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Mia R. BowlerThird party irrevocable spendthrift trusts are considered a means of asset protection for the beneficiaries; however, California already allows for many exceptions to the general rule that a creditor of a beneficiary cannot access the assets of such a trust.

Recently, in United States v. Harris, the Ninth Circuit held that any current or future distributions from an irrevocable trust to the beneficiary were subject to a continuing writ of garnishment payable to the United States as a result of a $646,000 restitution judgment owed by the beneficiary for a felony conviction.

In Harris, the defendant was the beneficiary of two California irrevocable trusts. By the terms of the trusts, the defendant could not assign his interest in the trusts and the trustee had the sole discretion to make or withhold distributions of principal and income.

The key issue was whether the garnishment statute in the Federal Debt Collection Procedures Act could be used to attach defendant’s interest in an irrevocable trust. In order to determine whether the asset fits within the definition of property, and are subject to attachment, the court looks at the asset and the laws of the state governing the asset.

The decision of the Ninth Circuit to allow a continuing writ of garnishment is generally consistent with California law and policy. California Probate Code Section 15305.5 discusses the availability of trust assets to satisfy a restitution judgment and subparagraph (c) specifically provides that “Whether or not the beneficiary has the right under the trust to compel the trustee to pay income or principal or both to or for the benefit of the beneficiary, the court may, to the extent that the court determines it is equitable and reasonable under the circumstances of the particular case, order the trustee to satisfy all or part of the restitution judgment out of all or part of future payments that the trustee, pursuant to the exercise of the trustees discretion, determines to make to or for the benefit of the beneficiary.”

However, in its analysis of California law, the Ninth Circuit did not focus on California Probate Code Section 15305.5 and instead based its decision on its finding that despite distributions being subject to the sole discretion of the trustee, the defendant had a right to compel distributions from the trust to fulfill the trust purpose. Empire Props. v. County of Los Angeles, 44 Cal. App. 4th 781 (1996), provides that a beneficiary of an irrevocable trust has a “vested and present beneficial interest in the trust property.” The Ninth Circuit found that under California law, a beneficiary has a right to compel a trustee to make a distribution using California Probate Code Section 17200. On that basis, the Ninth Circuit found that California state law creates a sufficient interest in a beneficiary of an irrevocable trust to satisfy the requirements of the federal lien provisions.

As a matter of California law, the discussion in the case regarding a beneficiary’s ability to compel distributions from an irrevocable discretionary trust, opens the door for an increase in the amount of petitions by beneficiaries to compel distributions despite specific language in the trust giving the trustee the sole discretion over distributions.

While the decision in Harris mentions that “the government is not attempting to compel distributions from the trusts” without any further discussion of whether such an action would be available, it leaves the question of whether a creditor of a beneficiary, including one with a federal lien, can seek to compel a trustee to make a distribution to a beneficiary if the creditor believes that the failure to make such a distribution is inconsistent with the terms of the trust. In Young v. McCoy, 147 Cal. App. 4th 1078 (2007), a creditor, holding a restitution judgment against the beneficiary of an irrevocable trust, sought to compel the trustee to make a discretionary distribution to the beneficiary. The decision in Young did not address whether a creditor had the standing to seek the relief, but decided that the trustee had not abused her discretion because the beneficiary was receiving adequate support from the state while in jail.

Irrevocable Trusts - Vehicles for Asset Protection?

Casey J. EdmondsonHenry Ford was not used to hearing “no.” But that is what the Michigan Supreme Court told him in 1919, when Ford tried to reinvest huge capital reserves of Ford Motor Company into wages and new facilities instead of shareholder dividends. Despite the “business judgment rule” that ordinarily prevents courts from overturning lawful business decisions, the Court did just that, finding that Ford altogether ignored the principle of maximizing shareholder value. Since this famous decision, business leaders have accepted shareholder value as the north star.

The idea that shareholder value was the only thing business leaders should care about was enshrined in the doctrines of Milton Friedman and the Chicago School of Economics – dominant for decades. But today’s business leaders often care about more: their employees, their customers, the environment, and their communities. When protecting these constituencies clashes with shareholder value, the custom has been to rely on the business judgment rule for protection by framing every decision as profit-maximizing regardless of true motive. Recognizing that semi-fiction, state legislatures have begun blessing “hybrid” corporations that operate for profit but may consider important outside concerns. In California, these are the “benefit” and “social purpose” corporations (“BC” and “SPC”). California introduced these hybrid forms beginning with the Corporate Flexibility Act of 2011, and has updated the law several times since. By way of example, two well-known benefit corporations are Kickstarter (Delaware) and Klean Kanteen (California). Though awareness of benefit and social purpose corporations has grown in the legal and business world, they still make up a tiny fraction of corporations overall.

BCs and SPCs are not non-profits, and they are taxed according to their general status (C or S corp.). Yet BC and SPC forms exist to protect business leaders whose choices defend important social values that may be in tension with a laser focus on maximizing profit.

As described by California’s Supreme Court, directors and officers have the duty “to refrain from doing anything that would work injury to the corporation, or to deprive it of profit or advantage which his skill and ability might properly bring to it.” Bancroft-Whitney Co. v. Glen, 64 Cal. 2d 327, 345 (1966). However, the statutes governing BCs and SPCs require directors and officers to consider matters above and beyond the shareholders’ profit interests. Because they must consider these matters, these statutes provide added protection from shareholders trying to impose liability for choices resulting in less-than-maximum profits.

Most California corporations have, in their articles of incorporation, generic statements of purpose that authorize the corporation to engage in all lawful activity. But BCs and SPCs must add statements about their public and social benefit purposes. The choice of language, particularly for SPCs, is critical in setting the scope of a director’s duties and protections.

BCs face stricter regulation than SPCs, are less flexible, and may give rise to greater exposure to claims than do SPCs. BCs provide more explicit statutory protections, however, for directors and officers who consider impacts on public stakeholders, particularly in the context of a potential takeover. SPCs are flexible, limited, and easier to administer. They offer more clarity to corporate leaders who can apply a more bright-line standard to corporate decisions than the very broad (almost limitless) set of concerns required to be considered by BCs.

BCs must consider many different social values, but SPCs are largely free to pick and choose among permissible values. A BC must analyze the impact of its major business decisions and strategies on not only shareholders, but also the environment, and society. Because the SPC can have narrowly-tailored public benefit purposes, its officers’ and directors’ duties are limited to considering just impact on those listed purposes.

The relative novelty and infrequent use of the BC and SPC forms leaves doubt as to how the statutory standards will be applied by courts in the future. Most questions will be matters of first impression, meaning that a court has little guidance from precedent. However, these innovations in law show that entrepreneurs are, more and more, trying to straddle the line between economics and politics.

Ford Couldn’t, But You Can: Hybrid Corporations for Social Goals

Kyle M. FisherMost of us were raised by our parents to say “please” and “thank you.” In today’s society, these simple words seem to be used less and less. Worryingly, this trend includes the country’s political discourse which has become increasingly harsh and insensitive.

This lack of civility overlooks the power of these magic words. Saying “please” makes a respectful request of the other person and empowers that person to respond to your request. Studies show that using the word makes it much more likely that your request will be granted. More fundamentally, it demonstrates a basic recognition of the human dignity of the other person.

Saying “thank you” is the simplest form of practicing gratitude. It helps prevent the other person from feeling under-appreciated and taken for granted. Like with saying “please,” studies show that saying “thank you” makes people more willing to do something for you again in the future.

This creates a cycle of good will which can be very powerful. Indeed, in at least one extreme situation, it made the difference between life and death.

During a polar expedition between 1914 to 1916, an Englishman, Ernest Shackleton, and his crew became trapped in the ice on their boat. Months went by and the ice still held. Eventually, the pressure of the ice crushed the hull of the ship and left the men trapped on the ice. Their epic adventure to survive was only beginning. It is an inspiring story. I apologize for ruining the ending, but everyone made it home safely, which is my point.

Shackleton proved himself to be an amazing leader in many respects. However, one trait in particular kept the group cohesive. He was always polite to the men and expected them to be polite to each other as well. The social lubricant that this created helped keep the men civil to and cooperative with each other, which literally saved their lives.

This is an obviously extreme example, but our ability to sincerely say “please” and “thank you” has a dramatic and beneficial impact on how we relate to each other. Besides, it will make your parents proud of you!

Thank you for reading my submission. I appreciate it.

The Power of Politeness

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