Domestic Asset Protection Trust Fails In Bankruptcy Case
I have written many blog posts over the years including reasons why wealthy debtors should avoid bankruptcy. I read about recent case where a bankruptcy court penetrated a domestic asset protection trust which would have been fully protected in a state court collection proceeding.
In this instance, a debtor established a self-settled Alaskan trust in 2005 for the benefit of himself and his family. Alaska has statutes providing that self-settled trusts, so-called domestic asset protection trusts, are protected from the settlor’s creditors. In fact, Alaska was the first state to enact DAPT legislation. In this case, the debtor incurred over $200,000 of credit card debt after he transferred property to his trust in 2005. He filed bankruptcy in 2009 to discharge the credit card debts. The bankruptcy trustee sued to include the Alaskan trust as part of the bankruptcy estate.
Under Florida law, and the law of most states, there is a four year statute of limitation applied to fraudulent transfer claims. A creditor could not bring a fraudulent transfer action in 2009 seeking to reverse a transfer to an Alaskan trust created and funded in 2005. Generally speaking, the four year limitations applies to most transfers in bankruptcy cases where the trustee brings the action under the applicable state law.
In this case, however, the bankruptcy trustee argued that the court could reverse the debtor’s transfers to the Alaskan trust under Section 548(e) which provides that bankruptcy trustee can avoid a transfer to a self-settled trust if the transfer was accomplished with the actual intent to defraud, hinder or delay a creditor within 10 years of the bankruptcy filing. In other words, transfers to self-settled asset protection trusts, domestic or foreign, are subject to a longer statute of limitations under this provision of the Bankruptcy Code.
The bankruptcy court found that the debtor was solvent at the time he created his Alaskan trust. The court concluded that the totality of evidence showed that the debtor created the trust to protect his assets from present and future creditors. Among other things, the court noted that the trust document itself stated that the trust’s purpose was, "to maximize the protection of the trust estate or estates from creditors' claims of the Grantor or any beneficiary ....” The court avoided transfers to the Alaskan trust and made the trust assets property of the bankruptcy estate.
This is another case illustrating the power of bankruptcy courts to avoid transfers that would be well protected in state court collections. It also shows why debtors must be careful not to include in a trusts or any legal document language that expresses an asset protection purpose. Battley v. Mortensen, Adv. D.Alaska, No. A09-90036-DMD
This is a very interesting article. Had no idea bankruptcy courts had such influential power. You're right tho, this case certainly exemplifies that point.