A recent decision allows Montana fraudulent transfer finding to affect protections of a self-settled trust.
Section 34.40.110(k) of the Alaska Trust Act purports to grant Alaska courts exclusive jurisdiction over an action brought to avoid, as a fraudulent transfer, a transfer of property to an Alaska self-settled spendthrift trust.1 At its core, the statute provides that “[a] court of this state has exclusive jurisdiction over an action brought under a cause of action or claim for relief that is based on a transfer of property to a trust that is the subject of this section.”2 On
March 2, 2018, however, in Toni 1 Trust v. Wacker,3 the Alaska Supreme Court ruled such provision invalid stating, “…the Alaska legislature’s purpose in enacting that statute was to prevent other state and federal courts from exercising subject matter jurisdiction over fraudulent transfer actions against such trusts…We conclude that it cannot.”4
Let’s examine the Toni 1 Trust decision and the court’s analysis concerning why the Alaska legislature can’t usurp subject matter jurisdiction through the enactment of AS Section 34.40.110(k). More importantly, however, let’s also examine the implications of the Toni 1 Trust decision as they relate to the typical situation involving an out-of-state settlor and the effectiveness of his self-settled spendthrift trust for estate and asset protection planning purposes.5
Factual Background
The procedural and factual history of Toni 1 Trust is long and convoluted. At its core, however, is a 2007 Montana state court lawsuit brought by Donald Tangwall (Donald) against William and Barbara Wacker, a counterclaim by the Wackers against Donald, his wife and his mother-in-law and a transfer, during the pendency of the suit, of Montana real estate by Donald’s wife and mother-in-law to an Alaska trust called the “Toni 1 Trust.”
The Wackers were successful on their counterclaim, and on May 17, 2011, they obtained judgment in the amount of $137,551.47. They then proceeded to file a fraudulent transfer action against the Toni 1 Trust, as transferee, in Montana state court under the Montana Uniform Fraudulent Transfer Act in connection with the real property transfer. The Wackers were again successful, and on May 7, 2012, the Montana state court entered an order holding that the real property transfer to the Toni 1 Trust was, in fact, a fraudulent transfer.
Following the fraudulent transfer finding, Donald’s mother-in-law filed a Chapter 7 bankruptcy proceeding in Alaska. Donald, as trustee of the Toni 1 Trust, then filed a complaint in the bankruptcy court alleging, among other things, that the judgment against the Toni 1 Trust in the Montana state court action was void due to defective service of process. The bankruptcy trustee responded by filing a counterclaim against the Toni 1 Trust based on federal fraudulent transfer law instead of attempting to convince the bankruptcy court that the Toni 1 Trust had been validly served in the Montana state court lawsuit. After many hearings, the bankruptcy court held that “the two real property transfers [in Montana] were made to keep the property out of the hands of the Wackers, who were on the verge of obtaining a $137,000 judgment against the debtor” and that the transfer of the real estate thereby violated the federal fraudulent transfer statute, 11 U.S.C. Section 548(a)(1)(A).
Finally, after further proceedings in the bankruptcy court that aren’t germane to the issues discussed in this article, Donald sought relief in Alaska state court, ultimately landing before the Alaska Supreme Court. The crux of Donald’s argument in the Alaska state courts was that AS Section 34.40.110 grants the Alaska courts exclusive jurisdiction over any fraudulent transfer action against the Toni 1 Trust. On this basis, Donald sought a declaratory judgment stating that all judgments against the Toni 1 Trust from other jurisdictions were void and that no future actions could be maintained against the Toni 1 Trust because the statute of limitations had, by then, run.
Alaska Supreme Court Analysis
In large part, the court’s determination that AS Section 34.40.110(k) can’t limit the scope of other states’ jurisdiction is based on the U.S. Supreme Court’s 1914 ruling in Tenn. Coal, Iron, & R.R. Co. v. George.6 In that case, an employee sued his employer in a Georgia court, relying on an Alabama statutory cause of action. The employer countered that Alabama state courts retained exclusive jurisdiction over the suit under the Alabama Code and that the Full Faith and Credit Clause of the U.S. Constitution compelled Georgia courts to respect Alabama’s assertion of exclusive jurisdiction. The Supreme Court found, however, that Full Faith and Credit doesn’t require states to go quite so far. Instead, the Supreme Court ruled 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.”7 The Alaska Supreme Court recognized in the Toni 1 Trust case that its analogy to the U.S. Supreme Court’s decision in Tennessee Coal was an imperfect one because the Montana court’s judgment wasn’t based on a fraudulent transfer cause of action created by an Alaska statute, but rather on a cause of action arising under Montana law relating to an Alaska trust. However, it found the constitutional argument rejected in Tennessee Coal to be even less compelling where, as here, Alaska sought to assert exclusive jurisdiction over suits based on a cause of action (that is, fraudulent transfer law), that it didn’t itself create.
Thus, to reiterate, Toni 1 Trust stands for the proposition that Alaska, or indeed any other state, can’t reserve to its courts exclusive jurisdiction over the question of whether the transfer of property to a trust created under that state’s law is, or isn’t, a fraudulent transfer.
Fraudulent Transfers
As of the writing of this article, 16 states have enacted self-settled spendthrift trust (sometimes also called “asset protection trust”) legislation.8 Obviously, the inverse to this statement is that, as of the writing of this article, 34 states (and the District of Columbia) haven’t (yet) enacted self-settled spendthrift trust legislation. Thus, cases may, and do, arise in which a conflicts-of- law question exists concerning the ability of a self-settled spendthrift trust to protect assets from the claims of the settlor’s creditors. Toni 1 Trust, however, isn’t one of those cases.
The most important fact to an understanding of Toni 1 Trust isn’t that some states permit self-settled spendthrift trusts to be created under their laws and that other states don’t; rather, it’s that all of the states provide that the fraudulent transfer of property to a self-settled spendthrift trust, or indeed, any trust, will be ineffective. This is because every state has enacted the Uniform Fraudulent Conveyance Law, the Uniform Fraudulent Transfer Act or the Uniform Voidable Transactions Act (UVTA) or alternatively continues to follow the common law as it relates to fraudulent transfers or, as in the case of Louisiana, a civil law jurisdiction, provides for the annulment of revocatory actions.9
Notably, at the edges, a state that’s enacted self-settled spendthrift trust legislation also often attempts to sharpen the parameters concerning what might constitute a fraudulent transfer of property to a self-settled spendthrift trust under that state’s law. And, it’s for this reason that a state might attempt, as Alaska did, to usurp by statute exclusive jurisdiction over the question of whether the transfer of property to a trust created under its law is, or isn’t, a fraudulent transfer.
For example, Alaska law provides that:
If a trust contains a transfer restriction allowed under (a) of this section [relating to self-settled spendthrift trusts], the transfer restriction prevents a creditor existing when the trust is created or a person who subsequently becomes a creditor from satisfying a claim out of the beneficiary’s interest in the trust, unless the creditor is a creditor of the settlor and…the settlor’s transfer of property in trust was made with the intent to defraud that creditor…10
In contrast, the comparable provision of the UVTA (formerly known as the “Uniform Fraudulent Transfer Act”), provides that a voidable transaction (that is, a fraudulent transfer), can be found “…if the debtor made the transfer or incurred the obligation…with actual intent to hinder, delay, or defraud any creditor of the debtor.”11 Similarly, the U.S. Bankruptcy Code proscription against fraudulent transfers provides that the bankruptcy trustee may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, if the debtor:
…made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted…12
Note two potentially important differences between the Alaska statute, on the one hand, and the UVTA and the Bankruptcy Code, on the other. The first difference is that under Alaska law, a finding of a fraudulent transfer requires a finding of an intent to “defraud,” whereas under the UVTA and the Bankruptcy Code, an intent merely to “hinder” or “delay,” as well as an intent to defraud, can be the basis for a finding of a voidable transaction/fraudulent transfer. The second important difference is that under Alaska law, the intent must be directed against the creditor who’s brought the action (that is, “…the settlor’s transfer of property in trust was made with the intent to defraud that creditor…”), whereas under the UVTA, the intent can be directed against any creditor (that is, “…the debtor made the transfer or incurred the obligation…to hinder, delay, or defraud any creditor of the debtor”), which is also the case under the Bankruptcy Code (that is, the debtor “…made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was…indebted”).
So, there are obviously differences in the law that may or may not prove relevant depending on whether an action is brought under Alaska law or under the law of another state or the Bankruptcy Code. But, the fact that Alaska, as a self-settled spendthrift trust jurisdiction, has sharpened the parameters concerning what would constitute a fraudulent transfer of property to an Alaska self-settled spendthrift trust doesn’t mean that, absent an exercise of exclusive jurisdiction by the Alaska courts pursuant to a statute like AS Section 34.40.110, no transfer of property to an Alaska self-settled
spendthrift trust would be found to be a fraudulent transfer. In fact, it would seem to be beyond question that the transfer of property to the Toni 1 Trust was an obvious fraudulent transfer, and would have been found to have been so even had the question been determined under Alaska law, because Donald’s wife and mother-in-law transferred their real estate to the trust during the pendency of the Wackers’ counterclaim against them.
Personal Jurisdiction
Finally, an entirely separate issue that further diminishes the importance of Toni 1 Trust is that of personal jurisdiction, to be contrasted with the question of subject matter jurisdiction, which was the actual matter at issue in the case. As regards personal jurisdiction, it’s important to note that the trust was funded with Montana sited real estate. As a result, the Montana courts had in rem jurisdiction over the corpus of the trust, which would have likely served to render academic the court’s decision in Toni 1 Trust, even had the Alaska Supreme Court instead determined that AS Section 34.40.110(k) was, in fact, enforceable as a valid exercise of authority by the Alaska legislature.
Ineffective Exercise of Authority
Toni 1 Trust provides a simple rule: Section 34.40.110(k) of the Alaska Trust Act, which purports to grant Alaska courts exclusive jurisdiction over fraudulent transfer actions against Alaska self-settled spendthrift trusts, was an ineffective exercise of the Alaska legislature’s authority and can’t control the jurisdictional question that it sought to control. Thus, a fraudulent transfer action against an Alaska trust may be brought outside of the Alaska courts, assuming, of course, that personal jurisdiction is found to exist. The important question, however, of whether the transfer of property to an Alaska self-settled spendthrift trust is, in fact, a fraudulent transfer in any particular case will, of course, remain. Toni 1 Trust changes nothing in the proposition that, to the extent that the funding of the trust wasn’t a fraudulent transfer, the trust will serve its purpose of protecting assets from the settlor’s potential future creditors.
Endnotes
1. AS Section 34.40.110(k) provides that “[n]otwithstanding another provision of the law of this state, an action, including an action to enforce a judgment entered by a court or other body having adjudicative authority, may not be brought at law or in equity for an attachment or other provisional remedy against property of a trust subject to this section or to avoid a transfer of property to a trust that is the subject of this section unless the action is brought under (b)(1) of this section and within the limitations period of (d) of this section. A court of this state has exclusive jurisdiction over an action brought under a cause of action or claim for relief that is based on a transfer of property to a trust that is the subject of this section.”
2. Ibid.
3. Toni 1 Trust v. Wacker, 2018 WL 1125033 (Alaska, March 2, 2018).
4. Ibid., at *3.
5. It should be noted that Alaska isn’t the only self-settled spendthrift trust jurisdiction that’s attempted to exclude out-of-state courts from exercising jurisdiction over such trusts. For example, in Delaware, Del Code Ann tit. 6, Section 3572(a) provides, in pertinent part, that “[t]he Court of Chancery shall have exclusive jurisdiction over any action brought with respect to a qualified disposition.”
6. Tenn. Coal, Iron, & R.R. Co. v. George, 233 U.S. 354 (1914).
7. Ibid., at p. 360.
8. Those states are: Alaska, Delaware, Hawaii, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia and Wyoming. Some attorneys name Oklahoma as an additional self-settled spendthrift trust jurisdiction, but as a technical matter, the Oklahoma Family Wealth Preservation Trust Act of June 9, 2004 (O.S. Section 10, Title 31), permits the creation of asset protected revocable trusts for the benefit of third parties, not self-settled spendthrift trusts.
9. La. Civ. Code Ann. Section 12:2036, et seq.
10. AS Section 34.40.110(b).
11. Uniform Voidable Transactions Act Section 4(a)(1). This language is also wholly unchanged from the language of the Uniform Fraudulent Transfer Act Section 4(a)(1) that preceded it. This is also the language of the Montana Uniform Fraudulent Transfer Act, MT Code Section 31-2-333 (2013).
12. 11 U.S. Code Section 548(a)(1).