Markham, etc v. Fay

UNITED STATES COURT OF APPEALS
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
FOR THE FIRST CIRCUIT

No. 95-1631

PAUL F. MARKHAM, TRUSTEE,

Plaintiff,

v.

CLAIRE M. FAY, AS TRUSTEE OF HIGHLAND AVENUE NURSING HOME
TRUST, PARKER HILL NURSING HOME TRUST,
AND GREEN PASTURES NURSING HOME TRUST,

Defendant, Appellant,

and

UNITED STATES,

Defendant, Appellee.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Robert B. Collings, U.S. Magistrate Judge]

Before

Torruella, Chief Judge,

Bownes, Senior Circuit Judge,

and Stahl, Circuit Judge.

Richard H. Gens for appellant.

Annette M. Wietecha, Attorney, with whom Donald K. Stern,

United States Attorney, Of Counsel, Loretta C. Argrett, Assistant

Attorney General, Gary R. Allen, Attorney, and Jonathan S. Cohen,

Attorney, Tax Division, United States Department of Justice, were
on brief for appellee.

February 7, 1996

BOWNES, Senior Circuit Judge. Appellant Claire M.
BOWNES, Senior Circuit Judge.

Fay ("Fay"), in her capacity as trustee of three trusts,

appeals the magistrate judge's ruling that a federal tax lien

upon her individual property extends to the entire assets of

the trusts. Fay contends that the magistrate judge erred

because the property of the trusts would not be considered

her own under Massachusetts law. Fay also raises federal

statutory and constitutional issues, contending that Appellee

Internal Revenue Service ("IRS") does not have a valid lien

upon the trust property because it failed to comply with

statutory notice and limitations requirements as to the

trusts, and also that the trust beneficiaries were

indispensable parties who were not joined and were deprived

of property without due process of law. We hold that there

was no statutory or constitutional error and that the

magistrate judge correctly held that the lien attached to the

entire property of the Green Pastures and Parker Hill Nursing

Home Trusts. We also hold that the magistrate judge erred in

holding that the lien attached to the entire property of the

Highland Avenue Nursing Home Trust. Thus, we affirm in part,

reverse in part, and remand for a new judgment.

I. BACKGROUND AND PROCEDURAL HISTORY

In a published opinion, the magistrate judge made

extensive findings of fact, Markham v. Fay, 884 F. Supp. 594

(D. Mass. 1995), none of which are in dispute in this appeal.

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We recount those necessary to provide context to the issues

before us.

During the 1960s and 1970s, Fay and others created

a number of legal entities for the purpose, inter alia, of

owning and operating nursing homes in Massachusetts. Three

of those entities -- the Green Pastures Nursing Home Trust,

the Parker Hill Nursing Home Trust and the Highland Avenue

Nursing Home Trust -- are involved in this appeal. Fay

created the trusts in 1974, conveying to herself as trustee

of each trust the nursing home for which the trust was named.

A fourth entity, Regina Nursing Home, Inc. ("the

corporation"), was incorporated in 1961. Fay became its

president and sole stockholder in 1967, then assigned all of

her stock to her sister Theresa Dzialo (Dzialo) sometime

during the 1970s. The corporation owned the Chester Manor

Nursing Home. At no time were the trusts and the corporation

organized or operated as one entity, and each owned different

property.

In June of 1976, Fay, as trustee of the trusts and

president of the corporation, sold the Parker Hill, Green

Pastures, Highland Avenue and Chester Manor Nursing Homes to

trusts owned by Louis Almeida ("Almeida"), in exchange for

mortgages and other consideration. Almeida filed for

bankruptcy in 1978. By then, the only assets owned by the

trusts and the corporation were the mortgages, and Almeida

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had defaulted on them. On October 2, 1990, the bankruptcy

court awarded the trusts and the corporation, as secured

creditors, the proceeds from the bankruptcy trustee's sale of

the nursing homes, amounting to $67,809.89.

On October 10, 1990, the IRS filed a derivative

claim with the bankruptcy court "for the purpose of obtaining

any dividend which may become payable to Claire M. Fay." The

IRS's claim was premised on Fay's individual tax liability.

In 1979, in view of Almeida's bankruptcy, the IRS had

assessed Fay individually as a "responsible person" under 26

U.S.C. 6671 and 6672 for income and F.I.C.A. taxes Almeida

failed to pay for the nursing homes' employees during the tax

years 1976 through 1978.1 On October 31, 1979, IRS filed a

notice of federal tax lien for $200,213.45 against Fay

individually, and refiled it on January 27, 1986. In 1984,

the IRS sued Fay individually, and on December 30, 1990,

judgment was entered against her in the amount of

$699,142.21, including penalties and interest.

On October 31, 1990, the IRS delivered to the

bankruptcy trustee (but not to the corporation) a notice of

levy on the corporation as alter ego and/or nominee of Fay.

The IRS did not file any liens, lawsuits or notices thereof

1. Fay apparently continued to be involved in managing the
nursing homes after selling them to Almeida. The efficacy of
the assessment against her is not before us in this appeal.

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against the trusts, Fay as trustee of the trusts, or the

beneficiaries of the trusts.

On February 12, 1991, Paul F. Markham ("Markham"),

the bankruptcy trustee who held the proceeds of the sale of

the nursing homes, filed an interpleader action in

Massachusetts Superior Court seeking a determination of the

rights of the various claimants to the interpled fund.

Markham named as defendants Fay individually and as trustee

of the trusts, the corporation, the United States, and two

attorneys seeking payment for litigating the claims of the

trusts and the corporation before the bankruptcy court. On

March 14, 1991, the IRS removed the case to the United States

District Court for the District of Massachusetts. On May 5,

1993, the court denied summary judgment to the IRS, the

corporation and the trusts, granted summary judgment in favor

of the attorneys (awarding them $16,970), and then referred

the case to the magistrate judge for all purposes including

trial and entry of judgment.

After a bench trial, the magistrate judge issued an

opinion, holding that the IRS was entitled to the entire

proceeds of the sale of the Parker Hill, Green Pastures and

Highland Avenue Nursing Homes because Fay had reserved to

herself such significant powers in the trusts that their

assets would be considered her own under Massachusetts law.

884 F. Supp. at 607, 609. The magistrate judge also held

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that the government had failed to prove that the trusts or

the corporation were Fay's alter egos, and found that the IRS

had not established that Fay used the trusts for a fraudulent

purpose or for her own individual benefit. Id. at 604.

Judgment was entered for the IRS in the amount of $27,732.85

plus 55% of the accumulated interest, and for the corporation

in the amount of $23,107.04 plus 45% of the accumulated

interest.2 Fay, in her capacity as trustee of the three

trusts, then filed this appeal.

Before we proceed to the legal issues, we clarify

the present status of the trusts and the proceeds of the sale

of the nursing homes. Since 1978, the trusts have not held

any property other than the mortgages on the nursing homes,

and have not engaged in any transaction or business other

than pursuing their claims against Almeida's bankrupt estate

and defending the bankruptcy court's award. Although

dormant, the trusts continue to exist. They were in no way

terminated by the bankruptcy trustee's sale of the nursing

homes. Rather, the bankruptcy court awarded the sale

proceeds to the trusts in satisfaction of the mortgages. We

refer to the sale proceeds as trust property, although not

2. After the attorneys were paid at the summary judgment
stage, $50,839.89 plus accumulated interest remained. The
parties stipulated at trial that the fund was attributable as
follows: $23,107.04 to the corporation; $16,046.63 to
Highland Avenue Nursing Home Trust; $11,246.12 to Parker
Hill Nursing Home Trust; and $440.10 to Green Pastures
Nursing Home Trust.

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yet paid to the trusts, because the proceeds will become

trust property unless paid to the IRS.

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II. STATUTORY AND CONSTITUTIONAL ISSUES

Fay first contends that the IRS does not have a

valid lien against the trust property because it did not

comply with statutory notice and statute of limitations

requirements as to the trusts. It gave no notice of

assessment as to the trust property in 1979, did not join the

trusts, Fay as trustee, or the trust beneficiaries as

defendants in its 1984 suit against Fay individually, and did

not proceed against them by separate suit, assessment,

demand, lien or levy. Second, Fay contends that because the

IRS sought in the interpleader action to collect from the

trust property as such, the beneficiaries were indispensable

parties who were required to be joined in their own right.

Finally, Fay argues that because the beneficiaries were given

no opportunity to appear and defend their rights in the

interpleader action, the magistrate judge's ruling deprived

them of property without due process of law.

The IRS responds first that it is only Fay's own

property from which it seeks to collect and all notice and

limitations requirements were met with respect to her. The

IRS concedes that if it had sought to hold the trustee, the

trusts or the beneficiaries personally liable as Fay's

transferees, it would have had to institute a collection

action directly against them within six years from the

assessment of the tax. See United States v. Updike, 281 U.S.

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489, 493 (1930); 26 U.S.C. 6901. The IRS, however, asserts

that it sought to collect the taxes out of property that

would be considered Fay's own under Massachusetts law.

Notice and limitations requirements with respect to the

trusts therefore were not implicated. As to Fay's joinder

and due process arguments, the IRS responds that the

bankruptcy trustee named Fay as trustee in the interpleader

action, she has represented the interests of the

beneficiaries throughout this litigation, and at no time have

the beneficiaries as such sought to intervene. Furthermore,

the IRS argues, the beneficiaries' exclusive remedy is a suit

for wrongful levy brought pursuant to 26 U.S.C. 7426(a),

which is now time-barred because no such suit was brought

within nine months from the date of levy, as required by 26

U.S.C. 6532(c).

Although the magistrate judge did not precisely

resolve these issues,3 we will review them de novo as

matters of federal law. Horton Dairy, Inc. v. United States,

986 F.2d 286, 290 (8th Cir. 1993). First, we must untangle

3. The magistrate judge stated at the beginning of his
analysis that the separate structures of the trusts could be
disregarded for notice and statute of limitations purposes if
they were Fay's alter egos, but went on to hold that they
were not Fay's alter egos, and never addressed whether the
trusts were required to be treated separately under the
distinct theory that prevailed -- that the trust property
would be considered Fay's own under Massachusetts law. The
magistrate judge did not mention Fay's joinder or due process
arguments.

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the web of statutory and procedural requirements implicated

in this phase of Fay's appeal. Once the IRS makes an

assessment of a taxpayer's liability, it has sixty days in

which to "give notice to each person liable for the unpaid

tax, stating the amount and demanding payment thereof." 26

U.S.C. 6303(a). Once notice and demand are given and the

tax goes unpaid, a lien in favor of the United States

automatically arises "upon all property and rights to

property, whether real or personal, belonging to such

person." 26 U.S.C. 6321. Whether and to what extent a

particular piece of property constitutes property of the

taxpayer to which a federal tax lien can attach is a question

of state law. Aquilino v. United States, 363 U.S. 509, 512

(1960). The lien arises at the time the assessment is made

and continues until the liability is satisfied or becomes

unenforceable by lapse of time. 26 U.S.C. 6322. The IRS

may collect the tax by levy or by bringing a proceeding in

court, which according to the pre-1990 version of 26 U.S.C.

6502 applicable in this case, must be done "within six years

after the assessment of the tax."4 26 U.S.C. 6502(a)

(1988). A lien becomes unenforceable by lapse of time upon

expiration of the six-year statute of limitations for

collection, but if the government brings suit within six

4. The statute was amended in 1990 to extend the limitations
period to ten years. 26 U.S.C. 6502(a) (1994).

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years from assessment and receives a judgment in its favor,

the life of the lien is extended indefinitely. See Rodriguez

v. Escambron Dev. Corp., 740 F.2d 92, 94 n.3 (1st Cir. 1984).

There is no dispute that the IRS assessed a tax

against Fay individually in 1979, that it gave notice and

demand to her within sixty days, that a lien dating from the

assessment arose against all of Fay's property and rights to

property, that the IRS timely filed a civil action against

Fay individually in 1984, that it refiled the notice of tax

lien in 1986, and that it obtained a judgment in December of

1990 that extended the life of the lien on Fay's property

indefinitely. That brings us to the IRS's collection

efforts beginning with the derivative claim in the bankruptcy

court in October of 1990 and leading to the interpleader

action below. As stated above, the IRS may collect by levy

or by a proceeding in court. 26 U.S.C. 6502(a). The

briefs are unhelpful (at best) as to which route the IRS

took. The IRS indicates that it levied on the trust

property, but the IRS may collect by levy only after

notifying the taxpayer in writing of its intention to make

such levy. 26 U.S.C. 6331(a), (b), (d)(1). The notice of

levy upon the corporation as Fay's alter ego did not

constitute notice of levy on the trust property because,

inter alia, the trusts and the corporation each held

different property. Because it has never notified Fay of an

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intention to levy on the trust property, there has been no

levy.

Other than by levy, the IRS can collect by a

proceeding in court, either by bringing an action pursuant to

26 U.S.C. 7403, or by simply suing for the amount owed and

then exercising "the usual rights of a judgment creditor" to

enforce any judgment obtained. United States v. Rodgers, 461

U.S. 677, 682 (1983). This is not a section 7403 action and

neither party contends that it is.5 The IRS is therefore

exercising the usual rights of a judgment creditor. It

asserts (inconsistently with its indication that it levied on

the trust property) that the Federal Debt Collection

Procedure Act of 1990 (FDCPA), 28 U.S.C. 3001, et seq.,

governs the interpleader proceedings, and Fay does not

contend otherwise. Fay's tax indebtedness is a "debt" as

defined in the FDCPA because it is "an amount owing to the

United States on account of [an] . . . assessment." 28

U.S.C. 3002(3)(B). Except to the extent that another

federal law specifies procedures for recovering on a judgment

for a debt arising under such law, the FDCPA is the exclusive

civil procedure for the government to recover a judgment on a

5. The government has the right in a section 7403 proceeding
to seek a forced sale of the entire property in which a
delinquent taxpayer has an interest even where innocent
others also have an interest in the property. This special
privilege arises from the express terms of section 7403,
Rodgers, 461 U.S. at 697, and is not available to the

government here.

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debt. 28 U.S.C. 3001(a), (b). The tax code (from which

the debt arose) does specify procedures for recovering on a

judgment by levy, 26 U.S.C. 6331, and by filing an action

in a federal district court to enforce a lien, 26 U.S.C.

7403, but does not contain specific procedures for otherwise

recovering on a judgment, for example by filing a derivative

claim in bankruptcy court and litigating against the taxpayer

in a resulting interpleader action, as the IRS did here.

Thus, the procedures of the FDCPA appropriately control. I f

the magistrate judge was correct that the entire property of

each trust would be considered Fay's own under Massachusetts

law, then the IRS had a valid lien on that property that it

could seek to enforce in the interpleader action. By

notifying Fay in 1979, the IRS complied with the plain

language of section 6303(a) requiring notice and demand on

the only "person liable." The IRS also complied with the

statute of limitations by suing Fay in 1984 within six years

of the tax assessment in 1979 as required by section 6502(a).

The judgment obtained in 1990 extended the life of the lien,

so that the IRS's effort to enforce the judgment in the

interpleader action was timely. Fay argues that the IRS

failed to establish a nexus between the taxes owed by her

individually and the proceeds of the sale of the nursing

homes, but the IRS does not contend that the tax liability

was incurred by the trusts such that the judgment could be

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satisfied directly from the entire trust property regardless

of whether it belonged to Fay. Rather, the IRS has a valid

lien upon Fay's individual property and rights to property

that it may enforce out of any trust property that under

Massachusetts law belongs to Fay, even though the claim arose

independently of the trusts.

As to whether the beneficiaries were indispensable

parties who were deprived of an opportunity to be heard in

their own right, we begin by rejecting the IRS's argument

that the beneficiaries' only remedy is a suit for wrongful

levy under 26 U.S.C. 7426(a). Third parties are limited to

that remedy only when the government proceeds by levy,

Rodgers 461 U.S. at 682-83, 695-96, which it has not done.

Rather, whether the beneficiaries were required to be joined

is governed by Fed. R. Civ. P. 19. See 28 U.S.C. 3003(f)

(Federal Rules of Civil Procedure apply in FDCPA actions).

That rule provides in relevant part that a person subject to

service of process and whose joinder will not deprive the

court of subject matter jurisdiction "shall be joined as a

party in the action if . . . the person claims an interest

relating to the subject of the action and is so situated that

the disposition of the action in the person's absence may (i)

as a practical matter impair or impede the person's ability

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to protect that interest . . . ."6 Courts applying this

rule generally have held that beneficiaries are indispensable

parties in actions like this to collect a tax or other debt

from the trust corpus, see Tick v. Cohen, 787 F.2d 1490,

1495-96 (11th Cir. 1986); United States v. Fried, 183 F.

Supp. 371, 373 (E.D.N.Y. 1960), and actions analogous to this

seeking to terminate a trust. See Hansen v. Peoples Bank,

594 F.2d 1149 (7th Cir. 1979). "The general rule is, that in

suits respecting trust-property, brought either by or against

the trustees, the cestuis que trust as well as the trustees

are necessary parties." Carey v. Brown, 92 U.S. 171, 172

(1875); see also Stevens v. Loomis, 334 F.2d 775, 777 (1st

Cir. 1964). An exception to the general rule, however,

exists when the trustee represents the beneficiaries'

interests fully and without conflict. 3A James W. Moore,

Moore's Federal Practice 19.08 at 175-76 (2d ed. 1985).

The bankruptcy trustee joined Fay both individually

and as trustee in the interpleader action. Fay had the duty

as trustee under the three declarations of trust to represent

the beneficiaries' interests in any lawsuit. While, at least

6. In contrast, in an action to enforce a lien or subject
property to payment of tax brought pursuant to 26 U.S.C.
7403, "[a]ll persons . . . claiming any interest in the
property involved" are required to be made parties. 26
U.S.C. 7403(b); United States v. Big Value Supermarkets,

Inc., 898 F.2d 493, 496 (6th Cir. 1990) (section 7403(b) is

mandatory); United States v. Overman, 424 F.2d 1142, 1146

(9th Cir. 1970) (same).

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on the surface, the fact that the trustee in this case

incurred the debt that the trust property might be reached to

pay indicates a potential conflict between Fay and the other

beneficiaries, all signs are that Fay represented them

zealously and without conflict. Fay has not asserted any

claim to the fund in her individual right throughout the

course of this litigation, but has appeared only in her

capacity as trustee. Moreover, as settlor and one of the

beneficiaries of the trust, Fay's interest in protecting the

trust property would seem to be at least as strong as that of

the other beneficiaries. The beneficiaries as such did not

seek to intervene at any point when the district court or the

magistrate judge could have joined them as parties in their

own right. This is not to say that the issue was waived,

Freeman v. Northwest Acceptance Corp., 754 F.2d 553, 559 (5th

Cir. 1985) (failure to raise below the issue of whether a

party should have been joined does not result in waiver), but

it does indicate that the beneficiaries did not perceive any

failure on Fay's part to represent their interests at the

time. And on appeal, Fay fails to describe any conflict

between her interests and those of the other beneficiaries,

any way in which their interests were not represented, or any

way in which the litigation might have gone differently if

they had been joined. As will be seen, resolution of the

core issue in the case -- whether the property of any of the

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trusts would be considered Fay's own under Massachusetts law

-- depended factually only on the language of the trust

instruments, documents that were before the magistrate judge

and are before us. Although in an abundance of caution it

may have been better for the beneficiaries to have been

joined, as it turned out, Fay faithfully represented their

interests. We therefore hold that the beneficiaries were not

indispensable parties. The same considerations defeat Fay's

argument that the beneficiaries were deprived of property

without due process of law. Moreover, assuming the

magistrate judge was right, the beneficiaries were not

deprived of their own property.

III. WAS THE TRUST PROPERTY FAY'S OWN UNDER MASSACHUSETTS

LAW? When the IRS assessed taxes owed by Fay as a

"responsible person" in 1979, a federal tax lien arose "upon

all property and rights to property, whether real or

personal, belonging to" Fay. 26 U.S.C. 6321, 6322. The

tax code "creates no property rights but merely attaches

consequences, federally defined, to rights created under

state law." United States v. Bess, 357 U.S. 51, 55 (1958).

Whether and to what extent Fay's powers, interests and rights

in the trusts constitute property to which the federal tax

lien could attach is a question of state law. Aquilino, 363

U.S. at 512.

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We review de novo the issue of whether the trust

instruments gave Fay such extensive powers over the trust

property that it was in effect her own under Massachusetts

law. Salve Regina College v. Russell, 499 U.S. 225, 231

(1991); Losacco v. F.D. Rich Constr. Co., 992 F.2d 382, 384

(1st Cir. 1993). In doing so, we will take care not to

extend state law beyond its well-marked boundaries in an area

such as trust law that is quintessentially the province of

state courts.

Initially, we clarify that it was not improper for

Fay, the settlor of the trusts, to designate herself as both

sole trustee and one of the trusts' beneficiaries. Under the

common law of trusts, "trustees may be included among the

beneficiaries of a trust." Mahoney v. Board of Trustees,

973 F.2d 968, 971 (1st Cir. 1992), citing Restatement

(Second) of Trusts 99, 115 (1959); William F. Fratcher, 2

Scott on Trusts, 99.2, 115 (4th ed. 1987). And a sole

trustee who is also the settlor may be one of two or more

beneficiaries. Sullivan v. Burkin, 460 N.E.2d 572, 575 (Mass.

1984); Ascher v. Cohen, 131 N.E.2d 198, 199-200 (Mass. 1956);

Restatement (Second) of Trusts 100.

When a trustee is also a beneficiary, she holds the

legal title to the entire trust property in trust for all of

the beneficiaries (including herself), has a duty to deal

with it for the benefit of the beneficiaries, and does not

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hold legal title to any of the trust property free of trust

to use as she pleases. There is no partial merger of the

legal and equitable interests. Restatement (Second) of

Trusts 99 cmt. b; 2 Scott on Trusts 99.3. It follows

that a creditor generally cannot reach a

trustee/beneficiary's interest in a trust, such as these,

with a spendthrift provision. Restatement (Second) of Trusts

99 cmt. b.

When a beneficiary is also the settlor, however,

she cannot keep property beyond the reach of her creditors by

placing it in a spendthrift trust for her own benefit. See

Merchants Nat'l Bank v. Morrissey, 109 N.E.2d 821, 823 (Mass.

1953); Forbes v. Snow, 140 N.E. 418, 419 (Mass. 1923). A

settlor/beneficiary's creditors therefore can reach "the

maximum amount which the trustee under the terms of the trust

could pay to him or apply for his benefit." Restatement

(Second) 156(2), quoted in Ware v. Gulda, 117 N.E.2d 137,

138 (Mass. 1954). This, of course, does not mean that the

interest of any other beneficiary may be reached by the

settlor/beneficiary's creditors. 2 Scott on Trusts 114.

As a matter of federal law, a tax lien extends only to

property or rights to property belonging to the delinquent

taxpayer, and not to property belonging to innocent third

parties. Rodgers, 461 U.S. at 690. Whether the tax lien in

this case attaches to the entire property of each trust

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depends on whether the trust instruments give Fay the power

to eliminate the other beneficiaries' interests.

A. The Parker Hill and Green Pastures Nursing

Home Trusts

On January 21, 1974, Fay created the Green Pastures

and Parker Hill Nursing Home Trusts under declarations of

trust whose terms were identical except for the names of the

trusts and the identity of their assets. Fay named herself

sole trustee and conveyed to herself as trustee the

respective nursing homes. Fay named herself and her two sons

as the beneficiaries of each trust, all in equal shares,

until the trusts terminate.7 She named her sister Dzialo as

the remainder beneficiary of each trust -- upon termination,

the trust property and undistributed income were to

immediately vest in her free of trust.

The magistrate judge ruled that the IRS was

entitled to reach that part of the interpled fund that

represents the assets of the Green Pastures and Parker Hill

Nursing Home Trusts, based on Fay's "copious" rights and

powers as settlor, sole trustee and one of the beneficiaries

of the trusts, and her reserved right as settlor to alter,

7. The trusts are to terminate at the earliest of the
following: twenty years from the date the trusts were
declared; Fay's election to terminate; her death; or
appointment of a guardian of her or a conservator of her
property. Although twenty years have now passed since Fay
created the trusts in 1974, we assume the trusts' continuing
existence because our point of reference is the date this
litigation began.

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amend or revoke the trusts, although Fay has not exercised

those powers or otherwise used the trusts for her exclusive

benefit. 884 F. Supp. at 607.

Traditionally, Massachusetts has given full effect

to inter vivos trusts, regarding their assets as trust

property rather than that of the settlor in spite of broad

powers reserved to him or her, at least while those powers

remain unexercised. See National Shawmut Bank v. Joy, 53

N.E.2d 113, 122-25 (Mass. 1944); Guthrie v. Canty, 53 N.E.2d

1009, 1010 (Mass. 1944). But another line of cases has more

recently emerged from the Massachusetts Court of Appeals. In

State Street Bank and Trust Co. v. Reiser, 389 N.E.2d 768

(Mass. App. Ct. 1979), the court broke with tradition,

holding that a settlor/beneficiary's creditors could reach

trust assets upon his death where he had reserved powers to

amend or revoke and to direct the disposition of principal

and income during his lifetime, even though the powers

remained unexercised at the time of his death, and even

though the remainder beneficiaries' rights in the trust

vested upon his death because there was no further

possibility that he could exercise his powers. Id. at 770-

71. The court emphasized that the settlor's powers gave him

the right until his death to destroy all other beneficial

interests in the trust. Id. at 771.

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Similarly, in ITT Commercial Finance Corp. v.

Stockdale, 521 N.E.2d 417 (Mass. App. Ct. 1988), the court

relied on Reiser to hold (in the alternative) that a

settlor's creditor could reach trust assets upon his death

where the settlor was sole trustee, his children were the

life and remainder beneficiaries, and he had a general power

to amend and revoke and a specific power to substitute

beneficiaries until his death. Id. at 417-18. As in Reiser,

his creditors could reach the trust assets even though he had

not exercised his powers and the other beneficiaries'

interests had vested. See also Wolfe v. Wolfe, 486 N.E.2d

747, 749 (Mass. App. Ct. 1985) (5/6 of trust property could

be reached to satisfy alimony judgment where settlor had

power to alter, amend and revoke and absolute right to

withdraw 5/6 of principal; remainder beneficiaries' rights

were not vested).

The touchstone of the analysis, then, is whether

the trust instrument as a whole gives Fay the power to

eliminate the interests of all others in the trust. As

settlor, Fay reserved to herself the right "to alter, amend

and revoke this Trust, in whole or in part, and to terminate

the same." These unrestricted and unconditional powers

include the right to substitute or strike out other

beneficiaries, Leahy v. Old Colony Trust Co., 93 N.E.2d 238,

239 (Mass. 1950), to vary the income or principal paid to the

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beneficiaries while the trust continues, including the power

not to pay them at all, State Street Trust Co. v. Crocker, 28

N.E.2d 5 (Mass. 1940), and to completely revoke the trust.

Sevinor v. Stahler, 84 N.E.2d 447, 448-49 (Mass. 1949). If

Fay revoked the trust, or amended it to make herself the sole

beneficiary, the legal title and equitable interest would

merge and thereby terminate the trust. See Atkins v. Atkins,

180 N.E.2d 613, 614 (Mass. 1932); Langley v. Conlan, 98 N.E.

1064, 1066 (Mass. 1912). As Fay points out, the trust

property would not vest free of trust in her if she caused it

to terminate, but in her sister Dzialo. Fay, however, could

amend the trust to delete that provision.

As trustee, Fay has broad powers to manage and

control the trust property. The IRS makes much of these

powers, but we attribute them no significance whatsoever.

Broad powers are typically conferred on a trustee as an

effective way to manage trust property. Trustees who are

also beneficiaries, "like trustees generally, have the power

to do acts that are 'necessary or appropriate to carry out

the purposes of the trust and are not forbidden by the terms

of the trust.'" Mahoney, 973 F.2d at 971, citing Restatement

(Second) of Trusts 186. As we have held in the estate tax

context, a settlor/trustee's administrative and management

powers cannot be equated with ownership. See Old Colony

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23

Trust Co. v. United States, 423 F.2d 601, 602-03 (1st Cir.

1970).

As trustee, Fay is to hold the nursing homes "in

trust" for the "general purposes" of the trusts, and to hold

and accumulate the principal and net income "for the use and

benefit of said beneficiaries." The sentence immediately

following that direction provides: "However, anything to the

contrary herein notwithstanding, the Trustee shall have full

power and discretion to pay over to said beneficiaries so

much or all or any part of the trust property, whether

principal or net income, as she shall deem proper." We think

that this sentence, in the context of the trust instrument as

a whole, gives Fay the power to pay income and/or invade

principal for her benefit alone.

We recognize, as we have before, that under

Massachusetts law, a trustee is restricted in the exercise of

even broad discretionary powers by the terms of the trust

viewed as a whole, and by the trustee's fiduciary duty to use

his or her best judgment in good faith. State Street Bank

and Trust v. United States, 634 F.2d 5, 9 (1st Cir. 1980)

(citations omitted); see also Fine v. Cohen, 623 N.E.2d 1134,

1139 (Mass. App. Ct. 1993); Dana v. Gring, 371 N.E.2d 755,

760-61 (Mass. 1977); Woodberry v. Bunker, 268 N.E.2d 841, 843

(Mass. 1971); Old Colony Trust Co. v. Sillman, 223 N.E.2d

504, 506 (Mass. 1967). In particular, a trustee may not

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exercise a broad discretionary power to shift beneficial

interests in a trust. Fine, 623 N.E.2d at 1139; Boston Safe

Deposit and Trust Co. v. Stone, 203 N.E.2d 547, 552 (Mass.

1965). A Massachusetts court necessarily would evaluate a

trustee's conduct, if challenged, in light of the powers and

duties set forth in the trust instrument. Stone, 203 N.E.2d

at 552; Fine, 623 N.E.2d at 1139. In Copp v. Worcester

County Nat'l Bank, 199 N.E.2d 200 (Mass. 1964), the court

found that the trust instrument's direction that the trustee

invade principal for the life beneficiary was enforceable and

not unrestricted because it was to be in a stated amount and

only as necessary for her reasonable support and maintenance.

Id. at 202-03. In cases interpreting trustee powers for

federal estate tax purposes, ascertainable standards limiting

trustee discretion have been found where the trust instrument

directed principal and/or income to be distributed for a

specific purpose (such as education and support), or

expressed an intent to preserve principal for remainder

beneficiaries, or both. See State Street Bank and Trust v.

United States, 634 F.2d at 9; Old Colony Trust Co. v. United

States, 317 F. Supp. 618, 622 (D. Mass. 1970);Dana, 371

N.E.2d at 761; Woodberry, 268 N.E.2d at 843; Worcester County

National Bank v. King, 268 N.E.2d 838, 840 (Mass. 1971);

Sillman, 223 N.E.2d at 507-08.

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25

If Fay exercised her discretion so as to take the

trust property for herself, thereby depleting or destroying

the others' interests, we doubt that a court could determine

that she had violated her fiduciary duty in carrying out the

terms of the trusts because the trust instruments as a whole

do not limit her discretion or define the other

beneficiaries' interests in income and principal. They do

not give Fay's sons the right to any particular proportion of

the trust income or principal, the right to receive it at any

particular time or interval, the right to receive it for

their support or any other definite purpose, or the right to

receive it free of trust when the trust terminates. Fay's

sister's remainder interest could amount to nothing if Fay

decided to pay all of the income and principal to herself.

Under these circumstances, we think that Fay's sons and

sister would have had little or no recourse if she took the

trust property for her own benefit. We recognize that Fay

has not done so, but what is dispositive for these purposes

is whether the trust instrument contained ascertainable

limits on her power to pay income or invade principal for her

benefit alone that the other beneficiaries could rely on to

enforce any rights of their own. Moreover, we do not think

that the other beneficiaries' interests in the trust are

vested. Although that apparently makes no difference in

light of Reiser and Stockdale, it does mean that their rights

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are inchoate at the present time. Under Massachusetts law,

whether a right in a trust has vested depends on "whether, in

substance, the interest is sufficiently established to

constitute an interest or right which has accrued to its

holder." New England Merchants Nat'l Bank v. Groswold, 444

N.E.2d 359, 363 (Mass. 1983). That an interest is "subject

only to total or partial defeat by biological events" does

not make it inchoate. Id. Thus, a beneficiary's right to

receive part of the trust property that depends only on his

or her survival until the death of other persons is a vested

property right. See Id.; Billings v. Fowler, 279 N.E.2d 906,

908 (Mass. 1972); Whiteside v. Merchants' Nat'l Bank, 187

N.E. 706, 709 (Mass. 1933); Alexander v. McPeck, 75 N.E. 88,

92 (Mass. 1905). But where the right depends on the exercise

or non-exercise of powers held by another, the beneficiary's

right does not vest until the person holding the powers can

no longer exercise them. See Reiser, 389 N.E.2d at 770

(remainder interests of beneficiaries became vested upon

death of settlor because his powers to amend or revoke the

trust and direct payments from it died with him); Old Colony

Trust Co. v. Clemons, 126 N.E.2d 193 (Mass. 1955) (rights of

remainder beneficiaries did not vest until settlor's death

where he had the right to revoke the trust or change

beneficiaries). Any right in Fay's sons or sister to receive

part of the trust property is not contingent on a mere

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biological event, but on whether or not Fay exercises her

power to amend or revoke the trusts, and on to whom and in

what amounts she distributes income and principal while the

trust continues. Their interests therefore are not vested.

Due to the broad nature of Fay's powers and the

limited and unenforceable nature of the beneficial interests,

Fay has the power to eliminate the interests of her sons and

her sister. We therefore think that a Massachusetts court

would treat the entire trust property of the Green Pastures

and Parker Hill Nursing Home Trusts as Fay's own in favor of

her creditors. Like the settlors in Reiser, Stockdale and

Wolfe, Fay has the right to amend and revoke the trusts and

to direct disposition of principal and income. Although

there is nothing invalid in the roles of settlor, trustee and

beneficiary co-existing in the same person, in this case it

meant that Fay had the power as trustee to distribute income

and principal in whatever proportion she deemed proper, the

right as a beneficiary to receive income and principal in

whatever amount she as trustee deemed proper, and the

unrestricted power as settlor to alter, amend, or revoke the

trusts. The trusts at issue here are even more vulnerable to

Fay's creditors than those at issue in Reiser and Stockdale

because the other beneficiaries' interests in the trust have

not vested and Fay remains able to exercise her powers and

thus deplete or destroy them.

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28

We do not hold that the trusts are invalid -- a

trust in which the settlor has reserved to herself the power

to alter, amend or revoke, and is also the sole trustee and

one of the trusts' beneficiaries with a right to receive

income and principal in her own discretion as trustee, is not

invalid. See Roberts v. Roberts, 646 N.E.2d 1061, 1064

(Mass. 1995); Sullivan, 460 N.E.2d at 575; Ascher, 131 N.E.2d

at 199-200. And although it may be only a technical

distinction, we do not hold that Fay must exercise her power

to amend or revoke to satisfy the tax debt. See In re

Cowles, 143 B.R. 5, 10 (Bankr. D. Mass. 1992) ("The Court can

allow the creditors to reach the assets of the trust without

requiring revocation of the trust."). Rather, we hold that

the federal tax lien on Fay's individual property reaches the

entire assets of the Green Pastures and Parker Hill Nursing

Home Trusts because Fay has the power to eliminate the other

beneficiaries' interests and treat the trust property as her

own based on the following combination of provisions in the

trust instruments: (1) Fay as settlor has the power to alter,

amend or revoke, which, if exercised, could result in the

entire trust property vesting in her; (2) Fay as trustee has

absolute discretion to pay income and principal to the

beneficiaries, including herself, in whatever proportion she

deems appropriate, even if such payments entirely deplete the

other beneficial interests; and (3) Fay is settlor, trustee

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and a beneficiary. Fay invokes George v. Kitchens by Rice

Bros., Inc., where we stated that "a power of revocation

under Massachusetts law is not considered property . . . and

cannot be reached by creditors." 665 F.2d 7, 8 (1st Cir.

1981). George remains a correct interpretation of

Massachusetts law where, as in that case, the only power

reserved by the settlor, who was also the trustee but not a

beneficiary, was the power to revoke.

Because the tax lien consequently attaches to the

mortgages now held by the trusts, the lien attaches to the

proceeds of the sale of the nursing homes that would

otherwise replace the mortgages as trust property. Cf.

Phelps v. United States, 421 U.S. 330, 334 (1975) (when

property subject to tax lien is transferred, the lien

attaches to the proceeds of the transfer).

B. The Highland Avenue Nursing Home Trust

On August 14, 1974, Fay created the Highland Avenue

Nursing Home Trust, naming herself as sole trustee for her

life, and the beneficiaries as herself, her two sons and her

sister Dzialo, "in equal shares." Paragraph 11 of the

declaration of trust provides as follows: "The Trustee, may,

subject to the limitations herein expressed, acquire, own,

and dispose of any interest in this trust [to] the same

extent as if she were not a Trustee." The magistrate judge

found that paragraph 11 gives Fay the power to treat the

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principal and income of the trust as her own, and held that

the IRS was therefore entitled to the proceeds of the sale of

the Highland Avenue Nursing Home. 884 F. Supp. at 609-10.

In reaching that conclusion, the magistrate judge first

observed that the meaning of the trust instrument as a whole

was difficult to discern, raising the suspicion that it was

drafted "so as to give the trustee free reign but also so as

to contain other language purporting to constrain the trustee

merely to have something at which to point if the trust were

attacked." Id. at 607. Against this backdrop, the

magistrate judge found specific ambiguity in paragraph 11, in

that the term "any interest" could mean either Fay's

"beneficial interest" or the "income and principal" of the

trust. Id. at 609. Resolving the ambiguity against Fay as

drafter, the magistrate judge concluded that "any interest"

must mean the "income and principal" of the trust. This was

so because the only other instance in which the word

"interest" is used without being modified by the word

"beneficial" is in paragraph 23, referring to the "interest

of any beneficiary hereunder, either as to income or

principal."8 The magistrate judge then read out of

8. Paragraph 23 is the spendthrift provision, providing that
"[t]he interest of any beneficiary hereunder, either as to
income or to principal, shall not be anticipated, alienated,
or in any manner assigned by such beneficiary and shall not
be subject to any legal process, bankruptcy proceedings, or
the interference or control of creditors or others, nor the
subject matter of any contract or trust made or entered into

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31

paragraph 11 the phrase "subject to the limitations herein

expressed," based on his interpretation of the trust

instrument as imposing no limitation on Fay's powers as

trustee. Id. at 609. Paragraph 11 therefore meant that Fay

could treat the principal and income as her own free of

trust. Id. at 609-10. We hold that the magistrate judge

erred as a matter of law in interpreting paragraph 11 as

giving Fay the power to treat the principal and income of the

trust as her own. First, we fail to see in the trust

instrument a purpose to mislead or an unusual or unfair

allocation of powers, rights and interests among the settlor,

the trustee and the beneficiaries. Fay reserved no powers to

herself as settlor, but the magistrate judge seemed to find

it significant that on the one hand, Fay as trustee holds

legal title to and has extensive powers to manage and dispose

of the trust property, while on the other, the beneficiaries

do not have any title in the trust property, but "shares of

beneficial interests" that cannot be transferred or assigned

without offering them first to the other beneficiaries, and

that are "personal property, giving only the rights in this

instrument specifically set forth." Id. at 607-09.

The trust instrument's definition of the various

powers, rights and interests was a correct statement of the

Massachusetts law of trusts. The creation of a trust results

by any beneficiary."

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32

in the separation of the legal interest in the trust

property, which is in the trustee, from the beneficial

interest in the trust, which is in the beneficiaries. 2

Scott on Trusts, 99. The trustee holds the legal title to

the trust property in trust for the beneficiaries, while the

beneficiaries hold beneficial interests, which are equitable

in nature. See Russell v. Russell, 468 N.E.2d 1104, 1106

(Mass. App. Ct. 1984) (defining a trust as the "manifestation

of an intention to create a fiduciary relationship with

respect to property, [which] subject[s] the person by whom

the title to the property is held to equitable duties to deal

with the property for the benefit of another person")

(internal quotation marks and citations omitted); National

Shawmut Bank v. Cumming, 91 N.E.2d 337, 338 (Mass. 1950)

(referring to the trustee's "title" to and the beneficiary's

"beneficial interests" in the trust property); Worcester

Trust Co. v. Turner, 96 N.E. 132, 134 (Mass. 1911) (trustee

holds title to the principal; beneficiary has a right to

receive so much of it as necessary in the trustee's

discretion, but no absolute right to the fund itself). A

trustee does not hold trust property as her own due to the

fact that she holds legal title to it. See Cook v. Howe, 182

N.E. 581, 582-83 (Mass. 1932) (trustee who holds legal title

to real estate in trust for a beneficiary may not keep the

proceeds as his own); cf. Cantor v. Wilbrahim and Monson

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33

Academy, 609 F.2d 32, 35 (1st Cir. 1979) (trustee is the

legal owner, but the trust itself is the debtor for purposes

of the Bankruptcy Act). Rather, a trustee holds legal title

in order to manage the trust property, and typically has

broad powers to do so as a practical way of conducting the

trust's business. Like any trustee's powers, Fay's powers to

hold, manage and dispose of the trust property were subject

to the "specific limitations herein contained," that is, to

conduct the trust business "for the benefit of the holders of

the shares hereunder."

That the beneficiaries' interests were "personal

property" was also a correct statement of the law. Where, as

here, a trust contains both real and personal property,9 and

the trust instrument directs that the trust assets be

liquidated upon termination of the trust, the beneficiaries'

interests are personal property from the trust's inception.

See Priestley v. Burrill, 120 N.E. 100, 104-05 (Mass. 1918);

Dana v. Treasurer and Receiver General, 116 N.E. 941, 943-44

(Mass. 1917).

9. Fay as trustee was to "hold [the Highland Avenue Nursing
Home] and cash so to be acquired by her, as well as all other
property which she may acquire as such Trustee together with
the proceeds thereof," and was "authorized to manage and
maintain the trust property and invest and reinvest the
property and proceeds of the trust in real estate, mortgages,
securities of any lawful business and to engage in any lawful
business."

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34

The language providing that "ownership of a

beneficial interest . . . shall not entitle the beneficiary

to any title in or to the trust property whatsoever, or right

to call for a partition or division of the same, or for an

accounting," is not unfamiliar in Massachusetts trusts. See,

e.g., Gardiner v. United States, 49 F.2d 992, 994 (1st Cir.

1931); Lauricella v. Lauricella, 565 N.E.2d 436, 437 (Mass.

1991); State Street Trust Co. v. Hall, 41 N.E.2d 30, 32, 35

(Mass. 1942); Dana, 116 N.E. at 942.10 As set forth above,

it is a correct statement of the law of trusts that

beneficiaries do not hold title to the trust property;

10. Trusts that contain similar provisions and that have a
similar purpose in that at least part of the purpose of the
trust is to carry on a business, are common in Massachusetts.
Whether such a trust is, for various purposes, a pure trust,
a business trust or a partnership has often been litigated,
and depends on the relative powers of the trustees and
beneficiaries, whether the primary activity of the trust is
commercial, and whether it issues transferrable certificates
of shares. See Hecht v. Malley, 265 U.S. 144 (1924); Pope

and Cottle Co. v. Fairbanks Realty Trust, 124 F.2d 132 (1st

Cir. 1941); Bomeisler v. M. Jacobson & Sons Trust, 118 F.2d

261 (1st Cir. 1941); Gardiner, 49 F.2d 992; In re Village

Green Realty Trust, 113 B.R. 105 (Bankr. D. Mass. 1990); In

re Medallion Realty Trust, 120 B.R. 245 (Bankr. D. Mass.

1990); In re L & V Realty Trust, 61 B.R. 423 (Bankr. D. Mass.

1986); First Eastern Bank v. Jones, 602 N.E.2d 211 (Mass.

1992); Hall, 41 N.E.2d 30; Baker v. Comm'r of Corps. and

Taxation, 148 N.E. 593 (Mass. 1925); Dana, 116 N.E. 941;

Frost v. Thompson, 106 N.E. 1009 (Mass. 1914); Williams v.

Inhabitants of Milton, 102 N.E. 355 (Mass. 1913). See also

Takemi Ueno, Defining a "Business Trust": Proposed Amendment

of Section 101 (9) of the Bankruptcy Code, 30 Harv. J. on

Legis. 499 (1993). That question is not before us, but
trusts with characteristics like those of the Highland Avenue
Nursing Home Trust are a "lawful method of transacting
business in [the] Commonwealth." Hall 41 N.E.2d at 34.

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35

rather, they own an equitable interest in the trust property.

Although we are somewhat concerned about the language

purporting to deny the beneficiaries a right to call for an

accounting, that language would have been disregarded if the

beneficiaries had petitioned a court for an accounting.

Briggs v. Crowley, 224 N.E.2d 417, 421 (Mass. 1967). And

spendthrift provisions like the one here are valid in

Massachusetts. Pemberton, 411 N.E.2d at 1312.

Second, we think that the interpretation of the

term "any interest" in paragraph 11 as "income and principal"

is extraordinarily strained, but more to the point, it does

not follow even from that interpretation that the

beneficiaries other than Fay do not have enforceable

equitable interests in the trust or that Fay has the power to

eliminate those interests in her own favor. Although we

agree that paragraph 11 is ambiguous viewed in isolation, it

is not susceptible of the meaning the magistrate judge

attributed to it when viewed in the context of the trust

instrument as a whole. The magistrate judge did not take

account of the distribution of powers in the trust that

should have led to the conclusion that Fay did not have the

power to eliminate the other beneficiaries' interests.

Fay did not reserve to herself the right to

unilaterally alter, amend or revoke the trust, but granted it

to those holding a majority of beneficial shares. The trust

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36

is to terminate twenty years after Fay's death, or may be

terminated earlier "by a majority vote of all shares

outstanding, at a meeting of the trustee and the

beneficiaries, called for that expressly stated purpose," at

which the trustee may not vote. Whenever the trust

terminates, the then trustee(s) must wind up the affairs of

the trust, liquidate the assets and distribute the proceeds

among the beneficiaries in proportion to the shares owned by

them. The trust "may be amended or altered in any part

whatever . . . with the consent of a majority percentage of

vote as hereinbefore provided."

A settlor may either reserve powers to herself or

grant them to others, Crocker, 28 N.E.2d at 7, but a trust

"cannot be revoked or altered except by a reserved power to

do so, which must be exercised in strict conformity with its

terms." Trager v. Schwartz, 189 N.E.2d 509, 511-12 (Mass.

1963) (citations omitted). See also Markell v. Sidney B.

Pfeifer Found., Inc., 402 N.E.2d 76, 92 (Mass. App. Ct.

1980); Stahler v. Sevinor, 84 N.E.2d 447, 448 (Mass. 1949);

Thorp v. Lund, 116 N.E. 946 (Mass. 1917). The Highland

Avenue Nursing Home Trust therefore could only be altered or

revoked by the beneficiaries holding a majority of shares.

Just as Fay could eliminate other beneficiaries of the Green

Pastures or Parker Hill Nursing Home Trusts as part of her

power to alter or amend, those holding a majority of

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37

beneficial shares in the Highland Avenue Nursing Home Trust

could eliminate Fay as a beneficiary by exercising their

power to amend "in any part whatever." Furthermore, the

other beneficiaries could have ousted Fay as trustee.

Although beneficiaries cannot appoint a new trustee without

an express grant of power to do so, where, as here, they have

a power to revoke and to compel the trustee to transfer the

trust property to them, they can revoke the trust and

immediately create a new trust, naming a new trustee. 2

Scott on Trusts 108.4; Restatement (Second) of Trusts 108

cmt. i.

Moreover, Fay does not have unbridled discretion as

trustee to take income or invade principal at the expense of

the other beneficiaries, who have enforceable interests in

the trust. While Fay may distribute net earnings in such

amount as she sees fit, she must make some distribution at

least annually "in the proportion to the shares owned by the

beneficiaries." Furthermore, the trust instrument evidences

Fay's intent that, upon termination, the trust property go to

beneficiaries in addition to herself or her successors. At

that time, the assets must be liquidated and the proceeds

distributed proportionately among the beneficiaries.

Although Fay is the settlor, trustee and a

beneficiary, the trust instrument gives her no power to

unilaterally alter, amend or revoke the trust, limits her

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38

discretion as trustee to distribute income, and limits her

right to receive income as a beneficiary to an amount in

proportion to the shares owned by her. Fay's rights and

powers therefore were not so centralized as to make the

entire trust property her own.

In light of the trust instrument as a whole, we

conclude that paragraph 11 does not mean that Fay has the

power to treat the principal and income of the trust as her

own free of trust. The term "any interest" could mean Fay's

beneficial interest, so that paragraph 11 means that Fay,

like any other beneficiary and although she is the trustee,

may acquire, own and dispose of shares in accordance with the

conditions and procedures set forth in the declaration of

trust;11 receive annual distributions out of net earnings

in proportion to her share; and have her equitable interest

in the trust pass to her successors upon her death.12 See

11. Paragraph 13 provides that "the beneficial interests
hereby created shall not be transferrable or assignable
without first offering said shares to the other beneficiaries
in writing." The trustee must notify the remaining
beneficiaries of a beneficiary's offer to sell shares; they
or any of them may accept the offer, or, alternatively, three
arbitrators may be chosen to ascertain the value of the
offered shares; the beneficiary desiring to sell may do so
free of restriction thirty days from the date of the
arbitrators' determination if the beneficiary desiring to buy
has not paid the amount so determined; and if more than one
beneficiary desires to buy, they may buy the offered shares
in proportion to the shares held by them.

12. The executors, administrators or assigns of any deceased
beneficiary are to succeed to his or her rights under the
trust.

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39

Andreson v. Andreson, 562 N.E.2d 91, 92 n.2 (Mass. App. Ct.

1990) (trust instrument stated that "[a]ny trustee may

without impropriety become a beneficiary hereunder and

exercise all rights of a beneficiary with the same effect as

though he were not a trustee."). Alternatively, the term

"any interest" could mean the trust principal and

undistributed income, so that paragraph 11 means that Fay as

trustee had full power to manage the business of the trust

free of the control of the other beneficiaries (who could

remove her as a beneficiary or as trustee). Cf. Navarro Sav.

Assoc. v. Lee, 446 U.S. 458, 459, 465 n.14 (1980) (trustees

had exclusive authority over trust property free from control

of shareholders "as if the Trustees were the sole owners of

the Trust Estate in their own right," while shareholders had

power to terminate or amend). Under any interpretation, Fay

was "subject to the limitations herein expressed," that is,

her duty as trustee to hold the trust property "in trust, to

manage and dispose of the same for the benefit of the holders

of the shares."

In sum, we hold that the entire property of the

Highland Avenue Trust does not constitute Fay's "property" or

"rights to property" to which the federal tax lien could

attach because the trust instrument defines the various

powers, rights and interests in accordance with the law of

trusts, gives the beneficiaries other than Fay enforceable

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40

equitable interests in the trust property, and does not give

Fay the unilateral power to eliminate their rights.

The lien does, however, attach to whatever aspect

of Fay's beneficial interest in the Highland Avenue Nursing

Home Trust that constitutes present "property or rights to

property" under Massachusetts law.13 While a federal tax

lien attaches to property and rights to property that the

taxpayer acquires at any time after assessment, it does not

attach unless and until the taxpayer acquires what is defined

as property by state law. United States v. McDermott,

U.S. , 113 S. Ct. 1526, 1530 (1993). Thus, courts have

held that while a federal tax lien attaches to a

taxpayer/beneficiary's present right to receive distributions

of income or principal, it does not attach to the trust

corpus when he or she has no present right to receive it.

United States v. Cohn, 855 F. Supp. 572, 576-77 (D. Conn.

1994); In re Cavanaugh, 153 B.R. 224, 228 (Bankr. N.D. Ill.

1993); Wilson v. United States, 140 B.R. 400, 404, 407

(Bankr. N.D. Tex. 1992). See also In re Lyons, 148 B.R. 88

(Bankr. D.D.C. 1992) ("a federal tax lien may attach to a

13. The spendthrift clause is ineffective as to Fay's
beneficial interest because she is both settlor and
beneficiary. See Morrissey, 109 N.E.2d at 823; Forbes, 140

N.E. at 419. Moreover, a spendthrift clause is "merely a
state-created exemption from the reach of creditors, and not
an aspect of the substantive [property] right" to which a
federal lien attaches. United States v. Rye, 550 F.2d 682,

685 (1st Cir. 1977).

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41

taxpayer's vested right, under a trust . . . to receive

periodic payments or distributions of property then due or

that will become due in the future.").

Fay's right to receive annual distributions from

net earnings in proportion to her share until her death or

until the trust terminates earlier is a presently vested

property right. See Forbes, 140 N.E. at 420. Because "a

settlor cannot place property in trust for his own benefit

and keep it beyond the reach of his creditors," Fay's

"creditors can reach the maximum amount which the trustee

under the terms of the trust could pay to [her] or apply for

[her] benefit." Ware v. Gulda, 117 N.E.2d 137, 138 (Mass.

1954), citing Restatement (Second) of Trusts 156(2)

(internal quotation marks and additional citations omitted).

Fay's right to sell her share is not a present

right to property because she cannot sell it to anyone other

than her co-beneficiaries without at least their passive

consent. See note 11, supra. In United States v. Bess, the

Supreme Court held that a lien attached to an insured's right

under the terms of his life insurance policy to exchange the

policy for its cash surrender value during his lifetime. 357

U.S. at 56. Fay's right to sell her beneficial share is

similar to Bess's right to exchange his policy for cash,

except that Fay's right to sell is qualified and limited by

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the rights of the other beneficiaries to buy her share, while

Bess's right to cash in his policy was unqualified. This

distinction is critical because Fay has property to which a

tax lien can attach only insofar as conferred by the trust

instrument as it would be enforced by state law. Cf. Chicago

Mercantile Exch. v. United States, 840 F.2d 1352, 1354-56

(7th Cir. 1988) (where taxpayer could transfer his exchange

seat only as authorized and on the conditions prescribed in

the exchange rules, with no rights in or to the membership or

the proceeds of the sale of such membership except as

specifically granted in the rules, the full extent of

member's property interest in the seat, which had already

been involuntarily sold, was the remainder of the proceeds

after internal claims were paid.). Although we have not

found any Massachusetts case discussing whether a qualified

right to sell a beneficial interest in a trust is property,

we have no doubt that a Massachusetts court would enforce the

other beneficiaries' right to buy Fay's share if she

attempted to sell it to an outsider without consulting them

or without their consent. Fay's limited right to sell her

share therefore is not a present right to property. The

lien, of course, will attach to the proceeds from the sale of

Fay's share if and when she sells it (assuming the tax debt

is not paid), because she will then be holding her own

property free of trust.

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Nor does Fay have present property rights in the

trust corpus. As a beneficiary, she has no title to the

trust property or right to call for a partition or division

of it as long as the trust continues, and has "only the

rights in this instrument specifically set forth." She has

no right to receive or withdraw any of the trust principal.

Cf. In re Cowles, 143 B.R. 5, 10 (Bankr. D. Mass. 1992)

(settlor had the power to withdraw "any part or all of the

trust property," so his creditors could reach the entire

trust principal); Wolfe, 486 N.E.2d at 749 (settlor had the

right to withdraw 5/6 of the trust corpus, so his creditor

was permitted to reach that part of the trust principal).

According to the declaration of trust, Fay could receive her

share of the liquidated assets during life only if those

owning a majority of beneficial shares vote to terminate the

trust during her lifetime; otherwise, her executors,

administrators or assigns will succeed to her rights upon her

death.

As set forth in Part III(A), under Massachusetts

law, whether a right in a trust has vested depends on

"whether, in substance, the interest is sufficiently

established to constitute an interest or right which has

accrued to its holder," that is, whether it is subject to

defeat only by biological events, in which case the right is

vested, Groswold, 444 N.E.2d at 363, or whether it is subject

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to defeat by another person's decision to exercise a power

that he or she holds, in which case the right does not vest

until the person holding the power can no longer exercise it.

Reiser, 389 N.E.2d at 770; Clemons, 126 N.E.2d 193. The

possibility that Fay might receive a share of the trust

corpus during her lifetime hinges on whether or not a

majority of the holders of beneficial shares vote to

terminate the trust, and whether or not they decide to amend

the trust by removing her as a beneficiary. Thus, it does

not amount to a present right to property under Massachusetts

law. The lien will attach to her share of the assets if and

when the trust terminates during her lifetime (again assuming

the tax debt is still unpaid), because she will then be

holding her own property free of trust.

Assuming that a majority of the beneficiaries do

not vote to terminate the trust during Fay's lifetime, her

executors, administrators or assigns will succeed to her

rights under the trust upon her death. In Bess, the Supreme

Court stated with regard to the proceeds of a life insurance

policy that "[i]t would be anomalous to view as 'property'

subject to lien proceeds never within the insured's reach to

enjoy, and which are reducible to possession by another only

upon the insured's death when his right to change the

beneficiary comes to an end." Id. at 55-56. But in

Massachusetts, the right of a trust beneficiary to have his

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share of the trust corpus paid over to his successors upon

death has been treated as a present right to property during

the beneficiary's lifetime. See, e.g., Forbes, 140 N.E. at

420; Alexander, 75 N.E. at 92. In those cases, however, the

trust instrument unequivocally provided that the

beneficiary's share of the corpus was to be paid over, free

of trust, to the beneficiary's successors upon death.

Whether there will be any interest in the trust to which

Fay's heirs or assigns could succeed depends, again, on

whether those holding a majority of beneficial shares vote to

terminate the trust before Fay's death, or to eliminate Fay

as a beneficiary. We think that Fay's right to have her

successors receive income or principal from the trust

therefore is too ethereal to constitute a present right to

property. The lien will attach, however, upon Fay's death to

whatever beneficial interest she holds at that time, again

assuming the tax debt remains unpaid. Cf. Welch v. Paine,

120 F.2d 141, 143 n.2 (1st Cir. 1941) (creditors of a

decedent must be paid before his property passes to the next

of kin).

We remand to the magistrate judge to fashion an

order enforcing the tax lien on Fay's present right to

receive annual distributions from net earnings in proportion

to her share. That the value of this right may be difficult

to discern does not alter the conclusion that the lien

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presently attaches, Rye, 550 F.2d at 685; Raihl v. United

States, 152 B.R. 615, 619 (Bankr. 9th Cir. 1993), but it does

not flow from that conclusion that the property can be

executed upon immediately. United States v. Overman, 424

F.2d 1142, 1145 (9th Cir. 1970). Under the FDCPA, property

held in trust is "co-owned property," cf. United States v.

Coluccio, 51 F.3d 337, 342 (2d Cir. 1995) (funds in

constructive trust are co-owned property), which the

government can execute on only "to the extent such property

is subject to execution under the law of the State in which

it is located."14 28 U.S.C. 3203(a); 28 U.S.C.

3010(a).

In Massachusetts, a trust cannot be terminated in

order to pay a creditor at any time earlier than the terms of

the trust provide, at least where there are beneficiaries

other than the debtor. See Forbes, 140 N.E. at 421;

Alexander, 75 N.E. at 91. Fay's beneficial right to receive

an annual share of net earnings can, however, be executed

upon in one of two ways. First, even though it ordinarily

could not be reached and applied "until a future time or is

of uncertain value," it can be reached and applied "if the

value can be ascertained by sale, appraisal or by any means

14. When the IRS seeks to collect other than through a
section 7403 proceeding or by levy, it has the privileges of
an ordinary judgment creditor, Rodgers, 461 U.S. at 682, 697,

or in this case, whatever privileges the FDCPA confers.

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within the ordinary procedure of the court." Mass. Gen. L.

ch. 214 3(6). See also New England Merchants Nat'l Bank v.

Hoss, 249 N.E.2d 635, 638 (Mass. 1969); Whiteside, 187 N.E.

at 710; Alexander, 75 N.E. at 92. Thus, Fay's right to

receive annual distributions from net earnings conceivably

could be sold and the proceeds paid to the IRS if its value

could be ascertained and a buyer found. Alternatively, her

share of net earnings could be paid to the IRS as it comes

due annually according to the terms of the trust. Forbes,

140 N.E. at 421; see also United States v. Solheim, 953 F.2d

379, 382 (8th Cir. 1992); Cohn, 855 F. Supp. 572, 576-77;

United States v. Taylor, 254 F. Supp. 752, 758 (N.D. Cal.

1966), cited with approval in Rye, 550 F.2d at 685. The

magistrate judge may proceed according to either method,

holding hearings or other proceedings as necessary.

IV. CONCLUSION

On remand, the judgment should be modified as

follows: The United States is entitled to $11,686.22 (the

proceeds of the sale of the Green Pastures and Parker Hill

Nursing Homes) plus the accumulated interest on those

proceeds. The Highland Avenue Nursing Home Trust is entitled

to $16,046.63 (the proceeds of the sale of the Highland

Avenue Nursing Home), plus the accumulated interest, less any

amount determined to be presently payable to the IRS. The

magistrate judge shall fashion an order enforcing the tax

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lien on Fay's right to annual payments from net earnings of

the Highland Avenue Nursing Home Trust.

Affirmed in part, reversed in part, and remanded
Affirmed in part, reversed in part, and remanded

for a new judgment. No costs.
for a new judgment. No costs.

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