). A majority of the Court found that the clause clearly expressed the intention of the testator to give the income of the property to the son to the exclusion of the son’s creditors. It determined that ⁶³¹ the terms and provisions of the will were “effectual to carry out this intention.” Id.

The majority reached this second conclusion, despite English decisions to the contrary and after consideration of conflicting decisions in this country. It opined [u]pon principle ... that the founder of a trust may provide in direct terms that his property shall go to his beneficiary to the exclusion of his alienees, and to the exclusion of his creditors. Id. at 90 , 14 A. 497 . Thus, under the direct terms of the will, the income in the hands of the trustee could not “be reached by [the son’s] creditors by any process, either at law or in equity, before such rents and profits [were] paid to him.” Id. at 91 , 14 A. 497 .

So was born the “spendthrift trust” in Maryland. 1 Restatement (Second) of Trusts § 152(2) (1959) defines a “spendthrift trust” as [a] trust in which by the terms of the trust or by statute a valid restraint on the voluntary and involuntary transfer of the interest of the beneficiary is imposed---- Medwedeff v. Fisher, 179 Md. 192 , 17 A.2d 141 (1941), made clear that in Maryland the principal of a trust, as well as income, can be subjected to a spendthrift clause, “even though principal and income are payable to the same beneficiary.” Id. at 197 , 17 A.2d 141 . In the years intervening since Smith v. Towers, this Court has addressed the matter of spendthrift trusts on a number of occasions and has steadfastly adhered to the position it took in that case. See cases cited in State, Cent. Collection Unit v. Brent, 71 Md.App. at 268 , 525 A.2d 241 .

And see Hoffman Chev. v. Wash. Co. Nat’l Sav., 297 Md. 691, 706 , 467 A.2d 758 (1983). It is axiomatic that the intention of the settlor governs the interpretation of a trust agreement. The intention is ordinarily ascertained from the language of the provisions ⁶³² of the agreement.

It is not disputed that the settlor in the case we here decide intended to create a spendthrift trust. Nor is it contended that the spendthrift clause did not apply to the funds set aside for each child, including those for Laura. But the intention of the settlor cannot prevail over recognized legal principles and the spendthrift provisions must be valid in the eyes of the law. When the State obtained the writ of garnishment, Laura was well past the age of 40 years.

There had been no prior attempt to invade the principal of her trust. But since 1961, when she attained the age of 40 years, she had, as we have indicated, the absolute right and option ... to request and direct the Trustee to convey, deliver and pay over unto ... her, free and clear of any and all further trust, the whole or any portion of ... her respective share thereof remaining in the hands of the Trustee____ The question is the status of the spendthrift provisions with respect to Laura’s trust at the time the writ of garnishment issued. If the Provisions were effective against creditors at that time, the circuit court was correct. If they had become ineffectual, the Court of Special Appeals properly reversed the judgment of the Circuit Court for Baltimore County.

It appeared to the Court of Special Appeals that the issue we are called upon to resolve is “one of first impression in Maryland____” Brent, 71 Md.App. at 271 , 525 A.2d 241 . We agree. There is no controlling Maryland judicial opinion or statute on the matter. We, therefore, look to authorities elsewhere, as did the Court of Special Appeals in reaching its decision, and as did the State in argument before us.

Two views emerge from an examination of the cases decided in our sister states. It has been held that where by the terms of the trust a beneficiary is entitled at some future time to receive the ⁶³³ principal of the trust estate and that time has arrived but the trustee has not yet paid the principal to him, a restraint on the alienation of his interest, even if valid up to that time, ceases to be effective. 2A A. Scott & W. Fratcher, Scott on Trusts § 153 at 133 (4th ed. 1987). This statement is supported by authorities listed under note 7 to the section. There is authority, however, to the effect that the restraint on alienation of the right to receive the principal is effective until the principal is actually paid over to the beneficiary.

Id. at 133-134. This statement is supported by the authorities listed under note 8 of § 153. The first view is in accord with the Restatement (Second) of Trusts (1959). Section 153(1) recognizes, with exceptions not here relevant, the validity of a restraint on the voluntary or involuntary transfer of the interest of a beneficiary when by the terms of the trust he is entitled to have the principal conveyed to him at a future time.

But § 153(2) declares that when a beneficiary is entitled to have the principal paid or conveyed to him immediately or at any time he may call for it, a restraint on alienation of his interest is invalid. See § 153(2) comment c. We have examined a fair sampling of the cases in other jurisdictions relating to the issue. With respect to the first view, we notice that years ago the court in Ullman v. Cameron, 186 N.Y. 339 , 78 N.E. 1074 (1906), stated what proved to be an alembic of the principles inherent in the first view. [It is] contrary to sound public policy to permit a person to have the absolute and uncontrolled ownership of property for his own purposes, and to be able at the same time to keep it from his creditors.

Id. at 346 , 78 N.E. 1074 . The rationale of this doctrine was explained by the court thus: ⁶³⁴ [A]s to my creditors, property is mine which becomes mine for the asking, and no words can make an instrument strong enough to hold it for me, and keep it from them.[ 2 ] Id. A significant number of states have followed the lead of Ullman . By judicial decision, and at times by statute, they have embraced the principle that when the beneficiary attains the right to a distribution of the corpus of the trust fund, the immunity of that corpus from attachments and alienations is ineffectual.

The cases to that end indicate that [i]t is uniformly held to be against public policy to permit a person to tie up his own property in such a way that he can still enjoy it but can prevent his creditors from reaching it. First Nat. Bank of Omaha v. First Cadco Corp., 189 Neb. 734, 738 , 205 N.W.2d 115 (1973). The key is the right of the beneficiary to the corpus as distinguished from his actual possession of it.

So the rights of the creditors depend upon the beneficiary’s interest in the property, not on the actual distribution of the fund to him. Sproul-Bolton v. SproulBolton, 383 Pa. 85, 94 , 117 A.2d 688 (1955). It would seem clear that as soon as [the beneficiary’s] right to receive his share of the principal accrued it became his property and he could immediately thereupon have compelled its conveyance to him; the trust thenceforth was a dry trust and neither [the beneficiary] nor the trustees could thereafter defeat the rights of creditors with respect to the principal of the trust merely by allowing it, deliberately or otherwise, to remain in the ⁶³⁵ trustees’ hands.[ 3 ] Id. at 93-94 , 117 A.2d 688 . It follows that [t]he very fact that power is given which may be used by the [beneficiary] to apply the fund in whole or in part to the payment of his debts, is an investiture pro tanto of ownership.

When a donor substitutes for his own absolute right of disposition, the pleasure of the donee, the gift is absolute. Morgan’s Estate (No. 1), 223 Pa. 228, 231 , 72 A. 498 (1909). This is in accord with the general rule that “if the beneficiary can call for the principal at will, there is in substance, no condition precedent, and the beneficiary is considered at this point to be the sole owner of the corpus.” Estate of Blardone v. McConnico, Tex.Civ.App. 604 S.W.2d 278,