Markham, etc v. Fay
Case Date: 02/07/1996
Court: United States Court of Appeals
Docket No: 95-1631
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UNITED STATES COURT OF APPEALS UNITED STATES COURT OF APPEALS FOR THE FIRST CIRCUIT FOR THE FIRST CIRCUIT ____________________ No. 95-1631 PAUL F. MARKHAM, TRUSTEE, Plaintiff, v. CLAIRE M. FAY, AS TRUSTEE OF HIGHLAND AVENUE NURSING HOME TRUST, PARKER HILL NURSING HOME TRUST, AND GREEN PASTURES NURSING HOME TRUST, Defendant, Appellant, and UNITED STATES, Defendant, Appellee. ____________________ APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS [Hon. Robert B. Collings, U.S. Magistrate Judge] _____________________ ____________________ Before Torruella, Chief Judge, ___________ Bownes, Senior Circuit Judge, ____________________ and Stahl, Circuit Judge. _____________ ____________________ Richard H. Gens for appellant. _______________ Annette M. Wietecha, Attorney, with whom Donald K. Stern, ____________________ ________________ United States Attorney, Of Counsel, Loretta C. Argrett, Assistant __________________ Attorney General, Gary R. Allen, Attorney, and Jonathan S. Cohen, _____________ _________________ Attorney, Tax Division, United States Department of Justice, were on brief for appellee. ____________________ February 7, 1996 ____________________ BOWNES, Senior Circuit Judge. Appellant Claire M. BOWNES, Senior Circuit Judge. ____________________ Fay ("Fay"), in her capacity as trustee of three trusts, appeals the magistrate judge's ruling that a federal tax lien upon her individual property extends to the entire assets of the trusts. Fay contends that the magistrate judge erred because the property of the trusts would not be considered her own under Massachusetts law. Fay also raises federal statutory and constitutional issues, contending that Appellee Internal Revenue Service ("IRS") does not have a valid lien upon the trust property because it failed to comply with statutory notice and limitations requirements as to the trusts, and also that the trust beneficiaries were indispensable parties who were not joined and were deprived of property without due process of law. We hold that there was no statutory or constitutional error and that the magistrate judge correctly held that the lien attached to the entire property of the Green Pastures and Parker Hill Nursing Home Trusts. We also hold that the magistrate judge erred in holding that the lien attached to the entire property of the Highland Avenue Nursing Home Trust. Thus, we affirm in part, reverse in part, and remand for a new judgment. I. BACKGROUND AND PROCEDURAL HISTORY _________________________________ In a published opinion, the magistrate judge made extensive findings of fact, Markham v. Fay, 884 F. Supp. 594 ______________ (D. Mass. 1995), none of which are in dispute in this appeal. -2- 2 We recount those necessary to provide context to the issues before us. During the 1960s and 1970s, Fay and others created a number of legal entities for the purpose, inter alia, of _____ ____ owning and operating nursing homes in Massachusetts. Three of those entities -- the Green Pastures Nursing Home Trust, the Parker Hill Nursing Home Trust and the Highland Avenue Nursing Home Trust -- are involved in this appeal. Fay created the trusts in 1974, conveying to herself as trustee of each trust the nursing home for which the trust was named. A fourth entity, Regina Nursing Home, Inc. ("the corporation"), was incorporated in 1961. Fay became its president and sole stockholder in 1967, then assigned all of her stock to her sister Theresa Dzialo (Dzialo) sometime during the 1970s. The corporation owned the Chester Manor Nursing Home. At no time were the trusts and the corporation organized or operated as one entity, and each owned different property. In June of 1976, Fay, as trustee of the trusts and president of the corporation, sold the Parker Hill, Green Pastures, Highland Avenue and Chester Manor Nursing Homes to trusts owned by Louis Almeida ("Almeida"), in exchange for mortgages and other consideration. Almeida filed for bankruptcy in 1978. By then, the only assets owned by the trusts and the corporation were the mortgages, and Almeida -3- 3 had defaulted on them. On October 2, 1990, the bankruptcy court awarded the trusts and the corporation, as secured creditors, the proceeds from the bankruptcy trustee's sale of the nursing homes, amounting to $67,809.89. On October 10, 1990, the IRS filed a derivative claim with the bankruptcy court "for the purpose of obtaining any dividend which may become payable to Claire M. Fay." The IRS's claim was premised on Fay's individual tax liability. In 1979, in view of Almeida's bankruptcy, the IRS had assessed Fay individually as a "responsible person" under 26 U.S.C. 6671 and 6672 for income and F.I.C.A. taxes Almeida failed to pay for the nursing homes' employees during the tax years 1976 through 1978.1 On October 31, 1979, IRS filed a notice of federal tax lien for $200,213.45 against Fay individually, and refiled it on January 27, 1986. In 1984, the IRS sued Fay individually, and on December 30, 1990, judgment was entered against her in the amount of $699,142.21, including penalties and interest. On October 31, 1990, the IRS delivered to the bankruptcy trustee (but not to the corporation) a notice of levy on the corporation as alter ego and/or nominee of Fay. The IRS did not file any liens, lawsuits or notices thereof ____________________ 1. Fay apparently continued to be involved in managing the nursing homes after selling them to Almeida. The efficacy of the assessment against her is not before us in this appeal. -4- 4 against the trusts, Fay as trustee of the trusts, or the beneficiaries of the trusts. On February 12, 1991, Paul F. Markham ("Markham"), the bankruptcy trustee who held the proceeds of the sale of the nursing homes, filed an interpleader action in Massachusetts Superior Court seeking a determination of the rights of the various claimants to the interpled fund. Markham named as defendants Fay individually and as trustee of the trusts, the corporation, the United States, and two attorneys seeking payment for litigating the claims of the trusts and the corporation before the bankruptcy court. On March 14, 1991, the IRS removed the case to the United States District Court for the District of Massachusetts. On May 5, 1993, the court denied summary judgment to the IRS, the corporation and the trusts, granted summary judgment in favor of the attorneys (awarding them $16,970), and then referred the case to the magistrate judge for all purposes including trial and entry of judgment. After a bench trial, the magistrate judge issued an opinion, holding that the IRS was entitled to the entire proceeds of the sale of the Parker Hill, Green Pastures and Highland Avenue Nursing Homes because Fay had reserved to herself such significant powers in the trusts that their assets would be considered her own under Massachusetts law. 884 F. Supp. at 607, 609. The magistrate judge also held -5- 5 that the government had failed to prove that the trusts or the corporation were Fay's alter egos, and found that the IRS had not established that Fay used the trusts for a fraudulent purpose or for her own individual benefit. Id. at 604. __ Judgment was entered for the IRS in the amount of $27,732.85 plus 55% of the accumulated interest, and for the corporation in the amount of $23,107.04 plus 45% of the accumulated interest.2 Fay, in her capacity as trustee of the three trusts, then filed this appeal. Before we proceed to the legal issues, we clarify the present status of the trusts and the proceeds of the sale of the nursing homes. Since 1978, the trusts have not held any property other than the mortgages on the nursing homes, and have not engaged in any transaction or business other than pursuing their claims against Almeida's bankrupt estate and defending the bankruptcy court's award. Although dormant, the trusts continue to exist. They were in no way terminated by the bankruptcy trustee's sale of the nursing homes. Rather, the bankruptcy court awarded the sale proceeds to the trusts in satisfaction of the mortgages. We refer to the sale proceeds as trust property, although not ____________________ 2. After the attorneys were paid at the summary judgment stage, $50,839.89 plus accumulated interest remained. The parties stipulated at trial that the fund was attributable as follows: $23,107.04 to the corporation; $16,046.63 to Highland Avenue Nursing Home Trust; $11,246.12 to Parker Hill Nursing Home Trust; and $440.10 to Green Pastures Nursing Home Trust. -6- 6 yet paid to the trusts, because the proceeds will become trust property unless paid to the IRS. -7- 7 II. STATUTORY AND CONSTITUTIONAL ISSUES ___________________________________ Fay first contends that the IRS does not have a valid lien against the trust property because it did not comply with statutory notice and statute of limitations requirements as to the trusts. It gave no notice of assessment as to the trust property in 1979, did not join the trusts, Fay as trustee, or the trust beneficiaries as defendants in its 1984 suit against Fay individually, and did not proceed against them by separate suit, assessment, demand, lien or levy. Second, Fay contends that because the IRS sought in the interpleader action to collect from the trust property as such, the beneficiaries were indispensable parties who were required to be joined in their own right. Finally, Fay argues that because the beneficiaries were given no opportunity to appear and defend their rights in the interpleader action, the magistrate judge's ruling deprived them of property without due process of law. The IRS responds first that it is only Fay's own property from which it seeks to collect and all notice and limitations requirements were met with respect to her. The IRS concedes that if it had sought to hold the trustee, the trusts or the beneficiaries personally liable as Fay's transferees, it would have had to institute a collection action directly against them within six years from the assessment of the tax. See United States v. Updike, 281 U.S. ___ _______________________ -8- 8 489, 493 (1930); 26 U.S.C. 6901. The IRS, however, asserts that it sought to collect the taxes out of property that would be considered Fay's own under Massachusetts law. Notice and limitations requirements with respect to the trusts therefore were not implicated. As to Fay's joinder and due process arguments, the IRS responds that the bankruptcy trustee named Fay as trustee in the interpleader action, she has represented the interests of the beneficiaries throughout this litigation, and at no time have the beneficiaries as such sought to intervene. Furthermore, the IRS argues, the beneficiaries' exclusive remedy is a suit for wrongful levy brought pursuant to 26 U.S.C. 7426(a), which is now time-barred because no such suit was brought within nine months from the date of levy, as required by 26 U.S.C. 6532(c). Although the magistrate judge did not precisely resolve these issues,3 we will review them de novo as __ ____ matters of federal law. Horton Dairy, Inc. v. United States, ___________________________________ 986 F.2d 286, 290 (8th Cir. 1993). First, we must untangle ____________________ 3. The magistrate judge stated at the beginning of his analysis that the separate structures of the trusts could be disregarded for notice and statute of limitations purposes if they were Fay's alter egos, but went on to hold that they were not Fay's alter egos, and never addressed whether the trusts were required to be treated separately under the distinct theory that prevailed -- that the trust property would be considered Fay's own under Massachusetts law. The magistrate judge did not mention Fay's joinder or due process arguments. -9- 9 the web of statutory and procedural requirements implicated in this phase of Fay's appeal. Once the IRS makes an assessment of a taxpayer's liability, it has sixty days in which to "give notice to each person liable for the unpaid tax, stating the amount and demanding payment thereof." 26 U.S.C. 6303(a). Once notice and demand are given and the tax goes unpaid, a lien in favor of the United States automatically arises "upon all property and rights to property, whether real or personal, belonging to such person." 26 U.S.C. 6321. Whether and to what extent a particular piece of property constitutes property of the taxpayer to which a federal tax lien can attach is a question of state law. Aquilino v. United States, 363 U.S. 509, 512 __________________________ (1960). The lien arises at the time the assessment is made and continues until the liability is satisfied or becomes unenforceable by lapse of time. 26 U.S.C. 6322. The IRS may collect the tax by levy or by bringing a proceeding in court, which according to the pre-1990 version of 26 U.S.C. 6502 applicable in this case, must be done "within six years after the assessment of the tax."4 26 U.S.C. 6502(a) (1988). A lien becomes unenforceable by lapse of time upon expiration of the six-year statute of limitations for collection, but if the government brings suit within six ____________________ 4. The statute was amended in 1990 to extend the limitations period to ten years. 26 U.S.C. 6502(a) (1994). -10- 10 years from assessment and receives a judgment in its favor, the life of the lien is extended indefinitely. See Rodriguez ___ _________ v. Escambron Dev. Corp., 740 F.2d 92, 94 n.3 (1st Cir. 1984). _______________________ There is no dispute that the IRS assessed a tax against Fay individually in 1979, that it gave notice and demand to her within sixty days, that a lien dating from the assessment arose against all of Fay's property and rights to property, that the IRS timely filed a civil action against Fay individually in 1984, that it refiled the notice of tax lien in 1986, and that it obtained a judgment in December of 1990 that extended the life of the lien on Fay's property indefinitely. That brings us to the IRS's collection efforts beginning with the derivative claim in the bankruptcy court in October of 1990 and leading to the interpleader action below. As stated above, the IRS may collect by levy or by a proceeding in court. 26 U.S.C. 6502(a). The briefs are unhelpful (at best) as to which route the IRS took. The IRS indicates that it levied on the trust property, but the IRS may collect by levy only after notifying the taxpayer in writing of its intention to make such levy. 26 U.S.C. 6331(a), (b), (d)(1). The notice of levy upon the corporation as Fay's alter ego did not constitute notice of levy on the trust property because, inter alia, the trusts and the corporation each held _____ ____ different property. Because it has never notified Fay of an -11- 11 intention to levy on the trust property, there has been no levy. Other than by levy, the IRS can collect by a proceeding in court, either by bringing an action pursuant to 26 U.S.C. 7403, or by simply suing for the amount owed and then exercising "the usual rights of a judgment creditor" to enforce any judgment obtained. United States v. Rodgers, 461 ________________________ U.S. 677, 682 (1983). This is not a section 7403 action and neither party contends that it is.5 The IRS is therefore exercising the usual rights of a judgment creditor. It asserts (inconsistently with its indication that it levied on the trust property) that the Federal Debt Collection Procedure Act of 1990 (FDCPA), 28 U.S.C. 3001, et seq., __ ___ governs the interpleader proceedings, and Fay does not contend otherwise. Fay's tax indebtedness is a "debt" as defined in the FDCPA because it is "an amount owing to the United States on account of [an] . . . assessment." 28 U.S.C. 3002(3)(B). Except to the extent that another federal law specifies procedures for recovering on a judgment for a debt arising under such law, the FDCPA is the exclusive civil procedure for the government to recover a judgment on a ____________________ 5. The government has the right in a section 7403 proceeding to seek a forced sale of the entire property in which a delinquent taxpayer has an interest even where innocent others also have an interest in the property. This special privilege arises from the express terms of section 7403, Rodgers, 461 U.S. at 697, and is not available to the _______ government here. -12- 12 debt. 28 U.S.C. 3001(a), (b). The tax code (from which the debt arose) does specify procedures for recovering on a judgment by levy, 26 U.S.C. 6331, and by filing an action in a federal district court to enforce a lien, 26 U.S.C. 7403, but does not contain specific procedures for otherwise recovering on a judgment, for example by filing a derivative claim in bankruptcy court and litigating against the taxpayer in a resulting interpleader action, as the IRS did here. Thus, the procedures of the FDCPA appropriately control. I f the magistrate judge was correct that the entire property of each trust would be considered Fay's own under Massachusetts law, then the IRS had a valid lien on that property that it could seek to enforce in the interpleader action. By notifying Fay in 1979, the IRS complied with the plain language of section 6303(a) requiring notice and demand on the only "person liable." The IRS also complied with the statute of limitations by suing Fay in 1984 within six years of the tax assessment in 1979 as required by section 6502(a). The judgment obtained in 1990 extended the life of the lien, so that the IRS's effort to enforce the judgment in the interpleader action was timely. Fay argues that the IRS failed to establish a nexus between the taxes owed by her individually and the proceeds of the sale of the nursing homes, but the IRS does not contend that the tax liability was incurred by the trusts such that the judgment could be -13- 13 satisfied directly from the entire trust property regardless of whether it belonged to Fay. Rather, the IRS has a valid lien upon Fay's individual property and rights to property that it may enforce out of any trust property that under Massachusetts law belongs to Fay, even though the claim arose independently of the trusts. As to whether the beneficiaries were indispensable parties who were deprived of an opportunity to be heard in their own right, we begin by rejecting the IRS's argument that the beneficiaries' only remedy is a suit for wrongful levy under 26 U.S.C. 7426(a). Third parties are limited to that remedy only when the government proceeds by levy, Rodgers 461 U.S. at 682-83, 695-96, which it has not done. _______ Rather, whether the beneficiaries were required to be joined is governed by Fed. R. Civ. P. 19. See 28 U.S.C. 3003(f) ___ (Federal Rules of Civil Procedure apply in FDCPA actions). That rule provides in relevant part that a person subject to service of process and whose joinder will not deprive the court of subject matter jurisdiction "shall be joined as a party in the action if . . . the person claims an interest relating to the subject of the action and is so situated that the disposition of the action in the person's absence may (i) as a practical matter impair or impede the person's ability -14- 14 to protect that interest . . . ."6 Courts applying this rule generally have held that beneficiaries are indispensable parties in actions like this to collect a tax or other debt from the trust corpus, see Tick v. Cohen, 787 F.2d 1490, ___ ______________ 1495-96 (11th Cir. 1986); United States v. Fried, 183 F. ________________________ Supp. 371, 373 (E.D.N.Y. 1960), and actions analogous to this seeking to terminate a trust. See Hansen v. Peoples Bank, ___ _______________________ 594 F.2d 1149 (7th Cir. 1979). "The general rule is, that in suits respecting trust-property, brought either by or against the trustees, the cestuis que trust as well as the trustees _______ ___ _____ are necessary parties." Carey v. Brown, 92 U.S. 171, 172 _______________ (1875); see also Stevens v. Loomis, 334 F.2d 775, 777 (1st ___ ____ __________________ Cir. 1964). An exception to the general rule, however, exists when the trustee represents the beneficiaries' interests fully and without conflict. 3A James W. Moore, Moore's Federal Practice 19.08 at 175-76 (2d ed. 1985). The bankruptcy trustee joined Fay both individually and as trustee in the interpleader action. Fay had the duty as trustee under the three declarations of trust to represent the beneficiaries' interests in any lawsuit. While, at least ____________________ 6. In contrast, in an action to enforce a lien or subject property to payment of tax brought pursuant to 26 U.S.C. 7403, "[a]ll persons . . . claiming any interest in the property involved" are required to be made parties. 26 U.S.C. 7403(b); United States v. Big Value Supermarkets, _________________________________________ Inc., 898 F.2d 493, 496 (6th Cir. 1990) (section 7403(b) is ____ mandatory); United States v. Overman, 424 F.2d 1142, 1146 _________________________ (9th Cir. 1970) (same). -15- 15 on the surface, the fact that the trustee in this case incurred the debt that the trust property might be reached to pay indicates a potential conflict between Fay and the other beneficiaries, all signs are that Fay represented them zealously and without conflict. Fay has not asserted any claim to the fund in her individual right throughout the course of this litigation, but has appeared only in her capacity as trustee. Moreover, as settlor and one of the beneficiaries of the trust, Fay's interest in protecting the trust property would seem to be at least as strong as that of the other beneficiaries. The beneficiaries as such did not seek to intervene at any point when the district court or the magistrate judge could have joined them as parties in their own right. This is not to say that the issue was waived, Freeman v. Northwest Acceptance Corp., 754 F.2d 553, 559 (5th ____________________________________ Cir. 1985) (failure to raise below the issue of whether a party should have been joined does not result in waiver), but it does indicate that the beneficiaries did not perceive any failure on Fay's part to represent their interests at the time. And on appeal, Fay fails to describe any conflict between her interests and those of the other beneficiaries, any way in which their interests were not represented, or any way in which the litigation might have gone differently if they had been joined. As will be seen, resolution of the core issue in the case -- whether the property of any of the -16- 16 trusts would be considered Fay's own under Massachusetts law -- depended factually only on the language of the trust instruments, documents that were before the magistrate judge and are before us. Although in an abundance of caution it may have been better for the beneficiaries to have been joined, as it turned out, Fay faithfully represented their interests. We therefore hold that the beneficiaries were not indispensable parties. The same considerations defeat Fay's argument that the beneficiaries were deprived of property without due process of law. Moreover, assuming the magistrate judge was right, the beneficiaries were not deprived of their own property. III. WAS THE TRUST PROPERTY FAY'S OWN UNDER MASSACHUSETTS _______________________________________________________ LAW? When the IRS assessed taxes owed by Fay as a ____ "responsible person" in 1979, a federal tax lien arose "upon all property and rights to property, whether real or personal, belonging to" Fay. 26 U.S.C. 6321, 6322. The tax code "creates no property rights but merely attaches consequences, federally defined, to rights created under state law." United States v. Bess, 357 U.S. 51, 55 (1958). ______________________ Whether and to what extent Fay's powers, interests and rights in the trusts constitute property to which the federal tax lien could attach is a question of state law. Aquilino, 363 ________ U.S. at 512. -17- 17 We review de novo the issue of whether the trust __ ____ instruments gave Fay such extensive powers over the trust property that it was in effect her own under Massachusetts law. Salve Regina College v. Russell, 499 U.S. 225, 231 _________________________________ (1991); Losacco v. F.D. Rich Constr. Co., 992 F.2d 382, 384 _________________________________ (1st Cir. 1993). In doing so, we will take care not to extend state law beyond its well-marked boundaries in an area such as trust law that is quintessentially the province of state courts. Initially, we clarify that it was not improper for Fay, the settlor of the trusts, to designate herself as both sole trustee and one of the trusts' beneficiaries. Under the common law of trusts, "trustees may be included among the beneficiaries of a trust." Mahoney v. Board of Trustees, ______________________________ 973 F.2d 968, 971 (1st Cir. 1992), citing Restatement (Second) of Trusts 99, 115 (1959); William F. Fratcher, 2 Scott on Trusts, 99.2, 115 (4th ed. 1987). And a sole trustee who is also the settlor may be one of two or more beneficiaries. Sullivan v. Burkin, 460 N.E.2d 572, 575 (Mass. __________________ 1984); Ascher v. Cohen, 131 N.E.2d 198, 199-200 (Mass. 1956); _______________ Restatement (Second) of Trusts 100. When a trustee is also a beneficiary, she holds the legal title to the entire trust property in trust for all of the beneficiaries (including herself), has a duty to deal with it for the benefit of the beneficiaries, and does not -18- 18 hold legal title to any of the trust property free of trust to use as she pleases. There is no partial merger of the legal and equitable interests. Restatement (Second) of Trusts 99 cmt. b; 2 Scott on Trusts 99.3. It follows that a creditor generally cannot reach a trustee/beneficiary's interest in a trust, such as these, with a spendthrift provision. Restatement (Second) of Trusts 99 cmt. b. When a beneficiary is also the settlor, however, she cannot keep property beyond the reach of her creditors by placing it in a spendthrift trust for her own benefit. See ___ Merchants Nat'l Bank v. Morrissey, 109 N.E.2d 821, 823 (Mass. _________________________________ 1953); Forbes v. Snow, 140 N.E. 418, 419 (Mass. 1923). A _______________ settlor/beneficiary's creditors therefore can reach "the maximum amount which the trustee under the terms of the trust could pay to him or apply for his benefit." Restatement (Second) 156(2), quoted in Ware v. Gulda, 117 N.E.2d 137, ______ __ _____________ 138 (Mass. 1954). This, of course, does not mean that the interest of any other beneficiary may be reached by the settlor/beneficiary's creditors. 2 Scott on Trusts 114. As a matter of federal law, a tax lien extends only to property or rights to property belonging to the delinquent taxpayer, and not to property belonging to innocent third parties. Rodgers, 461 U.S. at 690. Whether the tax lien in _______ this case attaches to the entire property of each trust -19- 19 depends on whether the trust instruments give Fay the power to eliminate the other beneficiaries' interests. A. The Parker Hill and Green Pastures Nursing __________________________________________ Home Trusts ___________ On January 21, 1974, Fay created the Green Pastures and Parker Hill Nursing Home Trusts under declarations of trust whose terms were identical except for the names of the trusts and the identity of their assets. Fay named herself sole trustee and conveyed to herself as trustee the respective nursing homes. Fay named herself and her two sons as the beneficiaries of each trust, all in equal shares, until the trusts terminate.7 She named her sister Dzialo as the remainder beneficiary of each trust -- upon termination, the trust property and undistributed income were to immediately vest in her free of trust. The magistrate judge ruled that the IRS was entitled to reach that part of the interpled fund that represents the assets of the Green Pastures and Parker Hill Nursing Home Trusts, based on Fay's "copious" rights and powers as settlor, sole trustee and one of the beneficiaries of the trusts, and her reserved right as settlor to alter, ____________________ 7. The trusts are to terminate at the earliest of the following: twenty years from the date the trusts were declared; Fay's election to terminate; her death; or appointment of a guardian of her or a conservator of her property. Although twenty years have now passed since Fay created the trusts in 1974, we assume the trusts' continuing existence because our point of reference is the date this litigation began. -20- 20 amend or revoke the trusts, although Fay has not exercised those powers or otherwise used the trusts for her exclusive benefit. 884 F. Supp. at 607. Traditionally, Massachusetts has given full effect to inter vivos trusts, regarding their assets as trust property rather than that of the settlor in spite of broad powers reserved to him or her, at least while those powers remain unexercised. See National Shawmut Bank v. Joy, 53 ___ ______________________________ N.E.2d 113, 122-25 (Mass. 1944); Guthrie v. Canty, 53 N.E.2d ________________ 1009, 1010 (Mass. 1944). But another line of cases has more recently emerged from the Massachusetts Court of Appeals. In State Street Bank and Trust Co. v. Reiser, 389 N.E.2d 768 ___________________________________________ (Mass. App. Ct. 1979), the court broke with tradition, holding that a settlor/beneficiary's creditors could reach trust assets upon his death where he had reserved powers to amend or revoke and to direct the disposition of principal and income during his lifetime, even though the powers remained unexercised at the time of his death, and even though the remainder beneficiaries' rights in the trust vested upon his death because there was no further possibility that he could exercise his powers. Id. at 770- __ 71. The court emphasized that the settlor's powers gave him the right until his death to destroy all other beneficial interests in the trust. Id. at 771. __ -21- 21 Similarly, in ITT Commercial Finance Corp. v. ___________________________________ Stockdale, 521 N.E.2d 417 (Mass. App. Ct. 1988), the court _________ relied on Reiser to hold (in the alternative) that a ______ settlor's creditor could reach trust assets upon his death where the settlor was sole trustee, his children were the life and remainder beneficiaries, and he had a general power to amend and revoke and a specific power to substitute beneficiaries until his death. Id. at 417-18. As in Reiser, __ ______ his creditors could reach the trust assets even though he had not exercised his powers and the other beneficiaries' interests had vested. See also Wolfe v. Wolfe, 486 N.E.2d ___ ____ _______________ 747, 749 (Mass. App. Ct. 1985) (5/6 of trust property could be reached to satisfy alimony judgment where settlor had power to alter, amend and revoke and absolute right to withdraw 5/6 of principal; remainder beneficiaries' rights were not vested). The touchstone of the analysis, then, is whether the trust instrument as a whole gives Fay the power to eliminate the interests of all others in the trust. As settlor, Fay reserved to herself the right "to alter, amend and revoke this Trust, in whole or in part, and to terminate the same." These unrestricted and unconditional powers include the right to substitute or strike out other beneficiaries, Leahy v. Old Colony Trust Co., 93 N.E.2d 238, _____________________________ 239 (Mass. 1950), to vary the income or principal paid to the -22- 22 beneficiaries while the trust continues, including the power not to pay them at all, State Street Trust Co. v. Crocker, 28 _________________________________ N.E.2d 5 (Mass. 1940), and to completely revoke the trust. Sevinor v. Stahler, 84 N.E.2d 447, 448-49 (Mass. 1949). If __________________ Fay revoked the trust, or amended it to make herself the sole beneficiary, the legal title and equitable interest would merge and thereby terminate the trust. See Atkins v. Atkins, ___ ________________ 180 N.E.2d 613, 614 (Mass. 1932); Langley v. Conlan, 98 N.E. _________________ 1064, 1066 (Mass. 1912). As Fay points out, the trust property would not vest free of trust in her if she caused it to terminate, but in her sister Dzialo. Fay, however, could amend the trust to delete that provision. As trustee, Fay has broad powers to manage and control the trust property. The IRS makes much of these powers, but we attribute them no significance whatsoever. Broad powers are typically conferred on a trustee as an effective way to manage trust property. Trustees who are also beneficiaries, "like trustees generally, have the power to do acts that are 'necessary or appropriate to carry out the purposes of the trust and are not forbidden by the terms of the trust.'" Mahoney, 973 F.2d at 971, citing Restatement _______ (Second) of Trusts 186. As we have held in the estate tax context, a settlor/trustee's administrative and management powers cannot be equated with ownership. See Old Colony ___ __________ -23- 23 Trust Co. v. United States, 423 F.2d 601, 602-03 (1st Cir. ___________________________ 1970). As trustee, Fay is to hold the nursing homes "in trust" for the "general purposes" of the trusts, and to hold and accumulate the principal and net income "for the use and benefit of said beneficiaries." The sentence immediately following that direction provides: "However, anything to the contrary herein notwithstanding, the Trustee shall have full power and discretion to pay over to said beneficiaries so much or all or any part of the trust property, whether principal or net income, as she shall deem proper." We think that this sentence, in the context of the trust instrument as a whole, gives Fay the power to pay income and/or invade principal for her benefit alone. We recognize, as we have before, that under Massachusetts law, a trustee is restricted in the exercise of even broad discretionary powers by the terms of the trust viewed as a whole, and by the trustee's fiduciary duty to use his or her best judgment in good faith. State Street Bank __________________ and Trust v. United States, 634 F.2d 5, 9 (1st Cir. 1980) ____________________________ (citations omitted); see also Fine v. Cohen, 623 N.E.2d 1134, ___ ____ _____________ 1139 (Mass. App. Ct. 1993); Dana v. Gring, 371 N.E.2d 755, _____________ 760-61 (Mass. 1977); Woodberry v. Bunker, 268 N.E.2d 841, 843 ___________________ (Mass. 1971); Old Colony Trust Co. v. Sillman, 223 N.E.2d _________________________________ 504, 506 (Mass. 1967). In particular, a trustee may not -24- 24 exercise a broad discretionary power to shift beneficial interests in a trust. Fine, 623 N.E.2d at 1139; Boston Safe ____ ___________ Deposit and Trust Co. v. Stone, 203 N.E.2d 547, 552 (Mass. ________________________________ 1965). A Massachusetts court necessarily would evaluate a trustee's conduct, if challenged, in light of the powers and duties set forth in the trust instrument. Stone, 203 N.E.2d _____ at 552; Fine, 623 N.E.2d at 1139. In Copp v. Worcester ____ __________________ County Nat'l Bank, 199 N.E.2d 200 (Mass. 1964), the court __________________ found that the trust instrument's direction that the trustee invade principal for the life beneficiary was enforceable and not unrestricted because it was to be in a stated amount and only as necessary for her reasonable support and maintenance. Id. at 202-03. In cases interpreting trustee powers for __ federal estate tax purposes, ascertainable standards limiting trustee discretion have been found where the trust instrument directed principal and/or income to be distributed for a specific purpose (such as education and support), or expressed an intent to preserve principal for remainder beneficiaries, or both. See State Street Bank and Trust v. ___ _______________________________ United States, 634 F.2d at 9; Old Colony Trust Co. v. United _____________ _______________________________ States, 317 F. Supp. 618, 622 (D. Mass. 1970);Dana, 371 ______ ____ N.E.2d at 761; Woodberry, 268 N.E.2d at 843; Worcester County _________ ________________ National Bank v. King, 268 N.E.2d 838, 840 (Mass. 1971); _______________________ Sillman, 223 N.E.2d at 507-08. _______ -25- 25 If Fay exercised her discretion so as to take the trust property for herself, thereby depleting or destroying the others' interests, we doubt that a court could determine that she had violated her fiduciary duty in carrying out the terms of the trusts because the trust instruments as a whole do not limit her discretion or define the other beneficiaries' interests in income and principal. They do not give Fay's sons the right to any particular proportion of the trust income or principal, the right to receive it at any particular time or interval, the right to receive it for their support or any other definite purpose, or the right to receive it free of trust when the trust terminates. Fay's sister's remainder interest could amount to nothing if Fay decided to pay all of the income and principal to herself. Under these circumstances, we think that Fay's sons and sister would have had little or no recourse if she took the trust property for her own benefit. We recognize that Fay has not done so, but what is dispositive for these purposes is whether the trust instrument contained ascertainable limits on her power to pay income or invade principal for her benefit alone that the other beneficiaries could rely on to enforce any rights of their own. Moreover, we do not think that the other beneficiaries' interests in the trust are vested. Although that apparently makes no difference in light of Reiser and Stockdale, it does mean that their rights ______ _________ -26- 26 are inchoate at the present time. Under Massachusetts law, whether a right in a trust has vested depends on "whether, in substance, the interest is sufficiently established to constitute an interest or right which has accrued to its holder." New England Merchants Nat'l Bank v. Groswold, 444 ______________________________________________ N.E.2d 359, 363 (Mass. 1983). That an interest is "subject only to total or partial defeat by biological events" does not make it inchoate. Id. Thus, a beneficiary's right to __ receive part of the trust property that depends only on his or her survival until the death of other persons is a vested property right. See Id.; Billings v. Fowler, 279 N.E.2d 906, ___ __ __________________ 908 (Mass. 1972); Whiteside v. Merchants' Nat'l Bank, 187 ____________________________________ N.E. 706, 709 (Mass. 1933); Alexander v. McPeck, 75 N.E. 88, ___________________ 92 (Mass. 1905). But where the right depends on the exercise or non-exercise of powers held by another, the beneficiary's right does not vest until the person holding the powers can no longer exercise them. See Reiser, 389 N.E.2d at 770 ___ ______ (remainder interests of beneficiaries became vested upon death of settlor because his powers to amend or revoke the trust and direct payments from it died with him); Old Colony __________ Trust Co. v. Clemons, 126 N.E.2d 193 (Mass. 1955) (rights of _____________________ remainder beneficiaries did not vest until settlor's death where he had the right to revoke the trust or change beneficiaries). Any right in Fay's sons or sister to receive part of the trust property is not contingent on a mere -27- 27 biological event, but on whether or not Fay exercises her power to amend or revoke the trusts, and on to whom and in what amounts she distributes income and principal while the trust continues. Their interests therefore are not vested. Due to the broad nature of Fay's powers and the limited and unenforceable nature of the beneficial interests, Fay has the power to eliminate the interests of her sons and her sister. We therefore think that a Massachusetts court would treat the entire trust property of the Green Pastures and Parker Hill Nursing Home Trusts as Fay's own in favor of her creditors. Like the settlors in Reiser, Stockdale and ______ _________ Wolfe, Fay has the right to |