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“In re Erskine: Debtor Attempts to Exclude Assets Held in ‘Tennessee Asset Protection Trust’”

Steve Leimberg's Asset Protection Planning Newsletter By Philip V. Martino

“Erskine demonstrates a court’s willingness to consider the effectiveness of a validly structured asset protection trust as a restriction of a beneficiary/debtor's interest in bankruptcy. But it also shows the court will not stop there -- actual intent will also be examined in various contexts, including fraudulent transfer law and Section 548(e).

Arranging one’s affairs in a fashion that results in less assets for creditors makes good sense for estate and asset protection planning purposes. However, such planning has been viewed unfavorably in bankruptcy, where the theme has been to permit a ‘fresh start,’ but not a ‘head start.’”

David Slenn and Philip Martino give members their perspective on In re Erskine, providing a quick review of how bankruptcy trustees approach assets held in trust, as well as the issues raised in Erskine that can apply to future cases involving domestic asset protection trusts in bankruptcy. [i]

David Slenn is a senior associate in the Naples, Florida office of Quarles & Brady LLP, and is the current Chair of the American Bar Association's (ABA) Committee on Captive Insurance, Co-Chair of the ABA’s Non-Tax Considerations Group, and a former Co-Chair of the ABA’s Asset Protection Planning Committee. Dave was an ABA Advisor to the 2014 Amendments to the Uniform Voidable Transaction Act (formerly, the Uniform Fraudulent Transfer Act.) Dave concentrates his practice in estate and business planning. He has served as counsel for both debtors and creditors in situations involving the intersection between fraudulent transfer law and estate and asset protection planning.

Philip Martino is a partner at Quarles & Brady LLP, practicing in its Chicago and Tampa offices. He concentrates his practice in Commercial Bankruptcy and Commercial Litigation. He was bankruptcy counsel for the court appointed receiver seeking to locate and liquidate the assets of Paul Bilzerian. He has been a Chapter 11 and Chapter 7 trustee in the Northern District of Illinois for almost 25 years, and as trustee he has been involved in high profile cases ranging from failed land developers, to overburdened franchisors, to cornered Ponzi scheme perpetrators.

Now, Dave and Phil provide their perspective on this case:

EXECUTIVE SUMMARY:

In re Erskine was a potential heavyweight title fight between a bankruptcy trustee and the trustee of a purported asset protection trust (“APT”). The fight, however, was cancelled due to disqualification when it was discovered that the APT was nothing but a mere revocable trust. Whereas In re Huber featured a Washington bankruptcy trustee challenging the exclusion of assets held in an Alaska APT, Erskine featured a Tennessee bankruptcy trustee challenging the exclusion of assets held in an alleged Tennessee APT. Thus, there would be no distractions over the choice of law[ii] involving substantial relations[iii] and public policy[iv] in the Western District of Tennessee. Instead, the issue would have been whether a debtor could exclude assets in an APT via Section 541(c)(2)[v] and potentially register a win for the APT community.

While Erskine obviously can’t be claimed as a victory for APTs in the bankruptcy setting, it does underscore several takeaways. First, Erskine is a preview of how a bankruptcy court might approach an APT formed in the debtor’s domicile. Second, APTs are creatures of statute and should be carefully drafted in accordance with the statute to stand a chance in (or out of) bankruptcy. Third, regardless of whether the trust appears to qualify as an APT (and qualify for exclusion under 541(c)(2)), showing the absence of actual intent to hinder, delay or defraud a creditor (in various contexts) will most likely be a challenge -- and that fight will be in the Bankruptcy Court, where judges are used to finding ways to get around debtors’ creative attempts to avoid paying creditors.

FACTS:

Procedural and Substantive Background

In Erskine, the debtor filed for Chapter 7 in September 2015. At issue was whether debtor’s interest in a trust was included in debtor’s bankruptcy estate. Generally a beneficiary’s interest would be considered property of the debtor’s bankruptcy estate under Section 541(a). The phrase “property of the estate” has been interpreted very broadly[vi] and includes all legal or equitable interests of the debtor in property as of the commencement of the case.” However, if transfer of the debtor’s interest is restricted, that restriction, if effective under applicable non-bankruptcy law, would remain effective in bankruptcy.[vii]

In chapter 7, once a debtor files a voluntary petition, or an order for relief is entered in an involuntary petition, all of the debtor's rights in property (including all causes of action) become part of the bankruptcy estate, no matter where those assets are located or who holds them. A bankruptcy trustee is appointed and is charged with assembling and liquidating the debtor's property for the benefit of creditors.[viii] The Bankruptcy Code gives the trustee a number of ways to accomplish that objective, ranging from a motion and resultant turnover order if the asset is held by the debtor or a custodian;[ix] to a lawsuit (called an “Adversary Proceeding” if the uncooperative asset-holder is a third party);[x] to contempt of court should the debtor or third party refuse to honor a turnover order. Moreover, the Bankruptcy Code gives the trustee a number of substantive rights beyond those that a creditor may have under nonbankruptcy law.[xi] These powers vest the trustee with all rights that state law would give a judgment creditor, or a bona fide purchaser for value of real estate, and deem the trustee to have all of those rights as of the moment before the bankruptcy was filed, even if no such creditor existed in the real world.

In addition, the Bankruptcy Code creates substantive federal causes of action in favor of the trustee, including the power to recover fraudulent transfers that occurred within two years before the case was filed, the power to recover fraudulent transfers recoverable under state law (which often may extend the reachback period beyond years) the right to void preferential transfers that the debtor made (voluntarily or otherwise) to unsecured creditors within 90 days of the bankruptcy.[xii]

To give the trustee time to sort through the facts and identify assets to be liquidated, the Bankruptcy Code allows the trustee to request (and almost always receive) permission to take pre-litigation discovery of any party regarding "the acts, conduct, or property" of the debtor, claims against the debtor, or "any matter which may affect the administration of the debtor's estate . . . ."[xiii] Importantly, the automatic stay precludes any action affecting property of the estate, and voids any action taken by anyone (litigant, judge, or otherwise) after the case was filed irrespective of whether that person knew of the case.[xiv]

If that is not confusing enough, the Supreme Court has said that the debtor's rights in property in general are determined by state law.[xv] Somehow, those state-law-created property rights are to be interpreted in light of the additional rights that the Bankruptcy Code also created and vested exclusively in the trustee.

Simplifying an exceptionally complex situation, the bankruptcy trustee is given time to identify and prosecute any and all potential causes of action—whether pending or not—that state law or federal law would allow the debtor or a fictional creditor to bring against any party. All of those lawsuits are centralized in the district court in which the bankruptcy is pending, even if they already were pending in another venue. [xvi]

Superimposed over all the rights afforded the trustee are complex, and perhaps contradictory, jurisdictional issues arising because Congress decided not to give bankruptcy judges lifetime tenure, as the Constitution mandated for federal district court judges.

In re Erskine

Against that procedural and substantive backdrop, in Erskine, the bankruptcy trustee (“Trustee”) sought an order compelling turnover of property of debtor's estate, which included bank accounts held by an LLC that was owned by the trustee of The Robert Massey Erskine, Sr. Irrevocable Living Trust dated February 25, 2011 (the “Trust”). The debtor claimed the Trust was a Tennessee Asset Protection Trust ("TAPT") formed in accordance with the Tennessee Investment Services Act.

The Bankruptcy Court (W.D. Tennessee) had to decide whether the Trust qualified as a TAPT and, if it did, whether the assets in the Trust were excluded from his bankruptcy estate by virtue of Section 541(c)(2)’s exclusion of beneficial interests in a trust subject to restrictions on transfer enforceable under applicable nonbankruptcy law.[xvii]

Generally, a debtor’s interest in a self-settled trust would be included in the debtor’s bankruptcy estate as most states do not afford protection to the assets transferred by the settlor to the trust.[xviii] However, in 16 states (“APT state”), protection is afforded to the traditional asset protection trust, so long as the trust complies with the state law granting such protection.[xix] In prior bankruptcy cases involving APTs, the APT at issue did not qualify for exclusion for various reasons, including but not limited to choice of law pointing to a non-APT state, avoidance under fraudulent transfer law and Section 548(e).

If the Trust was a TAPT, the Trust assets, held by a valid and enforceable TAPT, would be eligible for exclusion from the bankruptcy estate under Section 541(c)(2). But even if the TAPT provided an applicable restriction under Tennessee law, that wasn’t the end of the story. Among other hurdles, the TAPT would then need to clear the 10 year claw back rule under Section 548(e).[xx]

The Erskine Trust Agreement

Upon a quick review of the Trust agreement, it is evident that the Trust was a plain vanilla revocable trust. The name of the trust was the “Robert Massey Erskine, Sr., [sic] dated February 25, 2011.” The “irrevocable” title came from the cover page and Section 2 of the Trust agreement, which provides the “irrevocable” title applies “[f]or purposes of beneficiary designations.”

The court held that the revocable trust was not a TAPT due to noncompliance with various requirements of the Tennessee Investment Services Act, such as revocability, absence of a spendthrift clause protecting the settlor’s interest, no qualified disposition due to the lack of a qualified affidavit, etc. So the Trust was a loser before the fight even started. The court could have ended the analysis after finding the Trust to be revocable, without proceeding to examine other aspects of the Trust that did not comply with the Tennessee APT statute.[xxi]

COMMENT:

Although the Trust failed to qualify as an APT under the Tennessee Investment Services Act, the court does raise some key issues that will exist with APTs regardless of whether choice of law is muddying the waters. The court went on to examine compliance with the various Tennessee Investment Services Act requirements as well as Section 548(e).

Qualified Affidavit Requirement: “It’s not fraudulent, I swear”

An asset protection trust statute might require an affidavit for contributions to the asset protection trust, where, for example, the settlor swears that the settlor is not rendered insolvent and does not intend to defraud a creditor by transferring the assets to the trust. The comments to Tenn. Code Ann. § 35-16-102 provide that “[r]equiring the Transferor to execute a ‘Qualified Affidavit”’ prior to making a transfer of property to an Investment Services Trust reinforces the notion that fraudulent conveyances will not be effective to avoid creditors.”[xxii] Thus, failure to execute the affidavit prior to a contribution could prevent a trust from qualifying as an asset protection trust and prevent exclusion of a beneficial interest in bankruptcy:

The Debtor argues that the lack of a qualified affidavit is not fatal to his position. The Debtor's argument is puzzling. He says that the Trust Agreement only requires an initial funding of $10. Because this amount is minimal, he says that the required affidavit could be supplied now. If the Trust holds only $10 and does not hold the membership interest in Elite LLC, then there is nothing to talk about. If the Trust does hold the membership interest, but the qualified affidavit was not supplied prior to the transfer of funds necessary to obtain the membership interest to it, then the transfer of those funds is not a “qualified disposition.” Tenn.Code Ann. § 35–16–002(11). In re Erskine, 2016 WL 1644483, at *6 (Bankr. W.D. Tenn. Apr. 11, 2016)

Not surprisingly, the affidavit requirement has been criticized on the ground that executing affidavits for contributions to a trust might be overlooked.[xxiii]

Actual Fraud & Fraudulent Transfer

In addition to satisfying APT requirements,[xxiv] the affidavit has been used to defend against fraudulent transfer claims.[xxv] Such was the case in In re Niroomand, where the court accepted the affidavit as some evidence that no fraudulent transfer occurred:

As to the constructive fraud, fraudulent transfer, the Court thinks it's abundantly clear that there's been no establishment of insolvency. In fact, the record is abundant with records of solvency. The witness signed a solvency affidavit, which she said she did not read, but the Court notes—noted that the witness could remember some things in the way of financial numbers of a rather complicated structure down to the penny, and other things, she couldn't remember at all. In re Niroomand, 493 F. App'x 11, 13 (11th Cir. 2012).

What the court did not examine (or did not find, based on what was submitted) in Niroomand were other facts and circumstances, aside from the debtor’s solvency, that can show actual fraud.[xxvi] Relying on solvency as the sole factor in determining whether a transfer is voidable has its appeal; the test is perceived to be mechanical and straightforward.[xxvii] Solvency is relevant to both actual and constructive fraud claims (solvency being an element under an UFTA/UVTA Section 5(a) constructive fraud claim), and under UFTA/UVTA Section 4(b) as indirect evidence of actual intent (aka "badges of fraud").

But while solvency might foreclose an UFTA/UVTA Section 5(a) claim, it will not rule out an UFTA/UVTA Section 4 claim. The court in Erskine implied that even if the debtor executed an affidavit, such a document would not obviate the necessity of analyzing other facts and circumstances. Additionally, in Erskine, the value of a properly executed affidavit would be discounted given the settlor’s bankruptcy history.[xxviii]

Actual Fraud & Bankruptcy’s 10 Year Clawback

Under 548(e), if a debtor makes a transfer to a self-settled trust with actual intent to hinder, delay or defraud creditors, the bankruptcy trustee may avoid the transfer if it was made within 10 years before the date of filing the bankruptcy petition.[xxix]

Actual fraud may be shown by reference to the "badges of fraud," some of which are listed in UFTA/UVTA Section 4(b).[xxx] An affidavit signed by the settlor indicating that the settlor had no intent to hinder creditors is relevant (albeit self-serving) but just one factor to consider.[xxxi] In Erskine, the court acknowledges that a solvency affidavit may negate "some of" the badges of fraud:

The Tennessee Investment Services Act incorporates the negation of some of these badges of fraud into the Qualified Affidavit required before a transfer is made. Among those that are particularly relevant here are the obligation to affirm that the transfer of assets will not render the transferor insolvent; to affirm that there are no pending or threatened court actions taken against the transferor; and to affirm that the transferor does not contemplate filing for relief under the federal bankruptcy code. Tenn.Code Ann. § 35–16–103. The Debtor admits that a Qualifying Affidavit was not signed prior to the transfer of property to the Trust. Based upon his own admissions arising as the result of his prior bankruptcy filings, it does not appear that he could have given truthful responses in a Qualified Affidavit prior to the creation of the Trust.

Courts have used a settlor’s expressions, including emails and the trust agreement, as evidence of intent to defraud, despite state law prohibiting usage of such expressions in determining actual intent.[xxxii] So, regardless of whether the transfers to the trust were "qualified" transfers to a TAPT (and potentially trigger exclusion under Section 541(c)(2)), the trustee can always argue for avoidance under Section 548(e).

Actual Fraud and Denial of Discharge

Under Section 523(a)(2)(A), a bankruptcy court may deny a discharge of a debtor’s liabilities to the extent assets are obtained via “false pretenses, a false representation, or actual fraud.” In Husky Int'l Elecs., Inc. v. Ritz, the Supreme Court held that a debtor does not have to make a misrepresentation to the creditor. Instead, “the term “actual fraud” in Section 523(a)(2)(A) encompasses forms of fraud, like fraudulent conveyance schemes, that can be effected without a false representation.”[xxxiii] Thus, the conduct giving rise to avoidance due to fraudulent transfer or Section 548(e) may also result in the denial of the debtor’s discharge under Section 523(a).

Erskine demonstrates a court’s willingness to consider the effectiveness of a validly structured asset protection trust as a restriction of a beneficiary/debtor's interest in bankruptcy. But it also shows the court will not stop there -- actual intent will also be examined in various contexts, including fraudulent transfer law and Section 548(e).

Arranging one’s affairs in a fashion that results in less assets for creditors makes good sense for estate and asset protection planning purposes. However, such planning has been viewed unfavorably in bankruptcy, where the theme has been to permit a “fresh start,” but not a “head start.”[xxxiv]

HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE DIFFERENCE!

David Slenn

Philip Martino

TECHNICAL EDITOR: DUNCAN OSBORNE

CITE AS:

LISI Asset Protection Newsletter #324 (June 14, 2016) at http://www.leimbergservices.com Copyright 2016 Leimberg Information Services, Inc. (LISI). Reproduction in Any Form or Forwarding to Any Person Prohibited – Without Express Permission.

CITE AS:

In re Erskine, No. 15-28841-L, 2016 WL 1644483, at *1 (Bankr. W.D. Tenn. Apr. 11, 2016).

CITATIONS:

[i] The opinions expressed are those of the authors and do not necessarily reflect the views of Quarles & Brady LLP or its clients. This commentary is for general information purposes and is not intended to be and should not be taken as legal advice.

[ii] See In re Huber, 493 B.R. 798, 808 (Bankr. W.D. Wash. 2013). (““In federal question cases with exclusive jurisdiction in federal court, such as bankruptcy, the court should apply federal, not forum state, choice of law rules.” Lindsay v. Beneficial Reinsurance Co. (In re Lindsay), 59 F.3d 942, 948 (9th Cir.1995). In applying federal choice of law rules, courts in the Ninth Circuit follow the approach of the Restatement (Second) of Conflict of Laws (1971) (Restatement). Liberty Tool & Mfg. v. Vortex Fishing Sys., Inc. (In re Vortex Fishing Sys., Inc.), 277 F.3d 1057, 1069 (9th Cir.2002).”).

[iii] Id. at 808. (“Under the Restatement, the Debtor's choice of Alaska law designated in the Trust should be upheld if Alaska has a substantial relation to the Trust. Restatement § 270(a). Comment b provides that “a state has a substantial relation to a trust if at the time the trust is created: (1) the trustee or settlor is domiciled in the state; (2) the assets are located in the state; and (3) the beneficiaries are domiciled in the state. These contacts with the state are not exclusive.” In re Zukerkorn, 484 B.R. 182, 192 (9th Cir. BAP 2012). In the instant case, it is undisputed that at the time the Trust was created, the settlor was not domiciled in Alaska, the assets were not located in Alaska, and the beneficiaries were not domiciled in Alaska. The only relation to Alaska was that it was the location in which the Trust was to be administered and the location of one of the trustees, AUSA.”) For discussion on how to establish a more substantial relationship with an APT state, see Jonathan D. Blattmachr & Jonathan G. Blattmachr on In re Huber: Alaska Self-Settled Trust Held Subject to Claims of Creditors of Grantor-Beneficiary, LISI Asset Protection Planning Newsletter #225 (May 22, 2013).

[iv] Id. at 809. (“Washington State has a strong public policy against self-settled asset protection trusts. Specifically, pursuant to RCW 19.36.020, transfers made to self-settled trusts are void as against existing or future creditors. Carroll v. Carroll, 18 Wash.2d 171, 175, 138 P.2d 653 (1943). This statute has been in existence for well over a century, as it was first enacted in 1854. This policy is consistent with those in other states. For instance, in Marine Midland Bank v. Portnoy (In re Portnoy), 201 B.R. 685, 701 (Bankr.S.D.N.Y.1996), the bankruptcy court considered the public policy of New York against self-settled trusts when determining a choice of law issue: “Portnoy may not unilaterally remove the characterization of property as his simply by incorporating a favorable choice of law provision into a self-settled trust of which he is the primary beneficiary. Equity would not countenance such a practice.” As with New York, Washington has a policy that a debtor should not be able to escape the claims of his creditors by utilizing a spendthrift trust. Thus, in accordance with § 270 of the Restatement, this Court will disregard the settlor's choice of Alaska law, which is obviously more favorable to him, and will apply Washington law in determining the Trustee's claim regarding validity of the Trust.”).

[v] All references to the term “Section” refer to the relevant section of Title 11 of the United States Code also referred to as the Bankruptcy Code.

[vi] See United States v. Whiting Pools, Inc., 462 U.S. 198 (1983). (“The statutory language reflects this view of the scope of the estate. As noted above, § 541(a) provides that the “estate is comprised of all the following property, wherever located: ... all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1).8 The House and Senate Reports *205 on the Bankruptcy Code indicate that § 541(a)(1)'s scope is broad.”

[vii] See In re Nichols, 434 B.R. 906, 909 (Bankr. M.D. Fla. 2010).

[viii] Sections 701 and 704.

[ix] Sections 542 and 543.

[x] Bankruptcy Rule 7001.

[xi] Section 544.

[xii] Sections 544(b), 548, 547 and 549.

[xiii] Bankruptcy Rule 2004.

[xiv] Section 362.

[xv] See Butner v. United States, 440 U.S. 48 (U.S. 1979).

[xvi] Sections 546, 550, and 305, and Bankruptcy Rule 9027.

[xvii] 11 U.S.C.A. § 541(c)(1) provides “Except as provided in paragraph (2) of this subsection, an interest of the debtor in property becomes property of the estate under subsection (a)(1), (a)(2), or (a)(5) of this section notwithstanding any provision in an agreement, transfer instrument, or applicable nonbankruptcy law…” Paragraph (2) refers to § 541(c)(2), which provides, “A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title.”

[xviii] See comment to Tenn. Code Ann. § 35-16-101. (T.C.A. § 35-15-505 generally allows creditors of the settlor to reach assets transferred by a settlor to a trust of which he or she is a beneficiary. The Tennessee Services Investment Act of 2007 establishes an exception to this rule by authorizing the creation of self-settled trusts that are exempt from the settlor's creditors if certain conditions are met. A growing number of states authorize the creation of these types of trusts, sometimes referred to as “domestic asset protection trusts.”) See also, Walker v. Weese, 286 B.R. 294, 298 (D. Md. 2002). (“If the Trust is self-settled and void under the applicable law, then the transfer would be ineffective and this action could be resolved with little need for a finder of fact. Sattin v. Brooks (In re Brooks), 217 B.R. 98, 103 (Bankr.D.Conn.1998) (determining on summary judgment that trusts were self-settled); Cameron, 223 B.R. at 25 (determining on summary judgment that trust was self-settled and subject to turnover obligation).”

[xix] Per the Comment to Tenn. Code Ann. § 35-16-101, “T.C.A. § 35-15-505 generally allows creditors of the settlor to reach assets transferred by a settlor to a trust of which he or she is a beneficiary. The Tennessee Services Investment Act of 2007 establishes an exception to this rule by authorizing the creation of self-settled trusts that are exempt from the settlor's creditors if certain conditions are met. A growing number of states authorize the creation of these types of trusts, sometimes referred to as ‘domestic asset protection trusts.’”

[xx] There are other arguments available to void such a transfer or structure. Section 548(e) may be applied to transfers “[i]n addition to any transfer that the trustee may otherwise avoid.”

[xxi] Once a court finds the trust is revocable, it could end the analysis without turning to Section 548(e). Presumably the existence of a cover page that erroneously referred to the Trust as irrevocable despite the terms of the trust prompted the court to engage in further analysis. See In re Pollack, No. AP 15-1037-BAH, 2016 WL 270012, at *5 (Bankr. D.N.H. Jan. 20, 2016). (“The record does not support a finding that the NH Revocable Trust is a “self-settled trust or similar device” under the Bankruptcy Code. “A self-settled trust has been defined as ‘[a] trust in which the settlor is also the person who is to receive the benefits from the trust, usually set up in an attempt to protect the trust assets creditors.’ ” Id. at 561; see H.R.Rep. No. 109–31, 109th Cong., 1st Sess. 449–50 (2005) (statement of Rep. Cannon) (explaining that a self-settled trust is a trust created by a person for his or her own benefit with a provision restraining the voluntary or involuntary transfer of the person's interest) (quoted in 5 Collier on Bankruptcy ¶ 548.07 [3][a] n.4). The record is clear that the NH Revocable Trust is not an irrevocable trust or a spendthrift trust. It does not contain any provisions that would restrict the trustee's ability to make distributions or that would protect the trust assets from claims of creditors. The Trustee conceded as much during his counsel's closing argument.”)

[xxii] The comments suggest that “going through the motions” and signing an affidavit will not suffice; one must actually be solvent after the transfer, and must not have the intent to defraud creditors. Thus, in cases where the settlor of a trust relies on an advisor in creating and funding the trust, the advisor assisting with the transfer must understand, among other things, how to calculate solvency and how intent has been defined and applied under applicable fraudulent transfer law. See generally, Jonathan D. Blattmachr & Jonathan G. Blattmachr on In re Huber: Alaska Self-Settled Trust Held Subject to Claims of Creditors of Grantor-Beneficiary, LISI Asset Protection Planning Newsletter #225 (May 22, 2013). (“Based upon the facts recited in Huber, it seems questionable whether the Debtor could have signed such an affidavit. And if the settlor did not sign one, the trust would never have been entitled to the spendthrift protection under Alaska law. Hence, if the Debtor in Huber did not signed the affidavit before creating the trust, it would not have been necessary for the court to analyze the matter as it did to find the Trust was not valid. But the court does not discuss that.”).

[xxiii] See Steve Oshins Releases 7th Annual Domestic Asset Protection Trust State Rankings Chart...with Links to Statutes! LISI Asset Protection Newsletter #318 (April 5, 2016), where the requirement results in a penalty for the APT state in domestic APT rankings. “This might be the most important of all of the variables. As long as the advisor gives the client specific instructions and the client does, in fact, follow them, this isn’t a problem at all. But, especially for those clients who will make numerous additional transfers to the DAPT, they are likely better off using a jurisdiction that doesn’t require a new Affidavit of Solvency for each new transfer. Failure to comply with the state statute can mean that the new transfer to the DAPT is not protected.”

[xxiv] The requirements for an APT vary by state. Some requirements are more debtor-friendly than others when it comes to compliance with APT requirements. Compare Utah Code Ann. § 25-6-14(5)(m)(iii) with Tenn. Code Ann. § 35-16-103(3) for a subtle, pro-debtor difference.

[xxv] Presumably, the settlor executes the affidavit with an understanding of what actual fraud means with respect to a creditor for fraudulent transfer/voidable transaction purposes.

[xxvi] Actual “fraud” need not involve fraud. See Empire Lighting Fixture Co. v. Practical Lighting Fixture Co., 20 F.2d 295, 297 (2d Cir. 1927). (“An intent to delay and hinder creditors is as much within the statute as an intent to defraud them, and, if it exist, it is of no moment that the grantor be solvent.”

[xxvii] Regardless of the protection afforded to the debtor/client, the affidavit might help the attorney who assists with the transfers. See Jay Adkisson on Goldberg v. Rosen: The Effectiveness of Affidavits of Solvency, LISI Asset Protection Planning Newsletter #213 (November 28, 2012). (“There has, however, been general agreement that whether or not Affidavits of Solvency protect the debtor, they can still be very useful to protect the planner from such claims as the Bankruptcy Trustee asserted here. This Opinion is proof positive of that benefit.”).

[xxviii] Again, the court could have pointed to the fact that the trust was revocable and not address every failed requirement in the APT statute.

[xxix] See In re Huber, 493 B.R. 798, 814 (Bankr. W.D. Wash. 2013). (“Accordingly, the evidence presented by the Trustee supports an inference of actual fraudulent intent by the Debtor to hinder, delay, or defraud his current or future creditors, in violation of § 548(e)(1)(D). The Trustee is entitled to summary judgment on this claim as a matter of law.”).

[xxx] Note that the badges of fraud (adopted as part of the fraudulent transfer statute) address a common estate planning transaction, transfers to insiders for no consideration, a fact pattern often encompassing gifting. While the badges of fraud are statutory provisions (as opposed, for example, to an Official Comment), gifting has not disappeared and remains one of the most common forms of estate planning.

[xxxi] In a fraudulent transfer analysis, evidence of solvency would help preserve a transfer in a Section 5(a) action, but would not foreclose a creditor attack under other applicable sections of the UFTA/UVTA or otherwise.

[xxxii] See In re Mortensen, No. A09-00565-DMD, 2011 WL 5025249, at *7 (Bankr. D. Alaska May 26, 2011). (“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, AS 34.40.110(b)(1) cannot compel a different conclusion. To establish an avoidable transfer under § 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.54 Here, the trust's express purpose was to hinder, delay and defraud present and future creditors.”) See also, Huber at 805. (“Correspondence after drafting the Trust document acknowledges that one of the Debtor's principal goals for creating the Trust was to “protect a portion of [the Debtor's] assets from [his] creditors.” In a number of emails between the Debtor and Mr. Snow, the Debtor expressed urgency in setting up the Trust.”)

[xxxiii] See Husky Int'l Elecs., Inc. v. Ritz, 136 S. Ct. 1581, 1586 (2016).

[xxxiv] See In re Vangen, 334 B.R. 241, 245 (Bankr. W.D. Wis. 2005). (“[B]ankruptcy relief is intended to afford the “honest but unfortunate” debtor with the proverbial “fresh start.” See Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 659, 112 L.Ed.2d 755 (1991). Part of that fresh start is the notion that a debtor may retain certain assets in order to begin a new financial life. However, the law also recognizes that there is a point at which the fresh start becomes an impermissible “head start.” The question before the Court is whether the debtor has crossed the line into that forbidden territory.”) Perhaps the head start is no longer a “start” if 10 years has passed pursuant to Section 548(e).

Reproduced Courtesy of Leimberg Information Services, Inc. (LISI)

Originally published in Steve Leimberg's Asset Protection Planning Newsletter, June 14, 2016

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