KLABACKA VS. NELSON C/W 66772

Statutes cited

Key holdings

Practitioner summary

The Supreme Court, sitting en banc, addressed nine principal issues arising from a divorce that involved two valid Nevada self-settled spendthrift trusts. **Subject-matter jurisdiction.** Reviewing de novo (Ogawa v. Ogawa, 125 Nev. 660, 667, 221 P.3d 699, 704 (2009); Landreth v. Malik, 127 Nev. 175, 179, 251 P.3d 163, 166 (2011)), the court rejected the trust's argument that NRS 166.120(2) and NRS 164.015(1) (read with NRS 132.116 and NRS 164.005) gave probate exclusive jurisdiction. Because the action was a divorce initiated under NRS Chapter 125, not a proceeding to enforce spendthrift-beneficiary rights or determine internal trust affairs, the family court had jurisdiction notwithstanding NRS 3.223. Landreth controlled. **Validity of the SPA.** Treating contract interpretation on undisputed facts as de novo (Lehrer McGovern Bovis, Inc. v. Bullock Insulation, Inc., 124 Nev. 1102, 1115, 197 P.3d 1032, 1041 (2008)), the court held the SPA a valid transmutation agreement under NRS 123.220(1). Because its terms were unambiguous, parol evidence of contrary intent was inadmissible. Kaldi v. Farmers Ins. Exch., 117 Nev. 273, 281, 21 P.3d 16, 21 (2001); Frei v. Goodsell, 129 Nev. 403, 409, 305 P.3d 70, 73 (2013). **Validity of the SSSTs.** Applying NRS 166.050, NRS 166.015(2)(a), and NRS 166.040(1)(b), the court held both trusts validly created: each was in writing, irrevocable, contained a spendthrift provision, named a Nevada-resident distribution trustee (Lana Martin), did not require distributions to the settlor, and was not shown to hinder, delay, or defraud known creditors. Breaches of trust formalities by a trustee do not invalidate an otherwise valid SSST; the remedy is a civil suit against the trustee. See NRS 163.115. **Tracing.** The district court found the trust's CPA report unreliable but did not perform any alternative tracing. Citing Schmanski v. Schmanski, 115 Nev. 247, 984 P.2d 752 (1999), and Peters v. Peters, 92 Nev. 687, 692, 557 P.2d 713, 716 (1976), the Court held tracing was required because party testimony about characterization "carries no weight." Any community property identified must be equally distributed under NRS 125.150(1)(b); separate property remains protected. **Parol evidence in fashioning remedies.** Reviewed for abuse of discretion (Frei, 129 Nev. at 408-09, 305 P.3d at 73), the court held the family court abused its discretion by relying on parties' testimony of intent to equalize trust assets and to charge personal obligations to Eric's trust, given the unambiguous trust instruments. **Equalization of trust assets.** The court held NRS Chapters 163 and 166 forbid such equalization. NRS 163.417(1)(c)(1) bars a court from ordering exercise of a trustee's discretion to distribute a discretionary interest. NRS 166.120(2) prohibits payments by virtue of legal process. NRS 166.120(3) deprives a beneficiary of capacity to make dispositions upon court order. The narrow exception in NRS 166.170(3) (fraudulent transfer or transfer violating a legally enforceable contract or court order) was not implicated. **Personal obligations charged to the trust.** The court rejected reliance on Gilbert v. Gilbert, 447 So. 2d 299, 301 (Fla. Dist. Ct. App. 1984), S.D. Codified Laws § 55-16-15(1) (2016), Wyo. Stat. Ann. § 4-10-503(b) (2015), and Restatement (Third) of Trusts § 59 (Am. Law Inst. 2003). Citing NRS 166.090(1) and the legislative history of A.B. 469 (1999) and the failed A.B. 378 (2013), the court held Nevada protects SSST assets from a beneficiary's child- and spousal-support obligations not known at trust creation. The court "expressly reject[ed]" the section 59 exception. The court noted, however, that protections do not bar equal distribution of any community property identified within the trust, because the nonbeneficiary spouse retains a property interest in such community property. **Alimony.** Reviewed for abuse of discretion (Gardner v. Gardner, 110 Nev. 1053, 1055-56, 881 P.2d 645, 646 (1994); Williams v. Waldman, 108 Nev. 466, 471, 836 P.2d 614, 617 (1992)), the $800,000 lump-sum award was within discretion under NRS 125.150(1)(a) and the NRS 125.150(9) factors. Sargeant v. Sargeant, 88 Nev. 223, 228, 495 P.2d 618, 622 (1972), supported the lump-sum form. Error lay only in directing payment from Eric's trust rather than from Eric personally; the award was vacated for reassessment in his personal capacity. **Unjust enrichment.** The claim had been dismissed and never repleaded. The court held it was not tried by express or implied consent under the standard articulated in Schwartz v. Schwartz, 95 Nev. 202, 205, 591 P.2d 1137, 1140 (1979). The phrase "unjust enrichment" was not used at trial, and Eric's trust had moved to dismiss the claim. The district court exceeded its authority by predicating relief on the dismissed claim. **Constructive trusts.** Locken v. Locken, 98 Nev. 369, 372, 650 P.2d 803, 804-05 (1982), defines a constructive trust as a remedial device. Imposing one on assets within a valid SSST conflicts with NRS 166.120 and NRS 163.417(1)(c)(1). Drawing analogical support from Guidry v. Sheet Metal Workers Nat'l Pension Fund, 493 U.S. 365, 376-77 (1990), the court vacated the constructive trusts on the Russell Road and Lindell properties, holding that legislative carve-outs for equitable remedies, if any, are for the Legislature. **June 8, 2015, order.** Citing Foster v. Dingwall, 126 Nev. 49, 52, 228 P.3d 453, 455 (2010), the court reaffirmed that the district court retained authority to enforce its decree pending appeal as to collateral matters. The order was vacated to the extent it implemented portions of the decree being reversed but affirmed as to directives regarding health-care costs of the son, Lynita's insurance costs, Eric's payment of costs to remove the security gate, and attorney fees for contempt.

In plain language

Eric and Lynita Nelson married, and ten years into the marriage they signed a "separate property agreement" (SPA) that converted their shared marital property into separate property belonging to each spouse individually. They then placed each spouse's separate property into his or her own trust. In 2001, they converted those trusts into "self-settled spendthrift trusts" -- a type of trust that, under Nevada law, shields the assets from most creditors. Eric was the beneficiary of his trust; Lynita was the beneficiary of hers. In 2009, Eric filed for divorce. The family court eventually issued a divorce decree that, among other things, treated the two trusts as if their contents needed to be balanced out: it ordered roughly $8.7 million in trust assets to be equalized between the two trusts, ordered Eric's trust to pay Lynita $800,000 in lump-sum alimony, ordered Eric's trust to pay child-support arrears, and imposed "constructive trusts" (a court-created ownership interest) over two properties (the Russell Road and Lindell properties) held in the trusts. The court reasoned that Eric had effectively run both trusts, breached fiduciary duties, and unjustly enriched himself. The Nevada Supreme Court took the case and ruled mostly in favor of Eric's trust, while leaving the divorce itself and certain personal obligations of Eric in place. The court held: - The family court did have authority (subject-matter jurisdiction) to decide trust-related claims that came up in a divorce. Eric's trust had argued that only a probate court could hear them. - The SPA was a valid, clear written agreement that converted the couple's community property into separate property, and the court could not use outside testimony to contradict its plain terms. - Both spendthrift trusts were validly created under Nevada law. Even if Eric had broken trust formalities, the remedy was a lawsuit against the trustee -- not invalidating the trust. - The family court should have "traced" the assets in the trusts to figure out whether any community property had crept back in. Without that tracing, it could not rely on the parties' conflicting testimony about what was separate or community. - Nevada law strongly protects spendthrift-trust assets from court orders. The family court was wrong to "equalize" trust assets between the two trusts and wrong to make Eric's trust pay Eric's personal obligations like child support and alimony. Nevada -- unlike Florida, South Dakota, and Wyoming -- has no exception allowing spendthrift trusts to be tapped for child or spousal support that arose after the trust was created. - The lump-sum alimony award of $800,000 was within the trial court's discretion as to amount and form, but it should have been ordered against Eric personally, not against his trust. - The "unjust enrichment" claim had been dismissed earlier and never re-pled, so the family court could not base relief on it. Likewise, the constructive trusts on the Russell Road and Lindell properties had to be vacated because imposing a constructive trust on assets inside a valid spendthrift trust violates Nevada's statutory protections. - The June 8, 2015, follow-up order was vacated to the extent it tried to enforce parts of the decree being reversed, but kept in place for matters like health-care costs for the son, insurance costs, removal of a security gate, and attorney fees for contempt. The dissolution of the marriage itself stays in place. The case goes back to the family court to redo the property division and related rulings consistent with the opinion.