Motors Co. v. Nalaielua , 31 Haw. 418 ( 1930 )

I cannot concur in the view that a contingent interest of acestui que trust in property, under a trust deed, in the circumstances set forth in the majority opinion, can be subjected at the suit of the creditor to the satisfaction of a judgment debt of such cestui; and this for the following reasons, namely, (1) that such a result would defeat the plainly apparent purposes of the trust as expressed in its terms and (2) that it would be inequitable to subject to forced sale an uncertain interest which at the present time can have none other than a merely speculative value.

"In England, ordinarily, both the right of voluntary alienation and the liability to involuntary alienation in behalf of creditors are regarded as necessary incidents of property, legal or equitable, and consequently any indication of a contrary intention in connection with the creation of a trust is nugatory. * * * In some states the English view, that one cannot be given an equitable interest, any more than a legal one, free from liability for his debts, has been asserted, but the later decisions have usually adopted a contrary view, to the effect that the intention of the creator of a trust, as indicated by the language used in its creation, that the interest of the cestuique trust shall not be liable for his debts, will be given effect by a court of equity." 3 Tiffany, Real Property (2 Ed.) Sec. 592, pp. 2319, 2320 and cases cited in footnotes 82 and 86. Under the English rule above referred to, if the interest given the beneficiary "is an absolute vested right to property which he may reach if he so desires, any attempt to restrain his right as to alienation or to defeat the right of his creditors, is unavailing." 3 Pom. Eq. Jur. (4 Ed.) footnote to Sec. 989, p. 2154. But even in England a different rule has been applied with reference to contingent interests. "The line on which the cases divide is clear and distinct and is simply this: Has the cestui such vested interest, or such absolute property rights that he can force the trustee to pay him or deliver goods or property to him? If he has such interest the assignee or creditor can obtain it, and if he has not, the assignee or creditor can obtain nothing. The point is, not that one cannot be given an interest that will be beyond the reach of his creditors, but rather that one cannot be given an absolute property interest that will be beyond the reach of those creditors. This absolute property interest is the interest spoken of when it is said that a cestui's interest is subject to the demands of his creditors." 3 Pom. Eq. Jur. (4 Ed.) footnote to Sec. 989, p. 2156 and cases cited.

Referring to the English doctrine above announced the Supreme Court of the United States in Nichols v. Eaton, 91 U.S. 716, 725, said: "But, while we have thus attempted to show that Mrs. Eaton's will is valid in all its parts upon the extremest doctrine of the English Chancery Court, we do not wish to have it understood that we accept the limitations which that court has placed upon the power of testamentary disposition of property by its owner. We do not see, as implied in the remark of Lord Eldon, that the power of alienation is a necessary incident to a life estate in real property, or that the rents and profits of real property and the interest and dividends of personal property may not be enjoyed by an individual without liability for his debts being attached as a necessary incident to such enjoyment. This doctrine is one which the English Chancery Court has ingrafted upon the common law for the benefit of creditors, and is comparatively of modern origin. We concede that there are limitations which public policy or general statutes impose upon all dispositions of property, such as those designed to prevent perpetuities and accumulations of real estate in corporations and ecclesiastical bodies. We also admit that there is a just and sound policy peculiarly appropriate to the jurisdiction of courts of equity to protect creditors against frauds upon their rights, whether they be actual or constructive frauds. But the doctrine, that the owner of property, in the free exercise of his will in disposing of it, cannot so dispose of it, but that the object of his bounty, who parts with nothing in return, must hold it subject to the debts due his creditors, though that may soon deprive him of all the benefits sought to be conferred by the testator's affection or generosity, is one which we are not prepared to announce as the doctrine of this court. If the doctrine is to be sustained at all, it must rest exclusively on the rights of creditors. Whatever may be the extent of those rights in England, the policy of the states of this Union, as expressed both by their statutes and the decisions of their courts, has not been carried so far in that direction. It is believed that every state in the Union has passed statutes by which a part of the property of the debtor is exempt from seizure on execution or other process of the courts; in short, is not by law liable to the payment of his debts. This exemption varies in its extent and nature in the different states. In some it extends only to the merest implements of household necessity; in others it includes the library of the professional man, however extensive, and the tools of the mechanic; and in many it embraces the homestead in which the family resides. This has come to be considered in this country as a wise, as it certainly may be called a settled, policy in all the states. To property so exempted the creditor has no right to look, and does not look, as a means of payment when his debt is created; and while this court has steadily held, under the constitutional provision against impairing the obligations of contracts by state laws, that such exemption laws, when first enacted, were invalid as to debts then in existence, it has always held that as to contracts made thereafter, the exemptions were valid. This distinction is well founded in the sound and unanswerable reason that the creditor is neither defrauded nor injured by the application of the law to his case, as he knows when he parts with the consideration of his debt that the property so exempt can never be made liable to its payment. Nothing is withdrawn from this liability which was ever subject to it or to which he had a right to look for its discharge in payment. * * * Nor do we see any reason, in the recognized nature and tenure of property and its transfer by will, why a testator who gives, who gives without any pecuniary return, who gets nothing of property value from the donee, may not attach to that gift the incident of continued use, of interrupted benefit of the gift, during the life of the donee. Why a parent, or one who loves another, and wishes to use his own property in securing the object of his affection, as far as property can do it, from the ills of life, the vicissitudes of fortune, and even his own improvidence, or incapacity for self-protection, should not be permitted to do so, is not readily perceived. These views are well supported by adjudged cases in the state courts of the highest character." To the same effect isSpindle v. Shreve, 111 U.S. 542. Quoting from p. 547: "It cannot be doubted, that it is competent for testators and grantors, by will or deed, to construct and establish trusts, both of real and personal property, and of the rents, issues, profits and produce of the same, by appropriate limitations and powers to trustees, which shall secure the application of such bounty to the personal and family uses during the life of the beneficiary, so that it shall not be subject to alienation, either by voluntary act on his part, or in invitum, by his creditors." See also Seymour v. McAvoy, 121 Cal. 438, 53 P. 946, 41 L.R.A. 544.

The principle announced in Nichols v. Eaton, as above quoted, was later approved in Shelton v. King, 229 U.S. 90, wherein it was held, among other things, that (quoting from the syllabus): "While one may not by his own act preserve to himself the enjoyment of his own property in such manner that it shall not be subject to claims of creditors or to his own power of alienation, a testator may bestow his own property in that manner upon one to whom he wishes to secure beneficial enjoyment without being subject to the claims of assignees or creditors. Claflin v. Claflin, 149 Massachusetts, 19, approved."

Nichols v. Eaton, supra, it is true, referred to the effect of express testamentary restrictions upon alienation of a life estate in real property, of the rents and profits therefrom and all interest and dividends of personal property. Upon principle the same rule is applicable to a contingent interest before it vests. Thus "a condition or conditional limitation upon alienation of a contingent interest before it vests is good." Gray's Restraints on Alienation of Property (2 Ed.) p. 33, par. 46. And upon principle the same rule is applicable to restrictions not expressed which are necessary to carry out the intention of a donor as expressed in the trust deed. Thus (quoting from the syllabus in Harrison v. Davis, 22 Haw. 465) : "The right of alienation is not a necessary incident to an equitable interest to income or support for the life of the beneficiary, and it does not exist where it would be destructive of the trust or is incompatible with its purposes though there be no express prohibition against alienation."

In the case at bar the settlors have granted to the trustee the absolute power of management and control over the property described in the trust deed including the power "to lease or rent the above described property and to receive the rents, issues and profits thereof, including crops of cane, as the same now or hereafter shall become due and payable, deducting therefrom all sums of money paid on account of taxes, insurance, water and sewer rates, interest, commissions, attorney's fees, whether the same be for advice or for the instituting or defending any and all suits or actions at law or in equity when such may be deemed necessary to be obtained, brought and defended, and all such other sums and expenses incurred as may be necessary or proper for the preservation, protection and management of said property," with direction "to apply and to equally distribute and divide between and to give to the use of the said parties of the first part the overplus, if any, during the term of 20 years from the date hereof and after said term of 20 years to convey the said property to the said parties of the first part or to the survivors of them and to the heirs of each of all, if all or any of them should die before the expiration of the said term." From the foregoing excerpt from the trust deed it is apparent that the purpose of the settlors was to make such disposition of their property as would assure a more satisfactory management of the same than they could give it, to keep it intact for a period of twenty years, during which time the net income should be paid to them, with a provision for the vesting of the legal title in them, or the survivors of them, or in the event of the death of all, in the heirs of each, at the end of the trust period. I agree that the identity of the persons in whom legal title to the corpus shall vest is not determinable until the end of the trust period. To permit the ultimate contingent rights of a cestui to be taken away by a creditor would be clearly incompatible with the purposes of the trust and therefore contrary to the equitable principles above quoted.

Upon the second ground of dissent, the rule is thus stated in 2 Perry on Trusts (6 Ed.) p. 1335, Sec. 815a: "When the trust is not enforceable by the cestui his creditors cannot reach it. A remote, uncertain, contingent, beneficial interest cannot be reached," citing Russell v. Milton, 133 Mass. 181. Quoting from the last cited case on page 182: "In the case before us it is not in the power of the debtor to obtain anything under his father's will to apply to the plaintiff's debt. It would work a great and unconscionable hardship upon him to order a sale of his estate. His interest, if vested, is uncertain and contingent; it has no market value, and any purchase of it would be a mere speculative venture. We do not think the statute contemplates that such an uncertain, contingent and speculative interest can be seized and sold by a creditor by proceedings in equity." In Mears v.Lamona, 49 Pac. (Wash.) 251, by a suit in the nature of a creditors' bill plaintiff sought to subject defendant's interest in his mother's estate to the payment of a judgment. The mother's will provided that defendant could take nothing thereunder until his sister became of age in August, 1899. Defendant was one of the executors of the estate and had no other property of his own. Held, that his interest in the estate should not be sold until the sister became of age, since the immediate sale would cause an inequitable sacrifice of the property. See also Myer v.Thomson, 35 Hun 561; Seymour v. McAvoy, supra; Damhoff v.Shambaugh, 206 N.W. (Iowa) 248; Fleming v. Wood, 111 N.W. (Mich.) 80; and Mitchell v. Choctaw Bank, 65 So. (Miss.) 278. In the case last above cited, where a testatrix had devised all of her property to her husband in trust for her children, giving him complete control thereof until all of the children should arrive at the age of twenty-one years, when it should be equally distributed among those living, and directing him in the meantime to support them out of the income, it was held that a child did not have such an interest as could be subject by a creditor to the payment of his debt, nor could the court enter a decree directing payment out of the amount which would be due such child when the time arrived for distribution.

Beginning on page 803 of 60 A.L.R. is an exhaustive annotation of the subject of "Contingent remainder as subject to levy and sale by creditor." Section 3, p. 811, refers to creditors' suits. Quoting from the page last cited: "A creditor has been held in several states not to be entitled to maintain a creditor's suit to reach a contingent remainder of his debtor and have it sold to pay a debt due to him. Kenwood Trust Sav. Bank v. Palmer (1918) 285 Ill. 552, 121 N.E. 186; White v. McPheeters (1882) 75 Mo. 226; Watson v. Dodd (1873) 68 N.C. 528. * * * Watson v. Dodd (1873) 68 N.C. 528, was a suit for the purpose of satisfying a judgment by the sale of the defendant's interest under a will. The testator devised land to John Watson for life, and at his death to such of his children as might be then living, and the issue of such children as might have died leaving issue, with the provision that, if John Watson died without issue living at his death, the land should be equally divided between the defendant and three other persons. In holding that the plaintiff was not entitled to the sale of the defendant's contingent interest to satisfy a judgment against him, the court said: `It is clear that such a possibility would sell for little or nothing, as no one would bid except the holder of the first estate, for the purpose of extinguishing the limitation. The party may, if he choose, enter into such an executory agreement to convey, provided the estate vests, but there is no principle upon which a court of equity can compel him to make an agreement.' * * * Whatever may have been the variations from it in other jurisdictions, it is the rule in this state that a contingent remainder is not an estate, but is merely the chance of having one. It cannot be the subject of sale. It cannot be levied upon by legal process, and cannot be conveyed voluntarily by deed, though a warranty deed may transfer the title, by way of estoppel, after the happening of the contingency, and it may be released to the reversioner. Hill v. Hill (1914) 264 Ill. 219, 106 N.E. 262; Haward v. Peavey (1889)128 Ill. 430. * * * A court of equity has no jurisdiction to order the sale of a mere contingent remainder."

The foregoing rule appears to be supported by an overwhelming weight of authority. For the reasons above set forth I believe the principle hereinabove referred to as number two, and applied in the above cited cases, should be adopted with reference to the respondent's contingent interest in the corpus of the estate described in the complainant's bill of complaint.

I agree with the majority that "as to the right to the income during the twenty-year period of the trust, no issue is presented."