Bank of Dallas v. Republic National Bank of Dallas
1976 Tex. App. LEXIS 3022, 540 S.W.2d 499 (1976)
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Rule of Law:
A spendthrift provision in a trust is void as against the creditors of a settlor-beneficiary. Creditors can reach the maximum amount of income and principal that the trustee could, under the terms of the trust, pay to or apply for the benefit of the settlor.
Facts:
- On January 28, 1971, Patricia Murray Fewell, as settlor, transferred her own property to the Republic National Bank of Dallas to create a trust for the benefit of herself and her children.
- The trust terms mandated that the trustee pay all net income from the trust to Fewell for her lifetime.
- The trust also gave the trustee discretion to pay principal to Fewell or her descendants for their reasonable support, comfort, health, and education.
- Fewell retained a general power of appointment, allowing her to designate in her will who would receive any remaining trust assets upon her death.
- The trust contained a spendthrift provision intended to shield the trust's income and corpus from the beneficiaries' creditors.
- Bank of Dallas obtained a judgment against Patricia Murray Fewell and her husband for a debt of $30,471.88.
Procedural Posture:
- Bank of Dallas obtained a judgment against Patricia Murray Fewell and her husband, George H. Fewell.
- Bank of Dallas filed an application for a Writ of Garnishment in a trial court against Republic National Bank of Dallas, the trustee of the Patricia Murray Fewell Trust.
- The trial court decreed that Bank of Dallas could garnish the trust's income but denied garnishment of the trust's corpus (principal).
- Bank of Dallas and the Fewells, as appellants, appealed the portion of the judgment that protected the corpus from garnishment.
- Republic National Bank and the other trust beneficiaries, as appellees, appealed the portion of the judgment that allowed the income to be garnished.
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Issue:
Does a spendthrift provision in a self-settled trust protect the trust's income and corpus from garnishment by the settlor's creditors?
Opinions:
Majority - Chief Justice McDonald
No. A spendthrift provision in a trust created by a settlor for her own benefit is void as to her creditors, who can reach both the income and the corpus of the trust. While spendthrift trusts are valid when created for others, a settlor cannot use such a device to shield her own assets from her own creditors. Because the trust directs the trustee to pay all net income to Fewell, her creditors can garnish that income. Furthermore, because the trustee has the discretion to pay the principal to Fewell and she retains a general power of appointment over the remainder, her creditors can reach the corpus as well. The court followed the Restatement of Trusts, which holds that creditors can reach the maximum amount which the trustee could pay to the settlor-beneficiary.
Analysis:
This decision solidifies the well-established exception to the validity of spendthrift trusts for self-settled trusts in Texas law. It affirms that an individual cannot use a trust as a shield to protect their own assets from their own creditors while retaining beneficial enjoyment and control over those assets. By adopting the principles from the Restatement of Trusts, the court ensures that a settlor's creditors can reach not only the income but also the principal if the trustee has any discretion to distribute it to the settlor. This prevents settlors from creating illusory protection against liabilities they incur.
