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Lenders Beware! Notice Of The Borrower's Trust Planning Can Start A Statute of Limitations Running

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In July of 2006, TrustCo Bank, located in New York, provided a construction loan to StoreSmart of North Ft. Pierce, LLC, which was located in Florida. The loan, to construct some self-storage facilities in Florida, was personally guaranteed by Susan Mathews, who at that time was a resident of New York.

The StoreSmart loan soon ran into trouble, and was modified in 2008 and 2009.

Susan ceased to be a New York resident in 2009, and started splitting her time between Massachusetts and Florida, mostly the Sunshine State.

Finally, in 2011, StoreSmart default on the loan in 2011. TrustCo foreclosed on the loan, and sued StoreSmart and Susan in Florida state court, winning a judgment in July, 2012, for $8.2 million plus interest.

The next year, 2012, TrustCo Bank assigned its interest in the StoreSmart loan to ORE Property Two, Inc., which was located in Florida. Collectively, they will be referred to as the "Plaintiffs".

Ultimately, the Plaintiffs were able to reach an agreement with StoreSmart and Susan, whereby a deficiency judgment of $2.3 million was entered against the latter defendants.

The Plaintiffs then sued Susan, RBC Trust, and her children beneficiaries in Delaware, contending that Susan's transfers to the three Delaware trusts were fraudulent transfers. The Defendants fought back on a number of grounds, but the one that is important here is their Statute of Limitations defense to the fraudulent transfer claims.

What had happened was this: Since the Summer of 2004, Susan had been in love with a California real estate developer, and they started living together in 2005. However, her new boyfriend had financial difficulties of his own, to the tune of a $4.8 million judgment entered against him (debtors of a feather apparently do flock together).

Having four independently-successful adult sons, and not wanting her assets or their inheritance to get caught up in her boyfriend's difficulties should they marry, Susan had started the process to form three Delaware trusts a few months before she guaranteed the StoreSmart loan.

A few months after the StoreSmart loan was made, in December of 2006, Susan settled the three Delaware trusts for the benefit of her children, through RBC Trust Company (Delaware) Ltd.

At the start of the New Year, in January of 2007, Susan transferred her very valuable stock in a company that she had co-founded, called ITRAX, to two of the new trusts.

Thereafter, the facts become somewhat murky, but Susan contended that TrustCo was on notice as early as 2008 that she had transferred her ITRAX stock to the trusts:

 In connection with the discussions leading up to the first modification of the StoreSmart Loan, Ms. Mathews submitted a net worth statement to TrustCo on March 25, 2008, that reported her net worth at $11,773,446. On April 11, 2008, Ms. Mathews supplied a revised net worth statement to TrustCo indicating her net worth to be $5,578,857. That revised statement included the annotation: "I am the discretionary beneficiary of each of the 3 Delaware trusts that have been established as part of estate planning."

As part of the loan modification process, Ms. Mathews wrote in a May 6, 2008 email to Paul Steenburgh, a TrustCo Assistant Vice President and one of TrustCo's Rule 30(b)(6) deponents, that TrustCo had requested that she either guarantee the loan with all 3 Delaware Trusts or put up another $1MM in collateral." At his deposition, Steenburgh recalled receiving this email and stated that Ms. Mathews's description of Trustco's position was correct. The final terms of the first modification did include an additional $1,000,000 in collateral, as well as several other conditions, such as opening a $250,000 escrow account with TrustCo. The first modification to the StoreSmart loan closed on June 27, 2008. The accompanying closing binder included a copy of Trust II's Trust Agreement.

Finally, a series of conversations between Ms. Mathews and Michelle Simmonds, a TrustCo Vice President, occurred in May, June, and July 2010. Simmonds testified at her deposition that those conversations concerned transfers to Delaware trusts now known to be the ITRAX Transfers, which Simmonds understood rendered Ms. Mathews insolvent. This testimony comports with Plaintiffs' interrogatory response that they were aware of the transfers to the Three Trusts in June 2010.

In sum, Defendants contend that Plaintiffs had: (1) inquiry notice in March and April of 2008; (2) inquiry notice on May 6, 2008; (3) inquiry notice on June 27, 2008; and (4) both inquiry notice and actual notice of the alleged fraudulent ITRAX Transfers in May 2010.

As mentioned, the Plaintiffs sued Susan, RBT Trust Company, and her sons in Delaware, alleging Susan's fraudulent transfers in violation of Delaware law. This was on March 1, 2013, and the Complaint was accompanied by a Motion for Preliminary Injunction.

Curiously, on May 28, 2013, the Plaintiffs amended their Complaint to remove all references to Delaware's fraudulent transfer law. The Motion for Preliminary Injunction went forward, and finally resulting in the Opinion from Vice Chancellor Donald Parson of the Delaware Court of Chancery that I am about to relate.

That this matter was resolved in the Court of Chancery and on a Motion for Preliminary Injunction is important. The Court of Chancery itself is an anachronism, since most states have long since merged their courts of law and equity, and done away with the Chancery Courts. But the Delaware Court of Chancery has somehow survived court modernization, and deals with issues in equity, which has its own (often arcane) concepts and general principles.

Whereas in law, actions are subject to Statutes of Limitations that set specific time periods, in equity such actions are instead subject to "laches", which doesn't have any specific time periods but instead asks something like, "Did the Plaintiff wait so long to assert the claim that it became unfair to the Defendant to have to defend it?" Because that is an inherently vague question, Courts considering issues of laches often look to the Statutes of Limitations as sort of a rule of thumb.

Here, the Court of Chancery was faced with the issue of whether TrustCo waited too long in challenging Susan's transfers to the three trusts. To help resolve this question, the Court would look to the Statute of Limitations for fraudulent transfers.

But the Statute of Limitations for which state? That becomes the ultimate issue for this Opinion.

The Plaintiffs contended that New York law should be used to guide laches. Rare among states, New York has not adopted the Uniform Fraudulent Transfers Act, which provides for a 4-year limitations period, but still follows the obsolescent, predecessor Uniform Fraudulent Conveyances Act, which provides for a longer 6-year limitations period.

Defendants contended that either Delaware or Florida law should be used to guide laches, since those states follow the Uniform Fraudulent Transfers Act, with its shorter limitations period.

Delaware has what is known as a "Borrowing Statute" which basically says that where a cause of action arises outside of Delaware, then either the applicable Delaware limitations period applies, or that of the state where the cause of action did arise, whichever is shorter.

The Court then went through a very long and detailed analysis which concluded that Florida had the most significant relationship to the StoreSmart loan (or if not, then Delaware did). Thus, the Court would use the 4-year Florida limitations period as a guide to laches, which meant that the Plaintiffs' fraudulent transfer claims were time-barred.

But the Court noted that even if New York had applied, the Plaintiff's would still lose. Susan made her transfers to the trusts in January 2007, but the Plaintiffs didn't sue to set aside the fraudulent transfers until March, 2013 -- two months too late even under New York's longer 6-year limitations period.

ANALYSIS

More than anything else, this case illustrates the peril for lenders who have extended a loan in reliance on somebody's personal guarantee, and then they start seeing indications that the guarantor is transferring assets, i.e., taking the very chips off the table that the lender relied upon when making the loan in the first place.

Here TrustCo Bank had several indications that the Susan was transferring assets out of her name, but either didn't catch or ignored these indications (though, arguably, innocuous and obscure), and therefore was deemed to have slept on its rights.

This makes the instant decision one that is very important for bank counsel. They must be quite diligent in looking for any evidence that a guarantor has made transfers, and then immediately investigate further.

Somebody was sleeping on their watch for TrustCo. They received substantial information that Susan was transferring assets to the trusts as early as 2008, but apparently did nothing to investigate. Even when, by their own admission, TrustCo knew in July of 2011 that Susan had transferred assets to the trusts, they then sat on this information for over a year-and-a-half before quite belatedly (and too-latedly) filing the fraudulent transfer lawsuit in March of 2013.

I purposely didn't spend much time on the conflict-of-law issues, which were quite intense and discussed at long length in the Opinion. The reason I didn't spend much time on it was that these issues may soon become moot as more states adopt the Uniform Voidable Transactions Act (a/k/a the 2014 revisions to the Uniform Fraudulent Transfers Act), which has a new Section 10 that substantially simplifies the conflict-of-law rules in fraudulent transfer cases. In the future, the default rule in fraudulent transfer cases will be that the law of the state of the debtor's residence shall apply. Easy peasy lemon squeezy.

As a final note, some Delaware practitioners have made a big deal out of this case because it involved Delaware Asset Protection Trusts ("DAPTs"), which are irrevocable trusts that were self-settled, i.e., Susan settled the trusts, but also made herself the beneficiary. While that is technically true, this case was not at all about a creditor challenge against the trusts as being self-settled. Instead, as discussed, the creditor alleged that the transfers to the trusts were fraudulent transfers, which didn't have anything to do with the self-settled aspects of the trusts.

But you're likely to see this Opinion touted as supporting something it doesn't, what is known as "marketing fluff". There not just a little of that stuff out there in the asset protection sector.

Just a blizzard of it.

CITE AS:

TrustCo Bank v. Mathews, 2015 WL 295373 (Del.Ch., Jan. 22, 2015).

This article at http://onforb.es/1v7jqWH and http://goo.gl/NsdvzV