On Appeal from the United States District Court for the Eastern District of Pennsylvania. (D.C. Civil Action No. 90-cv-05806).
Before: Scirica, Lewis and Roney,*fn* Circuit Judges
This diversity case requires us to interpret the scope of a purported spendthrift provision in a trust created in the early part of the century. In so doing, we face an issue of first impression under the laws of Pennsylvania and most other states: the applicability of section 157(c) of the Restatement (Second) of Trusts, which allows creditors to reach a spendthrift trust interest in limited circumstances. The district court found the trust contained a spendthrift provision protecting the interest of the beneficiary and that Pennsylvania courts would not apply the Restatement exception under the circumstances of this case. Schreiber v. Kellogg, 849 F. Supp. 382, 389, 394 (E.D. Pa. 1994). We will affirm in part and reverse in part.
In 1928, Rodman Wanamaker died, leaving a will and codicils*fn1 that established trusts for his children and their descendants. At issue in this case is a $120 million trust created in Paragraph Third of his will.
For half a century, the trust consisted of the stock in the John Wanamaker department store. In March 1978, Carter, Hawley, Hale, Inc. offered the trust $40 million for the Wanamaker stock. Christopher G. Kellogg, one of Wanamaker's great-grandchildren and a contingent income beneficiary of the trust,*fn2 engaged attorney Palmer K. Schreiber to increase the purchase price of the stock. Partially as a result of those efforts, the stock was sold for $60 million, about $20 million more than the original offer. For his services, the Montgomery County Orphans' Court awarded Schreiber $117,000 in counsel fees and interest from the corpus of the trust, and he later received a judgment of nearly $88,000, plus counsel fees and interest, against another attorney involved in the stock sale for breach of a fee-sharing agreement.
In October 1978, after the stock was sold, Schreiber filed a surcharge action on behalf of Kellogg against the trustees of the Wanamaker trust, alleging negligence, mismanagement, and breach of fiduciary duty. In May 1981, the parties settled the suit. The trustees agreed to hold regular meetings, make certain information available to beneficiaries, and file a plan for the creation of a retirement age for trustees. For his part, Kellogg agreed to pay his own counsel fees and to obtain a release of any claims against the trust from his counsel. Schreiber and Kellogg then signed a fee agreement that provided for Kellogg to pay Schreiber $80,000, plus interest at a "commercially competitive" rate.
When Kellogg failed to pay the amount due, Schreiber filed this suit for breach of contract. The district court awarded him $512,864 for counsel fees and interest, and we affirmed. Schreiber v. Kellogg, 37 F.3d 1488 (3d Cir. 1994).
During the pendency of the appeal, Schreiber asked the district court to execute on Kellogg's interest in the trust to satisfy the judgment. The court denied the motion, holding that Wanamaker had intended to provide spendthrift protection for his great-grandchildren and Kellogg's interest in the trust was protected. Schreiber v. Kellogg, 849 F. Supp. 382, 389 (E.D. Pa. 1994). The court also ruled that Pennsylvania courts would not apply, under the circumstances of this case, section 157(c) of the Restatement (Second) of Trusts (1959), which permits judgment creditors that preserve or benefit an interest in a spendthrift trust to reach that interest to enforce valid claims. Id. at 394. Schreiber appealed.
The district court had diversity jurisdiction pursuant to 28 U.S.C. § 1332 (1988). We have jurisdiction under 28 U.S.C. § 1291 (1988). Our review of the district court's construction of Pennsylvania law is de novo. Salve Regina College v. Russell, 499 U.S. 225, 231, 113 L. Ed. 2d 190, 111 S. Ct. 1217 (1991) ("We conclude that a court of appeals should review de novo a district court's determination of state law."); Grimes v. Vitalink Communications Corp., 17 F.3d 1553, 1557 (3d Cir.) ("The determinations regarding state law, where appropriate, will be reviewed de novo."), cert. denied, 130 L. Ed. 2d 393, 115 S. Ct. 480 (1994). Our standard of review of the district court's interpretation of the Wanamaker will depends on whether Pennsylvania law treats such an interpretation as a question of law or of fact.*fn3
Under Pennsylvania law, interpretation of a will generally is a question of law, as long as the court determines the meaning of the document solely from its language and not from any surrounding circumstances. Cf. In re Estate of Livingston, 531 Pa. 308, 612 A.2d 976, 981 n.2 (Pa. 1992) ("In this case, the courts were called upon to interpret the legal effect of a writing. This entails reaching a Conclusion of law."); Miller v. Bower, 260 Pa. 349, 103 A. 727, 728 (Pa. 1918) ("The question dividing the parties was resolved into a pure question of law arising out of the construction of the will . . . ."). Because the district court here apparently did not consider any evidence beyond the four corners of the will,*fn4 our review is a question of Pennsylvania law subject to de novo review.
Under Rule 69(a) of the Federal Rules of Civil Procedure, a federal court must follow relevant state law in a proceeding to execute on a judgment, unless a federal statute dictates otherwise. See United States v. Yazell, 382 U.S. 341, 354-58, 15 L. Ed. 2d 404, 86 S. Ct. 500 (1966). Because no applicable federal statute exists here, we look to Pennsylvania law to determine whether Schreiber may execute on Kellogg's interest in the Wanamaker trust.
In general, "trusts in which the interest of a beneficiary cannot be assigned by him or reached by his creditors have come to be known as 'spendthrift trusts.'" 2A Austin W. Scott & William F. Fratcher, The Law of Trusts § 151, at 83 (4th ed. 1987).*fn5 No specific wording is required under Pennsylvania law to create a spendthrift trust.*fn6 If a spendthrift trust is created, courts will sustain its validity,*fn7 except in a few limited circumstances.*fn8
Because the purported spendthrift trust here was created in a will, we must consider the intent of the testator, which under Pennsylvania law controls interpretation of a will's provisions. In construing the same will at issue here, the Pennsylvania Supreme Court explained:
The intention of the testator is the pole star in the interpretation of every will and that intention must be ascertained from a consideration of the entire will, including its scheme of distribution, as well as its language, together with all the surrounding and attendant circumstances.
In re Estate of Wanamaker, 399 Pa. 274, 159 A.2d 201, 204 (Pa. 1960) (citations omitted); see also In re Estate of Patrick, 487 Pa. 355, 409 A.2d 388, 390 (Pa. 1979) ("In construing a will, the intent of the testator, if it can be ascertained, must prevail.").
Similarly, the intent of the creator of a trust controls the interpretation of the trust document. See In re Benson, 419 Pa. Super. 582, 615 A.2d 792, 794-95 (Pa. Super. Ct. 1992) ("The polestar in every trust is the settlor's intent and that intent must prevail"). Pennsylvania courts agree the writing establishing a trust "'must be considered to be the best and controlling evidence of the settlor's intent.'" 615 A.2d at 795 (quoting In re Girard Trust Corn Exch. Bank, 418 Pa. 112, 208 A.2d 857, 859 (Pa. 1965)). Because the trust here was created in the Wanamaker will, we look to the language of that will to determine the validity of the purported spendthrift provision.
The relevant provisions of the will are Paragraphs Third and Eighth. Paragraph Third*fn9 established the stock trust and divided certain proceeds between Wanamaker's children "for their sole and separate use, not to be anticipated, or assigned by them, in any manner whatever, nor subject to any attachment, alienation or sequestration for their debts, contracts or engagements." There is no dispute that this language established a spendthrift trust protecting Wanamaker's children.
Paragraph Eighth*fn10 stipulated that the trust established in Paragraph Third also shall provide for descendants of the Wanamaker children "subject to the provisions herein previously contained." The fundamental disagreement in this case is whether this language extends the spendthrift protection from Paragraph Third to cover the bequest to Wanamaker's grandchildren and great-grandchildren in Paragraph Eighth. The district court held that it did, thereby providing spendthrift protection to Kellogg's interest. Schreiber, 849 F. Supp. at 388-89. But ...