Thursday, April 20, 2017

U.S. v. Harris (9th Cir. - April 20, 2017)

Is this really right?

I mean, part of it seems right.  But I'm not sure about the very end.

Michael Harris stole some money and was convicted, so he's got a $640,000 restitution order against him.  Good luck getting him to pay much of it, though, since he's unlikely to have a great job or very substantial assets upon his release from prison.

He does, however, have parents.  Who established a couple of irrevocable trusts for their son.

Can the United States attach the trusts to satisfy the restitution order?

Well, not really.  The trusts are totally discretionary ones.  The trustees (the parents) don't have to distribute any money if they don't want to.  So you definitely can't grab the entire trust.

But what about the actual distributions to Harris?

That's what the government wants here.  They just want to file a lien on any future distributions.  So if Harris gets any money, the U.S. ends up with it (in order to satisfy the restitution order).

The trial court says that's fine, and Harris appeals.

The Ninth Circuit's per curiam opinion sounds mostly right to me.  It says, yeah, any distributions are totally discretionary, so they're not generally "property" of Harris that can be attached.  But the Ninth Circuit (rightly) also says that even though the trust says that distributions are entirely within the discretion of the trustees, under state law, that's not entirely true -- the trustees have fiduciary duties under the trust, and Harris (in turn) has the power to compel such distributions.  In the words of the Ninth Circuit:

"[D]espite the discretionary language of the trusts, California law grants Harris the right to compel distributions from the trusts, insofar as those distributions are necessary to fulfill the trusts’ purposes. Even if a trust confers “absolute, sole, or uncontrolled discretion on a trustee,” the trustee must “act in accordance with fiduciary principles” and must not act in bad faith or in disregard of the trust’s purposes. . . . Thus, even though the trust purports to grant the trustees absolute discretion over distributions, Harris can petition the probate court to ensure that the trustees’ exercise of that discretion is consistent with the trusts’ purposes."

Yep.  That sounds right to me.  Ditto for the Ninth Circuit's resulting conclusion that "Mindful of the rights granted to trust beneficiaries under California law, we hold that Harris’s interest falls within the federal definition of “property”" that can be subject to a lien.

I'm on board.  The Ninth Circuit's opinion seems logically true to me.  If Harris has the legal right to compel $X distributions from a trust, then that $X is "property" of Harris that can be attached.  Makes sense.

With the additional bonus that it helps stop circumvention of restitution orders.

But here's the thing.

Based on this conclusion -- which, again, I think is right -- the Ninth Circuit holds:

"In sum, we conclude that Harris’s interest in the trusts qualifies as property under the federal debt collection procedure that applies in this case. The government is not attempting to compel distributions from the trusts. However, any current or future distributions from the trusts to Harris shall be subject to the continuing writ of garnishment, until the restitution judgment is satisfied."

Wait.  Not so fast.

I agree that Harris has the right to compel the trustee to distribute $X from the trust.  Now, we don't exactly know what $X is right now, since neither Harris nor the government have moved to compel such a distribution.  If the trust contains, say, $500,000, maybe Harris is entitled to a distribution of $10,000 a year from it, or $1,000, or maybe $0.  Depends on what the trust says, its purpose, the needs of Harris, etc.  But, yes, the $X that is Harris' enforceable "property" in the $500,000 trust is subject to a lien.

But that's not what the Ninth Circuit does.

The Ninth Circuit, like the trial court, didn't make $X subject to a lien.  It made ANY distributions from the trust subject to a lien.  Even those greater than $X.

Worse, it expressly held that "any current or future distributions from the trusts to Harris shall be subject to the continuing writ of garnishment, until the restitution judgment is satisfied."  So, by definition, ALL distributions from the trust to Harris will be intercepted and used to satisfy the restitution order.

That remedy, in my view, doesn't at all follow from the court's analysis.

Harris owns $X.  That's it.  That's his only "property". You can put a lien on that.  But you can't put a lien on anything that's in excess of $X.  If I own $10,000 of a $500,000 trust, you can take $10,000 to satisfy a restitution order.  But if the trust distributes, say, $30,000, you can't take the whole thing, as only $10,000 of that is "my" property subject to a lien.  You don't have a lien on the other $20,000, as that's someone else's property.  (At least until it becomes mine; once it's in my bank account, maybe you can seize it at that point, but that doesn't permit the initial lien authorized here.)

So I have no problem with saying that because Harris owes $X, the government can seize $X.  Or to say the same thing without symbols, because Harris has a right under state law to a certain minimum distribution from the trust, the government can seize that minimum distribution  But it can't seize anything beyond that -- yet that's precisely what the courts here permit.  (An analogy to IRAs springs to mind.  There may be required minimum distributions -- RMDs -- that you can seize, but that does not permit you to seize the entire IRA, or any distributions in excess of the RMD.)

Now, I admit, things can get complicated here, since we don't know exactly what $X is in the present case.  Some could easily say, with some persuasive effect:  "Well, that's the government's burden, since it has the burden of showing both the existence and extent of its purported lien.  So if it wants a lien, it has to show what the legally compelled distribution is, and that -- and only that -- it can seize."

I'd be fairly sympathetic to such a view.

But I'd also understand a contrary view that says:  "You know what?  Since we don't know how much $X is, and since this is a restitution order, maybe I'm going to allow a 'provisional' lien on any and all distributions to Harris, since they may (or may not) be part of $X.  So we'll intercept them and then the parties can litigate later on whether part of the distribution was in excess of $X."

I could find that plausible.  I might need to know a bit more about trusts and remedies to express a complete view as to which of those alternatives seems doctrinally right.

But here's what I do know.  Just because you have a lien on $X doesn't mean you get to take $X + $20,000 and apply it to a restitution order.  Because that extra $20,000 is someone else's property, since it's not the $X to which the relevant person is actually entitled.

State law, for example, requires me to do X for my kids.  Feed them.  Clothe them.  Do some other stuff for them.  That's the minimum.  They're entitled to that, so that's their "property" right in some sense.  So that you can attach.  But if I do anything else for them -- things that I'm not required to do -- that's a gift.  You can't attach a preexisting lien to that.  Since that gift isn't their property.

So too here.

Everything in excess of the required minimum distributed from the trust is a gift -- a total gift -- from Harris' parents to Harris.  You can't place a lien on gifts before they're made.  And that's true whether the gift's made outside of a trust or inside it.  Just like the government would not be entitled to an order that says that any birthday gift of $5 that I make (or Harris' parents make) to Harris is subject to a preexisting lien and seizure, ditto for the excess (extra-legal) distributions from the trust.

So I follow the Ninth Circuit's analysis.  And think it sounds right.

But the court's conclusion from that analysis, and the order it affirms, nonetheless seems off, and not justified by the underlying legal principle.