Battley v. Mortensen, Adv. D.Alaska, No. A09-90036-DMD, May 26, 2011 (Original Memorandum) and July 18, 2011 (Memorandum Denying Motion For Reconsideration). Opinion at http://goo.gl/7gWjA
In 2005, an Alaska resident, Mortensen, who was solvent and liquid at the time, settled a self-settled Alaska Domestic Asset Protection Trust ("DAPT" or "APT") for his own benefit and the benefit of his heirs, and contributed a $60,000 piece of property to the trust, along with $80,000 in cash that was a gift from his mother.
In 2009, having after 2005 incurred more than $250,000 in credit card and other debts from bad investments and hospitalization, Mortensen filed for Chapter 7 bankruptcy, but did not declare the assets in his trust as part of his bankruptcy estate. The Bankruptcy Trustee brought an adversary action against Mortensen, the two trustees of Mortensen's trust, and Mortensen's mother who was the protector of the trust.
The Bankruptcy Trustee attacked the trust claiming that Mortensen was really insolvent when he settled the trust, in violation of Alaska law, and the Court rejected this contention finding that Mortensen clearly was solvent at the time the trust was settled.
Alternatively, the Bankruptcy Trustee claimed that because Mortensen settled his trust with the intent to protect the trust asset from potential creditors, the transfers to the trust should be avoided under new Bankruptcy Code section 548(e), which was adopted as part of the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA") in 2005. The Court agreed with the Bankruptcy Trustee on this point, and voided the transfers to the APT.
11 U.S.C. sec. 548 provides at subsection (e) that:
(e)(1) In addition to any transfer that the trustee may otherwise avoid, the trustee may avoid any transfer of an interest of the debtor in property that was made on or within 10 years before the date of the filing of the petition, if –
(A) such transfer was made to a self- settled trust or similar device;
(B) such transfer was by the debtor;
(C) the debtor is a beneficiary of such trust or similar device; and
(D) the debtor made such transfer 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, indebted.
Upon this section, the Court commented that:
Section 548(e) was added to the Bankruptcy Code in 2005, as part of the Bankruptcy Abuse Prevention and Consumer Protection Act. Section 548(e) 'closes the self-settled trusts loophole' and was directed at the five states that permitted such trusts, including Alaska. Its main function 'is to provide the estate representative with an extended reachback period for certain types of transfers.' However, the 'actual intent' requirement found in sec. 548(e)(1)(D) is identical to the standard found in sec. 548(a)(1)(A) for setting aside other fraudulent transfers and obligations.
* * *
Congress has codified a federal interest which requires a different result. * * * Section 548(e) was enacted to close this 'self-settled trust loophole.' . . ..
It would be a very odd result for a court interpreting a federal statute aimed at closing a loophole to apply the state law that permits it. I conclude that a settlor's expressed intention to protect assets placed into a self-settled trust from a beneficiary's potential future creditors can be evidence of an intent to defraud. In this bankruptcy proceeding, [Alaska law] cannot compel a different conclusion.
To establish an avoidable transfer under sec. 548(e), the trustee must show that the debtor made the transfer with the actual intent to hinder, delay and defraud present or future creditors by a preponderance of the evidence. Here, the trust's express purpose was to hinder, delay and defraud present and future creditors. However, there is additional evidence which demonstrates that Mortensen's transfer of the property to the trust was made with the intent to hinder, delay and defraud present and future creditors.
* * *
The bottom line for Mr. Mortensen is that he attempted a clever but fundamentally flawed scheme to avoid exposure to his creditors. When he created the trust in 2005, he failed to recognize the danger posed by the Bankruptcy Abuse Protection and Consumer Protection Act, which was enacted later that year. Mortensen will now pay the price for his actions. His transfer of [his] property to the Mortensen Seldovia Trust will be avoided.
On Motion to Reconsider, the Court made it crystal-clear that it was the intent of the Trust to protect assets from creditors that caused the Trust to fail:
when property is transferred to a self-settled trust with the intention of protecting it from creditors, and the trust's express purpose is to protect that asset from creditors, both the trust and the transfer manifest the same intent. In this case, I found that the trust's express purpose could provide evidence of fraudulent intent. However, it was not the only evidence upon which I based my decision.
The Court also again ruled -- for a second time -- that Mortensen was solvent when he settled the Trust (so this case is absolutely not a solvency or "debtor already in distress" case).
After Mortensen's Motion to Reconsider failed, he filed an appeal, and then the case settled before the appeal could be heard.
So, as we sit here today, the Mortensen opinion basically says that under Bankruptcy Code section 548(e), Asset Protection Trusts do not provide protection in bankruptcy for a period of at least 10 years from the date the Trust was settled, where a purpose of the trust was to protect the trust assets from creditors of the settlor/beneficiary.
Will Mortensen be followed by other courts? If so, it may be the start of the death of the entire Domestic Asset Protection Trust industry -- and that is not hyperbole. (But note that this decision applies to Foreign Asset Protection Trusts too). So stay tuned.
Full Opinion at http://goo.gl/7gWjA
This article at http://onforb.es/oY7ypy and http://goo.gl/1TPMn
