After repeated attempts, in multiple courts, in different states, the Toni 1 Trust has lost again – this time, in the Supreme Court of Alaska.
The recent and final version of Toni 1 Trust v. Wacker is an unsurprising, but long-awaited, declaration of the statutory vulnerability of Domestic Asset Protection Trusts (“DAPTs”).
To be clear, the facts are bad and the result should be fairly obvious. At the same time, the outcome of the case should not be construed as the death knell of the DAPT. DAPTs can work. They can also fail. Toni 1 Trust v. Wacker provides more certainty in the areas where we expected them to fail.
In Toni, it was specifically an Alaska DAPT that failed. Some of the pertinent facts are as follows:
- The initial lawsuit was filed in Montana Court for events taking place in Montana.
- The debtor committed a clear fraudulent conveyance by transferring property to the Alaska DAPT right before the final negative state court judgment was to be issued. Both a Montana State Court and an Alaska Bankruptcy Court held the transfers were fraudulent.
- The property transferred into the Alaska DAPT was real estate physically located in Montana, not Alaska.
- The debtor’s husband was trustee of the DAPT.
- In an effort to thwart levy of the property, debtor also filed for Chapter 7 Bankruptcy under the Federal Code.
- After losing repeatedly in Montana, debtor chose to file in Alaska to test the Alaska DAPT statute, which provides that the Alaska Courts have “exclusive jurisdiction over an action…based on a transfer of property to a [DAPT].” Alaska Statute 34.40.110(k).
The Supreme Court of Alaska was of no help to the Toni 1 Trust, but the case will hopefully help to stop the overpromotion of DAPTs and their purported protections. The Toni 1 Trust was hoping that the Alaska Court would uphold the provisions of the Alaska Statute claiming that the Alaska State Court had exclusive jurisdiction, thereby nullifying the results of the Montana State Court and the Alaska Federal Bankruptcy Court. To the contrary, the Alaska Supreme Court concluded that the “statute cannot unilaterally deprive other state and federal courts of jurisdiction” based on the following:
- A fraudulent conveyance claim involving a transfer to a DAPT in another state is inherently a transitory claim, and not just a local one.
- Montana had proper jurisdiction over the matter. The events took place in Montana and the property is physically located in Montana.
- Under the Tennessee Coal case, a case over 100 years old, the court stated that “jurisdiction is to be determined by the law of the court’s creation, and cannot be defeated by the extraterritorial operation of a statute of another state, even though it created the right of action.” 233 U.S. at 360.
- Moreover, under Tennessee Coal, the court held that the Full Faith and Credit Clause of the Constitution does not compel states to follow another state’s statute claiming exclusive jurisdiction even though the other state may have created the cause of action. 233 U.S. at 380.
- A state cannot create a transitory cause of action and at the same time destroy the right to sue on that transitory cause of action in any court having jurisdiction. 233 U.S. at 360. A local cause of action could presumably be so limited.
- As for the Bankruptcy Court jurisdiction, the court cited Marshall v. Marshall, which relied on Tennessee Coal, to conclude that state efforts to limit federal jurisdiction were invalid. 547 U.S. at 314. It was further highlighted that any such limitation “might well run afoul of the Supremacy Clause of the Constitution.” Id.
To condense the foregoing, DAPTs are not intended to protect those who commit fraudulent conveyances, nor can they magically deprive another court of its proper jurisdiction. That’s it.
Does this mean DAPTs are ineffective? No, not at all. To the contrary, they can be very effective if structured and positioned properly. From the outset of DAPT planning, we have had to grapple with the risks of the unknown pertaining to conflict of law analyses and the Full Faith and Credit Clause of the Constitution. The Toni 1 Trust v. Wacker case only confirms our suspicions as to the result with facts arising from a non-DAPT state.
DAPTs are useful and effective when:
- The settlor is a resident of a DAPT state.
- The settlor does not commit a fraudulent conveyance.
- The settlor avoids contact with non-DAPT states.
- The settlor is not in a bankruptcy court.
- The assets are in a DAPT state.
- The DAPT is layered in as an owner of a limited liability company to further enhance protection.
- The DAPT has a truly independent trustee.
Incidentally, the analysis and outcome of this DAPT case would be largely the same if the trust were an Offshore Asset Protection Trust (“OAPT”). The OAPT and its governing statute is not going to thwart a court with proper subject matter or personal jurisdiction from exercising that jurisdiction. The key difference is the ability to reach the assets in the foreign jurisdiction – a reach that the courts generally do not have.
If you would like to explore proper asset protection trust planning – domestic or offshore – please do not hesitate to contact our office to discuss your facts and objectives. We are happy to assist.