Memorandum of Decision Re: Void Trust

IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re JANET L. FERETTI, aka JANET L. DAMNER,                                               No. 586-01593-A      Debtor. ________________________/ JANET L. KJELSON, aka JANET L. DAMNER,      Plaintiff,    v.                                                                              A.P. No. 860465 JEROME E. ROBERTSON, Trustee,      Defendant. _________________________/
Memorandum of Decision
     In September, 1979, the debtor's former husband, Leland Damner, purported to transfer his assets to a revocable trust with himself as trustee. The trust document gave him unlimited power to dispose of trust assets as he wished and revoke the trust at any time. The beneficiaries of the trust were the children of the marriage. The debtor was subsequently adjudged to have a one-half ownership interest in the assets transferred to the trust.      On April 22, 1981, a state court entered an interlocutory judgment of dissolution of the debtor's marriage. The judgment incorporated the stipulation of the debtor and her husband that the trust would continue until the children reached the age of eighteen. Following entry of the judgment, the debtor was substituted as the trustee under the trust and the trust was amended to provide that Damner could revoke it only with the debtor's permission.      A person cannot by his own act create a trust that will protect his property from claims of creditors; equity will treat such a trust as void, insofar as it operates to defeat creditors' claims. 60 Cal.Jur.3d, Trusts, sec. 95. In Sheehan v. Michel (1936) 6 Cal.2d 324, 329-30, the California Supreme Court declared void as a fraud on creditors a trust essentially identical to the one in this case. The debtor argues that while the trust here may have been originally void, it has been turned into a valid trust by subsequent orders of the state court. This Court finds this argument unconvincing, and will accordingly grant the Bankruptcy Trustee's motion for summary judgment.      The factor which makes the trust void is the power to revoke it at will. The subsequent amendments to the trust did not do away with the right to revoke it, but merely made revocation possible by mutual agreement of the debtor and her former spouse instead of his unilateral decision. The fact remains that the trust is a device whereby the debtor and her spouse have attempted to have full control of their assets while keeping them from their creditors.      A provision of the interlocutory judgment does purport to order the continuance of the trust until the children reach age eighteen. However, this judgment merely approved a stipulation of the debtor and her husband, and was hardly the reasoned decree of a distinguished jurist as the debtor characterizes it, nor could it alter the rights of creditors who were not parties in the dissolution proceedings. Since the parties have the power to mutually agree to ignore the interlocutory judgment or stipulate to its modification, and since the trust documents themselves still provide for revocation, the debtor cannot rely on the state court decree to turn a void trust into a trust enforceable against creditors.      While not necessary to the present decision, the Court notes that even if the trust were not void as to creditors the debtor's rights to one-half of the current income* and one-half of the corpus when the children reach eighteen would be property of the bankruptcy estate. In re Morales Travel Agency (1st Cir.1981) 667 F.2d 1069, 1071; In re Treiling (Bkrtcy.E.D.N.Y.1982) 21 B.R. 940, 943; 11 U.S.C. section 541(a)(1).      For the foregoing reasons, the motion of the Bankruptcy Trustee for summary judgment will be granted. Pursuant to Bankruptcy Rule 9021, counsel for the Trustee shall submit an appropriate form of judgment.
Dated: May 26, 1988                                                                              _____________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy Judge
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     *While the third amendment to the trust makes Damner's share of the income payable back to the trust, the debtor's share still belongs t