On July 21, 2001, the Iowa Court of Appeals issued an opinion in the case of A.Y. McDonald Industries, Inc. vs. Michael B. McDonald, No. 20-0766 (Iowa Ct. App. July 21, 2021).
The Defendant, Michael B. McDonald, began his employment with the Plaintiff in 1983. During the time Michael was the manager of payroll for executive compensation, he misappropriated significant Company funds to himself. Due to the misappropriation, he was terminated in May 2012. Later in 2012, Michael signed a Restitution Agreement and promissory note to repay the Plaintiff the amount of $2,538,500. Pursuant to the Restitution Agreement, Michael was required to liquidate certain assets including his 401(k) plan. He also signed a Confession of Judgment to be filed in the event of a default. In 2013, Michael defaulted and failed to pay the Plaintiff the funds he withdrew from his 401(k) and a Confession of Judgment was filed in the amount of $1,325,174.89, plus interest. Michael also had a beneficial interest in two trusts that contained spendthrift provisions. In 2014, in order to end the Plaintiff’s collection efforts, Michael executed an Amendment to the Restitution Agreement whereby he executed a Limited Power of Attorney which authorized an appointed third-party attorney-in-fact to receive and then forward payments from the Spendthrift Trust trustees to the Plaintiff. As part of the Agreement, the Plaintiff agreed to cease all collection activities. The payments from the Trusts commended in October 2014. However, in September 2016, Michael received a payment from one of the Trusts when the appointed attorney-in-fact inadvertently sent him a check. Michael did not return the money or notify the Plaintiff. In April 2017, Michael filed a Chapter 7 bankruptcy action. The Plaintiff filed a Motion for relief from stay as to the Trust distributions and also an Adversary Complaint seeking to determine that Michael’s debt was not dischargeable. On May 31, 2017, Michael sent the Plaintiff a revocation of the Limited Power of Attorney. The Bankruptcy Court held that Michael’s debt was non dischargeable because it was the result of fraud while acting in a fiduciary capacity, embezzlement, or larceny.
In November 2018, the Bankruptcy Court lifted the stay in the case of the Plaintiff and the Plaintiff filed a Petition and Request for Injunctive and Declaratory Relief in the Iowa District Court. The District Court granted the Plaintiff’s claim for breach of contract finding that Michael breached the Restitution Agreement when he revoked the Limited Power of Attorney, and awarded attorney fees to the Plaintiff. The District Court further ordered a permanent injunction requiring Michael to comply with the Agreements, including the Limited Power of Attorney and declared the signed Limited Power of Attorney irrevocable. Finally, the District Court denied and dismissed Michael’s counterclaims with prejudice.
The Court of Appeals noting that the parties agree that the Trusts involved contained spendthrift provisions, cited Iowa Code Section 633.A.2302(2) which states:
A beneficiary shall not transfer, assign, or encumber an interest in a trust in violation of a valid spendthrift provision, and a creditor or assignee of the beneficiary of a spendthrift trust shall not reach the interest of the beneficiary or a distribution by the trustee before its receipt by the beneficiary.
The Court of Appeals found that once Michael received his Trust payment, either directly or through his agent, he could agree to transfer or assign the payment to the Plaintiff. The Court went on to state that the beneficiary could not transfer his right to future payments from the Trust, nor can the beneficiary’s creditors collect future Trust payments due to the beneficiary. The Court of Appeals also noted that under Iowa’s Power of Attorney Statute, the principal may revoke a power of attorney at any time.
The Court of Appeals next addressed the issue of whether Michael breached his Agreements with the Plaintiff. The Court found that Michael breached his Agreement to pay the Plaintiff the Trust distributions when he directly received the Trust distribution of $6,218.44 and failed to pay it to the Plaintiff. The Court of Appeals went on to find that Michael’s breach of the Agreement allows the Plaintiff to begin collection activities against him. The Court of Appeals cited Restatement (Third) of Trusts §58, cmt. d(1), which provides as follows:
If the beneficiary of a spendthrift interest purports to transfer it to another for value but later revokes the assignment and the trustee’s authority pursuant to it, the beneficiary is liable to that other person. Although that person cannot reach the beneficiary’s interest under the trust, satisfaction of the claim can be obtained from other property of the beneficiary or from trust funds after they have been distributed to the beneficiary.
In regard to the Plaintiff’s request for an injunction, the Court of Appeals concluded that the Plaintiff cannot enforce an irrevocable Limited Power of Attorney compelling future payments from a Spendthrift Trust, and as such the Plaintiff is not entitled to an injunction.
The Court of Appeals ruled that due to Michael’s breach of the terms of the Agreement, the Plaintiff is entitled to reasonable attorney fees which were allowed under the Agreement of the parties.
In conclusion, the Court of Appeals affirmed the District Court’s Order finding Michael in breach of the Restitution Agreement and awarding attorney fees to the Plaintiff. The Court of Appeals also ruled that the Plaintiff did not breach any Agreement with Michael and the Court of Appeals reversed the Order enforcing the Limited Power of Attorney and its restraint on the Spendthrift Trust distributions and also reversed the grant of the Plaintiff’s request for a permanent injunction.