Debtor Cannot Use Spendthrift Trust to Back Out of Gift

Image Credit: Engel & Reiman PC

From the English common law, a rule that has endured over the centuries is that a person cannot use a self-settled trust for his own benefit so as to be free from liability of his debts.

In the Sessions case, however, a decedent’s estate argued that this common law principle was supplanted by Illinois’ version of the Uniform Fraudulent Transfer Act, which it alleged provided “specific mechanisms for proving a transfer by a debtor was fraudulent.” [FN1]

The question split the trial and appeals court, but the Illinois Supreme Court answered the question in the negative. The Supreme Court found no conflict between the common law trust rule and the fraudulent conveyance law, citing also the longstanding coexistence between these principles.

The ruling supports the arguments of creditors and parties who step into the shoes of such creditors, such as bankruptcy trustees. It is also grounded in longstanding public policy disfavoring an individual’s effort to transfer property into a trust for self-benefit while avoiding payment to creditors.

The Spendthrift Trust  

Roger Sessions, during his lifetime, established the Sessions Family Trust. At the time of his death, the trust contained assets valued at more than $18.9 million. He was both the settlor and lifetime beneficiary of the trust, and had the absolute power to appoint or remove trustees. The trust was irrevocable, and it authorized the trustees to make distributions to Sessions of both income and principal for his “maintenance, support, education, comfort and wellbeing, pleasure, desire and happiness.” The trust also contained a spendthrift provision that prohibited any trust assets from being used to pay creditors of Sessions or his estate. [FN2]

The Gift … and Change of Heart

In the fall of 1995, Sessions made an irrevocable pledge to Rush University Medical Center (“Rush”) of $1.5 million for the construction of a new president’s house on the Rush university campus in Chicago. He then executed successive codicils to his will which provided that any amount remaining unpaid on his pledge as of his death would be given to Rush on his death. Relying on this pledge, Rush constructed the president’s house at a cost in excess of $1.5 million. [FN3]

In February 2005, Sessions was diagnosed with late-stage lung cancer, and he blamed Rush for not diagnosing the cancer sooner so that it could be treated. In March 2005, about six weeks before he died, he executed a new will revoking all previous wills and codicils. The new will made no provision for any payment to Rush toward his pledge. [FN4]

The Litigation

Rush subsequently filed claims in Sessions’ probate proceedings, which were contested by Sessions’ estate and litigation ensued. The trial court entered summary judgment in favor of Rush, finding that the trust was void as to plaintiff’s judgment against Sessions’ estate and that the trust is liable for payment to plaintiff on the $1.5 million pledge. The appeals court reversed, agreeing with the trustees’ argument that the common law principle relied upon by Rush was supplanted by the Illinois Fraudulent Transfer Act. [FN5]

The Supreme Court was unpersuaded by the trustees’ argument, finding that the common law and the statute were supplementary, not contradictory. While acknowledging that both laws have a general purpose of protecting creditors, it noted that “the common law focuses on the additional matter of the interest retained by the settlor of a specific kind of trust, and not simply the fraudulent transfer of an asset or the fraudulent incurring of a debt, as does the statute.” [FN6]

The appeals court found that the fraudulent conveyance statute defined the conditions required to prove a transfer was fraudulent. But the Supreme Court noted that the Illinois Fraudulent Transfer Act specifically states that the common law relating to fraud supplements the Act’s provisions, absent a clear indication otherwise. [FN7] In addition, the Court noted that common law rule is applicable even if the settlor-beneficiary had no intent to defraud his creditors. [FN8]

As noted by the Court, Illinois’ law on fraudulent conveyances, like that of many jurisdictions in the United States, traces back to the Statute of 13 Elizabeth enacted in the 16th century, which codified the common law with regard to fraudulent conveyances. Illinois law then codified the common law on fraudulent conveyances, which the Court observed had existed in complete harmony with the common law trust rule for centuries. [FN9] Given this, the Supreme Court found that the legislature did not intend to abrogate the common law rule by implication when it enacted the Uniform Fraudulent Transfer Act. [FN10]

———-

[FN1] Rush University Medical Center v. Sessions, 980 N.E.2d 45, 2012 IL 112,906, 2012 WL 4127261, at *3 (Ill. Sept. 20, 2012).

[FN2] Id. at *1.

[FN3] Id. at *2.

[FN4] Id.

[FN5] Id. at *3.

[FN6] Id. at *5 (emphasis in original).

[FN7] Id. at *6.

[FN8] Id. at *5.

[FN9] Id. at *6.

[FN10] Id.

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