The Supreme Court of Illinois has allowed the Rush University Medical Center in Chicago to pursue a claim against a trust created by a donor who died without fulfilling his irrevocable pledge for $1.5 million.  The Court said that a trust created by the donor/settlor naming himself as beneficiary could be liable for the debt even though it contained a spendthrift clause saying its assets could not be used to pay claims of creditors. The Court said the common law rule was not abrogated by the state’s enactment of the Uniform Fraudulent Transfer Act. (Rush University Medical Center v. Sessions, No. 112906, 9/20/12.)

Robert W. Sessions had pledged $1.5 million for the construction of a new president’s house and conference center on the campus in 1995.  He reiterated the pledge in 1996, writing that to the extent that he had not paid in cash before his death, it would be an obligation of his estate.

In reliance on the pledge, the University constructed the building and Sessions cut the ribbon at the dedication of the facility named after him.  In 2005, however, he was diagnosed with late-stage lung cancer and, according to the Court, blamed the medical center for not diagnosing it earlier so that it could be treated.  He revoked his prior will and codicil and transferred most of his remaining personal assets to a new living trust. 

He had previously transferred his most valuable assets, worth about $19 million at the time of his death, to a trust created in 1994 to be governed by the law of the Cook Islands.  Sessions was both settlor and lifetime beneficiary of the 1994 trust, which was irrevocable and authorized distributions for his “maintenance, support, education, comfort and wellbeing, pleasure, desire, and happiness.”  It contained a spendthrift clause that prohibited any trust assets from being used to pay creditors of Sessions or his estate.

When Sessions’ estate did not contain sufficient assets to pay the $1.5 million pledge, the University sued the 1994 trust under the common law rule that a self-settled spendthrift trust provision is void as to existing and future creditors of the settlor.  A trial court agreed, but an appellate court reversed on the ground that the common law rule had been abrogated by passage of the Uniform Fraudulent Transfer Act.  The Supreme Court has now reversed the appellate court, affirmed the trial court, and remanded the case for further proceedings.

The Supreme Court said that implied repeal of a common law rule by new legislation has never been a favored result and without an express repeal in the statute it will be deemed to have been done only if “necessarily implied” from the act.  In this case, it said, there was no express repeal and no irreconcilable inconsistency with the common law rule, that both were intended to protect the debtor’s unsecured creditors from unfair reductions in the debtor’s estate to which they usually look for security, and that the common law rule supplements the statute in a consistent manner.

YOU NEED TO KNOW

A spendthrift trust is generally designed to protect the assets of a beneficiary other than the settlor against the claims of creditors.  It can be used, for example, by a parent who wants to create a trust for a gambling-addicted child so that funds are available only for necessary life expenses.  The common law rule expressed in this case is generally prevalent throughout the country. 

Interestingly, the Court applies the law of Illinois to the case even though it says the trust was to be governed by the law of the Cook Islands. Maybe the general rule is so widespread that it applies in the Cook Islands as well, but the Court doesn’t say so.  Maybe it was sufficient to remand the case to the court in Cook County.