Asset-protection planning using Domestic Asset Protection Trusts (DAPTs) just got a whole lot riskier after the recent Bankruptcy Court decision in Battley v. Mortensen. The Alaska court held that assets in an Alaska Asset Protection Trust were fair game for creditors, despite the fact that the trust’s settlor was solvent at the time he formed and settled the trust. [Battley v. Mortensen, Adv. D.Alaska, No. A09-90036-DMD (May 26, 2011)].
Thomas William Mortensen was an Alaska resident who settled a self-settled Alaska DAPT in 2005 for the benefit of himself and his heirs. He funded the trust with $80,000 in cash and property worth $60,000. After settling the trust, he accrued $250,000 in credit card debt, hospital bills, and debts stemming from bad investments.
In 2009, Mortensen filed for Chapter 7 bankruptcy. He didn’t declare the DAPT’s trust assets as part of his bankruptcy estate. The bankruptcy trustee became aware of the trust’s existence and brought an action in Bankruptcy Court to set aside Mortensen’s transfers to the trust as fraudulent transfers.
The trustee claimed Mortensen was insolvent at the time the trust was settled. The court disagreed. But the trustee argued in the alternative that Mortensen’s settling of the trust was done with the intent to protect the assets from future creditors, opening up the trust to attack under the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) (the bankruptcy overhaul passed in 2005).
The Anti-DAPT Section of BAPCPA
Under Bankruptcy Code Section 548, the bankruptcy trustee has the power to void “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:
- such transfer was made to a self- settled trust or similar device;
- such transfer was by the debtor;
- the debtor is a beneficiary of such trust or similar device; and
- 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.”
In sum, a transfer within the last 10 years can be voided by the trustee “when property is transferred to a self-settled trust with the intention of protecting it from creditors.” Mortensen argued that creation of the trust should not be viewed as evidence of a fraudulent transfer. The court disagreed, holding that the trust’s express asset protection purpose could be viewed as evidence of fraudulent intent.
The voiding of transactions entered into with the purpose of defrauding current creditors is common in debtor-creditor law, but BAPCPA extends creditor protection by voiding transfers that were made with the intent to protect assets from future creditors.
Applying Section 548 to the Mortensen case, the court ruled the Alaska DAPT was void and that the trust assets were part of the bankruptcy estate. As a result, those assets could be liquidated to satisfy Mortensen’s creditors—directly obviating the purpose for which the trust was formed.