Alaska Supreme Court Takes a Wack at their Domestic Asset Protection Trust Statutes

The Alaska Supreme Court ruled that Alaska does not have exclusive jurisdiction to hear claims of whether conveyances to an Alaska domestic asset protection trust (“DAPT”) were fraudulent transfers. In Toni 1 Trust v. Wacker, 2018 WL 1125033 (Alaska, Mar. 2, 2018), as judgments were being entered against them, Bertran and Barbara Tangwall transferred Montana real property to an Alaska DAPT.  The Wackers filed a fraudulent transfer claim in Montana to reach the property transferred to the DAPT and, after the debtors failed to respond, obtained a default judgment.  The creditor was able to obtain judicial sale of Barbara Tangwall’s interest in the property before any further actions were taken.  However, before the creditor could proceed, Donald Tangwall, trustee of the DAPT, filed Chapter 7 bankruptcy in Alaska.

In bankruptcy court, Donald claimed that only Alaska state court has jurisdiction to determine whether a conveyance to an Alaska DAPT is a fraudulent transfer, thereby voiding the Montana default judgements.  Alaska statutes, at AS 34.40.110(k), purport to assert such jurisdiction.  Donald’s attempt at bankruptcy relief backfired when the bankruptcy trustee counterclaimed that the transfers into the DAPT were fraudulent transfers under federal bankruptcy law.  The bankruptcy court quickly dispensed with Wacker’s argument, noting that §548 of the Bankruptcy Code applies.  The bankruptcy trustee was able to get control of the remaining property to satisfy Wacker’s creditors.

Not to be deterred, Wacker sought a declaratory judgment in Alaska state court that only Alaska law applies to determine a fraudulent conveyance into an Alaska DAPT.  The case ended up in the Alaska Supreme Court which decided that Alaska, regardless of its statutes, cannot limit the ability of other states when they have personal jurisdiction. Therefore, as long as another state has personal jurisdiction, its laws can apply to determining whether a fraudulent conveyance has occurred in the funding of an Alaska DAPT.

At least one commentator, Jay Adkinsson, has called this case “the last nail in the DAPT coffin for use in non-DAPT states.”1 He states that “DAPTs do not work if the settlor is not a resident of a DAPT state, or is subject to personal jurisdiction in a non-DAPT state.”2 Is this true?  Another commentator, Steve Oshins, concludes that the real question raised is what state’s fraudulent transfer laws apply when there is personal jurisdiction in another state.3 The Alaska court held that Alaska cannot claim exclusive jurisdiction.  However, Oshins points out that the funding of the trust would have been a fraudulent transfer under Alaska law anyway.4

There were at least two primary mistakes made here.  First, the DAPT was funded through a fraudulent transfer.  Certainly, anyone engaging in a fraudulent transfer, even to a DAPT, should not expect to succeed in avoiding his or her creditors.  Second, the DAPT trustee filed bankruptcy.  Clearly, §548 of the Bankruptcy Code applies in bankruptcy court to determine whether a fraudulent transfer has occurred.  Therefore, not only will the bankruptcy court’s laws apply, but those laws provide a 10 year statute of limitations on avoiding transfers to a DAPT.  Voluntarily subjecting the issue to the bankruptcy court was not a good idea.

In the end, what does this mean for DAPTs?  Although DAPT states may purport to hold exclusive jurisdiction, that may not be the case when another state has personal jurisdiction over the debtor.  This includes the bankruptcy court and its 10 year statute of limitations to challenge transfers.  However, as long as the DAPT funding is not voidable (whether in the DAPT state or otherwise) or the statute of limitations to contest transfers has passed, it appears this case does not damage the usefulness of DAPT planning.  Funding a DAPT while judgements are actively being entered is not likely to succeed. It does not appear the Wacker opinion changes the landscape substantially, instead it illustrates the importance of proactive planning before the need for the asset protection plan arises.

Reflecting on the results of the Wacker, Mississippi residents considering asset protection may take comfort in knowing that Mississippi is a DAPT state having enacted its own DAPT statutes in 2014. As such, many of the concerns from Wacker are immediately addressed because the Mississippi settlor of the Mississippi DAPT would be a resident of the DAPT state.

S. Gray Edmondson, J.D., LL.M.

Gray practices in the areas of tax, business, and estate planning. View Full Profile.

Footnotes

  1. Jay Adkinsson, Alaska Supreme Court Hammers Last Nail In DAPT Coffin For Use In Non-DAPT States In Toni 1 Trust, FORBES (March 5, 2008, 10:08 PM) https://www.forbes.com/forbes/welcome/?toURL=https://www.forbes.com/sites/jayadkisson/2018/03/05/alaska-supreme-court-hammers-last-nail-in-dapt-coffin-for-use-in-non-dapt-states-in-toni-1-trust/
  2. Id.
  3. Steve Oshins, Steve Oshins on Toni 1 Trust v. Wacker – DAPT Fraudulent Transfer Statutes Not Exclusive, But Yet Again No Discussion about Whether Non-Resident Can Use a DAPT, Steve Leimberg’s Asset Protection Planning Newsletter Issue:360 (March 6, 2018).
  4. Id.