In the Matter of Arthur Clarke Ahlswede and Dorothy Ahlswede, Bankrupts. Richard W. Stebbins, Trustee v. Crocker Citizens National Bank

This case presents a unique question regarding the extent of a bankruptcy court’s equitable power to subordinate a creditor’s claim against the bankruptcy estate.

Bankrupt is one of four beneficiaries of a so-called “spend-thrift” trust created inter vivos by his father. The trust instrument provides that “[t]he interests of all beneficiaries other than the Trustor in principal or income shall not be subject to claims of their creditors or others nor to legal process and may not be voluntary [sic] or involuntary [sic] alienated or encumbered.” The trust situs is California; California law enforces such trust provisions. See Kelly v. Kelly, 11 Cal.2d 356 , 79 P.2d 1059 (1938); Cal.Civ.Code § 867. But see Cal.Civ. Code § 859; II Scott on Trusts § 152.1, at 1143 and n.21 (3d ed. 1967); Comment, Trusts: Spendthrift Trusts in California: Civil Code Sections 859 and 867: Planning and Construction of Spendthrift Provisions, 40 Cal.L.Rev. 441, 442 (1952). The effect of the trust provision is that upon the bankruptcy of the beneficiary his equitable interest in the income and principal of the trust estate, being non-assignable and immune from judicial process under California…