Spendthrift - Fahey Banking Co. v Carpenter

Posted on: March 4, 2019
Tags: Wiils, Trusts, Estate Planning, Cincinnati, Ohio, Kentucky, Wealth Management

Fahey Banking Co. v. Carpenter, 2019-Ohio-679

Trial court's Civ.R. 12(B)(6) dismissal on motion of trustee of a spendthrift trust in action brought by creditor bank to collect future required distributions to beneficiary lacked analysis of exceptions under R.C. 5805.06. Decision reversed and remanded for trial court to apply R.C. 5805.06 in reaching a decision on parties' dispute.

To the extent that a trust that gives a beneficiary the right to receive one or more mandatory distributions does not contain a spendthrift provision, the court may authorize a creditor or assignee of the beneficiary to attach present or future mandatory distributions to or for the benefit of the beneficiary or to reach the beneficiary's interest by other means.

Fahey argues that since Carpenter has the power to withdraw an amount annually, she should be treated as the settlor of a revocable trust but only to the extent of the amount that she may withdraw annually ($5,000 or five percent of the principal). However, R.C. 5805.06(A)(1) provides that the property of a revocable trust is subject to claims of the settlor's creditors but only during the settlor's lifetime. While the original settlor is deceased, Fahey argues that Carpenter's power of withdrawal creates for her the same rights as the settlor of a revocable trust and is thus subject to Fahey's claims as Carpenter's creditor.

D E C I S I O N
Rendered on February 26, 2019
On brief: Kemp, Schaffer & Rowe Co., L.P.A., Michael N.
Schaeffer, Richard G. Murray, II, Scott N. Schaeffer, and
Lauren A. Kemp, for appellant. Argued: Scott N. Schaeffer.


On brief: Susan M. Stasiewicz, for appellee Patricia A.
Carpenter.


On brief: Carlile Patchen & Murphy LLP, Carl A. Aveni, II,
and Brandon A. Borgmann, for appellee Stephen D. Enz,
Trustee of the Kenneth N. Carpenter Irrevocable Trust.
Argued: Carl A. Aveni, II.

APPEAL from the Franklin County Court of Common Pleas
BRUNNER, J.

{¶ 1} Plaintiff-appellant, the Fahey Banking Company ("Fahey"), appeals from a
judgment of the Franklin County Court of Common Pleas granting the Civ.R. 12(B)(6)
motion to dismiss of defendant-appellee Stephen D. Enz, Trustee of the Kenneth N.
Carpenter Irrevocable Trust ("Trustee"), and dismissed Fahey's complaint. For the
following reasons, we reverse the trial court's judgment and remand for specific
consideration of legal issues raised only in Fahey's reply brief and at oral argument.

No. 17AP-842 2

I. FACTS AND PROCEDURAL HISTORY

{¶ 2} On February 23, 2013, the Franklin County Court of Common Pleas granted
Fahey a judgment against defendant-appellee Patricia A. Carpenter ("Carpenter") and C &
G Golf, LLC, jointly and severally, which judgment remains unsatisfied. As of May 10, 2017,
the amount remaining due on the judgment was $1,252,782.22 plus interest. On May 11,
2017, Fahey filed a complaint for a creditor's bill under R.C. 2333.01. On July 24, 2017,
Fahey filed an amended creditor's bill complaint, naming the Trustee and Carpenter as
defendants. Carpenter is a beneficiary of the Kenneth N. Carpenter Irrevocable Trust
("trust"). Fahey alleges in the complaint that Carpenter does not have sufficient real or
personal property with which to satisfy the debt.
{¶ 3} On August 7, 2017, Carpenter filed an answer to the amended complaint and,
on September 13, 2017, the Trustee filed a motion to dismiss pursuant to Civ.R. 12(B)(6),
and the trial court granted the motion.

II. ASSIGNMENT OF ERROR
{¶ 4} Fahey filed a timely notice of appeal and raised the following assignment of
error for our review:
The Trial Court erred by failing to recognize that a present right
of withdrawal from a Trust is a present ownership interest to
which a spendthrift provision does not apply and the interest
may be attached by a creditor pursuant to a Creditor's Bill
under R.C. §2333.01.

III. ANALYSIS
{¶ 5} In its assignment of error, Fahey contends that the trial court erred in
granting the trustee's motion to dismiss its amended complaint. A Civ.R. 12(B)(6) motion
to dismiss for failure to state a claim is procedural and "tests the sufficiency of the
complaint." Volbers-Klarich v. Middletown Mgt., 125 Ohio St.3d 494, 2010-Ohio-2057,
¶ 11, citing Assn. for Defense of Washington Local School Dist. v. Kiger, 42 Ohio St.3d 116,
117 (1989). For a trial court to grant a motion to dismiss for failure to state a claim on which
relief may be granted, "it must appear beyond doubt from the complaint that the plaintiff
can prove no set of facts entitling him to recovery." O'Brien v. Univ. Community Tenants
Union, 42 Ohio St.2d 242 (1975), syllabus. In construing the complaint on a Civ.R. 12(B)(6)
motion, a court must presume all factual allegations contained in the complaint to be true
and make all reasonable inferences in favor of the nonmoving party. State ex rel. Turner
No. 17AP-842 3
v. Houk, 112 Ohio St.3d 561, 2007-Ohio-814, ¶ 5. An appellate court uses a de novo
standard of review to determine whether the dismissal of a complaint under Civ.R. 12(B)(6)
was proper. Woods v. Riverside Methodist Hosp., 10th Dist. No. 11AP-689, 2012-Ohio-
3139, ¶ 9.
{¶ 6} In its assignment of error, Fahey contends that the trial court erred by failing
to recognize that a present right of withdrawal from a trust is a present ownership interest
to which a spendthrift provision does not apply and the interest may be attached by a
creditor under a complaint for a creditor's bill under R.C. 2333.01. The trustee argued that
Fahey sought a prospective injunction barring the trustee from making future distributions
from a spendthrift trust and a legal determination that Ohio statutes expressly prohibit this.
Fahey argued that, because Carpenter's right to an irrevocable trust distribution is
unqualified and not subject to the trustee's discretion, Fahey is entitled to a creditor's bill
to the extent of such distributions.
{¶ 7} The trial court determined that the trust is a spendthrift trust and held that
R.C. 5805.01 prohibits a creditor of the beneficiary from reaching the interest or a
distribution from a spendthrift trust by the trustee before its receipt by the beneficiary. The
trial court examined R.C. 5805.05(A), which permits creditors to attach present and future
mandatory distributions only if the trust is not a spendthrift trust. It determined that Fahey
was not entitled to an injunction and could not obtain an order directing future payments
from the spendthrift trust to be paid to Fahey before Carpenter received the payments. It
granted the Trustee's motion under Civ.R. 12(B)(6) and dismissed Fahey's complaint for
creditor's bill.
{¶ 8} The parties do not contest the fact that the trust is an irrevocable trust with a
valid spendthrift provision. See Trust at Article VIII, Ex. A attached to May 11, 2017 Compl.
R.C. 5805.01(A) provides that "[a] spendthrift provision is valid only if it restrains both
voluntary and involuntary transfer of a beneficiary's interest or if it restrains involuntary
transfer of a beneficiary's interest and permits voluntary transfer of a beneficiary's interest
only with the consent of a trustee who is not the beneficiary." The issue central to our review
of Fahey's single assignment of error is whether a creditor is able to enjoin a trustee from
making prospective distributions from the spendthrift trust to the beneficiary when the
No. 17AP-842 4
beneficiary has an unqualified right to withdraw from the trust $5,000 or five percent of
the principal annually. (Trust at Article VI.)
{¶ 9} Fahey contends that R.C. 5805.06 controls and permits the injunction and
attachment, despite the valid spendthrift provision. We examine Fahey's claim.
{¶ 10} R.C. 5805.06 provides:
(A) Whether or not the terms of a trust contain a spendthrift
provision, all of the following apply:
(1) During the lifetime of the settlor, the property of a revocable
trust is subject to claims of the settlor's creditors.
(2) Except to the extent that a trust is established pursuant to,
or otherwise is wholly or partially governed by or subject to
Chapter 5816. of the Revised Code, with respect to an
irrevocable trust, a creditor or assignee of the settlor may reach
the maximum amount that can be distributed to or for the
settlor's benefit. If an irrevocable trust has more than one
settlor, the amount distributable to or for a settlor's benefit that
the creditor or assignee of a particular settlor may reach may
not exceed that settlor's interest in the portion of the trust
attributable to that settlor's contribution. The right of a
creditor or assignee to reach a settlor's interest in an
irrevocable trust shall be subject to Chapter 5816. of the
Revised Code to the extent that that chapter applies to that
trust.
(3) With respect to a trust described in 42 U.S.C. section
1396p(d)(4)(A) or (C), the court may limit the award of a
settlor's creditor under division (A)(1) or (2) of this section to
the relief that is appropriate under the circumstances,
considering among any other factors determined appropriately
by the court, the supplemental needs of the beneficiary.
(B) For purposes of this section, all of the following apply:
(1) The holder of a power of withdrawal is treated in the same
manner as the settlor of a revocable trust to the extent of the
property subject to the power during the period the power may
be exercised.
(2) Upon the lapse, release, or waiver of the power of
withdrawal, the holder is treated as the settlor of the trust only
to the extent the value of the property affected by the lapse,
release, or waiver exceeds the greatest of the following
amounts:
No. 17AP-842 5
(a) The amount specified in section 2041(b)(2) or 2514(e) of the
Internal Revenue Code;
(b) If the donor of the property subject to the holder's power
of withdrawal is not married at the time of the transfer of the
property to the trust, the amount specified in section 2503(b)
of the Internal Revenue Code;
(c) If the donor of the property subject to the holder's power of
withdrawal is married at the time of the transfer of the property
to the trust, twice the amount specified in section 2503(b) of
the Internal Revenue Code.
(3) None of the following shall be considered an amount that
can be distributed to or for the benefit of the settlor:
(a) Trust property that could be, but has not yet been,
distributed to or for the benefit of the settlor only as a result of
the exercise of a power of appointment held in a nonfiduciary
capacity by any person other than the settlor;
(b) Trust property that could be, but has not yet been,
distributed to or for the benefit of the settlor of a trust pursuant
to the power of the trustee to make distributions or pursuant to
the power of another in a fiduciary capacity to direct
distributions, if and to the extent that the distributions could
be made from trust property the value of which was included in
the gross estate of the settlor's spouse for federal estate tax
purposes under section 2041 or 2044 of the Internal Revenue
Code or that was treated as a transfer by the settlor's spouse
under section 2514 or 2519 of the Internal Revenue Code;
(c) Trust property that, pursuant to the exercise of a
discretionary power by a person other than the settlor, could be
paid to a taxing authority or to reimburse the settlor for any
income tax on trust income or principal that is payable by the
settlor under the law imposing the tax.
(Emphasis added.) R.C. 5805.06(A) and (B). As persuasive authority, the official comment
to R.C. 5805.06 includes the following discussion, in pertinent part:
Subsection (b)(1) treats a power of withdrawal as the
equivalent of a power of revocation because the two powers
are functionally identical. This is also the approach taken in
Restatement (Third) of Trusts Section 56 cmt. b (Tentative
Draft No. 2, approved 1999). If the power is unlimited, the
property subject to the power will be fully subject to the claims
of the power holder's creditors, the same as the power holder's
other assets. If the power holder retains the power until death,
No. 17AP-842 6
the property subject to the power may be liable for claims and
statutory allowances to the extent the power holder's probate
estate is insufficient to satisfy those claims and allowances. For
powers limited either in time or amount, such as a right to
withdraw a $10,000 annual exclusion contribution within 30
days, this subsection would limit the creditor to the $10,000
contribution and require the creditor to take action prior to the
expiration of the 30-day period.
(Emphasis added.)
{¶ 11} Relying on this statutory authority and related interpretation, Fahey argues
that since Carpenter has the power to withdraw an amount annually, she should be treated
as the settlor of a revocable trust but only to the extent of the amount that she may withdraw
annually ($5,000 or five percent of the principal). However, R.C. 5805.06(A)(1) provides
that the property of a revocable trust is subject to claims of the settlor's creditors but only
during the settlor's lifetime. While the original settlor is deceased, Fahey argues that
Carpenter's power of withdrawal creates for her the same rights as the settlor of a revocable
trust and is thus subject to Fahey's claims as Carpenter's creditor. Fahey argues it can reach
the trust's assets during Carpenter's lifetime and that Great Am. Ins. Co. v. Thompson
Trust, 1st Dist. No. C-040127, 2006-Ohio-304, supports its argument.
{¶ 12} In Great Am. Ins., the debtor was a beneficiary of the trust and had requested
and received year-end distributions and the debtor expected future distributions. The
trustee argued that the trust's spendthrift provision prevented the creditor from attaching
the beneficiary's interest in the trust. However, the First District Court of Appeals held that
the beneficiary's power to withdraw $5,000 or five percent of the trust principal at the end
of each year was unconditional, and, therefore, the assets subject to the debtor's demand
were not protected by the spendthrift provision. The First District stated:
But it is black-letter trust law that a spendthrift provision
cannot protect assets that a beneficiary has an unconditional
right to withdraw. "An intended spendthrift restraint is * * *
invalid with respect to a nonsettlor's interest in trust property
over which the beneficiary has the equivalent of ownership,
entitling the beneficiary to demand immediate distribution of
the property. Thus, if an income beneficiary also holds a
presently exercisable general power of appointment (that is, a
power currently to compel distribution of trust property to the
power holder), a spendthrift restraint will not prevent the
beneficiary's creditors * * * from reaching the property that is
subject to the power."
No. 17AP-842 7
Great Am. Ins at ¶ 9, quoting Restatement of the Law 3d of Trusts, Section 58, at Comment
on Subsection (1), part b(1) (2003).
{¶ 13} The trustee argues that the Ohio Trust Law was effective in 2007, after Great
Am. Ins. was decided and that R.C. 5805.05(A) provides the trust proceeds cannot be
distributed in violation of the spendthrift provision.
To the extent that a trust that gives a beneficiary the right to
receive one or more mandatory distributions does not contain
a spendthrift provision, the court may authorize a creditor or
assignee of the beneficiary to attach present or future
mandatory distributions to or for the benefit of the beneficiary
or to reach the beneficiary's interest by other means.
Id. The Trustee uses this language to support his argument that a creditor cannot attach
present or future distributions to the beneficiary because the trust contains a spendthrift
provision. However, as we read this provision, we notice the language "to the extent" as
applying to the spendthrift provision and not to the right to receive one or more mandatory
distributions. As such, we cannot agree with the trial court that the mere existence of a
spendthrift provision in a trust is dispositive of the right of a creditor to gain access to trust
distributions that are mandatory.
{¶ 14} Spendthrift provisions are enforceable in Ohio. Scott v. Bank One Trust Co.,
62 Ohio St.3d 39 (1991). However, R.C. 5805.02 provides exceptions to enforceability of
spendthrift provisions. R.C. 5805.02(E) provides that "[t]he only exceptions to the
effectiveness of a spendthrift provision are those described in divisions (B) and (D) of this
section [beneficiary is child or spouse with judgment for support or a claim of the United
States], in division (B) of section 5805.05 of the Revised Code [trustee has not made a
mandatory distribution within reasonable time after designated distribution date] and in
sections 5805.06 and 5810.04 [attorney's fees and costs from administration of a trust] of
the Revised Code." (Emphasis added.) Thus, R.C. 5805.02 provides that R.C. 5805.06 is
an exception to the enforceability of spendthrift provisions.
{¶ 15} Fahey raised the argument that it could reach the trust assets in the trial
court, but Fahey did not specifically argue that R.C. 5805.06 applied to avoid spendthrift
limitations for creditors until its reply brief to this court and during oral argument.
Generally, appellate courts do not address an argument made for the first time on appeal,
the trial court not having had an opportunity to address it. Oglesby v. Toledo, 92 Ohio
No. 17AP-842 8
App.3d 432, 437 (6th Dist.1993). Still, we recognize that our standard of review under these
circumstances is de novo. We see merit to Fahey's argument but believe the parties and the
trial court need the opportunity to thoroughly brief and consider it.

IV. CONCLUSION
{¶ 16} We therefore vacate the decision of the trial court granting the Trustee's
Civ.R. 12(B)(6) motion to dismiss and remand this matter to the trial court to order the
defendants to file answers and for the trial court to determine appropriate motion(s) of the
parties the issue of whether R.C. 5805.06 would operate to permit Fahey to attach
mandatory distributions to Carpenter despite the spendthrift provisions that are part of the
Trust.
{¶ 17} Fahey's sole assignment of error is sustained to the extent that we reverse the
judgment of the Franklin County Court of Common Pleas and remand this matter to the
trial court to fully consider under appropriate procedural circumstances the arguments of
the parties concerning the application of R.C. 5805.06 to the Trust in question.
Judgment reversed and cause remanded.
HORTON, J., concurs.
DORRIAN, J., dissents.