Opinion
Case No. 01-21283, Adversary Proceeding No. 03-2058
October 3, 2003
Michael S. Schenker, Esq. FRANCIS O'NEIL DEL PIANO, LLC, Hartford, CT Counsel for Plaintiff — Respondent
Julie A. Manning, Esq. SHIPMAN AND GOODWIN LLP, Hartford, CT Counsel for Defendant — Movant
RULING ON MOTION TO DISMISS COMPLAINT
I
William W. Britton ("the debtor") filed a Chapter 7 petition on April 20, 2001. John J. O'Neil, Esq. ("the plaintiff), the Chapter 7 trustee in the debtor's bankruptcy case, on April 17, 2003, filed a complaint against Peter M. Britton, Trustee of the Doris W. Britton Irrevocable Trust ("the trust"), and the debtor to determine that the debtor's interest in the trust income and trust remainder are property of the bankruptcy estate and to compel turnover to the plaintiff. Peter M. Britton, Trustee ("the movant"), on August 26, 2003, filed a timely motion pursuant to Fed.R.Civ.P. 12(b)(6), made applicable to bankruptcy proceedings by F.R.Bankr.P. 7012(b), to dismiss the complaint "for failure to state a claim upon which relief can be granted."
11 U.S.C. § 541 provides, in relevant part:
§ 541. Property of the estate (a) The commencement of a case under section 301, 302, or 303 of this title creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held: (1) Except as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case.
. . .
(c)
. . .
(2) A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title.
Although the plaintiff argues that the motion is untimely pursuant to the June 17, 2003 Scheduling Order, the court finds this argument without merit as the Scheduling Order clearly states that "[A]11 dispositive motions shall be filed no later than 11/17/03."
II ARGUMENTS
The debtor is a beneficiary of the income from an irrevocable inter vivos trust established on December 29, 1982 by Doris W. Britton (the debtor's mother), now known as Doris Newman, as settlor. The first count of the complaint alleges that the debtor is an income beneficiary of at least 2/7ths of the trust income, and that the movant abused his discretion as trustee by not paying or using a portion of the income of the trust for the debtor's support. The second count alleges that the debtor has an interest in at least 2/7ths of the remainder of the trust and that such interest is property of the debtor's bankruptcy estate. The movant argues that the trust is a spendthrift trust under Connecticut law and the trust income, pursuant to § 541(c)(2), is, therefore, not property of the estate. Neither party directly discusses in their memoranda whether the debtor's interest in the trust remainder qualifies as property of the estate.
III DISCUSSION A
The court, in resolving this motion under Rule 12(b)(6), must accept as true all allegations of the complaint and draw all reasonable inferences in the plaintiff's favor. See Sykes v. James, 13 F.3d 515, 518 (2d Cir. 1993). The motion should be denied "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46,78 S.Ct. 99, 101-102, 2 L.Ed.2d 80, 84 (1957).
The plaintiff argues that the "complaint alleges the existence of the Trust and that the defendant, William W. Britton, has an interest in the trust; the complaint also alleges that the Trust's Trustee has abused his discretion in making distributions. Those allegations are sufficient to state a cause of action." (Plaintiff's Memorandum at 3.) The movant does not dispute the factual allegations of the complaint but raises the affirmative defense that the terms of the trust have established a spendthrift trust which is not property of the estate. In support of his position, the movant has attached a copy of the trust provisions ("the trust document") to the memorandum of law filed with his motion.
The Second Circuit has held that, under certain circumstances, a court ruling on a Rule 12(b)(6) motion to dismiss may consider an affirmative defense raised in the motion and the contents of a document not attached to the complaint without converting the motion to dismiss to a motion for summary judgment. Pani v. Empire Blue Cross Blue Shield, 152 F.3d 67 (2d Cir. 1998) (upholding dismissal where facts alleged in complaint, together with documents of which plaintiff had notice and which were integral to the complaint, supported the affirmative defense raised in the defendant's Rule 12(b)(6) motion to dismiss). "An affirmative defense may be raised by a pre-answer motion to dismiss under Rule 12(b)(6), without resort to summary judgment procedure, if the defense appears on the face of the complaint." Pani at 74. "For purposes of this rule [12(b)(6)], the complaint is deemed to include any written instrument attached to it as an exhibit or any statements or documents incorporated in it by reference. Even where a document is not incorporated by reference, the court may nevertheless consider it where the complaint relies heavily upon its terms and effect, which renders the document integral to the complaint." Chambers v. Time Warner. Inc., 282 F.3d 147, 152 (2d Cir. 2002).
Fed.R.Civ.P. 12(b) provides, in relevant part:
If, on a motion asserting the defense numbered (6) to dismiss for failure of the pleading to state a claim upon which relief can be granted, matters outside the pleading are presented to and not excluded by the court, the motion shall be treated as one for summary judgment and disposed of as provided in Rule 56, and all parties shall be given reasonable opportunity to present all material made pertinent to such a motion by Rule 56.
Because the complaint relies on the existence and terms of the trust document as the basis for its claim that a portion of the trust's assets are property of the debtor's estate, the trust document is integral to the complaint and the court may consider it in ruling on the motion to dismiss. The court may also consider the movant's affirmative defense in light of the allegations of the complaint and the terms of the trust document.
The complaint states that the trust is irrevocable, that the debtor is a "an income beneficiary of at least 2/7th of the trust income," that the movant "is obligated to exercise his discretion to pay or use a share of the trust income for the debtor's `support, maintenance, education and needs in connection with any physical or mental disability'," and that the debtor "is a residuary beneficiary having a vested interest in at least a 2/7th interest in the trust corpus . . . payable to him if he shall survive the trust Settlor . . . or as he shall direct by Will." (Complaint at ¶¶ 6-8, 12-13.)
B
"Section 541(a)(1) of the Bankruptcy Code provides that the filing of a petition creates an estate including "all legal or equitable interests of the debtor in property as of the commencement of the case." Section 541(c)(2) excludes from the estate certain property in the form of a trust subject to a transfer restriction enforceable under applicable nonbankruptcy law." In re Robbins, 211 B.R. 2, 4 (Bankr. D.Conn. 1997) (citations and internal quotation marks omitted).
The trust document provides that the "trustees shall divide the principal of the trust and any additions thereto into seven equal shares," with two such shares to be for the benefit of the debtor ("the debtor's share"), two shares for the benefit of each of the debtor's two siblings and one share for the benefit of "the family." "As to (the debtor's share), the Trustees shall . . . from time to time pay or apply for the benefit of [the debtor] so much of the net income from this share as the Trustees in their discretion shall deem advisable for his support, maintenance, education and needs in connection with any physical or mental disability. Any income not so paid or applied shall, from time to time, be added to principal." (Trust Document at Art. Third.)
The provisions of the trust document give the trustees the discretion to determine whether and how much of the income from the debtor's share of the trust to distribute or accumulate. However, the court need not consider the movant's argument that the trust is a spendthrift trust under Connecticut law. The complaint's allegation that the trustee has abused his discretion is sufficient to state a claim, regardless of whether the trust is a spendthrift trust. "When discretion is given to a trustee [of a spendthrift trust], his exercise of it is subject to the control of the court to the extent, and only to the extent, that there has been an abuse of it. . . . An abuse of discretion is the basis for action by the court and the question whether it has occurred depends necessarily upon the consideration of all relevant circumstances."City of Bridgeport v. Reilly, 133 Conn. 31, 37 (1946); see also Conn. Gen. Stat. § 45a-543 (Supp. 2003) (establishing standards and remedies applicable to a court's determination of fiduciary abuse of discretion).
The court, on a motion to dismiss the complaint, lacks any basis to address the factual issue of whether there has been an abuse of discretion. The first count of the complaint, therefore, states a claim upon which relief may be granted.
C.
Upon the death of the settlor, the trust document provides that the trustees shall distribute the remainder of the debtor's share to the debtor, if living; if the debtor predeceases the settlor, the remainder of the debtor's share shall be distributed in accordance with the terms of the debtor's will "to or for the benefit of any person or persons, including . . . his creditors, his estate, and the creditors of his estate." (Trust Document at Art. Third.)
In In re Crandall, 173 B.R. 836 (Bankr. D.Conn. 1994), this court construed an inter vivos trust provision which provided that the debtor was to receive a share of the trust remainder after the death of the life beneficiary (his mother), if the debtor survived the life beneficiary. Crandall concluded that the debtor's interest in the trust remainder, whether considered contingent or vested subject to divestment, constituted property of the debtor's bankruptcy estate under § 541(a)(1).
Section 541(a)(1) provides that a debtor's estate upon commencement of the case comprises, inter alia, "all legal or equitable interests of the debtor in property." The debtor at the commencement of his case held an interest in the Trust which he had acquired upon the execution of the Trust. See Restatement (Second) of Trusts, § 56 cmt. f, illus. 8 (1959) (describing such interest as "a contingent equitable interest in remainder); cf. Austin W. Scott, The Law of Trusts § 57.1 (4th ed. 1987) (stating that under such a trust, "the beneficiary at once acquires a future interest, although it is an interest subject to be divested by the exercise of the power [of the settlor to revoke or modify]"); Burg v. Old Nat'l Bank, 4 Wash.App. 773,483 P.2d 1290, 1292, modified, 79 Wn.2d 849, 490 P.2d 731 (1971) (identifying this type of interest as "a vested remainder subject to complete defeasance"). In defining property of the estate, "Congress indicated its intention to include all legally recognizable interests, although they may be contingent and not subject to possession until some future time." In re Knight 164 B.R. 372, 374 (Bankr.S.D.Fla. 1994) (citing In re Ryerson, 739 F.2d 1423, 1425 (9th Cir. 1984)). In the present case, the debtor's interest in the trust, regardless of nomenclature, is property of the estate. In re Crandall, 173 B.R. at 839; Cf. Gaynor v. Payne, 261 Conn. 585, 593 (2002)
("That the contingent remainders . . . are subject to a condition precedent . . . is thus irrelevant; although that condition may never be fulfilled, that possibility does not alter the nature of the contingent remainder as an enforceable, presently existing property interest."). The debtor's interest in the trust remainder is property of the bankruptcy estate pursuant to § 541(a)(1).
IV CONCLUSION
The court concludes that the debtor's claim against the movant for abuse of discretion and the debtor's interest in the remainder of his share of the trust are property of his bankruptcy estate. Accordingly, both counts of the complaint state claims upon which relief may be granted and the motion to dismiss the complaint is denied. It is
SO ORDERED.