Pfannenstiehl: Out of a Mistake Comes Clarity

Pfannenstiehl: Out of a Mistake Comes Clarity

Lower courts’ decision overruled for failure to properly construe settlor’s intent

The Massachusetts Supreme Judicial Court’s decision on Aug. 4, 2016 in Curt Pfannenstiehl v. Diane Pfannenstiehl corrected the noteworthy errors by the Appeals Court and trial judge and, in so doing, clarified how lower courts should determine whether an interest is “property” when dividing marital assets under Section 34 of the Commonwealth of Massachusetts’ equitable division statute.1 Justice Fernande Duffly’s opinion in Pfannenstiehl holds for a unanimous Court that the husband’s beneficial interest in a discretionary spendthrift trust, subject to an ascertainable standard with an open class of beneficiaries, is too speculative to constitute a property interest and is only an expectancy. Expectancies may not be included in any financial award incident to a divorce. Many practitioners were alarmed that the Appeals Court relied on the ascertainable standard for the proposition that the trustees were “required” to make distributions to Curt, the husband, which was contrary to the historical meaning of the term as limiting trustee discretion. If left uncorrected, only in Massachusetts would this meaning exist for the ascertainable standard.

Settlor’s Intent

The decision should be read closely not just for the result but how the analysis differs in fundamental ways from the approach by the lower courts. This isn’t a case in which a holding or statute may have been misconstrued by the lower courts. In Pfannenstiehl, the lower courts were overruled essentially because they decided the legal question of Curt’s beneficial interest not as defined by terms of the trust instrument, but on how those courts viewed the facts of the case. The lower courts paid little attention, if any, to the settlor’s intent. The Supreme Judicial Court construed the settlor’s intent based on terms of the instrument as a question of law according to how trusts are supposed to be interpreted.

Inconsistencies in Appeals Court’s Ruling 

This case had huge practical consequences to Curt, as well as to the trusts and estates community. After trial, he was ordered to pay Diane approximately $1.4 million that the trial judge attributed to Curt’s trust interest but which the evidence showed he didn’t have and could never earn or accumulate. By including the trust in the property division, Diane was awarded 114 percent of the actual marital estate. The trustees correctly refused to make distributions for payments to a non-beneficiary and due to the spendthrift clause. There was also evidence that, due to federal regulatory changes that drastically affected the family business interests that comprised the trust assets, the trust wasn’t receiving income and so it didn’t have $1.4 million to pay out for Curt to turn over to Diane even if the trustees so elected. 

Predictably, when Curt was unable to pay the judgment (unless his father actually supplied the money), Diane prosecuted him for contempt and won—on a theory that the trustees should make the distributions. Curt’s inability to pay without outside sources for the money was not contested. Curt was sentenced to jail and placed in shackles, with neither Diane nor the trial court explaining how he could purge himself of contempt with money he didn’t have. On appeal, the Appeals Court reversed the contempt decision based on inability to pay. One is left to wonder how to reconcile the inconsistencies in the Appeals Court’s rulings that, on the one hand, held Curt to have an interest that was “vested in possession” with the trustees being “required” to make distributions to him under the ascertainable standard, and yet at the same time held that he lacked financial ability to pay the judgment because he didn’t have access to the trust.

Reconciling the Inconsistencies

Justice Duffly’s opinion corrects these inconsistencies to hold that the settlor’s intent wasn’t to benefit ex-spouses of beneficiaries, but his children and subsequent generations. Therefore, whatever Curt’s interest in the trust may be, it’s not sufficiently certain to constitute an asset for purposes of marital property division. Unlike the lower courts, the opinion relies on the trust instrument to explain that the discretionary power over distributions in the trustees removes from Curt any notion of a possessory interest in the trust assets. Second, and perhaps more significantly, the Court rejected the lower courts’ analysis that relied on the ascertainable standard. In clear, unambiguous language the Court reaffirmed the established doctrine that the ascertainable standard actually limits discretion, so that distributions aren’t “required” as the lower courts had ruled. The opinion further explains that the trustees’ discretion to make distributions in equal or unequal shares rendered incorrect, under the terms of the instrument, the lower courts’ valuation of Curt’s interest as a simple fractional share of 1/11th of the trust corpus simply because he’s one of 11 current beneficiaries. Together with the history of unequal distributions among the beneficiaries, periods when no distributions were made and a spendthrift clause, these terms and the whole of the trust instrument indicate that Diane is clearly not intended to benefit from the trust. 

Takeaway for Draftsmen and Litigators

Pfannenstiehl provides a critical reference point both for draftsmen and litigators. After the Appeals Court’s decision, safeguarding assets became a riddle that the trust and estates bar might never solve. For example, the Appeals Court’s decision left draftsmen in a quandary of advising clients to place total discretion in trustees, or using an ascertainable standard for tax and guidance purposes in order to clearly spell out the settlor’s intent. A long history of reliable, predictable trust law that many feared the Appeals Court’s decision abandoned was restored by the Supreme Judicial Court. How the Court approached the issue is also important to litigators.  After all, the factual summary in the Supreme Judicial Court’s decision isn’t that different from the Appeals Court’s. Where the opinions differ sharply is how they addressed the legal question. The Supreme Judicial Court didn’t blend the legal analysis with perceptions of the facts as the Appeals Court did. In short, the high court allowed the facts to follow the law. Therefore, both appellate decisions in Pfannenstiehl teach the importance of isolating the legal and factual issues, analyzing them accordingly—and the possible far-reaching and unintended consequences of not doing so. 

*O’Regan represented Curt Pfannenstiehl in this case before the Appeals Court and the Massachusetts Supreme Judicial Court.

Endnote

1. M.G.L. c. 208, Section 34.

 
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