Mary Beth Massillon and Leon J Massillon

UNITED STATES BANKRUPTCY COURT
DISTRICT OF MASSACHUSETTS
EASTERN DIVISION
Chapter 7
Case No. 09-17613-FJB
MEMORANDUM OF DECISION
ON TRUSTEE’S OBJECTION TO DEBTOR’S CLAIM OF EXEMPTION
The matter before the court is the objection of the chapter 7 trustee, Lynne F. Riley, to
debtor Mary Beth Massillon’s (“Mary Beth”) claim of exemption as to her interest, valued at
approximately $62,000, in a testamentary spendthrift trust that is governed by New York law. 1
On August 10, 2009, the date of her bankruptcy filing, Mary Beth had a beneficial interest in
this trust. As a beneficiary of the trust, she is entitled to distributions of the net income of the
trust at least semi-annually, and she is further entitled to distribution of the remaining principal in
two installments of approximately $31,000 each, the first to occur in June 2010 and the second
in June 2015. On her schedule of exemptions, she states that her interest in the trust is wholly
excluded from the estate; and, with respect to any portion that may nonetheless come into the
estate, she claims an exemption under 11 U.S.C. § 522(d)(5) in the amount of $20,950. The
parties agree that the spendthrift clause is valid and enforceable and that it excludes her
beneficial interest in the trust from the bankruptcy estate. They disagree as to (i) whether New
York law, in combination with 11 U.S.C. § 541(c)(2), excludes her rights to distributions from the
estate and (ii) if and to the extent that those distributions are assets of the estate, whether the
debtor may claim them as exempt by use of 11 U.S.C. § 522(d)(5), as the debtor maintains, or
whether use of § 522(d)(5) would amount to impermissible stacking of Code exemptions on top
In re
MARY BETH MASSILLON and
LEON J. MASSILLON,
Debtors
1 The trust was created by the wills of her deceased grandparents.
Case 09-17613 Doc 43 Filed 03/10/10 Entered 03/10/10 13:07:05 Desc Main
Document Page 1 of 5

of state law exemptions, as the trustee argues. 2
Applicable New York law, set forth in N.Y.C.P.L.R. § 5205(c) and (d), provides as
follows:
(c) Trust exemption.
1. Except as provided in paragraphs four and five of this
subdivision, all property while held in trust for a judgment
debtor, where the trust has been created by, or the funds
so held in trust has proceeded from, a person other than
the judgment debtor, is exempt from application to the
satisfaction of a money judgment. . . .
(d) Income exemptions. The following personal property is exempt
from application to the satisfaction of a money judgment, except
such part as a court determines to be unnecessary for the
reasonable requirements of the judgment debtor and his
dependents:
1. ninety per cent of the income or other payments from a
trust the principal of which is exempt under subdivision
(c)[.]
Subsection (c)(1) places the trust assets, while held in trust, beyond the reach of any judgment
creditor. 	And, because the trust itself contains a valid and enforceable spendthrift clause, Mary
Beth herself is not free to alienate the trust assets or control their disposition. As the trustee
concedes, the trust assets, while held in trust, are consequently excluded by § 541(c)(2) from
the bankruptcy estate. 3
2 The Trustee also argues that Mary Beth’s exemption under § 522(d)(5), if she is
entitled to one at all, must be limited to $11,200, the maximum to which a debtor is entitled
under that exemption, because the beneficial interest belongs to her alone and not also to her
co-debtor husband. Mary Beth does not now contend otherwise.
3 11 U.S.C. § 541(c)(2) (“A restriction on the transfer of a beneficial interest of the
debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case
under this title.”); In re Hunger, 272 B.R. 292 (Bankr. M.D. Fla. 2002) (holding that where the
debtor holds a beneficial interest in a New York trust as to which, under the trust instrument and
New York law, the debtor had no right to direct the disposition of the principal of the trust, the
assets of the trust come within the exception of § 541(c)(2) and are not within the debtor’s
bankruptcy estate).
The protections afforded by N.Y.C.P.L.R. § 5205(c) and (d) apply where a trust “has
been created by, or the funds so held in trust has proceeded from, a person other than the
judgment debtor.” The trust need not be a spendthrift trust to qualify for their protection. If, on
2
Case 09-17613 Doc 43 Filed 03/10/10 Entered 03/10/10 13:07:05 Desc Main
Document Page 2 of 5

Upon their distribution, however, the assets of the trust become available in part to
creditors: by operation of N.Y.C.P.L.R. § 5205(d)(1), creditors can reach ten percent of such
distributions plus such additional amounts as a court determines are unnecessary for the
reasonable requirements of the debtor and her dependents. Thus, New York law treats the
distributions differently from the trust assets while they are in the trust. While in the trust, the
trust assets are wholly protected from creditor process; but upon their distribution, they become
only partly protected.
From this two issues arise. The first is whether N.Y.C.P.L.R. § 5205(d)(1) is more
properly characterized as an exemption within the meaning of 11 U.S.C. § 522(b) or as “a
restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under
applicable nonbankruptcy law “ within the meaning of 11 U.S.C. § 541(c)(2). If it is an
exemption as opposed to an exclusion, Mary Beth may enjoy its benefit only by claiming it as an
exemption, which would effectively bar her from also sheltering under § 522(d)(5) the portion not
sheltered by N.Y.C.P.L.R. § 5205(d)(1), state exemptions and § 522(d) exemptions being
mutually exclusive. 4 Mary Beth having elected the § 522(d) exemptions, she would be limited to
the exemptions available to her thereunder and could have no recourse to N.Y.C.P.L.R. §
5205(d)(1). 5 On the other hand, if N.Y.C.P.L.R. § 5205(d)(1) is a § 541(c)(2) exclusion, then
Mary Beth would be free to apply the § 522(d)(5) exemption to protect any portion of the
distributions not excluded by N.Y.C.P.L.R. § 5205(d)(1) via § 541(c)(2). The second issue
account of the spendthrift character of the trust, any provision of New York law affords the
debtor any additional or stronger protection against the ability of creditors to reach distributions
from the trust than that afforded by N.Y.C.P.L.R. § 5205(d)(1), the debtor has not cited or
invoked it.
4 Section 522(b)(1) of the Bankruptcy Code permits a debtor to exempt from property of
the estate the property listed in § 522(b)(2), which is the property listed in § 522(d), or the
property listed in § 522(b)(3), which includes applicable state law exemptions. 	11 U.S.C. §
522(b)(1).
5 This disposition would be without prejudice to the debtor’s right to seek to amend her
claims of exemption.
3
Case 09-17613 Doc 43 Filed 03/10/10 Entered 03/10/10 13:07:05 Desc Main
Document Page 3 of 5

would then be to quantify the amount excluded.
Is N.Y.C.P.L.R. § 5205(d)(1) more properly characterized as an exemption within the
meaning of 11 U.S.C. § 522(b) or as “a restriction on the transfer of a beneficial interest of the
debtor in a trust that is enforceable under applicable nonbankruptcy law “ within the meaning of
11 U.S.C. § 541(c)(2)? The court agrees with the trustee that N.Y.C.P.L.R. § 5205(d)(1) is not a
“restriction on transfer” within the meaning of § 541(c)(2). In order to qualify as a restriction on
transfer under § 541(c)(2), the operative restriction must do more than restrict the right of a
creditor to reach the debtor’s interest in order to satisfy a debt. A restriction that only impairs a
creditor’s ability to transfer the asset is a simple exemption. Rather, § 541(c)(2) excludes from
the estate those interests which both creditor and debtor are restricted from transferring, such
as, most typically, a spendthrift trust or an ERISA-qualified pension plan. The evident logic of
this provision is that the estate should not include those assets that the debtor herself is not free
to alienate. The language of N.Y.C.P.L.R. § 5205(d)(1) clearly restricts only creditors: “[t]he
following personal property is exempt from application to the satisfaction of a money judgment .
. . .” 	It plainly does not restrict the debtor’s ability to spend or otherwise alienate the asset.
Accordingly, N.Y.C.P.L.R. § 5205(d)(1) is a simple exemption and not a § 541(c)(2) restriction
on transfer.
It follows that the future distributions are assets of the estate. Mary Beth has claimed
them as exempt under § 522(d)(5) to the extent of $20,950. The trustee argues correctly that
her exemption under § 522(d)(5) can be no more than the statutory limit of $11,200. 6 Having
no interest in the trust, her co-debtor husband, Leon Massillon, is not free to shelter any portion
of the distributions under his § 522(d)(5) exemption.
6 11 U.S.C. § 522(d)(5) (permitting debtor to exempt “[t]he debtor’s aggregate interest in
any property, not to exceed in value $1075 plus up to $10,125 of any unused amount of the
exemption provided under paragraph (1) of this subsection”).
4
Case 09-17613 Doc 43 Filed 03/10/10 Entered 03/10/10 13:07:05 Desc Main
Document Page 4 of 5

A separate order will enter sustaining the trustee’s objection and limiting the exemption
to $11,200.
Date: March 10, 2010 	_______________________________
Frank J. Bailey
United States Bankruptcy Judge
5
Case 09-17613 Doc 43 Filed 03/10/10 Entered 03/10/10 13:07:05 Desc Main
Document Page 5 of 5