In re Reynolds

          Argued and Submitted March 7, 2014 Pasadena, California

         Appeal from the Ninth Circuit Bankruptcy Appellate BAP No. 11-1433 Panel Hollowell, Pappas, and Dunn, Bankruptcy Judges, Presiding

          Jesse S. Finlayson (argued), Finlayson Williams Toffer Roosevelt & Lilly LLP, Irvine, California, for Appellant.

          David W. Meadows (argued), Law Offices of David W. Meadows, Los Angeles, California, for Appellees.

          Before: Alex Kozinski and Susan P. Graber, Circuit Judges, and Charles R. Breyer, ^[*] District Judge.

         SUMMARY^[**]

         Bankruptcy

         The panel reversed a decision of the Bankruptcy Appellate Panel following the California Supreme Court's opinion answering a certified question regarding whether the creditors of the beneficiary of a spendthrift trust may reach the trust distributions.

         The panel held that a bankruptcy estate is entitled to the full amount of spendthrift trust distributions due to be paid as of the date of the bankruptcy petition. But the estate may not access any portion of that money the beneficiary needs for his support or education, as long as the trust instrument specifies that the funds are for that purpose. The estate may also reach 25 percent of expected future payments from the spendthrift trust, reduced by the amount the beneficiary needs to support himself and his dependents.

          OPINION

          PER CURIAM.

         Debtor is the beneficiary of a spendthrift trust. The trust payments he receives come entirely from trust principal. The California Probate Code is unclear as to whether and to what extent his creditors may reach the trust distributions, so we certified the question to the California Supreme Court. Frealy v. Reynolds, 779 F.3d 1028, 1030 (9th Cir. 2015). That court answers us in the attached opinion.

         In our order certifying the question, we recounted the facts of this case. Id. at 1031-32. Based on the California Supreme Court opinion, we now hold that a bankruptcy estate is entitled to the full amount of spendthrift trust distributions due to be paid as of the petition date. See Carmack v. Reynolds, 391 P.3d 625, 628 (Cal. 2017); Cal. Prob. Code § 15301(b). But the estate may not access any portion of that money the beneficiary needs for his support or education, as long as the trust instrument specifies that the funds are for that purpose. See Carmack, 391 P.3d at 629; Cal. Prob. Code § 15302. The estate may also reach 25 percent of expected future payments from the spendthrift trust, reduced by the amount the beneficiary needs to support himself and his dependents. See Carmack, 391 P.3d at 632; Cal. Prob. Code § 15306.5.

         We remand so that the bankruptcy court can apply the teachings of Carmack.

         REVERSED and REMANDED.

         APPENDIX

         215 Cal.Rptr.3d 749

         John M. CARMACK, as Trustee, etc., et al., Plaintiffs and Respondents,

         v.

         Rick H. REYNOLDS, Defendant;

         Todd A. Frealy, as Trustee in

         Bankruptcy, etc., Claimant and Appellant.

         S224985

         Supreme Court of California.

         Filed 3/23/2017

         Background:

         Chapter 7 trustee brought adversary proceeding, seeking to compel turnover of the undistributed principal to which debtor was entitled under spendthrift trust established by his late father. The United States Bankruptcy Court for the Central District of California, Meredith A. Jury, J., granted debtor's motion for summary judgment, and trustee appealed. The Bankruptcy Appellate Panel (BAP), Hollowell, J., 479 B.R. 67, affirmed, and trustee appealed, and the Court of Appeals, 2017 WL 1131882, certified question to the California Supreme Court as to the extent to which a bankruptcy estate may reach a beneficiary's interest in spendthrift trust.

         Holding:

         The Supreme Court, Liu, J., held that creditor may petition for pending distribution of principal as well as up to 25 percent of future payments. Question answered.

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