• Creditor's Bills and Spendthrift Trusts in Ohio: Where Subtle Analysis is Key
  • December 17, 2012 | Author: Hannah F.G. Singerman
  • Law Firm: Weltman, Weinberg & Reis Co., L.P.A. - Cleveland Office
  • Ohio Courts have held that “[a] creditor’s bill is an equitable measure by which a party having a valid judgment against a debtor may secure a lien on certain assets held by a third-party if the debtor lacks sufficient personal or real property to satisfy the judgment.” In the vernacular, Ohio Revised Code section 2333.01 allows a creditor to attach, in certain circumstances, monies due to a debtor from a third-party before the debtor receives said monies. Not all states allow creditor’s bills or other types of equitable liens. Even in Ohio, one of the most favorable states towards creditors with regards to equitable lines, the availability of such liens is limited to circumstances in which the debtor does not have enough interest in real property or property that can be levied, garnished or other-wise attached to pay his/her debts. Common types of property subject to creditor’s bills include royalties, settlement payments, rental payments from tenants of the debtor, and distributions from trusts.

    There is however some tension in trust law regarding what is known as a “spendthrift provision.” Until 1991, there was some ambiguity in Ohio regarding the enforceability of spendthrift trusts in the state. The Ohio Supreme Court stated that as “enforcing a spendthrift provisions takes nothing from the prior or subsequent creditors of the beneficiary to which they previously had the right to look for payment...[as] a beneficiary owns no greater interest in the trust property then the settlor has given him and, in the case of a spendthrift trust, the settlor has not given the beneficiary an alienable interest.” In other words, the Court held that spendthrift provisions are permitted as such provisions do not hurt creditor’s as funds held in such trust are deemed restricted enough by the clauses themselves so that the debtor-beneficiary essential has no control over the trust property. In coming to this conclusion, the Court looked at O.R.C. 2333.01 and argued that spendthrift provisions do not encroach on a creditor’s rights via creditor’s bills as creditor’s bills only reach property the debtor controls “...and, in the case of a spendthrift trust, the beneficiary does not have any interest in the trust because the settlor did not give the beneficiary an interest.” The Court’s decision was reaffirmed two years later.

    Thus, based on the appropriate case law, a creditor’s recourse against property in a trust, in Ohio, with a valid spendthrift provision in the subject trust, is limited to attaching funds paid first to the debtor-beneficiary, not while said funds are still in the trust. Therefore, it is important when encountering such a trust, for a creditor and its counsel to look to the trust as a whole and make sure the spendthrift provision is truly valid.

    There is no set language for a spendthrift provision, however most clauses include language which restricts the beneficiary, to the extent of the law from exercising control over the trust property, income or principal in any way. Additionally, spendthrift clauses specifically state that the beneficiary’s interest in the trust property while in the possession and/or control of the trustee(s) be subject to the beneficiary’s debts, contracts, liabilities, torts, etc. Language in trust documents similar to the above should trigger the reader that the trust is intended to be a spendthrift trust.

    Even if the trust agreement has the proper language, Ohio Courts have noted that the analysis does not stop. Ohio Courts have found that language elsewhere in a trust can invalidate an otherwise valid spendthrift provision. For example, courts have held that any unconditional power to withdraw funds from a trust, even one with a spendthrift provision, invalidates the spendthrift provision as “...the power to withdraw money from the trust [is] akin to having money in the bank.”

    Thus, when seeking to attach an interest in a trust, a creditor and his/her counsel, as well as the courts, cannot take a defense of a spendthrift provision on its face. The entire trust document must be examined as a whole to determine whether such a provision is valid or whether the trust gives enough power to the debtor-beneficiary to make it subject to attachment via creditor’s bill. Spendthrift trusts interpretation and argument require close reading and attention to detail. The clauses are not fool-proof under Ohio law.

    Sources:
    Gaib v. Gaib (1983), 14 Ohio App.3d 97; R.C. 2333.01
    Parsons v. Mumford (1989), Del. Ch. LEXIS 70.
    Scott v. Bank One Trust Co. N.A. (1991), 62 Ohio S t.3d 39.
    Domo v. McCarthy (1993), 66 Ohio St. 3d 312.
    Seaway Acceptance Corporation v. Ligtvoet (2007), Ohio 405 (Ohio App. 8th Dist.)
    Great American Ins. Co. v. Patricia Smith Thompson Trust (2006), Ohio 304 (Ohio App. 1st Dist)