UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 98-10213
IN THE MATTER OF: R. DANIEL BASS, JR.,
Debtor,
RICHARD D. BASS; HARRY W. BASS, JR.; HARRY
M. WHITTINGTON; FRED R. DEATON, JR., Trustee,
On Behalf of Richard D. Bass Trust No. 2;
Corporate & Trustee Services, Inc.,
Appellants,
versus
GEORGE DENNEY; JOYCE DENNEY,
Appellees.
- - - - - - - - - -
Appeal from the United States District Court
for the Northern District of Texas
- - - - - - - - - -
April 15, 1999
Before HIGGINBOTHAM, JONES,* and WIENER, Circuit Judges
WIENER, Circuit Judge.
This appeal arises from the efforts of Appellees George and
Joyce Denney (“the Denneys”) to collect an agreed non-dischargeable
judgment that they obtained against R. Daniel Bass, Jr. (“the
Debtor”) in his Chapter 7 bankruptcy proceedings in Utah. After
the Debtor’s Utah bankruptcy proceeding was completed, the Denneys
filed the instant garnishment and injunction suit against the
*
Concurring in section IIB and the judgment only.
Appellants (collectively, “the Trustees”) in the Bankruptcy Court
for the Northern District of Texas, where the Denneys had
registered their Utah judgment. The Trustees ask us to vacate a
mandatory injunction entered against them by the Bankruptcy Court
in Texas which commands the Trustees henceforth to furnish the
Denneys and their counsel written and oral notice 72 hours in
advance of each intended discretionary distribution to the Debtor,
who is the primary beneficiary of the Trust. The Trustees attack
that ruling on two fronts: (1) The bankruptcy court in Texas does
not have jurisdiction to enforce collection of the subject
judgment; and (2) the injunction is invalid as a matter of law.
Agreeing with both contentions, we reverse the bankruptcy court and
render judgment in favor of the Trustees, vacating the injunction.
I.
Facts and Proceedings
In the 1950s, the Debtor’s grandparents (“Settlors”) created
several irrevocable, fully discretionary “spendthrift trusts”
pursuant to Texas law, one for the primary benefit of each of their
grandchildren. One of those trusts (“the Trust”) was created for
the primary benefit of the Debtor. Decades later, the Denneys made
loans on the strength of the Debtor’s guaranty, which loans were
never repaid. Financial representations made by the Debtor at the
time of his guaranties proved to have been materially false and
misleading.
2
In 1992, the Debtor filed a voluntary petition in bankruptcy
in the District of Utah, seeking protection under Chapter 7 of the
United States Bankruptcy Code.1 The Denneys initiated an adversary
proceeding seeking to recover the amounts owed by the Debtor and to
have these obligations excepted from discharge pursuant to § 523 of
the Code.2 The Trustees were never parties to the Utah bankruptcy
proceedings.
The Denneys eventually obtained a stipulated non-dischargeable
judgment against the Debtor in the principal amount of $734,096.60.
Their collection efforts proved fruitless, demonstrating that the
Debtor was difficult to find. So, when they learned that the
Debtor had been receiving approximately $300,000.00 in
distributions from the Trust each year, the Denneys sought to
obtain satisfaction of their judgment from the Debtor’s interest in
the Trust. They set the stage for this effort when, in October,
1995, they “registered” an authenticated copy of their judgment
with the Bankruptcy Court for the Northern District of Texas
“pursuant to 28 U.S.C. § 1738.”3 After the Debtor’s bankruptcy
1
11 U.S.C. § 101 et seq. (“the Bankruptcy Code” or “the
Code”).
2
11 U.S.C. § 523.
3
The Denneys’ appellate brief states that the judgment was
registered “in compliance with 28 U.S.C. § 1738," a statutory
provision that specifies how legislative acts and judicial
proceedings of states, territories, or possessions of the United
States are to be authenticated, proved, or admitted into evidence
for purposes of full faith and credit. Cf. Fed. R. Civ. P. 44.
Neither the authenticity nor the registry of the Denneys’ judgment
3
case in Utah was completed in early 1996, the Denneys filed suit
against the Trustees in the bankruptcy court serving the Greater
Dallas area where one or more of the Trustees are domiciled. Aware
that, in Smith v. Moody (In re Moody),4 we had affirmed a ruling of
the Bankruptcy Court for the Southern District of Texas that
imposed a 72-hour notice requirement on the trustee of a
spendthrift trust of which the debtor in that proceeding was the
beneficiary, the Denneys sought such an injunction against the
Trustees in the bankruptcy court in Dallas.
Initially, the bankruptcy court granted the Trustees’ motion
to dismiss the Denneys’ adversary proceeding in which they sought
such a court-ordered advance notice from the Trustees.5 On appeal,
however, the district court reversed —— largely in reliance on its
reading of our opinion in Moody and § 105 of the Code —— and
remanded the matter to the bankruptcy court for a hearing on the
Denneys’ requested injunction.
On remand, the bankruptcy court obediently followed the legal
conclusions of the district court and ordered the Trustees to
furnish the Denneys and their counsel “at least 72 hours prior
written and oral notice of any distribution to be made to or for
the benefit of” the Debtor from income, principal, or other assets
is at issue in this appeal.
4
837 F.2d 719 (5th Cir. 1988).
5
The Denneys originally sought to garnish the Trustees as
well but voluntarily withdrew this demand early in the proceedings.
4
of the Trust. This mandatory injunction specified that such notice
must include the date and time of any intended distribution, the
method, the name and address of the person or entities to receive
the distribution, including account numbers in financial
institutions, as well as the “source of instructions authorizing
distributions if other than those contained in” the Trust, and, of
course, the amount of the intended distribution. The bankruptcy
court did not, however, require the Denneys to meet this court’s
usual prerequisites for obtaining a mandatory injunction.
The second time around it was the Trustees who appealed the
bankruptcy court’s decision to the district court. Inasmuch as, on
remand, the bankruptcy court had simply applied the district
court’s interpretation of the law to the largely uncontested facts
of the case, the district court affirmed the bankruptcy court on
that subsequent appeal. Both the bankruptcy court and the district
court continued to rely largely on Moody and § 105, plus the
district court’s perception that the bankruptcy court has
“inherent” jurisdiction to enforce such a judgment. The Trustees
timely filed a notice of appeal to this court.
II.
Analysis
A. Standard of Review
Federal courts must be assured of their subject matter
jurisdiction at all times and may question it sua sponte at any
5
stage of judicial proceedings.6 The holding of a bankruptcy court
(or a district court hearing an appeal from the bankruptcy court)
that it has jurisdiction is a legal determination which we review
de novo.7 More generally, we review appeals from rulings and
decisions of the bankruptcy court under the same standards employed
by the district court when it hears an appeal from bankruptcy
court.8 Thus, we review the bankruptcy court’s conclusions of law
de novo and its findings of fact for clear error.9 Mixed questions
of fact and law, and questions concerning the application of law to
the facts, are reviewed de novo.10
B. Bankruptcy Court Jurisdiction
In response to the Trustees’ challenge to the jurisdiction of
the bankruptcy court in Texas to aid in the collection of the
judgment obtained by the Denneys in the bankruptcy proceedings in
Utah, the Denneys have advanced no less than five theories for
sustaining such jurisdiction. We consider those contentions
6
13 Charles A. Wright & Arthur R. Miller et al., Federal
Practice and Procedure § 3522, at 66-72 (2d ed. 1984).
7
See Calhoun County v. United States, 132 F.3d 1100, 1103
th
(5 Cir. 1998).
8
Texas Lottery Comm’n v. Tran (In re Tran), 151 F.3d 339,
342 (5th Cir. 1998).
9
See Shurley v. Texas Commerce Bank (In re Shurley), 115
F.3d 333, 336 (5th Cir. 1997).
10
Southmark Corp. v. Marley (In re Southmark Corp.), 62 F.3d
104, 106 (5th Cir. 1995), cert. denied 516 U.S. 1093 (1996); United
States v. Blakeman, 997 F.2d 1084, 1089 (5th Cir. 1992), cert.
denied 510 U.S. 1042 (1994).
6
seriatim.
1. “Related to” jurisdiction
All federal courts are courts of limited jurisdiction which,
for the most part, derives from statutory grants of the Congress.
A bankruptcy court’s jurisdiction is even more circumscribed and is
wholly “grounded in and limited by statute.”11 Specifically, 28
U.S.C. § 1334(b) grants jurisdiction to district courts and adjunct
bankruptcy courts to entertain proceedings “arising under,”
“arising in a case under,” or “related to” a case under Title 11 of
the United States Code, i.e., proceedings “related to” bankruptcy.
To determine whether such jurisdiction exists, “‘it is necessary
only to determine whether a matter is at least “related to” the
bankruptcy.’”12 In each instance of challenged bankruptcy court
jurisdiction, then, the result turns on how broad or how narrow
“related to” should be construed under the circumstances.
A proceeding is “related to” a bankruptcy if “‘the outcome of
that proceeding could conceivably have any effect on the estate
being administered in bankruptcy.’”13 More specifically, “‘[a]n
action is related to bankruptcy if the outcome could alter the
11
Celotex Corp. v. Edwards, 514 U.S. 300, 307 (1995).
12
Walker v. Cadle Co. (In re Walker), 51 F.3d 562, 569 (5th
Cir. 1995)(quoting Wood v. Wood (In re Wood), 825 F.2d 90, 93 (5th
Cir. 1987)).
13
Id.; see also Celotex, 514 U.S. at 308 n.6 (noting that the
First, Fourth, Fifth, Sixth, Eighth, Ninth, Tenth, and Eleventh
Circuits have adopted this test, which originated in Pacor, Inc. v.
Higgins, 743 F.2d 984 (3d Cir. 1984)).
7
debtor’s rights, liabilities, options, or freedom of action (either
positively or negatively) and...in any way impacts upon the
handling and administration of the bankruptcy estate.’”14 This test
is obviously conjunctive: For jurisdiction to attach, the
anticipated outcome of the action must both (1) alter the rights,
obligations, and choices of action of the debtor, and (2) have an
effect on the administration of the estate.
The injunction sought by the Denneys doubtlessly passes the
first prong of that test: By assisting the Denneys in their efforts
to intercept discretionary distributions from the Trust, the
advance notice mandated by the injunction would deprive the Debtor
of those funds and constrain his ability to spend them. The second
prong, however, is problematical. Although the injunction would
have an impact on the Debtor, it could not have any effect
whatsoever on his estate in bankruptcy or its administration.
First and foremost, such an estate no longer exists. The Utah
bankruptcy proceedings were closed before the Denneys ever filed
suit against the Trustees in the Bankruptcy Court in Texas. So,
from the beginning of this litigation, there has been no bankruptcy
estate to affect. “To fall within the court’s jurisdiction, the
plaintiffs’ claims must affect the estate, not just the debtor.”15
The fact that the judgment was entered by the Bankruptcy Court in
14
Walker 51 F.3d at 569 (citations omitted).
15
Wood, 825 F.2d at 94.
8
Utah rather than another court is irrelevant for purposes of
“related to” jurisdiction.
“Related to” is a term of art in bankruptcy jurisdiction,
where its meaning is not as broad as it is in ordinary parlance
where it means “having some connection with.” The distinction is
that, for purposes of bankruptcy jurisdiction, there is a cause
component in “related to.” The proceeding must be capable of
affecting the bankruptcy estate for it to be “related to” the
bankruptcy. The only causal relationship here is the obverse: The
bankruptcy proceedings in Utah affected the obligations owed by the
Debtor to the Denneys by reducing them to judgment and making them
non-dischargeable. Once that was done, the Denneys were simply
judgment creditors of the former debtor in bankruptcy, unrelated to
any extant bankruptcy proceeding or any bankruptcy court.16
We and other courts have refrained from extending “related to”
jurisdiction to proceedings that would not affect the bankruptcy
estate. For example, in Feld v. Zale Corp. (In re Zale Corp.),17
16
Recently, this court held that 11 U.S.C. § 522(c) does not
furnish a basis for a former wife to seek execution on a debtor’s
homestead, which has been claimed as exempt during his bankruptcy
proceeding. Davis v. Davis (In Re Davis), No. 95-11112, 1999 WL
144113 (5th Cir. (Tex.) March 17, 1999). Unlike the present case,
Davis questioned the facial applicability of the Bankruptcy Code to
the claim being made, and the courts accordingly had jurisdiction
to interpret the Code. Here, by contrast, the only question is
subject matter jurisdiction over a controversy not guided by any
Code provision.
17
62 F.3d 746 (5th Cir. 1995).
9
we reversed a settlement that would have enjoined third parties
from filing various tort and contract actions. We stated that
“[t]hose cases in which courts have upheld ‘related to’
jurisdiction over third-party actions do so because the subject of
the third-party dispute is property of the estate, or because the
dispute over the asset would have an effect on the estate.”18 We
noted in Zale that “‘it is the relation of dispute to estate, and
not of party to estate, that establishes jurisdiction.’”19 Although
the litigation between the Debtor and the Denneys that resulted in
their judgment was related to the Debtor’s bankruptcy estate and
bankruptcy proceeding in Utah, the dispute between the Denneys and
the Trustees over collection of the Debtor’s non-dischargeable
judgment debt to the Denneys is not related to his bankruptcy
estate. Again, by the time this dispute commenced, the Debtor had
no such estate anywhere.
Another feature of this case that eschews “related to”
bankruptcy court jurisdiction is the fact that any recovery that
might result from the mandatorily enjoined advance notice of an
imminent Trust distribution would not accrue to the estate. In
18
Id. at 753 (footnote omitted); see also Walker, 51 F.3d at
569 (finding that a third-party contribution claim does not relate
to the bankruptcy because the claim could not affect the
administration of the estate or the debtor).
19
62 F.3d at 755 (quoting Elscint, Inc. v. First Wis. Fin.
Corp. (In Re Xonics), 813 F.2d 127, 131 (7th Cir. 1987)).
10
Miller v. Kemira, Inc. (In re Lemco Gypsum, Inc.),20 the Eleventh
Circuit recognized the importance of the destination of the
proceeds from a lawsuit, noting that “there is no suggestion that
the proceeds, if recovered, would be turned over to the
[bankruptcy] trustee....[W]e fail to see how recovery could
conceivably have an effect on [the] debtor’s estate....There is no
reason for the bankruptcy court’s jurisdiction to linger.”21 The
same holds true here, only more so. The Bankruptcy Court for the
Northern District of Texas has no “related to” jurisdiction to
entertain the Denneys’ injunction suit.
2. Inherent or Other Supplemental Jurisdiction
Agreeing with the district court, the Denneys alternatively
insist that the bankruptcy court has inherent jurisdiction to
enforce the properly registered judgment. Unflawed logical
analysis dictates otherwise. Inherent jurisdiction is an aspect of
the kind of jurisdiction formerly known as “ancillary
jurisdiction.”22 Ancillary jurisdiction is now one facet of
“supplemental jurisdiction,”23 and we have held that bankruptcy
courts cannot exercise supplemental jurisdiction.24 Even though in
20
910 F.2d 784 (11th Cir. 1990).
21
Id. at 789 (footnote omitted).
22
See, e.g., Peacock v. Thomas, 516 U.S. 349 (1996).
23
Royal Ins. Co. v. Quinn-L Capital Corp., 3 F.3d 877, 881
n. 2 (5th Cir. 1993).
24
Walker, 51 F.3d at 570-73.
11
Walker we dealt specifically with the type of supplemental
jurisdiction previously labeled “pendent” jurisdiction, our
reasoning in Walker applies equally to all supplemental
jurisdiction. “Congress has gone to great lengths to determine
what proceedings may be tried by bankruptcy courts, and ‘the
exercise of ancillary and pendent jurisdiction by bankruptcy courts
could subsume the more restrictive “relate to” and “arising in”
jurisdiction, such that the latter would be rendered substantially,
if not entirely, superfluous.’”25
Perhaps even more to the point is the recognition that the
particular “supplemental jurisdiction” action we review today is a
new and independent action. As noted earlier, the Denneys
instituted this case against the Trustees as a combined garnishment
and injunction proceeding pairing (1) current collection efforts to
seize interest of their judgment debtor in the hands of the third
party Trustees with (2) enhanced ability to intercept future
distributions from the Trustees to the Debtor as the beneficiary of
the Trust. Even though the Denneys voluntarily non-suited the
garnishment, it and the mandatory injunction for advance notice are
analytically indistinguishable for purposes of classification as
new and independent actions.
In this we are bound by our holding in Berry v. McLemore and
25
Id. at 573 (quoting Southtrust Bank v. Alpha Steel Co. (In
re Alpha Steel Co.), 142 B.R. 465, 471 (M.D.Ala. 1992) (emphasis
added)).
12
the reasoning behind it.26 If anything, Berry was a closer case:
It dealt with a money judgment previously rendered by the same
court in which the judgment creditor was seeking to garnish the
judgment debtor’s former employer. Moreover, the court in question
was a federal district court and thus a court of broader
jurisdiction than a bankruptcy court. As in the instant case, the
judicial proceeding in which the money judgment was rendered had
been completed and was inactive, and the third party against whom
the garnishment was sought in the second proceeding had not been a
party to the first. The Berry court recognized the general
principle that prior termination of a proceeding does not
ordinarily prevent the court from aiding in collection,27 but
determined that the general rule gives way to the more specific
exception when the subsequent action is new and independent from
the first.28 Relying on our pronouncement in Butler v. Polk29 that
garnishment actions against those who were not parties to the
original action “are generally construed as independent suits, at
26
795 F.2d 452 (5th Cir. 1986).
27
Id. at 455; see Riggs v. Johnson County, 73 U.S. (6 Wall.)
166, 187 (1868)(“[T]he jurisdiction of a court is not exhausted by
the rendition of the judgment, but continues until that judgment
shall be satisfied....Process subsequent to judgment is as
essential to jurisdiction as process antecedent to judgment, else
the judicial power would be incomplete and entirely inadequate to
the purposes for which it was conferred by the Constitution.”).
28
Berry, 795 F.2d at 455.
29
592 F.2d 1293 (5th Cir. 1979).
13
least in relation to the primary action”30 in which the judgment was
rendered, we held in Berry that the district court lacked
jurisdiction to entertain the garnishment.31
The Butler/Berry analysis is clearly applicable to the action
brought by the Denneys in the Bankruptcy Court in Texas and stymies
their effort to support jurisdiction of that court under the rules
of supplemental jurisdiction. As we stated in Berry, “[w]e can
find no case where a court held that it had ancillary jurisdiction
to consider claims in a new and independent action merely because
the second action sought to satisfy or give additional meaning to
an earlier judgment.”32 The bankruptcy court has no inherent
jurisdiction to hear this case.
3. Retained Jurisdiction
The Denneys’ reliance on Querner v. Querner (In re Querner)33
to support their contention that the bankruptcy court has
“retained” jurisdiction is misplaced. Querner observed that,
30
See id. at 1295.
31
795 F.2d at 455.
32
Id. (emphasis added). Although the question whether the
Utah Bankruptcy Court —— or the district courts for the District of
Utah or the Northern District of Texas for that matter —— would
have jurisdiction to entertain the Denneys’ action is not before
us, we sense that the holdings in Butler and Berry would
circumscribe the jurisdiction of those courts as well.
33
7 F.3d 1199 (5th Cir. 1993).
14
because a court’s jurisdiction over related proceedings depends on
the nexus between the underlying bankruptcy case and the related
proceeding, the dismissal or closing of a bankruptcy case will,
ordinarily, result in the dismissal of related proceedings.34
Notwithstanding this general rule, however, Querner noted that
“[t]he decision to retain jurisdiction over related proceedings
rests within the sound discretion of the bankruptcy court,” and
that the court’s decision should not be reversed absent clear abuse
of that discretion.35
Implicit in the Querner analysis —— and missed or ignored by
the Denneys —— is an assumption that, before a court can exercise
its discretion to “retain” jurisdiction over a “related
proceeding,” the court must have had jurisdiction over that
proceeding in the first place. The Denneys did not file their suit
in Texas until after the bankruptcy case in Utah had been closed.
From a purely temporal standpoint, there was no proceeding over
which bankruptcy court jurisdiction could be “retained.” Moreover,
nothing in the Utah case suggests that the court contemplated or
ordered that it should retain jurisdiction. In any event, if it
had tried to do so, its order could not have extended beyond the
34
Id. at 1201.
35
Id. at 1202. Similar to a federal district court’s
decision regarding the retention of jurisdiction over pendent state
claims after federal claims have been dismissed, a bankruptcy court
must consider the factors of economy, convenience, fairness, and
comity in deciding whether to dismiss or retain jurisdiction over
related proceedings. Id.
15
scope of “related-to” jurisdiction. Retained jurisdiction is
unavailing here.
4. Core Bankruptcy Jurisdiction
In apparent disregard of the ruling in Walker that the court
need only assess whether the proceeding “relates to” the
bankruptcy,36 the Denneys insist that their action is within the
core jurisdiction of the bankruptcy court. Under this proposition,
however, essentially any lawsuit that, if successful, could adjust
the debtor-creditor relationship in any way would be a core
bankruptcy proceeding. The Denneys’ reliance on 28 U.S.C. §
157(b)(2)(O) is unavailing.37 We have never held that § 157 confers
jurisdiction separate and apart from that existing under § 1334.38
Thus, the case must be “arising under” Title 11 or “arising in” a
case involving Title 11 to be a core proceeding. Albeit true that,
under Wood, a proceeding is core if it “invokes a substantive right
provided by title 11” or “could arise only in the context of a
36
Walker, 51 F.3d at 568-69.
37
28 U.S.C. § 157(b)(2)(O) provides:
Core proceedings include, but are not limited
to...other proceedings affecting...the
adjustment of the debtor-creditor...
relationship, except personal injury tort or
wrongful death claims.
38
28 U.S.C. § 1334; see Walker, 51 F.3d at 569 (“Section 157
does not give bankruptcy courts power beyond that granted in 28
U.S.C. § 1334; rather, § 157 allows district courts to assign cases
to the bankruptcy courts.”).
16
bankruptcy case,”39 we locate nothing in Title 11 that can be read
to provide a statutory right to obtain the kind of third party
notice sought by the Denneys.40 This is confirmed by the
recognition that collection of money judgments emanating from a
bankruptcy case —— particularly non-dischargeable money judgments
—— can be resolved outside the bankruptcy case. The instant action
does not fall within a core bankruptcy provision.41
5. Diversity or Federal Question Jurisdiction
In a final jurisdiction argument that approaches
frivolousness, the Denneys contend that their action falls within
both the diversity of citizenship and federal question
jurisdictions of the bankruptcy court. They appear to argue, with
flawed logic, that because the district court could entertain their
action under diversity jurisdiction in a second lawsuit and then
refer the case to the bankruptcy court, requiring them to file
initially in the district court would be a waste of judicial
resources. The Denneys also argue, without citation, that the
collection of a federal judgment is a question of federal law.
Separate and apart from the insurmountable hurdle that these
39
Wood, 825 F.2d at 97.
40
Cf. Perkins Coie v. Sadkin (In re Sadkin), 36 F.3d 473, 478
th
(5 Cir. 1994)(explaining that 11 U.S.C. § 105 does not authorize
the bankruptcy courts to create substantive rights).
41
See Edwards v. Sieger (In re Sieger), 200 B.R. 636, 639
(Bankr. N.D. Ind. 1996)(“Section 1334(b) does not confer the
jurisdiction needed to enforce a non-dischargeable money judgment
entered against a bankruptcy debtor.”).
17
arguments would encounter in the Butler/Berry doctrine, it is clear
that § 157 does not allow referral of a diversity or federal
question jurisdiction case to the bankruptcy court when the case
does not otherwise meet the requirement for jurisdiction of that
court.42 This effort to conjure up jurisdiction on theories of
diversity of citizenship or federal question is meritless.
B. Merits43
Alternatively, the bankruptcy court’s mandatory injunction,
granted as instructed on remand from the district court, cannot
stand even if we assume, arguendo, that the bankruptcy court had
jurisdiction to entertain the injunction action in the first place.
Essentially disregarding the long-established precepts of Anglo-
American trust law in general and the subtopics of trustee
discretion and spendthrift trusts in particular —— from which Texas
does not deviate —— the bankruptcy court, like the district court
before it, relied almost entirely on our opinion in Moody44 as
authority to override the absolute discretion vested in the
Trustees by the Settlors of the Trust by ordering, via a mandatory
42
See 28 U.S.C. § 157(a).
43
As we hold that the bankruptcy court and district court
lacked jurisdiction, the analysis we conduct on the merits is
persuasive authority at best. We conduct this analysis
nonetheless, in the hope that it will be sufficiently persuasive to
help such courts avoid the misunderstanding that we believe our
precedent (or a creative reading thereof) caused here.
44
See Smith v. Moody (In re Moody), 837 F.2d 719 (5th Cir.
1988).
18
injunction, that the Trustees furnish the aforesaid 72-hour advance
notice. In addition to ignoring centuries of trust law, this
ruling failed to recognize significant differences between the
instant action and the Moody litigation that so clearly distinguish
the two cases: (1) The bankruptcy proceeding in Moody commenced
under Chapter 13 and was converted to a Chapter 11 reorganization;
the Bass bankruptcy was a Chapter 7 liquidation, (2) the Moody
bankruptcy proceeding was on-going; the Bass bankruptcy proceeding
was completed and quiescent before the instant litigation was
commenced, (3) the advance notice action in Moody took place in the
active bankruptcy proceeding of the debtor; the instant action is
separate and independent from the closed or at least dormant
bankruptcy proceeding in which the Denneys’ judgment was rendered,
(4) the basis of the action in Moody was the post-petition
misappropriation by the debtor of trust distributions he received
within 180 days after the filing of the bankruptcy petition; the
basis of the Denney judgment was a pre-petition loan guarantee, (5)
the trustee bank in Moody was a party to the debtor’s bankruptcy
proceeding; the Trustees here were not parties to the Utah
bankruptcy litigation that produced the Denneys’ judgments, (6) the
claim of the trustee in bankruptcy in Moody was not sought in a
Butler/Berry “new and independent action” but was an integral part
of the efforts of the bankruptcy trustee to marshal the assets of
the bankruptcy estate, i.e., to recoup the misappropriated post-
petition trust distributions; the judgment on which collection is
19
sought by the Denneys represents a pre-petition debt that had no
direct connection with the bankruptcy proceedings, (7) the
spendthrift trust distributions sought by the bankruptcy trustee in
Moody would inure directly to the estate; the distributions sought
in the instant case go directly to judgment creditors without even
passing through an estate or the hands of a trustee in bankruptcy,
and (8) —— most significantly from the standpoint of trust law ——
the future trust distributions that the complaining bankruptcy
trustee in Moody was seeking were not discretionary spendthrift
trust distributions but rather non-discretionary, mandatory
quarterly income distributions which under the provisions of the
trust agreement the bank trustee was required to make to its
beneficiary who just happened to be the debtor in bankruptcy; in
stark contrast, the disbursements that the Denneys seek to
intercept are entirely discretionary future trust distributions to
their judgment debtor who just happens to be a former bankruptcy
debtor.
Not only do the myriad differences in the two cases palpably
distinguish the instant case from Moody, the discrete facts and
circumstances of Moody dictate that its holding and reasoning be
limited to those unique and difficult facts for which its highly
imaginative solution was crafted. Most obviously, Moody cannot be
read as precedent for the Denneys’ proposition that the bankruptcy
court in Texas can enforce a non-dischargeable money judgment
against the Debtor —— particularly a judgment obtained in a former
20
Chapter 7 proceeding in a different bankruptcy court —— against the
non-party trustee of a discretionary, spendthrift trust, the
beneficiary of which is the judgment debtor.
To illustrate the significance of these distinctions, a
hypothetical situation is helpful. In addition to assuming
arguendo that the Texas bankruptcy court had jurisdiction, assume
further that (1) the Bass Chapter 7 bankruptcy petition was filed
in the Northern District of Texas rather than in Utah, (2) those
proceedings were still ongoing when the Denneys instituted the
instant action, and (3) the Trustees were parties to that ongoing
Chapter 7 bankruptcy case in Texas. This hypothetical illustration
crystallizes the tension between, on the one hand, the equitable
powers of the bankruptcy court, under § 105 and other provisions,
to enforce its rulings, orders, and judgments, and, on the other
hand, the venerable tenets of Anglo-American trust law in general
and Texas trust law in particular that proscribe judicial tinkering
with provisions of a valid spendthrift trust that, inter alia, vest
the trustees with unfettered discretion whether and when to make
distributions to the beneficiary of the trust. We cannot help but
note that the Denneys’ appellate brief is devoid of any
comprehensive discussion of substantive trust law. As the
Trustees’ appellate brief treats this subject extensively, we
borrow from it in the following analysis.
As we acknowledged in Shurley, the State of Texas has long
recognized the validity of discretionary trusts and spendthrift
21
trusts.45 It is here undisputed that the Trust is a spendthrift
trust and that the Trustees are vested with maximum discretion. By
voluntarily and irrevocably committing substantial assets to the
Trust for the benefit of their grandson, the Settlors exercised
their prerogative to shield trust principal and future trust income
from the vulnerability of youth and the potential weaknesses of the
human condition of their then-young grandson —— as well as from the
avarice (or even fraud) of his putative future creditors —— to the
maximum extent permitted by law.46 The embodiment of this
protection is found in the Trust’s anti-alienation and
discretionary distribution provisions.
When, as here, a Texas trust indenture contains express
prohibitions against voluntary and involuntary alienation, the
trust is a “spendthrift” trust for all purposes.47 As such, “no
part of [a] spendthrift trust estate can be taken on execution or
garnishment by creditors of the beneficiary.”48
Additionally, “[w]here by the terms of the trust a beneficiary
is entitled only to so much of the income or principal as the
45
115 F.3d at 338.
46
See Wilson v. United States (In re Wilson), 140 B.R. 400,
405-06 (Bankr. N.D. Tex. 1992)(applying Texas law).
47
Texas Commerce Bank Nat’l Ass’n v. United States, 908 F.
Supp. 453, 457 (S.D. Tex. 1995)(applying Texas law).
48
Bank of Dallas v. Republic Nat’l Bank of Dallas, 540 S.W.2d
499, 501 (Tex. Civ. App.-Waco 1976, writ ref’d n.r.e.).
22
trustee in his uncontrolled discretion shall see fit to give him,”49
the trust is denominated a “discretionary trust” by Texas law. It
follows that when “no standard or guide is affixed to the trustee’s
distribution power,”50 a beneficiary has no authority to force a
trustee to distribute trust assets.51 A universal canon of Anglo-
American trust law proclaims that when the trustee’s powers of
distribution are wholly discretionary, the beneficiary has no
ownership interest in the trust or its assets until the trustee
exercises discretion by electing to make a distribution to the
beneficiary.52 Texas law is to the same effect: “Where
discretionary trusts are involved, the beneficiary has no right to
trust income [or assets] until the trustee elects to irrevocably
and unconditionally place it in the beneficiary’s control.”53 It
follows that when such discretionary powers are granted to trustees
of a spendthrift trust, assets of the trust are immune from claims
of the beneficiary’s creditors, who can stand in his shoes but no
higher:
49
Wilson, 140 B.R. at 404 (quoting 2 Austin W. Scott &
William F. Fratcher, The Law of Trusts § 155, at 152 (4th ed.
1988)).
50
Id.
51
Id.; Kolpack v. Torres, 829 S.W.2d 913, 915 (Tex. App.-
Corpus Christi 1992, writ denied).
52
George G. Bogert & George T. Bogert, The Law of Trusts and
Trustees § 228, at 524-25 (2d ed. 1979).
53
Wilson, 140 B.R. at 404 (citing Commissioner v. Porter, 148
F.2d 566 (5th Cir. 1945)).
23
Discretionary trusts are similar in effect to
a spendthrift trust in that where a trustee
has been invested with a discretionary power
to give an interest in a trust fund to a named
beneficiary, the beneficiary cannot alienate
the funds nor can creditors reach the fund
until the trustee’s discretion has been
exercised.54
A universally recognized corollary is that courts can neither
prevent or force the exercise of discretion by the trustee nor
specify a particular exercise or otherwise interfere with or
impinge on such discretion when it is expressly vested, without
condition or limitation, under the terms of the trust instrument.55
Again, Texas is in accord: Texas courts “are limited in their
powers over the trustee of a discretionary trust,”56 prohibited by
law from interfering with the discretion of the trustee absent a
clear showing of fraud or other egregious conduct.57 No such
54
Id. at 404; see also Texas Commerce Bank Nat’l Ass’n, 908
F. Supp. at 457-58 (S.D. Tex. 1995)(prohibiting the IRS from
levying on present or future discretionary distributions under
spendthrift trust).
55
3 Austin W. Scott & William F. Fratcher, The Law of Trusts
§ 187, at 14-15 (4th ed. 1988).
56
Wilson, 140 B.R. at 405.
57
Id. Although our opinion in Moody does not contain such an
expression, the clear inference is that, were it not for the
evasive misconduct of the debtor —— and possibly even the
complicity or cooperation of the bank (coincidentally the “Moody”
National Bank) with the miscreant debtor —— in connection with
post-petition trust distributions to the debtor, or to his
administrative assistant, or directly into his account in a
Canadian bank, the bankruptcy court may well not have imposed the
notice provision on the co-defendant trustee bank, even in
connection with non-discretionary quarterly distributions of trust
income.
24
fraudulent or egregious misconduct by the Trustees is charged in
the instant case, so court interference with the unconditional
discretion vested in the Trustees is prohibited by applicable trust
law.
Moreover, as rules of trust interpretation mandate a
construction of the trust instrument that will best effectuate the
purposes of its settlor, any distribution of trust assets by a
trustee that would frustrate the purposes and intentions of the
settlor could constitute a breach of the trust.58 Thus, were the
Trustees to be faced with the dilemma whether (1) to exercise their
discretion and make a distribution of income to the Debtor after
furnishing 72 hours advance notice to the Denneys or (2) to refrain
from making any distributions at all, the Trustees could well be
facing a breach of trust claim irrespective of which “horn” of that
dilemma they might choose. This well illustrates how the
imposition of such a notice provision substantially impinges on the
otherwise unfettered discretion of the Trustees and goes to the
heart of spendthrift provisions that proscribe involuntary
alienation by the creditors of the beneficiary.
We recently confirmed that the United States bankruptcy court
is subject to the same strictures as are the courts of Texas when
it comes to honoring the provisions of a discretionary spendthrift
trust. In Shurley, we partially reversed the bankruptcy court to
58
Hughes v. Jackson, 81 S.W.2d 656, 659 (Tex. Comm’n App.
1935, opinion adopted).
25
the extent it had declared portions of a spendthrift trust funded
by the parents of the debtor to be property of his Chapter 7
estate.59 In so doing, we announced that we were following “the
longstanding rule of Texas law that a settlor should be allowed to
create a spendthrift trust that shields trust assets from the
beneficiary’s creditors.”60 We emphasized that bankruptcy does not
free federal courts to ignore the clear public policy of a state
that makes sacrosanct the intentions of the settlor of a
spendthrift trust:
The bankruptcy court’s ruling ignores the
wishes of...the primary settlors of the trust,
and the state’s policy of respecting their
expectations. “Spendthrift trusts are not
sustained out of consideration for the
beneficiary. Their justification is found in
the right of the donor to control his bounty
and secure its application according to his
pleasure.”61
Even more closely on point was the recognition by the
bankruptcy court in Wilson that it could not compel the trustee of
a discretionary spendthrift trust to exercise discretionary
distribution powers for the benefit of the IRS (and, obviously, to
the detriment of the beneficiary of the trust).62 In implicit
recognition that our decision in Moody is inapt when an individual
59
115 F.3d at 338.
60
Id.
61
Id. (quoting Hines v. Sands, 312 S.W.2d 275, 279 (Tex. Civ.
App.-Fort Worth 1958, no writ)).
62
Wilson, 140 B.R. at 406-07.
26
creditor seeks to impose conditions or restrictions on the
discretion of the trustee of a spendthrift trust, the Wilson court
noted that “[t]he parties have not cited, nor has the court
located, any authority requiring the Trustee to notify [a creditor]
when it makes a distribution.”63
In addition to placing the Trustees in the untenable position
of either refraining from making Trust distributions altogether or
doing so after giving notice to the Denneys and thereby risking
charges of breach of trust, the judicial engrafting of the advance
notice requirement mandated by the bankruptcy court’s injunction
here undeniably defeats a principal feature of every spendthrift
trust, i.e., the dual proscription against both voluntary and
involuntary alienation, the latter of which is, as a practical
matter, rendered nugatory by such a notice requirement. A settlor
who intends to protect the property that he places in trust from
the potential profligacy of the beneficiary first prohibits
voluntary alienation so that the beneficiary himself cannot
anticipate future distributions by encumbering his interest in the
trust or future trust distributions. Prohibiting voluntary
alienation is supposed to chill a potential creditor who cannot
look to the assets of the trust as collateral for a loan to the
beneficiary. But, without the complementary prohibition against
involuntary alienation, the adventurous or inadvertent creditor ——
63
Id. at 407 n.6.
27
or the fraudulently induced creditor, such as the Denneys —— could
be converted from unsecured to secured creditors by the simple
expediency of seizing the interests of their debtor in his trust.
To be completely effective, therefore, a spendthrift trust must
prohibit both voluntary and involuntary alienation.
No sophistication is required to discern that superimposing on
the trustee of a discretionary spendthrift trust a requirement to
furnish advance notice to the trust beneficiary’s creditor would
eliminate (or at least greatly reduce) the efficacy of the
involuntary alienation facet of the spendthrift trust’s
prohibitions. For, given the knowledge that advance notice would
be forthcoming in time to allow the interception of trust
distributions, an aggressive creditor could more comfortably afford
to risk making an otherwise unsecured loan to the beneficiary.
We are convinced beyond peradventure that, absent fraudulent
or egregious acts by the trustee of a wholly discretionary Texas
spendthrift trust, federal courts are shackled by the same
constraints as are the courts of Texas: They can neither prohibit
nor command the exercise of such discretion, or otherwise interfere
— directly or indirectly — with the unfettered discretion of such
trustees. We therefore hold in the alternative that the Bankruptcy
Court for the Northern District of Texas, in dutifully following
the instructions of the district court on remand, erred as a matter
of law when it enjoined the Trustees to furnish to the Denneys and
their counsel 72 hours advance notice of any discretionary
28
distributions to be made by the Trustees to or for the benefit of
the Debtor as the Trust’s beneficiary.
III.
Conclusion
For the reasons explained above, the judgment of the
bankruptcy court must be reversed and its mandatory injunction
vacated. Procedurally, the bankruptcy court in Texas lacks
jurisdiction to enjoin the Trustees, who had not been parties to
the Utah Chapter 7 bankruptcy proceeding of the Debtor, to furnish
to the Denneys advance notice of impending trust distributions.
Substantively, if we had jurisdiction to consider the merits of the
injunction, we would conclude that the court violated firmly
established trust law by granting an injunction that indisputably
impinges on and interferes with the Trustees’ non-fraudulent free
exercise of their discretion. Either way, the rulings of the
bankruptcy court could not stand.
JUDGMENT REVERSED and INJUNCTION VACATED.
29