MEMO TO:
Alexsei Demo US
RESEARCH ID:
#4000725117868a
JURISDICTION:
State
STATE/FORUM:
California, United States of America
ANSWERED ON:
May 16, 2022
CLASSIFICATION:
Estates and trusts
Debtors and creditors

Issue:

Can a judgment debtor escape the judgment creditor by transferring their assets to a revocable trust?

Conclusion:

The increasing use of revocable living trusts as probate avoidance devices caused concern in the California Legislature over the problems faced by creditors of settlors and led to the enactment of Cal. Prob. Code § 18200. (Walgren v. Dolan, 276 Cal.Rptr. 554, 226 Cal.App.3d 572 (Cal. App. 1990))

Cal. Prob. Code § 18200 provides that if the settlor retains the power to revoke the trust in whole or in part, the trust property is subject to the claims of creditors of the settlor to the extent of the power of revocation during the lifetime of the settlor. (Cal. Prob. Code § 18200)

Courts have consistently held that Cal. Prob. Code § 18200 allows a judgment creditor to reach the assets of a revocable trust set up by a judgment debtor.  (Travelers Cas. & Sur. Co. of Am. v. K.O.O. Constr., Inc., 16-cv-00518-JCS (N.D. Cal. 2017), Cal. Prob. Code § 18200, In re Ferrante, SA CV 16-337 MWF (C.D. Cal. 2016), Keitel v. Heubel, 103 Cal.App.4th 324, 126 Cal.Rptr.2d 763 (Cal. App. 2002), Bank One Texas v. Pollack, 29 Cal.Rptr.2d 510, 24 Cal.App.4th 973 (Cal. App. 1994), Walgren v. Dolan, 276 Cal.Rptr. 554, 226 Cal.App.3d 572 (Cal. App. 1990), Erickson Prods. v. Kast, 769 Fed. Appx. 482, 2019 U.S. App. LEXIS 13180, 2019 WL 1958015 (9th Cir. May 1, 2019), HARBOR PIPE & STEEL, INC. v. STEVENS, 2006 Cal. App. Unpub. LEXIS 2755, 2006 WL 856215 (Cal. App. April 4, 2006))

A judgment lien created by an abstract of judgment recorded against the settlor of a revocable trust attaches directly to the assets contained within the trust, without any need to amend the judgment to include the trust as a judgment debtor. (In re Ferrante, SA CV 16-337 MWF (C.D. Cal. 2016), HARBOR PIPE & STEEL, INC. v. STEVENS, 2006 Cal. App. Unpub. LEXIS 2755, 2006 WL 856215 (Cal. App. April 4, 2006))

In the unpublished case of HARBOR PIPE & STEEL, the California Court of Appeal for the Fourth District held that the debtor's transfer of property into his revocable family trust could not in any way shield that property from enforcement of the plaintiff's judgment against him individually.

In the unpublished case of In re Ferrante, the United States District Court for the Central District of California affirmed the bankruptcy court's holding that a judgment lien automatically attached to a property that was held in a revocable trust when the lien was recorded.

Law:

If the settlor retains the power to revoke the trust in whole or in part, the trust property is subject to the claims of creditors of the settlor to the extent of the power of revocation during the lifetime of the settlor.

In the unpublished case of Travelers Cas. & Sur. Co. of Am. v. K.O.O. Constr., Inc., 16-cv-00518-JCS (N.D. Cal. 2017), the United States District Court for the Northern District of California noted that courts have consistently held that Cal. Prob. Code § 18200 allows a judgment creditor to reach the assets of a revocable trust set up by a judgment debtor (at 12-13):

In California, "[i]t is against public policy to permit a man to tie up his property in such a way that he can enjoy it but prevent his creditors from reaching it," including by holding assets in a trust for the settlor's own benefit. Nelson vCalTrCo., 33 Cal. 2d 501, 501-02 (1949). Section 18200 of the California Probate Code provides that if the settlor of a trust "retains the power to revoke the trust in whole or in part, the trust property is subject to the claims of creditors of the settlor to the extent of the power of revocation during the lifetime of the settlor." Cal. Prob. Code § 18200; see also Walgren vDolan, 226 Cal. App. 3d 572, 578 (noting that the "increasing use of revocable living trusts as probate avoidance devices caused concern in the California Legislature over the problems faced by creditors of settlors," leading to the enactment of section 18200 and other statutes). Courts have consistently held that section 18200 allows a judgment creditor to reach the assets of a revocable trust set up by a judgment debtor. E.g., In re Ferrante, No. SA CV 16-337 MWF, 2016 WL 4844073, at *4 (C.D. Cal. Sept. 13, 2016) (holding that a judgment lien extended to "a settlor's property held in a revocable trust" pursuant to Probate Code section 18200); Keitel vHeubel, 103 Cal. App. 4th 324, 336-40 (2002) (finding that an appeal of an order allowing a creditor to reach revocable trust assets was frivolous).

[...]

As a starting point, it is not controversial that judgment creditors can reach assets held in a revocable trust pursuant to section 18200. See In re Ferrante, 2016 WL 4844073, at *4; Keitel, 103 Cal. App. 4th at 336-40. The broad language of section 18200 makes assets held in revocable trusts available to "creditors" generally, not only to judgment creditors. See Cal. Prob. Code § 18200. [...]

In Bank One Texas v. Pollack, 29 Cal.Rptr.2d 510, 24 Cal.App.4th 973 (Cal. App. 1994) ("Bank One"), the California Court of Appeal for the Second District explained that Cal. Prob. Code § 18200 and Cal. Prob. Code § 18201 (which has since been replaced by Cal. Prob. Code § 19001) were part of an extensive reorganization of trust law. Before the enactment of these statutes, the sole remedy available to a creditor after a deceased trust settlor had left the estate insolvent by transferring assets to a revocable inter vivos trust was a separate action for relief against the trust on the ground the conveyance was fraudulent. The enactment of Cal. Prob. Code § 18201 removed these constraints and eliminated the necessity of proving that the conveyance was fraudulent. Cal. Prob. Code § 18201 permitted a judgment creditor who established the inadequacy of estate assets to ignore the trust and reach directly those assets subject to the decedent settlor's power of revocation. Furthermore, a judgment creditor of such a deceased settlor who had established a judgment lien against the settlor may then levy a writ of execution directly on the trust assets which were subject to revocation during the settlor's lifetime (at 979-980):

Turning to the merits of the matter, appellant's predecessor in interest relied on Probate Code section 18201 2 as authority for the amendment of the judgment entered on the sister state judgment. Section 18201 and [24 Cal.App.4th 980] a companion statute, section 18200 3, were enacted in 1986 (Stats.1986, ch. 820, § 40) as part of an extensive change and reorganization of the law governing trusts (Division 9 of the Probate Code) that the Law Revision Commission had recommended. (See Law Revision Com. com., Prob. Code, Div. 9.)

Prior to the enactment of section 18201, the sole remedy available to a creditor after a deceased trust settlor had left the estate insolvent by transferring assets to a revocable inter vivos trust was a separate action for relief against the trust on the ground the conveyance was fraudulent. (Civ. Code, § 3439.07.) With respect to creditors' claims which arose before the transfer to the trust, the transfer need not have been fraudulent in the literal sense, i.e., made with the intent of deceiving creditors. A transfer would be deemed fraudulent if it were made without consideration and left the transferor insolvent. (Id., § 3439.05; Estate of Heigho (1960) 186 Cal.App.2d 360, 365-366, 9 Cal.Rptr. 196.) The transfer to an inter vivos trust of sufficient assets to render the settlor's personal estate insolvent met this test, particularly when the settlor also was the beneficiary and retained the power of revocation. Thus, an action to set aside the conveyance to the trust almost invariably was successful. It was, however, a cumbersome, time-consuming procedure, and it was circumscribed by a restrictive limitations period. (Civ. Code, § 3439.09.)

The enactment of Probate Code section 18201 removed these constraints and eliminated the necessity of proving the conveyance fraudulent. Section 18201 permitted a judgment creditor who establishes the inadequacy of estate assets to ignore the trust and reach directly those assets subject to the decedent settlor's power of revocation. (See Law Revision Com. com., Prob. Code, § 18200.) The judgment creditor of such a deceased settlor need only have established a judgment lien against the settlor; thereafter, the judgment creditor may levy a writ of execution directly on the trust assets which were subject to revocation during the settlor's lifetime. (Heywood v. Municipal Court (1988) 198 Cal.App.3d 1438, 1445-1446, 244 Cal.Rptr. 435.) Therefore, it appears no amendment of the judgment to add the trust as a judgment debtor was necessary. The judgment lien attached absolutely to the assets of the Pollack estate and provisionally to the assets of the trust when the abstract of judgment was recorded. Having granted amendment, however, the superior court was obligated to preserve the priority of the lien if possible.

In a footnote, the Court explained that Cal. Prob. Code § 18200 applies to living settlors of inter vivos trusts (at FN 3):

3 Probate Code section 18200 applies to living settlors of inter vivos trusts. It provides: "If the settlor retains the power to revoke the trust in whole or in part, the trust property is subject to the claims of creditors of the settlor to the extent of the power of revocation during the lifetime of the settlor."

In the unpublished case of In re Ferrante, SA CV 16-337 MWF (C.D. Cal. 2016), the United States District Court for the Central District of California affirmed the bankruptcy court's holding that a judgment lien automatically attached to a property that was held in a revocable trust when the lien was recorded. The Court explained that while Bank One relied on a different section of the California Probate Code than the bankruptcy court relied on in this case, the language of the Bank One opinion made it clear that the Court of Appeal considered both sections to work in tandem. Additionally, the Court relied on the unpublished case of HARBOR PIPE & STEEL, INC. v. STEVENS, 2006 Cal. App. Unpub. LEXIS 2755, 2006 WL 856215 (Cal. App. April 4, 2006) ("Harbor Pipe") and noted that Cal. Prob. Code § 18200 provides that all property contained within a settlor's revocable trust is subject to recorded liens against them (at 8-9):

The bankruptcy court relied on Bank One Texas vPollack, 24 Cal. App. 4th 973, 29 Cal. Rptr. 2d 510 (1994), to conclude that "[w]hen an abstract of judgment is recorded, the lien attaches to the assets of a settlor's revocable trust." (ER 1571). In Bank One, a Texas bank recorded an abstract of judgment against an individual named Sheldon Pollack, whose assets were held in a revocable trust that Pollack settled. Id. at 976. Pollack died with little money in his estate, and his creditors disputed the relative priority of their liens. Id. at 977. The Court of Appeal discussed the effect on the litigation of California Probate Code sections 18200 and 18201, which the court noted were promulgated "as part of an extensive change and reorganization of the law governing trusts." Id. Section 18200 stated that property of a revocable trust "is subject to the claims of creditors of the settlor to the extent of the power of revocation during the lifetime of the settlor." Cal. Prob. Code § 18200. Similarly, section 18201 "permitted a judgment creditor who establishes the inadequacy of estate assets to ignore the trust and reach directly those assets subject to the decedent settlor's power of revocation." Bank One, 24 Cal. App. 4th at 980. Ultimately, the court concluded that "[t]he judgment lien attached absolutely to the assets of the Pollack estate and provisionally to the assets of the trust when the abstract of judgment was recorded." Id.

In a subsequent decision, the Court of Appeal made clear that its holding in Bank One extends to living settlors of solvent estates as well: "Probate Code section 18200 simply provides that all property contained within [a settlor's] revocable trust is subject to recorded liens against them." Harbor Pipe & SteelIncvStevens, No.

Page 9

G035530, 2006 WL 856215, at *5 (Cal. Ct. App. Apr. 4, 2006); see also Employers Insof Wausau vGranite State InsCo., 330 F.3d 1214, 1220 n.8 (9th Cir. 2003) (stating that federal courts "may consider unpublished state decisions, even though such opinions have no precedential value." (footnote omitted)).

Applying this case to the facts at hand, the bankruptcy court was correct to conclude that the Seay Lien attached automatically to the 518 Property when it was recorded. The Seay Lien was recorded during the period from 2001-2006 in which Trust III owned the 518 Property. Trust III was expressly revocable, and thus under California Probate Code section 18200 and Bank One, the Seay Lien attached to the 518 Property as an asset of Ferrante's revocable trust.

Remar's attempts to distinguish Bank One are unconvincing. Although the opinion relied on a different section of the California Probate Code than did the bankruptcy court, the language of the opinion makes clear that the Court of Appeal considered both sections to work in tandem. See Bank One, 24 Cal. App. 4th at 980. Moreover, as discussed above, in Harbor Pipe the Court of Appeal applied the Bank One decision to a case under California Probate Code section 18200. Finally, although it is true that in Bank One the settlor's name was clear from the name of the revocable trust, that fact alone cannot distinguish the case. Remar possessed the Trust III instrument, from which the identity of the trust's settlor was clear. It must be expected that a reasonably prudent person would look beyond the name of the trust to determine who the settlor is.

In the unpublished case of HARBOR PIPEsupra, the California Court of Appeal for the Fourth District explained that all property owned by a revocable trust is legally subject to the debts of its settlor pursuant to Cal. Prob. Code § 18200. A judgment lien created by an abstract of judgment recorded against the settlor of a revocable trust attaches directly to the assets contained within the trust, without any need to amend the judgment to include the trust as a judgment debtor. Thus, the debtor's transfer of property into his revocable family trust could not in any way shield that property from enforcement of the plaintiff's judgment against him individually (at 6-9):

Initially, we note there is no dispute that Sarver was not entitled to shield his assets from creditors by transferring them into a revocable family trust. All property owned by a revocable trust is legally subject to the debts of its settlor. Probate Code section 18200 provides: "If the settlor [*7]  retains the power to revoke the trust in whole or in part, the trust property is subject to the claims of creditors of the settlor to the extent of the power of revocation during the lifetime of the settlor." 

As explained in Bank One Texas v. Pollack (1994) 24 Cal.App.4th 973, 980, a judgment lien created by an abstract of judgment recorded against the settlor of a revocable trust attaches directly to the assets contained within the trust, without any need to amend the judgment so as to include the trust as a judgment debtor. In essence, California law treats the assets transferred by a settlor into a revocable trust as though the assets were still held in the settlor's name individually.

In Galdjie v. Darwish (2003) 113 Cal.App.4th 1331, [*8] the court concluded that a specific performance action seeking to compel the settlors/trustees of a revocable trust, in their individual capacities, to convey title to property held in the trust, was not fatally flawed. As the court explained: "a revocable inter vivos trust is a probate avoidance device, but does not prevent creditors of the settlors - who are often also the trustees and the sole beneficiaries during their lifetimes - from reaching trust property." (Id. at p. 1349.)

In Gagan v. Gouyd (1999) 73 Cal.App.4th 835, 842 (disapproved on other grounds in Mejia v. Reed (2003) 31 Cal.4th 657, 669) the court went so far as to conclude that a transfer of property to a revocable trust could not constitute a fraudulent conveyance under the Uniform Fraudulent Transfer Act (Civ. Code, §§ 3439 et seq.), because the transaction "did not result in 'disposing of or parting with an asset or an interest in an asset.' The property remained available to creditors." (Id. at p. 842, italics added.)

Clearly, then, Sarver's transfer of the property into his revocable family trust could not in any way shield [*9]  that property from enforcement of Harbor Pipe's judgment against him individually. Had the property remained under the trust's ownership, there is no question Harbor Pipe could have claimed it.

In Keitel v. Heubel, 103 Cal.App.4th 324, 126 Cal.Rptr.2d 763 (Cal. App. 2002), the California Court of Appeal for the First District held that the appellants' appeal of the trial court's order permitting a judgment creditor to execute against property held in their revocable trust was frivolous. The Court explained that the trial court's order was based on sound legal authority, specifically Cal. Prob. Code § 18200, and the appellants' arguments were not supported by any legal authority (at 336-337, 339):

Keitel has filed a motion asking this court to impose sanctions on the Heubels for filing a frivolous appeal. (See Cal. Rules of Court, rule 26(a)(2) ["If the appeal is frivolous or taken solely for the purpose of delay ... the reviewing court may impose upon offending attorneys or parties such penalties, including the withholding or imposing of costs, as the circumstances of the case and the discouragement of like conduct in the future may require"]; Code Civ. Proa, § 907 ["When it appears to the reviewing court

[103 Cal.App.4th 337]

that the appeal was frivolous or taken solely for delay, it may add to the costs on appeal such damages as may be just."].)

An appeal is frivolous and warrants the imposition of sanctions "when it is prosecuted for an improper motive—to harass the respondent or delay the effect of an adverse judgment—or when it indisputably has no merit—when any reasonable attorney would agree that the appeal is totally and completely without merit. [Citation.]" (In re Marriage of Flaherty (1982) 31 Cal.3d 637, 650, 183 Cal.Rptr. 508, 646 P.2d 179 (Flaherty); see also Pierotti v. Torian (2000) 81 Cal.App.4th 17, 31, 96 Cal.Rptr.2d 553.)

In the present case, the lower court based its July 3 order on Probate Code section 18200, which provides: "If the settlor retains the power to revoke the trust in whole or in part, the trust property is subject to the claims of creditors of the settlor to the extent of the power of revocation during the lifetime of the settlor."

[126 Cal.Rptr.2d 773]

This provision clearly and explicitly permitted Keitel, as a judgment creditor, to reach real property held in the trust over which the Heubels retained the power of revocation.

The Heubels argue that Probate Code section 18200 does not apply in this case because they never created a valid trust against which Keitel could enforce her judgment. This argument has no merit. The five elements required to create an express trust are (1) a competent trustor, (2) trust intent, (3) trust property, (4) trust purpose, and (5) a beneficiary. (Estate of Heggstad (1993) 16 Cal.App.4th 943, 947, 20 Cal.Rptr.2d 433.) The revocable living trust document that appears in this appellate record meets all these required elements. The document states an intent to create a trust and it identifies the trust-makers, the property to be placed into the trust, the trust's purpose, and the beneficiaries of the trust.

[..]

The July 3 order is supported by sound legal authority. In contrast, the arguments advanced by the Heubels and Bacon to attack that order are simply not supported by any legal authority. The nature of those arguments and the circumstances relating to Keitel's efforts to enforce her judgment compel the conclusion that this appeal is frivolous both because it has no merit and because it was quite obviously taken solely for purposes of delay.2 (Flaherty, supra, 31 Cal.3d at p. 650, 183 Cal.Rptr. 508, 646 P.2d 179.)

In Walgren v. Dolan, 276 Cal.Rptr. 554, 226 Cal.App.3d 572 (Cal. App. 1990), the California Court of Appeal for the Fourth District discussed the legislative history of Cal. Prob. Code § 18200, explaining that the increasing use of revocable living trusts as probate avoidance devices caused concern in the California Legislature over the problems faced by creditors of settlors. Thus, the legislature enacted Cal. Prob. Code § 18200, specifically permitting creditors to reach the property of a trust over which the settlor has retained the power of revocation (at 578):

We are confirmed in this conclusion by a review of the evolution of the law of creditors' rights as respects interests in California revocable inter vivos trusts. The increasing

Page 558

use of revocable living trusts as probate avoidance devices caused concern in the California Legislature over the problems faced by creditors of settlors. 2 Provisions in the current Probate Code provide that settlors may not prevent creditors from recovering from trust property by restraining the transfer of their interest in the trust. 3 Also, provisions that took effect in 1987 specifically permit creditors to reach property of a trust over which the settlor has retained the power of revocation, even after the settlor's death. 4 In adopting Probate Code sections 18200 and 18201, the California Legislature followed the lead of Massachusetts and Oregon by patterning these provisions after the law governing property subject to a general power of appointment by the donee. 5 The Law Revision Commission comment to Civil Code section 1390.3 states as part of the purpose of enacting this section:

"It is intended to make appointive property available to satisfy creditors' claims when the donee has the equivalent of full ownership of the property."

Although Probate Code sections 18200 and 18201 did not take effect until 1987, these rules represent a clarification of an unsettled area of law and apply to trusts regardless of when they were created. 6

In the unpublished decision of Erickson Prods. v. Kast, 769 Fed. Appx. 482, 2019 U.S. App. LEXIS 13180, 2019 WL 1958015 (9th Cir. May 1, 2019), the United States Court of Appeals for the Ninth Circuit affirmed the district court's judgment adding several judgment debtors, including the defendant as trustee of a revocable trust, to a copyright judgment. The Court explained that while the district court had jurisdiction to amend the judgment to facilitate the enforcement of the judgment against the defendant, the Court could not add parties not already liable for the judgment. The Court found that adding the defendant in his capacity as trustee would not hold a new party liable for the judgment because the trust was revocable and the defendant was the trustee. Thus, pursuant to Cal. Prob. Code § 18200, the trust property was subject to the defendant's personal liability (at 1-2): 

Following a jury trial, the district court entered judgment against Kraig Kast ("Kast") in favor of Jim Erickson and Erickson Productions, Inc. (collectively, "Erickson"), on Erickson's copyright claims. We resolved Kast's appeal of that judgment in a published opinion. See Erickson Prods., Inc. v. Kast, 921 F.3d 822, 2019 U.S. App. LEXIS 11037, 2019 WL 1605668 (9th Cir. Apr. 16, 2019). We now address Kast's appeal of the district court's order adding several judgment debtors to the judgment, including "Kraig Kast as Trustee of the Black Oak Trust (a/k/a Kraig Kast, Trustee of The Black Oak Trust, dated March 11, 1995)." We have jurisdiction under 28 U.S.C. § 1291 and affirm.

Kast challenges the district court's jurisdiction to amend the judgment while it was on appeal, and further asserts that the district court lacked jurisdiction over some of the parties [**2]  it added to the judgment. While "an appeal to the circuit court deprives a district court of jurisdiction as to any matters involved in the appeal," Hoffman v. Beer Drivers & Salesmen's Local Union No. 888, 536 F.2d 1268, 1276 (9th  [*483]  Cir. 1976), the district court retains authority to "exercise ancillary jurisdiction . . . to manage its proceedings, vindicate its authority, and effectuate its decrees," Peacock v. Thomas, 516 U.S. 349, 354, 116 S. Ct. 862, 133 L. Ed. 2d 817 (1996) (citation and quotation marks omitted). Thus, the district court had jurisdiction to amend the judgment to facilitate its enforcement against Kast, but could not add parties "not already liable for that judgment." Id. at 357.

The district court concluded that adding Kast in his capacity as trustee of the Black Oak Trust would not hold a new party liable for the copyright judgment. Two premises supported this conclusion. First, the Black Oak Trust was a revocable trust. Second, Kast was the trustee of the Black Oak Trust. Thus, the trust property was subject to Kast's personal liability. See CAL. PROBATE CODE § 18200; Zanelli v. McGrath, 166 Cal. App. 4th 615, 82 Cal. Rptr. 3d 835, 850 (Cal. Ct. App. 2008) ("Property transferred to, or held in, a revocable inter vivos trust is nonetheless deemed the property of the settlor and is reachable by the creditors of the settlor."). We affirm on both points.

Authorities:
Cal. Prob. Code § 18200
Travelers Cas. & Sur. Co. of Am. v. K.O.O. Constr., Inc., 16-cv-00518-JCS (N.D. Cal. 2017)
Bank One Texas v. Pollack, 29 Cal.Rptr.2d 510, 24 Cal.App.4th 973 (Cal. App. 1994)
In re Ferrante, SA CV 16-337 MWF (C.D. Cal. 2016)
HARBOR PIPE & STEEL, INC. v. STEVENS, 2006 Cal. App. Unpub. LEXIS 2755, 2006 WL 856215 (Cal. App. April 4, 2006)
Cal. Prob. Code § 19001
Keitel v. Heubel, 103 Cal.App.4th 324, 126 Cal.Rptr.2d 763 (Cal. App. 2002)
Walgren v. Dolan, 276 Cal.Rptr. 554, 226 Cal.App.3d 572 (Cal. App. 1990)
Erickson Prods. v. Kast, 769 Fed. Appx. 482, 2019 U.S. App. LEXIS 13180, 2019 WL 1958015 (9th Cir. May 1, 2019)