In 2009, our client, Todd H., transferred his home and some cash to a 541 Trust™ at a time when they were solvent and had no foreseeable liability problems. Todd’s wife was the trustee, and his wife and children were the beneficiaries. In 2010, Todd’s business went downhill along with the rest of the US economy. In 2011, Todd’s small business when bankrupt and he was also forced into personal bankruptcy. The transfer of the home to the 541 Trust™ was fully disclosed to the bankruptcy court, but the bankruptcy court excluded the trust and its assets pursuant to the federal bankruptcy code which provides that this type of trust is excluded from the bankruptcy estate. After losing everything else they owned in the bankruptcy, Todd’s family continues to live in the paid-off home that is owned by the 541 Trust™.
Tag Archives: Asset Protection
Wilshire Credit v. Karlin – Irrevocable Trust Protects Home Despite Partial Rent Payments
988 F.Supp. 570 (1997)
WILSHIRE CREDIT CORPORATION, Plaintiff,
v.
Stanley KARLIN, et al., Defendants.
No. Civ.A. AW 96-943.
United States District Court, D. Maryland, Southern Division.
December 8, 1997.
571*571 William A. Isaacson, Washington, DC, for Wilshire Credit Corp.
Yale L. Goldberg, Bethesda, MD, M. Michael Cramer, Benjamin A. Klopman, Rockville, MD, for Stanley Karlin, Robert Dawson.
MEMORANDUM OPINION
WILLIAMS, District Judge.
I
Presently before the Court are cross-motions for summary judgment. In ruling on the motions, the Court has considered the briefs of the parties, the arguments of counsel at a hearing in open court, and the entire record.
572*572 II
Allan and Mary Rozansky (hereinafter sometimes “the Rozanskys”, and “the settlors”) established a trust for the benefit of their two minor children on July 21, 1982. The children, and any other future lineal descendants of the Rozanskys, are the sole beneficiaries of the trust. The trustees are Stanley Karlin, a former neighbor of the Rozanskys, and Robert Dawson, Mary Rozansky’s brother. The trust vests the trustees with discretion to distribute funds for the benefit of the beneficiaries during the life-time of the settlors.[1] Upon the death of the settlors, the trust is to be distributed equally among the beneficiaries so long as they are at least 25 years old. Because the trustees hold legal title and the beneficiaries hold equitable title to the trust, the Rozanskys have no remaining legally recognizable property interest. The trust is irrevocable, and cannot be modified in any fashion by either settlor.
When the trust was created, its sole asset was the home of the Rozanskys. The Rozanskys retained a life estate, but transferred the remainder interest to the trust. In 1992, the trust purchased the Rozanskys life estate for $50,000. Thus, the trust owns a complete interest in the home (subject to its mortgage). The settlors are tenants of the trust, and pay “rent” which covers the cost of the monthly mortgage, insurance, and other related expenses. The trustee Karlin, who authorized the transaction, concedes that the decision to purchase the life estate was made at the direction of the Rozanskys. No alternative investments were considered and no one other than the Rozanskys was consulted respecting the prudence of the investment. In setting the rent to be paid by the settlors, Karlin never took into account any factor other than the fact that the payment would equal the monthly mortgage.
In 1994, the trust acquired a $695,000 beach home in Delaware which the Rozanskys used for vacations. Karlin, the trustee who authorized the purchase, again did so at the request of the settlors. Karlin had never seen the home before the transaction. The trust also purchased furniture for the beach home for $20,000. Because the trust did not have cash assets, the purchase was financed by refinancing the mortgage on the existing home. The Rozanskys’ rent payments were increased to match the increased mortgage payments. These actions were all taken at the direction of the settlors.
In 1995, the beach home was sold. This action was taken because Karlin was told by the Rozanskys that they could not afford to pay the rent on the two homes. The Rozanskys themselves found the realtor and handled the sale of the beach home; the trustees never spoke with the realtor. The beach house was finally sold for approximately the same price as its initial purchase, excluding realtor fees and other closing costs. After the sale, the trust held a cash balance of approximately $144,000.
Since the sale of the beach home, the Rozanskys have defaulted on rental payments owed to the trust. The Rozanskys have executed promissory notes to the trust. However, the notes provided no date of repayment, and thus far no repayment has been made. The trust has dissipated the $144,000 in cash making mortgage payments. Thus, the trust has accumulated no investment or cash assets for the benefit of the children. The only money the trust has ever paid for the support of the children was a summer camp bill of less than one thousand dollars. According to the trustees, at no time has any of the property belonging to the trust been disbursed to the Rozanskys. According to Trustee Karlin, major decisions regarding the management of the trust property were made with the benefit of independent professional advice. The trustees admit that certain of the acts taken on behalf of the trust were undertaken at the direction of the settlors. While the trustees appear to have acted at times at the direction of the Rozanskys, the Plaintiff makes no allegation that the Rozanskys’ conveyances of the property held by the trust were fraudulent.
Plaintiff, the successor in interest to a creditor of the Rozanskys, secured a stipulated 573*573 judgment against them on July 16, 1990, in the amount of approximately $1.7 million.
III
A.
The parties have filed cross-motions for summary judgment. Summary judgment is appropriate where there is no genuine dispute of material fact and when the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986). The evidence of the non movant is to be believed and all justifiable inferences drawn in his favor, but a party cannot create a genuine dispute of material fact through mere speculation or compilation of inferences. Runnebaum v. NationsBank of Md., N.A., 123 F.3d 156, 164 (4th Cir.1997) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 2513-14, 91 L.Ed.2d 202 (1986); Beale v. Hardy, 769 F.2d 213, 214 (4th Cir.1985))
B.
In this action, Plaintiff seeks to recover the assets of the trust as satisfaction of the debt of the Rozanskys. The defendant trust moves for summary judgment, arguing simply that a creditor of the settlors of the trust has no valid claim to the res of the trust. Plaintiff has filed a cross-motion for summary judgment, arguing that because the uncontradicted evidence clearly shows that the Rozanskys have so dominated the trust that it is effectively their “alter ego,” this Court should equitably disregard the trust and treat its assets as those of the Rozanskys.
The Plaintiff’s argument is as follows: “Under Maryland law, where an entity is a mere `creature’ of another party, the entity may be treated as the alter ego of the dominating party.” In support of this position, Plaintiff cites three cases that conclude, essentially, that courts will equitably disregard a corporate form where such disregard is necessary to prevent fraud or to enforce a “paramount equity.” Colandrea v. Colandrea, 42 Md.App. 421, 428, 401 A.2d 480 (1979) (tort claim for fraud may be had against sole shareholder of corporation); Bart Arconti & Sons v. Ames-Ennis, 275 Md. 295, 312, 340 A.2d 225 (1975) (corporate entity may be disregarded to prevent fraud).
Under Maryland law, the question of whether a party exerts sufficient “dominion” and “control” over a corporation to warrant the conclusion that the corporation is a “mere instrumentality” of another turns on the facts of the particular case. As one court explained, “(T)he corporate entity is disregarded … wherein it is so organized and controlled, and its affairs are so conducted, as to make it merely an instrumentality, agency, conduit, or adjunct of another corporation. The control necessary to invoke what is sometimes called the `instrumentality rule’ is not mere majority or complete stock control but such domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own and is but a business conduit for its principal.” Dixon v. Process Corporation, 38 Md.App. 644, 653, 382 A.2d 893 (1978). The Plaintiff here argues that, because the trust operated exclusively at the command of the Rozanskys, it must be concluded that the trust was so dominated and controlled by the settlors that it was nothing more than the settlors’ instrumentality.
However, Plaintiff cites no Maryland case, and the Court’s research has revealed no Maryland authority, supporting the application of this corporate “alter ego” principle to a trust. The Plaintiff does point to several federal cases where courts have applied the corporate “alter ego” doctrine to trusts. In William L. Comer Family Equity Trust v. U.S., 732 F.Supp. 755 (E.D.Mich.1990), aff’d., 966 F.2d 1455 (6th Cir.1992), the court acknowledged that it had “uncovered no precedent analyzing the `alter ego’ theory of property ownership in the context of a trust,” but reasoned that “cases involving corporate entities provide appropriate guidance.” Id. at 759. The court went on to explain that “where a corporation is a mere agent or instrumentality of its shareholders or a device to avoid legal obligations, the corporate entity can be ignored.” Id. By parity of logic, where a trust “is a mere agent or 574*574 instrumentality” of another party, the trust may similarly be disregarded. Id. Other federal courts have accepted the view that the corporate “alter ego” doctrine may be applied to trusts. E.g., F.P.P. Enterprises v. U.S., 830 F.2d 114, 118 (8th Cir.1987); Loving Saviour Church v. U.S., 728 F.2d 1085, 1086 (8th Cir.1984); U.S. v. Boucher, 735 F.Supp. 987, 988 (D.Col.1990).
The cases make clear, however, that whether a court is to equitably exercise the “alter ego” doctrine as to a particular entity must be determined in accordance with the law of the forum state. See Loving Saviour Church, 728 F.2d at 1086 (applying South Dakota law); Comer Trust, 732 F.Supp. at 759 (applying Michigan law).
The scant authority pertinent to the inquiry appears to suggest that, under Maryland law, a settlor’s access to the trust res will not defeat an otherwise valid trust. In United States v. Baldwin, 283 Md. 586, 391 A.2d 844 (1978), the government sought to impose a tax lien on the assets of a trust established by the settlor before he incurred his tax liability. The trust was irrevocable, but the settlor maintained the right to receive the income from the investments and other personalty of the trust during his lifetime. While the trustee was a third party bank, the settlor maintained the right to name himself as trustee. The Court concluded that “the settlor of an irrevocable trust, reserving to himself only the right to receive, during his lifetime, the income from the investments and other personalty of the trust does not have such an estate in the corpus thereof as constitutes `property and rights to property’ under Maryland law,” and thus the lien could not be attached. Id. at 595-596, 391 A.2d 844.
This seems to be the consistent rule of Maryland law. In Mercantile Trust Co. v. Bergdorf & Goodman, 167 Md. 158, 173 A. 31 (1934), the court explained that “[w]ith the ownership of the corpus in the [beneficiary] remaindermen, even though possession may be delayed or defeated by the will of the donor, there being no evidence of fraud in the inception of the trust, and none in the instrument creating it, the corpus cannot be attached to satisfy the creditors of the settlor.” Id. at 166, 173 A. 31. Similarly, after reviewing the relevant precedent, the U.S. Claims Court found “no assumption by the Maryland courts that the wife may be deemed merely the husband’s alter ego for purposes of insulating property from a settlor’s creditors in a non-fraudulent conveyance transaction.” Estate of German v. U.S., 7 Cl.Ct. 641, 645 (1985), citing Watterson v. Edgerly, 40 Md.App. 230, 388 A.2d 934 (1978). Likewise, in the present case the Rozanskys retain no ownership interest in the corpus of the trust benefitting their children and there is no allegation of fraud in the establishment of the trust;[2] accordingly, it is logical to conclude that, under Maryland law, the trust res is beyond the reach of the Rozanskys’ creditors.
Further, even assuming that the “alter ego” doctrine were applicable to properly established trusts in Maryland, the Plaintiff has not offered an adequate basis for invoking “alter ego” principles here. Again, there is no allegation of any fraud on the part of the Rozanskys in conveying the property to the trust; Plaintiff merely contends that the Rozanskys should not be able to evade their legal obligations through a trust device that they dominate and control. Concededly, this argument finds support in the out-of-state authority referred to by Plaintiff. “[W]here [a] corporation is a mere agent or instrumentality of its shareholders or a device to avoid legal obligations, the corporate entity may be ignored.” Comer Trust, 732 F.Supp. at 759. The Maryland courts, however, have adopted a somewhat different view of the “alter ego” doctrine.
In Arconti, the Maryland Court of Appeals acknowledged that “although the courts will, in a proper case, disregard the corporate entity,” it appears that such a “proper case” may only be found “where it is necessary to prevent fraud or enforce a paramount equity.” Arconti, 275 Md. at 310, 340 A.2d 225. 575*575 Notably, the Arconti court specifically overruled a lower court’s determination that the “alter ego” doctrine may be applied “in order to prevent evasion of legal obligations.” Id. at 311-312, 340 A.2d 225. Thus, in Arconti, even though three corporations commingled equipment, operated from a single place of business, permitted one corporation to become dormant as the two other corporations improved, and made personal loans and transferred insurance policies to the principals, the “alter ego” doctrine could not be applied to hold the dominant corporations and principals liable for the obligations of the indebted corporation because there was no showing of fraud.
Similarly, even assuming the general applicability of the “alter ego” doctrine to trusts in Maryland, there can be no application of the doctrine in this case. There has been no showing of fraud here. While Plaintiff generally avers that the Rozanskys have “fraudulently shelter[ed] assets from their creditors,” there has been no contention that the property held by the trust was fraudulently conveyed. While it is true that a settlor cannot place assets in trust for the settlor’s own benefit in order to frustrate his or her own creditors, in absence of a fraudulent conveyance of the property, the property becomes an asset of the trust when conveyed; non-beneficiary settlors no longer have assets to shield. Inasmuch as the only “fraudulent” conduct of the Rozanskys is the domination of the trust while failing to honor legal obligations, this does not warrant the application of the “alter ego” doctrine under Maryland law. Arconti, 275 Md. at 311-312, 340 A.2d 225.[3] Indeed, even in the out-of-state cases relied upon by the Plaintiff, in every instance the “alter ego” doctrine was applied in concert with an allegation of a fraudulent conveyance. See, e.g., F.P.P. Enterprises, 830 F.2d at 118 (affirming conclusion that “the trusts were shams and fraudulent conveyances”); Loving Saviour Church, 728 F.2d at 1086 (applying “alter ego” as an alternative to conclusion that “the property transfers to the church were a sham”); Boucher, 735 F.Supp. at 988 (government argues alternatively that “the trusts are void as fraudulent conveyances, or that the trusts are the settlor’s alter egos”); Comer Family Trust, 732 F.Supp. at 760 (relying on “indicia of improper transfers” in applying “alter ego” doctrine).
It is apparently true that the trustees have at times acted at the behest of the Rozanskys, though they are under no legal obligation to do so.[4] Nonetheless, to the extent that the trust was properly created and the property properly transferred to it, the Court must conclude that the trust res is now beyond the reach of the Rozanskys’ creditors, notwithstanding Plaintiff’s prayer for equitable application of the “alter ego” doctrine. Further, even assuming “alter ego” principles apply to trusts in Maryland, Plaintiff here points to no fraudulent conduct other than the fact that the Rozanskys have “controlled” the trust while failing to pay their debts. It seems clear that under Maryland law, the evasion of legal obligations does not warrant the invocation the of “alter ego” doctrine. Accordingly, Plaintiff has no legal claim to the assets of the trust.
576*576 IV
For the reasons set forth, the Defendants’ motion for summary judgment must be granted, and Plaintiff’s cross-motion for summary judgment must be denied.
[1] The trust document also vests the trustees with the power to “mortgage, lease, … [or] borrow on … any and all of the funds and properties of the Trust.”
[2] It is interesting to note that the conveyance into the trust of the Rozanskys’ life estate interest in the property occurred in 1992, two years after the judgment was entered. Nonetheless, Plaintiff makes no allegation that this subsequent conveyance was fraudulent.
[3] It is true that “alter ego” principles may be invoked to “enforce a paramount equity” as well as to prevent fraud. However, the enforcement of “a paramount equity” rationale appears to be of limited application in Maryland. See Travel Committee v. Pan Am., 91 Md.App. 123, 158, 603 A.2d 1301 (1992) (“Notwithstanding its hint that enforcing a paramount equity might suffice as a reason for piercing the corporate veil, the Court of Appeals to date has not elaborated upon the meaning of the phrase or applied it in any case of which we are aware”). In any event, the Court concludes that principles of fundamental equity and fairness do not compel the invalidation of a trust for the benefit of minor children, in favor of creditors of the settlor, simply because the trust’s third-party trustees may have been less than diligent in the discharge of their duties.
[4] Indeed, the trustees do so at their own peril. It is black letter law that the trustees of a trust owe a duty of loyalty to the beneficiaries of the trust. “Even if a trustee has no personal stake in a transaction, the duty of loyalty bars him from acting in the interest of third parties at the expense of the beneficiaries.” Trustees of Employees Retirement System of Baltimore v. Baltimore, 317 Md. 72, 109, 562 A.2d 720 (1989). It does not appear, however, that a creditor of the settlor has standing to bring a claim of breach of fiduciary duty against the trustees. See Parish v. Md. & Va. Milk Producers, 261 Md. 618, 277 A.2d 19 (1971) (suggesting that a “fiduciary relationship” is necessary to give “former members the right to maintain this action”).
Shurley v. Texas Commerce Bank, 115 F.3d 333 (5th Cir. 1997)
Shurley Shurley v. Texas Commerce Bank, 115 F. 3d 333 (5th Cir 1997) Bankr. L. Rep. P 77,423, 11 Tex.Bankr.Ct.Rep. 259 In The Matter of Billy R. SHURLEY and Jane Bryant Shurley, Debtors. Billy R. SHURLEY and Jane Bryant Shurley, Appellants, v. TEXAS COMMERCE BANK–AUSTIN, N.A. and Texas Commerce Bank–San Angelo, N.A., Appellees. In The Matter of Billy R. SHURLEY and Jane Bryant Shurley, Debtors. Billy R. SHURLEY and Jane Bryant Shurley, Appellants, v. TEXAS COMMERCE BANK–SAN ANGELO, N.A., Texas Commerce Bank–Austin, N.A. and Dennis Elam, Trustee, Appellees. In The Matter of Billy R. SHURLEY and Jane Bryant Shurley, Debtors. William H. ARMSTRONG, II, Appellant, v. TEXAS COMMERCE BANK–SAN ANGELO, N.A., Dennis Elam, Trustee, and Texas Commerce Bank–Austin, Appellees. Nos. 96-50137, 96-50138. United States Court of Appeals, Fifth Circuit. June 20, 1997. John P. Higgins, Michael Lee Rush, Higgins & Rush, Dallas, TX, for Shurley Appellants. Eric Jay Taube, Hohmann, Werner & Taube, Austin, TX, Mitchell Dodd Savrick, Hohmann, Werner & Taube, Austin, TX, for Texas Commerce Bank–Austin. Stanley M. Johanson, University Of Texas Law, Austin, TX, Henry H. McCreight, Jr., Houston, TX, for Texas Commerce Bank–San Angelo in No. 96-50137. Michael A. Wren, McGinnis, Lochridge & Kilgore, Austin, TX, Shannon H. Ratliff, Austin, TX, Scott Davis Moore, Joseph & Moore, Austin, TX, for William H. Armstrong. John Lloyd Hopwood, Houston, TX, Stanley M. Johanson, Austin, TX, Henry H. McCreight, Jr., Houston, TX, for Texas Commerce Bank–San Angelo in No. 96-50138. Michael G. Kelly, The McMahon Law Firm, Odessa, TX, for Trustee. James Alfred Carter, W. Truett Smith, Smith, Carter, Rose, Finley & Griffis, San Angelo, TX, for amicus curiae. Appeals from the United States District Court for the Western District of Texas. Before REAVLEY, JOLLY and BENAVIDES, Circuit Judges. REAVLEY, Circuit Judge: 1 The question here is to what extent the assets of a spendthrift trust settled by a bankruptcy debtor and others are included in the debtor’s bankruptcy estate. The bankruptcy and district courts held that the entirety of the debtor’s interest in the trust is property of the bankruptcy estate. We limit the estate to the property contributed to the trust by the debtor. BACKGROUND 2 In 1965 M.D. Bryant, Ethel Bryant, Anne Bryant Ridge, and Jane Bryant Shurley created a trust under Texas law. M.D. and Ethel Bryant were husband and wife. Anne Bryant Ridge and Jane Bryant Shurley are their daughters. The trust is known as the “M.D. Bryant Family Trust” or the “Bryant Family Trust.” 3 The parents and daughters contributed real property to the trust. The property consisted of ranches owned by the family, including one owned by Shurley. Shurley contributed approximately 11,000 acres of raw land from the south of a west Texas ranch (her contribution herein the “Marfa ranch”).1 The trust agreement states that the property contributed by the parents “represents two-thirds (2/3) of the total value of all of said real property to be contributed and that the value of that portion of said real property to be contributed by [the two daughters] each represents (1/6) of the total value of all of said real property to be contributed.” 4 The trust agreement provided that additional property could be added to the trust at a later date. According to Shurley the vast bulk of the corpus of the trust came through pourover provisions in the parents’ wills, which were executed at the same time the trust agreement was executed. She claims that the Marfa ranch represents only two percent of the value of the total assets of the trust. The parents died in 1967 and 1971. 5 Under the trust agreement, while the parents were alive, two-thirds of the income generated by the trust was distributed to the parents and one-sixth of the income was distributed to each of the daughters. Upon the death of one parent, the income was distributed equally among the living parent and the daughters. Upon the death of the second parent, the two daughters each received half of the income if both were living at the time. The agreement has provisions for the children and other descendants of the daughters to receive income from the trust and distribution of its assets upon final termination of the trust. 6 In 1992, Shurley and her husband filed for bankruptcy under Chapter 7 of the Bankruptcy Code. Since Shurley’s parents were deceased at the time, she and her sister each had a one-half interest in the income from the trust. The Marfa ranch was still held by the trust. Two bank creditors and the bankruptcy trustee brought an adversary action, seeking a declaratory judgment that Shurley’s interest in the trust was property of the bankruptcy estate. After a trial, the bankruptcy court entered a judgment declaring that Shurley’s “entire interest in the [trust], being an undivided 50 percent interest in the principal assets and income of the [trust], is property of the Chapter 7 bankruptcy estate.” In its memorandum opinion it enjoined the trustee of the trust “from disbursing any beneficial interest previously held by Mrs. Shurley to anyone other than” the bankruptcy trustee.2 Shurley and the trustee of the trust3 appealed to the district court, which affirmed. This appeal followed. DISCUSSION 7 We review the bankruptcy court’s factual findings under the clearly erroneous standard, and we review its legal conclusions de novo.4 8 Under section 541 of the Bankruptcy Code5 a bankruptcy estate is created at the commencement of the bankruptcy case. Section 541(a)(1) states that “[e]xcept as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case” is included in the estate. Subsection (c)(2) states the exclusion relevant here: “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.” 9 Section 541(c)(2) excludes “spendthrift trusts” from the bankruptcy estate if such a trust protects the beneficiary from creditors under applicable state law.6 “In general, a spendthrift trust is one in which the right of the beneficiary to future payments of income or capital cannot be voluntarily transferred by the beneficiary or reached by his or her creditors.”7 10 The Bryant Family Trust agreement vests in the trustee authority over the trust assets. Among other powers vested in the trustee, the agreement provides: 11 The trustee (and his successors) shall have full power and authority: to manage, handle, invest, reinvest, sell for cash or credit, or for part cash and part credit, convey, exchange, hold, dispose of, lease for any period of time, whether or not longer than the life of the trust, improve, repair, maintain, work, develop, operate, use, mortgage, or pledge all or any part of the funds…. The trustee shall have full power to determine the manner in which expenses are to be borne and in which receipts are to be credited as between principal and income, and also to determine what shall constitute income or net income and what shall constitute corpus and principal…. [B]eneficiaries shall have no right or power to transfer, assign, convey, sell or encumber said trust estate and interest therein, legal or equitable, during the existence of these trusts. 12 The agreement expressly provides that trust assets cannot be reached by creditors of the beneficiaries.8 13 By vesting control of the trust in the trustee, denying the beneficiaries control over the trust, and denying creditors of the beneficiaries access to trust assets, the trust agreement qualifies as a spendthrift trust under Texas law. For two reasons, however, the bankruptcy court concluded that the trust assets are not beyond the reach of creditors under state law. The first reason, which we reject in part, is that spendthrift trust protection under state law does not extend to a trust settled by the beneficiary herself. The second reason, which we reject, is that Shurley exercised sufficient control over the trust to make the assets subject to her creditors. 14 A. The Self-Settlor Rule and its Consequences 15 The bankruptcy court’s principal reason for holding that Shurley’s interest in the trust is property of the bankruptcy estate is that she was one of the original settlors of the trust. We have recognized that a beneficiary’s interest in a spendthrift trust is not subject to claims of creditors under Texas law “[u]nless the settlor creates the trust and makes himself beneficiary.”9 The rationale for this “self-settlor” rule is obvious enough: a debtor should not be able to escape claims of his creditors by himself setting up a spendthrift trust and naming himself as beneficiary. Such a maneuver allows the debtor, in the words of appellees, to “have his cake and eat it too.” As one Texas court has explained:Public policy does not countenance devices by which one frees his own property from liability for his debts or restricts his power of alienation of it; and it is accordingly universally recognized that one cannot settle upon himself a spendthrift or other protective trust, or purchase such a trust from another, which will be effective to protect either the income or the corpus against the claims of his creditors, or to free it from his own power of alienation. The rule applies in respect of both present and future creditors and irrespective of any fraudulent intent in the settlement or purchase of a trust.10 16 The novel issue presented here is whether the entirety of a beneficiary’s interest in a spendthrift trust is subject to creditors’ claims where the trust is only partially self-funded by the beneficiary. There is no compelling Texas authority on this issue, but we conclude that on these facts Texas courts would surely hold that the partially self-funded spendthrift trust is only partially subject to creditors’ claims. 17 Allowing creditors to reach only the self-settled portion of the trust is consistent with the other long-standing rule of Texas law that a settlor should be allowed to create a spendthrift trust that shields trust assets from the beneficiary’s creditors. “Spendthrift trusts have long been held valid by Texas courts.”11 The bankruptcy court’s ruling ignores the wishes of Shurley’s parents, the primary settlors of the trust, and the state’s policy of respecting their expectations. “Spendthrift trusts are not sustained out of consideration for the beneficiary. Their justification is found in the right of the donor to control his bounty and secure its application according to his pleasure.”12 Allowing creditors to reach only that portion of the trust contributed by Shurley would further the policy of allowing her parents to create a spendthrift trust for the benefit of Shurley that is protected from her creditors, while giving effect to the exception for self-settled trusts. At least one court from another jurisdiction agrees with this this approach,13 and we believe that Texas courts would do the same. Accordingly we hold that the property which Shurley herself contributed to the trust–the Marfa ranch–is not protected from creditors under state law and is therefore property of the bankruptcy estate, but that all other assets of the trust are not property of the estate.14 18 We so hold despite Shurley’s “power of appointment” granted by the trust agreement. Under the agreement each sister has a right to allocate assets of the trust to specified beneficiaries. The agreement states that the sisters “shall each have a special power of appointment over an adjusted one-half (1/2) of the trust assets, to appoint such adjusted one-half (1/2) of the assets of said trust to and among their children and lineal descendants…. Neither [daughter] can appoint assets to herself, her creditors, her estate, or the creditors of her estate.” If a daughter does not exercise her power of appointment, the trust agreement provides that her interest shall be distributed in equal shares “to her children and lineal descendants, and to the lineal descendants of a deceased child, per stirpes.” Shurley represents on appeal that she has not exercised her special power of appointment because she is content with the trust’s distribution provisions for her descendants. 19 This power of appointment does not alter our conclusion that the Marfa ranch is property of the bankruptcy estate. The Bankruptcy Code expressly excludes such a power of appointment from the bankruptcy estate, since section 541(b)(1) provides that property of the estate does not include “any power that the debtor may exercise solely for the benefit of an entity other than the debtor.” However, while the power of appointment to others does not become property of the estate under § 541(b)(1), the property which became part of the bankruptcy estate under the Code upon the commencement of the bankruptcy case now belongs to that estate and is controlled by the bankruptcy trustee. Regardless of how Shurley might indicate that trust assets should be divided upon her death, the Marfa ranch now belongs to the bankruptcy estate, and her designation of beneficiaries is irrelevant. The bankruptcy estate will be divided among creditors according to the Code, regardless of Shirley’s appointment of assets under the trust agreement. 20 The exercise of the power of appointment under the trust agreement is analogous to a will, and has no more effect on the property of the bankruptcy estate and creditor priorities than a garden-variety will of the debtor. With an ordinary will, the heirs only receive the stipulated items of the property that were owned by the testator. Stated more simply, a testator can only give away that which was hers. Here, the Marfa ranch no longer belongs to Shurley; it is property of the bankruptcy estate. 21 Shurley argues that she only has a life estate in the Marfa ranch and other trust assets in the form of an equitable interest in the income from the trust assets during her life, and that creditors therefore cannot reach the corpus of the trust even if it is self-settled. She is correct that absent distributions of corpus at the discretion of the trustee or a premature termination of the trust (discussed below), the trust agreement only provides her with an income interest in the trust assets, with the remainder going to other beneficiaries. Shurley cites authority that even when a settlor creates a trust for herself, creditors can only reach trust assets to the extent of the settlor’s interest.15 22 The issue here–whether the creditors can reach only Shurley’s income from the Marfa ranch or the ranch itself–does not turn on whether the Shurley’s interest in the trust is “equitable,” since the Bankruptcy Code defines property of the bankruptcy estate to include “all legal or equitable interests of the debtor in property.”16 Resolution of this question turns on whether creditors can reach the trust corpus under state law, regardless of how the interest is characterized. 23 We conclude that under Texas law creditors can reach not only Shurley’s income from the Marfa ranch but the ranch itself, in light of Bank of Dallas v. Republic National Bank of Dallas.17 In Bank of Dallas, the debtor settled a trust with spendthrift language for the benefit of herself and her children. The debtor was to receive the net income of the trust during her lifetime, with the remainder going to her children or other beneficiaries named in her will. The trust agreement further provided that “[w]henever the trustee determines that the income of the Settlor from all sources known to the trustee is not sufficient for her reasonable support, comfort, and health and for reasonable support and education of Settlor’s descendants, the trustee may in its discretion pay to, or use for the benefit of, Settlor or one or more of Settlor’s descendants so much of the principal as the trustee determined to be required for those purposes.” 24 The court held that “where a settlor creates a trust for his own benefit, and inserts a spendthrift clause, it is void as far as then existing or future creditors are concerned, and they can reach his interest under the trust by garnishment.”18 It further held that income from the trust was subject to creditor claims, and that “the interest of [the debtor] in the trust is such that the corpus may be reached by her creditors.”19 25 The court considered the Restatement (Second) of Trusts § 156 (1959), which provides: 26 (1) Where a person creates for his own benefit a trust with a provision restraining the voluntary or involuntary transfer of his interest, his transferee or creditors can reach his interest. 27 (2) Where a person creates for his own benefit a trust for support or a discretionary trust, his transferee or creditors can reach the maximum amount which the trustee under the terms of the trust could pay to him or apply for his benefit. 28 The court also looked to comment e of this section, which states that “[w]here by the terms of the trust a trustee is to pay the settlor or apply for his benefit as much of the income or principal as the trustee may in his discretion determine, his transferee or creditors can reach the maximum amount which the trustee could pay to him or apply for his benefit.” Applying these rules the court held that the creditor could reach the corpus of the trust, even though the debtor only had a life interest in the trust. 29 By this reasoning the creditors are able to reach the self-settled asset of the trust in our case, namely the Marfa ranch. The trust agreement states that “[i]f the trustee determines that the net income of said trust is insufficient to maintain and support any of the beneficiaries of said trust or their children and lineal descendants in their accustomed manner of living, taking into account, however, such beneficiary’s income from all other sources, the trustee may use so much of the corpus of said trust as the trustee sees fit to make up such deficiency.” This language is even broader than the language of the trust agreement in Bank of Dallas, since in our case the trustee can make grants of trust corpus to support the beneficiaries’ or their descendants’ “accustomed manner of living,” while in Bank of Dallas the trustee was limited to making such distributions to support the beneficiary’s “reasonable support, comfort, and health” and the reasonable support and education her descendants. If anything, the former term grants even more discretion to the trustee than the latter. Accordingly we conclude that the creditors in our case can reach the corpus of the trust under Texas law as to that property–the Marfa ranch–contributed by Shurley to the trust, and that the ranch is therefore property of the estate. 30 The court in Bank of Dallas also quoted comment c to § 156, which states that “[i]f the settlor reserves for his own benefit not only a life interest but also a general power to appoint the remainder by deed or will or by deed only or by will alone, the creditors can reach the principal of the trust as well as the income.” In Bank of Dallas the debtor apparently had a general power to appoint the remaining trust assets by will, while in our case Shurley and her sister have a special power of appointment, meaning that the trust document limits the choice of recipients of appointed assets to the sisters’ descendants. We do not see this factual distinction as significant. Comment c was only one of three comments to § 156 (comments c, d, and e) quoted by the court in Bank of Dallas, and § 156 itself, as we read it, states than any self-settled support or discretionary trust is subject to creditor claims up to “the maximum amount which the trustee under the terms of the trust could pay to” the beneficiary. We cannot fathom why the court would have reached a different result if the debtor had had a special rather than a general power of appointment. Before even mentioning the Restatement, the court stated without qualification that, under Texas law, “where a settlor creates a trust for his own benefit, and inserts a spendthrift clause, it is void as far as then existing or future creditors are concerned, and they can reach his interest under the trust by garnishment.”20 31 A similar result was reached in State v. Nashville Trust Co.21 The debtor was the beneficiary of a spendthrift trust holding real estate. The debtor built a mansion on the property. The court held that the debtor had self-settled the trust to the extent of the improvements he had made, and that the property was therefore subject to the creditor’s claim to the extent of the debtor’s improvements. The debtor argued that even if he “can be held to have contributed to the trust property, enhanced its value, and to that extent created a spendthrift trust for his own benefit, only his interest in such enhancement, i.e. his life estate in such enhancement, may be subjected and that the remainder interest of his children … may not be subjected for any debt of his.”22 The court rejected this argument, reasoning that the debtor’s children “could only be donees or volunteers and could take no benefits under such transfer as against his creditors. So we think the chancellor did not err against defendants in decreeing that the [creditor] had a right to subject the land for the amount by which its value had been enhanced by reason of the improvements.”23 The court held that the creditor was entitled to a lien on the trust property for the value of the debtor’s improvements, and that the creditor was “entitled to a sale of the land, if necessary, to enforce the lien.”24 32 Shurley argues that creditors cannot reach the corpus of the trust because of our decisions in In re Goff, 706 F.2d 574 (5th Cir.1983) (Goff I), and In re Goff, 812 F.2d 931 (5th Cir.1987) (Goff II ). In Goff I we held that the debtor’s Keogh plan, a pension trust under the ERISA statute,25 was not a spendthrift trust excluded from the bankruptcy estate under Bankruptcy Code § 541(c)(2) because it was self-funded. We stated that “[t]he general rule is well established that if a settlor creates a trust for his own benefit and inserts a ‘spendthrift’ clause, restraining alienation or assignment, it is void as far as creditors are concerned and they can reach the settlor’s interest in the trust.”26 33 In Goff II, a creditor claimed that its recorded judgment against the debtor gave it a statutory lien against the property held in the pension trust, and that it therefore had a secured bankruptcy claim. The bankruptcy trustee argued that the claim was unsecured. We held that the claim was unsecured, because under Texas law a judgment lien only attaches to real property in which the debtor has legal title, and the debtor only had equitable title to the real property in the trust. We stated that “[t]he trust remains valid; only the spendthrift clause is void, allowing creditors to reach the property held in trust by garnishment.”27 Goff II did not, as appellants argue, hold that creditors cannot reach the corpus of a self-funded trust with an invalid spendthrift clause. It held only that a judgment lien against the debtor did not create a secured claim against the assets of the trust. We have cited Goff II for the proposition that “[a] creditor can reach the trust assets” of a trust funded by the debtor-beneficiary.28 As with the Bryant Family Trust, the trust in question (1) contained a spendthrift clause, (2) provided the debtor with a life interest in the income, with the remainder going to other beneficiaries, and (3) provided that the trustee could invade the corpus of the trust for the debtor’s support, maintenance and welfare. 34 Shurley points out that when she made the original contribution of the Marfa ranch to the trust, it was subject to a note and lien. She argues that this lien should affect our analysis, but we disagree. There is no dispute that Shurley was the owner of the ranch when she conveyed it to the trust, even if it was encumbered with a lien. The note and lien may have affected the value of the property at the time the trust was funded, but they did not affect ownership of the property. When determining the property of the estate, the Bankruptcy Code looks to the debtor’s property “as of the commencement of the case.”29 It makes no more sense to look to the value of the ranch at the time of the creation of the trust than in does to look to the value of any other property of the debtor on the date of acquisition. If the debtor owns stock, bonds, real estate or other property, the original value or cost basis of those assets is irrelevant to the bankruptcy matter of defining the estate. Accordingly a lien on the ranch at the time of the trust’s creation does not alter our conclusion that the ranch is property of the bankruptcy estate. The ranch might have appreciated or depreciated in value for any number of reasons since 1965, including the balance on the note, but it is still property of the bankruptcy estate. 35 Shurley argues that there was no proof by appellees that she had any equity in the ranch at the time of creation of the trust, reasoning that she could not be a self-settlor if the property she contributed was worthless. Assuming that Shurley is legally correct–that a settlor’s contribution to a trust of real property in which she had no equity at the time of the trust’s creation does not fall within the self-settlor rule–the bankruptcy court found that she had equity in the property at the time of the creation of the trust in 1965.30 This fact finding is not clearly erroneous. Shurley purchased the ranch from her parents in 1950 for $131,366.64 and assumed a $50,000 balance on the note.31 The balance on the note was only $23,000 when the property was conveyed to the trust.32 Moreover, in the trust agreement itself, Shurley as a signatory represented that “the value of that portion of said real property to be contributed by [Shurley and her sister] each represents (1/6) of the total value of all of said real property to be contributed.” This declaration is an admission by Shurley that the property she contributed had some value, exceeding the balance on the note, since the trust assumed the note. B. Beneficiary Control 36 The bankruptcy court concluded that “[e]ither substantial control or self-settlement may operate to invalidate protective trust provisions.”33 It found that Shurley exercised too much control over the trust to qualify as the beneficiary of a spendthrift trust. We find none of the reasons given persuasive.34 37 First, the court found that “Mrs. Shurley, in conjunction with her father during his life, had the power to revoke, alter, or amend the Trust document, or distribute the Trust assets back to the settlors.”35 We disagree. The agreement provides that “M.D. Bryant (the father) with the concurrence of either Settlor Anne Bryant Ridge or Settlor Jane Bryant Shurley, shall have the right at any time during his lifetime to revoke, alter and amend said trust and distribute the assets of said trust to the Settlors in the same proportion as the original contributions by each of said Settlor, taking into account any adjustment under paragraph (b).” The power to revoke or amend the trust was vested in the father, not the daughters. Shurley had no authority to alter the trust. She only had the authority to prevent her father from doing so, and only if she and her sister vetoed the change. At most therefore she and her sister in combination had the power to ensure the perpetuation of the trust. Further, this power lapsed upon the death of the father in 1967. We find no authority that such a limited power rendered the trust subject of creditor claims against the beneficiaries. 38 Second, the bankruptcy court noted that the agreement provided that Shurley had the right to petition three “special trustees” for the partial or complete termination of the trust. The agreement provides for the appointment of certain named special trustees, including a state judge, after the death of the parents. It states that “[u]pon application made by either daughter … or both, showing that termination would best serve the intended purpose of the trust, such Special Trustees shall in their sole and absolute discretion have the power and authority by unanimous consent to terminate in whole or in part and from time to time the trust or trusts established hereunder.” Again, this provision does not vest in Shurley the power to terminate or alter the trust. It only authorizes her to request such a change from special trustees, who have “in their sole and absolute discretion” the authority to alter the trust. Even absent such a provision, Shurley, like all Texas trust beneficiaries, had a statutory right to seek judicial modification or termination of the trust if “compliance with the terms of the trust would defeat or substantially impair the accomplishment of the purposes of the trust.”36 No court has ever held that such a statutory right renders a spendthrift trust subject to creditor claims. 39 Third, the bankruptcy court noted Shurley’s special power of appointment. This provision merely gave the daughters the authority to allocate trust assets to their descendants. It grants no authority to the daughters to allocate assets to themselves. As explained above, the Bankruptcy Code expressly excludes such a power of appointment from the bankruptcy estate. Section 541(b)(1) of the Code provides that property of the estate does not include “any power that the debtor may exercise solely for the benefit of an entity other than the debtor.” 40 Aside from the terms of the trust agreement, the bankruptcy court found that Shurley had exercised de facto control over the trust. The court found: 41 Outside the Trust document, the Shurleys also manipulated Trust assets and governed the initial Trustee, Bryant Williams. The Shurleys were regularly able to obtain unrestricted corpus distributions and loans. While the Trust provides for such distributions, the liberality and circumstances under which they were requested and granted suggested a domination by M.D. Bryant, Mrs. Shurley and Mrs. Watkins of Mr. Williams. Only recently had any corpus distribution request been denied, and only recently had the successor Trustee, Mr. Armstrong, started to make only “loans,” to the exclusion of corpus distributions. Indeed, in the early days of the Trust, the initial Trustee, on behalf of the Trust, executed promissory notes as a comaker for the Shurleys. Part of the malleability of Bryant Williams may have arisen either from his fear of being replaced for failing to abide by the wishes of Mrs. Shurley and Mrs. Watkins, or from his close relationship with the family. While M.D. Bryant, the Shurleys and the Watkines may not have held all of the puppet strings to Mr. Williams, they held enough of them to exert the control necessary to defeat the Trust’s protective attributes.37 42 Shurley strongly denies that the evidence at trial supported these findings, arguing for example that there is no evidence that the first trustee ever made a single distribution of trust corpus or a single loan to Shurley or any other beneficiary. Appellees argue that in addition to the above-quoted findings, Shurley, among other things, “used the Trust income to induce extensions of credit to herself and her husband,” and “engaged in ‘trustee shopping’ to help further her control of the trust assets.”Even if these findings are taken as undisputed, they do not establish control by the daughters over the trust assets sufficient to make the trust subject to their creditors. The fact that the trustees liberally bestowed trust assets on the daughters, by itself, does not establish de facto control by the daughters over the affairs of the estate. The daughters were after all two of the principal beneficiaries of the trust, and distributions of the wealth of the the trust to the daughters is entirely consistent with its apparent purpose. The agreement provides that the trustee was not limited to distributing income generated from the corpus of the trust. As discussed above, it expressly authorized the trustee to make distributions from the trust corpus “[i]f the trustee determines that the net income of said trust is insufficient to maintain and support any of the beneficiaries of said trust or their children and lineal descendants in their accustomed manner of living….” It also expressly authorized the trustee to “loan money to … and otherwise deal with any and all persons” including “the beneficiaries of this trust.” 43 As one Texas decision has explained in denying a creditor’s claim against assets held by a spendthrift trust: 44 the purpose of such a trust is not defeated by the fact that the trustee is authorized in his discretion to apply a part of the corpus of the fund to the use of the beneficiary in accordance with the terms of the trust. Neither is the purpose of such trust defeated by the fact that the trustee is authorized or even required to turn the entire trust fund or property over to the beneficiary absolutely at some fixed time in the future.38 45 Appellees did not establish that loans or grants from the trust to the daughters, on their face consistent with the purpose and language of the trust, amounted to de facto control of the trust by the daughters. Further, the fact that the beneficiary of a spendthrift trust may have behaved as a spendthrift only shows the prescience of the settlors, and should not defeat the protective features of the trust. Appellees’ focus on the behavior of Shurley as beneficiary is misplaced, since as explained above, spendthrift trusts are not shielded from creditors “out of consideration for the beneficiary. Their justification is found in the right of the donor to control his bounty and secure its application according to his pleasure.”39 C. Whether the Trust Is an Annuity 46 By separate appeal Shurley argues that the bankruptcy court erred in denying her summary judgment motion urging that her interest in the trust is an “annuity” exempt from creditors under Texas law. 47 Under Texas law and Bankruptcy Code § 522, Texas debtors may elect either state or federal exemptions from creditors.40 Shurley’s claims that her interest in the trust is an annuity exempt from creditors under Tex. Ins. Code Ann. art. 21.22 (Vernon Supp.1997), which provides an exemption for “all money or benefits of any kind, including policy proceeds and cash values, to be paid or rendered to the insured or any beneficiary under any policy of insurance or annuity contract issued by a life, health or accident insurance company, including mutual and fraternal insurance, or under any plan or program of annuities and benefits in use by an employer or individual.” The emphasized language was added by a 1993 amendment to the statute, after Shurley filed for bankruptcy. 48 This argument fails for two reasons. First, her interest in the trust was not issued by an insurance company or employer, so the only conceivable claim of exemption is that her interest is part of a “plan or program of annuities and benefits in use by an … individual.” The reference to an individual was added to the statute after the bankruptcy filing. In determining exemptions we must apply the law in effect at the time the debtor entered bankruptcy.41 Although Texas exemption laws are liberally construed,42 the exemption Shurley claims simply did not exist at the commencement of her bankruptcy case. We cannot agree with Shurley that the 1993 amendment merely “clarified” legislative intent insofar as it added a reference to non-employer annuities that are not issued by insurance companies.43 The statute plainly did not apply to such annuities prior to the amendment. 49 Second, we do not believe that Shurley’s trust interest can be characterized as an annuity in any event. One Texas court has described an annuity as a “a form of investment which pays periodically during the life of the annuitant or during a term fixed by contract rather than on the occurrence of a future contingency.”44 We have cited this same definition with approval.45 While all annuities do not make payments in fixed, predetermined amounts,46 we do not believe that the term extends to a trust where future payments are highly contingent on the future circumstances of the beneficiaries. The trust agreement provides that the trustee “may” make distributions of trust corpus if he determines that such distributions are needed to “maintain and support any of the beneficiaries or their children or lineal descendants in their accustomed manner of living.” Any such good faith determination by the trustee is “final and binding on all interested parties.” Such distributions were in fact made. By design, such distributions are tied to contingencies unknown at the time of the creation of the trust, and are not consistent with the concept that an annuity makes payments without regard to “the occurrence of a future contingency.”47 In addition, under terms of the trust agreement discussed above, payments to Shurley were contingent on (1) the death of her parents, since her interest increased on the death of one parent and increased again on the death of the second parent, (2) whether the father, with the consent of either sister, chose to terminate the trust, and (3) whether the special trustees terminated the trust. 50 Further, Shurley’s argument simply proves too much, since if her interest in the trust is an annuity, then all beneficiaries of self-settled trusts could make the same argument, as long as the trust agreement called for periodic payments to the settlor for life or a fixed term. We cannot accept that the Texas legislature intended this result, which would reject the universally recognized rule, and one codified by Texas statute, that a settlor cannot create his own spendthrift trust and shield its assets from creditors. If the legislature had intended this result, it would have repealed Tex. Prop.Code Ann. § 112.035(d), which provides that “[i]f the settlor is also a beneficiary of the trust, a provision restraining the voluntary or involuntary transfer of his beneficial interest does not prevent his creditors from satisfying claims from his interest in the trust estate.” CONCLUSION 51 In summary, we conclude that the Marfa ranch and income generated therefrom is property of the estate.48 The judgment is reversed and the case is remanded for further proceedings consistent with this opinion. 52 REVERSED and REMANDED. 1 The briefs indicate that the “Marfa Ranch” also refers to a larger tract of land out of which came the acreage Shurley contributed to the trust. In this opinion the “Marfa ranch” means only that acreage owned by Shurley and conveyed to the trust in 1965, together with any mineral interests she may have owned and conveyed to the trust 2 In re Shurley, 171 B.R. 769, 789 (Bankr.W.D.Tex.1994) 3 For convenience, appellants Shurley and the trustee of the trust are sometimes collectively referred to as Shurley 4 In re Herby’s Foods, Inc., 2 F.3d 128, 130-31 (5th Cir.1993) 5 11 U.S.C. § 541 6 Patterson v. Shumate, 504 U.S. 753, 762, 112 S.Ct. 2242, 2248, 119 L.Ed.2d 519 (1992) (noting legislative history that § 541(c)(2) “continues over the exclusion from property of the estate of the debtor’s interest in a spendthrift trust to the extent the trust is protected from creditors under applicable State law.”); In re Moody, 837 F.2d 719, 722-23 (5th Cir.1988) (“A beneficiary’s interest in a spendthrift trust is excluded from his bankruptcy estate by 11 U.S.C. § 541(c)(2), if state law and the trust so provide.”) 7 Id. at 723 8 The agreement states: “The interest of the beneficiaries in the trust estate and the increase and proceeds thereof, both legal and equitable, so long as the same are held in trust, shall not be subject in any manner to any indebtedness, judgment, judicial process, creditors’ bills, attachment, garnishment, execution, receivership, charge, levy, seizure or encumbrance, of or against said beneficiaries; nor shall the interest of the beneficiaries in said trust be in any manner reduced or affected by any transfer, assignment, conveyance, sale, encumbrance, act, omission or mishap, voluntary or involuntary, anticipatory or otherwise of said beneficiaries….” 9 Id. at 723. See also Daniels v. Pecan Valley Ranch, Inc., 831 S.W.2d 372, 378 (Tex.App.–San Antonio 1992, writ denied) (“In Texas, a settlor cannot create a spendthrift trust for his own benefit and have the trust insulated from the rights of creditors.”); Tex. Prop.Code Ann. § 112.035(d) (“If the settlor is also a beneficiary of the trust, a provision restraining the voluntary or involuntary transfer of his beneficial interest does not prevent his creditors from satisfying claims from his interest in the trust estate.”) 10 Glass v. Carpenter, 330 S.W.2d 530, 533 (Tex.Civ.App.–San Antonio 1959, writ ref’d n.r.e.) 11 Moody, 837 F.2d at 723 12 Hines v. Sands, 312 S.W.2d 275, 279 (Tex.Civ.App.–Fort Worth 1958, no writ) 13 In re Johannes Trust, 191 Mich.App. 514, 479 N.W.2d 25, 29 (1991) (“[The self-settlor's] creditors can reach the assets of the trust and compel payment in the maximum amount that would be in the trustee’s discretion with respect to that portion of the assets that came from [the self-settlor], but not with respect to any portion of the trust that came from other individuals, particularly petitioner.”) 14 We note that the Marfa ranch was still held by the trust when Shurley commenced her bankruptcy case. If the ranch had been sold, prior to the bankruptcy filing, this case would be more complicated. We would still hold that some portion of Shurley’s interest in the trust was self-settled and therefore property of the estate, but would have to engage in a further analysis of (1) how to value the self-settled portion of the trust, through tracing of assets or some other method of calculating Shurley’s proportionate contribution to the trust relative to the other settlors’ contributions, and (2) who should have the burden of proof on this issue 15 E.g., Fordyce v. Fordyce, 80 Misc.2d 909, 365 N.Y.S.2d 323, 328 (N.Y.Sup.Ct.1974) (“Even in the case of a self-settled trust, creditors can only reach the interest the settlor retained for himself.”) 16 11 U.S.C. § 541(a)(1) 17 540 S.W.2d 499 (Tex.Civ.App.–Waco 1976, writ ref’d n.r.e.) 18 Id. at 501 19 Id. at 501-02 20 Bank of Dallas, 540 S.W.2d at 501 21 28 Tenn.App. 388, 190 S.W.2d 785 (1944) 22 Id. 190 S.W.2d at 791 23 Id. at 792 24 Id. at 799 25 29 U.S.C. §§ 1001 et seq 26 Goff I, 706 F.2d at 587. The principal holding of the case–that a qualified ERISA pension plan is not excluded from the bankruptcy estate because the federal ERISA statute is not “applicable nonbankruptcy law” under Bankruptcy Code § 541(c)(2)–was expressly overruled in Patterson, 504 U.S. at 757 n. 1, 112 S.Ct. at 2246 n. 1 (citing Goff I ) 27 Goff II, 812 F.2d at 933 28 In re Latham, 823 F.2d 108, 111 (5th Cir.1987) 29 11 U.S.C. § 541(a)(1) 30 Shurley, 171 B.R. at 778-79 n. 5 31 Shurley paid only $200 down for the ranch, and executed 25 separate promissory notes to her parents, which were annually forgiven by the parents 32 The note was subsequently paid off by the trust 33 Shurley, 171 B.R. at 782 34 We assume without deciding that the court was legally correct in concluding that “substantial control” can render a spendthrift or other protective trust subject to creditor claims. We note however that we do not believe that appellees have cited any Texas authority for this proposition 35 Id. at 783 36 Tex. Prop.Code Ann. § 112.054 (Vernon 1995) 37 Shurley, 171 B.R. at 783 38 Adams v. Williams, 112 Tex. 469, 248 S.W. 673, 679 (1923) 39 Hines v. Sands 312 S.W.2d 275, 279 (Tex.Civ.App.–Fort Worth 1958, no writ) 40 In re Walden, 12 F.3d 445, 448 (5th Cir.1994) 41 Walden, 12 F.3d at 449 n. 7. In so holding, Walden was interpreting the same state statute at issue here, Insurance Code art. 21.22 42 Id. at 448 43 We assume without deciding that Shurley is correct that an annuity under the current statute can be issued by an entity other than an insurance company. But see art. 21.22(6) (“For purposes of regulation under this code, an annuity contract issued by a life, health, or accident insurance company, including a mutual company or fraternal company, or under any plan or program of annuities or benefits in use by an employer or individual, shall be considered a policy or contract on insurance.”). Texas, like all states, comprehensively regulates insurers and insurance policies 44 Steves & Sons, Inc. v. House of Doors, Inc., 749 S.W.2d 172, 175 (Tex.App.–San Antonio 1988, writ denied) (quoting In re Howerton, 21 B.R. 621 (Bankr.N.D.Tex.1982)) 45 In re Young, 806 F.2d 1303, 1306 (5th Cir.1987) (quoting Howerton ) 46 With a variable annuity, “payments to the purchaser vary with investment performance.” NationsBank of North Carolina, N.A. v. Variable Annuity Life Ins. Co., 513 U.S. 251, 254, 115 S.Ct. 810, 812, 130 L.Ed.2d 740 (1995) 47 Steves & Sons, 749 S.W.2d at 175 48 Income from the ranch belongs to the estate because the Bankruptcy Code defines property of the estate to include “[p]roceeds, product, offspring, rents, or profits of or from property of the estate.” 11 U.S.C. § 541(a)(6)
In re Jane McLean Brown – 11th Circuit Discusses Asset Protection of Non-Self-Settled Trusts
IN RE: Jane McLean BROWN
IN RE: Jane McLean BROWN, Debtor. Deborah Menotte, Plaintiff-Appellant, v. Jane McLean Brown, Defendant-Appellee.
No. 01-16211.
– August 28, 2002 Before EDMONDSON, Chief Judge, and BLACK and COX, Circuit Judges.
Morris Gary Miller,Adorno & Zeder, P.A., West Palm Beach, FL, for Plaintiff-Appellant.David Lloyd Merrill, Cohen, Conway, Copeland, Copeland, Paiva & Merrill, P.A., Fort Pierce, FL, for Plaintiff-Appellee.
This case involves a Chapter 7 bankruptcy debtor seeking to exclude her interest in a trust from the bankruptcy estate. The trust, which was created by the debtor prior to insolvency, was established to provide income to the debtor for her lifetime with the remainder ultimately being given to several charities. Based on the presence of a spendthrift clause prohibiting assignment or alienation, the debtor contends her interest in the trust is exempt from her bankruptcy estate. Alternatively, the debtor contends her interest is exempt because the trust qualifies as a support trust. Having created the trust for her own benefit, however, the debtor cannot shield her interest in the trust from her creditors. This interest, consisting of a yearly income stream from the trust assets, is not exempt from the debtor’s bankruptcy estate. The corpus of the trust, however, is not likewise subject to the claims of the debtor’s creditors.
I. BACKGROUND
A. Establishment of the Trust
Appellee Jane McLean Brown (Appellee), the debtor in the bankruptcy case giving rise to this appeal, suffers from chronic alcoholism. In 1993, her mother died, leaving her an inheritance of approximately $250,000. In order to protect the inheritance from her own improvidence, Appellee decided to place the money into an irrevocable trust which would pay her a monthly income for life. On August 11, 1993, Appellee executed the trust agreement, entitled Irrevocable Charitable Remainder Unitrust Agreement (ICRUA).
Under the ICRUA, Appellee is entitled to receive an annual amount equal to 7% of the net worth of the trust, valued as of the first day of each taxable year. The payments are due in monthly installments. Appellee, who is unemployed, lives off of the monthly payments flowing from the ICRUA. Appellee is the only beneficiary currently entitled to receive income payments under the trust.
As a trust beneficiary, Appellee’s only rights are to receive the 7% income payments. Although Appellee also serves as trustee, her powers are generally limited to directing investment decisions. She does not have the discretion to invade the trust corpus or to alter the amount of payments made to the trust beneficiaries. Furthermore, Appellee is prohibited from assigning or otherwise alienating her interest in the trust by virtue of a “spendthrift” clause contained into the ICRUA:
To the extent permitted by law, no beneficiary shall have any power to dispose of or to charge by way of anticipation any interest given to her, and all sums payable to any beneficiary shall be free and clear of her debts, contracts, dispositions and anticipations, and shall not be taken or reached by any legal or equitable process in satisfaction thereof.
See Article IV of the ICRUA.
Upon Appellee’s death, the 7% yearly trust income payments will be made to her daughter for life.1 At the daughter’s death, the corpus of the trust will pass to four charities listed in the ICRUA. Although the ICRUA expressly reserves Appellee’s right to designate substitute or additional charitable beneficiaries by testamentary instruction, the right of redesignation is limited to substituting or adding other charities meeting certain Internal Revenue Code qualifications.2
B. Chapter 7 Bankruptcy
On February 4, 1999, Appellee filed a voluntary petition for Chapter 7 bankruptcy. Appellant Deborah Menotte (Appellant) was appointed as the Chapter 7 trustee. In her bankruptcy petition, Appellee listed secured and unsecured claims totaling $110,023.53. Although Appellee acknowledged her interest in the ICRUA, no value for the interest was included as part of her asset calculation.3 Rather, Appellee claimed her interest in the trust was exempt from the bankruptcy estate. Appellant objected, arguing self-funded trusts are not insulated from the claims of creditors.
On July 26, 2000, the bankruptcy court overruled Appellant’s objection to the claimed exemption. Based on the presence of the spendthrift clause, the bankruptcy court concluded Appellee’s interest in the trust could not be attached by her creditors. As an additional ground for exemption, the bankruptcy court indicated the trust also qualified as a support trust, which is a type of trust established to provide for a beneficiary’s needs. The bankruptcy court rejected Appellee’s alternative argument that her interest in the trust constituted an exempt annuity.
On November 8, 2001, Appellant filed an appeal to the United States District Court for the Southern District of Florida. On appeal, Appellant argued the bankruptcy court erred in finding the ICRUA was exempt from the bankruptcy estate as either a spendthrift trust or a support trust. The district court affirmed in part, finding the ICRUA was exempt from the bankruptcy estate based on its spendthrift provision. Although it did not need to reach the bankruptcy court’s other ground for exemption, the district court indicated the trust likely would not qualify as a support trust because the ICRUA provided for payment of a fixed sum to Appellee each year regardless of the amount needed for her support. Having not been raised on appeal, the issue of whether the trust qualified as an exempt annuity was not addressed by the district court.4 This appeal followed.
II. STANDARD OF REVIEW
In bankruptcy appeals, legal determinations of the bankruptcy court and the district court are subject to de novo review. Bush v. JLJ, Inc. (In re JLJ, Inc.), 988 F.2d 1112, 1116 (11th Cir.1993).
III. DISCUSSION
An estate in bankruptcy consists of all interests in property possessed by the debtor at the time of her bankruptcy filing. 11 U.S.C. § 541(a)(1) (1994). Where there is a restriction on transfer of the debtor’s interests under applicable non-bankruptcy law, however, such restriction remains effective even in bankruptcy. 11 U.S.C. § 541(c)(2). As a result, spendthrift and support trusts are excluded from a debtor’s bankruptcy estate to the extent they are protected from creditors under applicable state law.5 The state law applicable in this case is the law of the State of Florida. We will examine in turn whether the ICRUA qualifies as either a spendthrift trust or a support trust under Florida law.
A. The ICRUA as a Spendthrift Trust
In Florida, trusts containing valid spendthrift provisions are protected from the reach of creditors, so long as the beneficiaries cannot exercise dominion over the trust assets. See generally Waterbury v. Munn, 159 Fla. 754, 32 So.2d 603, 605 (Fla.1947) (en banc) (recognizing the validity of spendthrift trusts); Croom v. Ocala Plumbing & Elec. Co., 62 Fla. 460, 57 So. 243, 244-45 (Fla.1911) (holding creditors could reach trust property, despite presence of spendthrift clause, where the beneficiaries possessed absolute control over the property). Where a trust is self-funded by a beneficiary, however, there is an issue as to whether the trust’s spendthrift provision is valid as against creditors of the settlor-beneficiary. We conclude it is not, and the beneficiary’s interest is subject to alienation by her creditors.
1. Validity of the ICRUA’s Spendthrift Provision as Against Appellee’s Creditors
Spendthrift trusts are defined under Florida law as “those trusts that are created with a view of providing a fund for the maintenance of another, and at the same time securing it against his own improvidence or incapacity for self-protection.” Croom, 57 So. at 244 (emphasis added); see also Waterbury, 32 So.2d at 605 (“A spendthrift trust is one that is created with the view of providing a fund for the maintenance of another, and at the same time securing it against his own improvidence or incapacity for self protection.”).
As impliedly recognized by the definition of spendthrift trusts set forth in Croom, Florida law will not protect assets contained within a spendthrift trust to the extent the settlor creates the trust for her own benefit, rather than for the benefit of another.6 See In re Witlin, 640 F.2d 661, 663 (5th Cir. Unit B 1981) (holding, under Florida law on spendthrift trusts, debtor’s interest in his Keogh plan was not exempt from his bankruptcy estate where the debtor was both the beneficiary and the settlor of the plan); 7 In re Wheat, 149 B.R. 1003, 1004-05 (Bankr.S.D.Fla.1992) (holding, under Florida law on spendthrift trusts, debtor’s deferred compensation plan was not exempt from his bankruptcy estate where it was self-funded); In re Williams, 118 B.R. 812, 815 (Bankr.N.D.Fla.1990) (holding, under Florida law on spendthrift trusts, debtor’s interests in his employer’s thrift plan was not exempt from his bankruptcy estate where it was self-settled); John G. Grimsley, Florida Law of Trusts § 15-5(b) (4th ed. 1993) (“A settlor cannot create for himself a spendthrift trust to avoid creditors.”); 55A Fla. Jur.2d Trusts § 78 (2000) ( “The trustee and the sole beneficiary cannot be one in the same under spendthrift trust law. A settlor cannot create a spendthrift trust for his or her own benefit.”).
This limitation comports with the common law of trusts.8 See, e.g., Restatement (Second) of Trusts § 156(1) (1959) (“Where a person creates for his own benefit a trust with a provision restraining the voluntary or involuntary transfer of his interest, his transferee or creditors can reach his interest.”); George Gleason Bogert & George Taylor Bogert, Trusts & Trustees § 223 (rev.2d ed. 1992) (“If a settlor creates a trust for his own benefit and inserts a spendthrift clause, it is void as far as then existing or future creditors are concerned, and they can reach his interest under the trust.”); Erwin N. Griswold, Spendthrift Trusts § 474 (1936) (“A spendthrift trust created by a person for his own benefit is invalid against creditors.”); II Austin Wakeman Scott, The Law of Trusts § 114 (3d ed. 1967) (“It is to be noticed that the beneficial interest reserved to the settlor is for some purposes treated differently from a beneficial interest created in a third person. Thus, although a beneficial interest created in a third person may be inalienable by him and not subject to the claims of his creditors, a beneficial interest reserved to the settlor himself can be alienated by him or reached by his creditors even though it is otherwise provided by the terms of the trust.”). Self-settled trusts may be reached by creditors, even if the settlor was solvent at the time of the trust’s creation and no fraud was intended. See Scott, supra, at § 156 (“It is immaterial that in creating the trust the settlor did not intend to defraud his creditors. It is immaterial that he was solvent at the time of the creation of the trust. It is against public policy to permit a man to tie up his own property in such a way that he can still enjoy it but can prevent his creditors from reaching it.”).
In this case, Appellee is a beneficiary of a self-settled spendthrift trust. In 1993, Appellee inherited $250,000 from her mother. To protect the inheritance from her own squandering, Appellee established a charitable trust under which she retained the right to receive a 7% income for life. Appellee purportedly was not insolvent at the time the trust was established; nor is there evidence Appellee intended to defraud her creditors. Nevertheless, Appellee is both the settlor and a beneficiary of the trust. Consequently, the spendthrift clause contained in the trust is ineffective as against Appellee’s creditors.9
2. Interest Reachable by Appellee’s Creditors
When a settlor creates a trust for her own benefit and inserts a spendthrift clause, the entire spendthrift clause is void as to her creditors. See Bogert § 223 (“The entire spendthrift clause, both as to voluntary and involuntary alienation, is void. The creditors can reach the settlor-beneficiary’s interest.”). In the absence of a valid spendthrift provision, a beneficiary’s interest in a trust is a property right which is liable for the beneficiary’s debts to the same extent as her legal interests. See generally Grimsley § 8-3 (“Where the beneficiary’s equitable interest is vested in him without restraint on alienation, the interest is transferable by him and subject to claims of his creditors.”); Bogert § 193 (“If the trust is active the creditor of the beneficiary can subject the latter’s interest in the trust to the satisfaction of the debt, either in law or equity, unless a statute or a valid spendthrift provision prevents this result.”).
As with any other property right, a trust beneficiary’s right to receive income for life is an interest which may be alienated or subject to attachment by her creditors. See generally Blair v. Comm’r of Internal Revenue, 300 U.S. 5, 13-14, 57 S.Ct. 330, 333-34, 81 L.Ed. 465 (1937) (holding that in absence of a valid restraint on alienation, the interest of a trust beneficiary to income for life was present property which could be assigned to others); Bradshaw v. Am. Advent Christian Home & Orphanage, 145 Fla. 270, 199 So. 329, 332-33 (Fla.1940) (holding that in absence of a restraint on alienation, income stream granted to orphanage as trust beneficiary was subject to the claims of the orphanages’ creditors).
Where the only interest a settlor has retained for herself under a trust is the right to income for life, it is solely this interest which her creditors can reach.10 See II Scott § 156 (“Where the only interest which the settlor has created for himself under the trust is a right to the income for life or for some other period, it is this interest alone which his creditors can reach, unless the creation of the trust was a disposition in fraud of his creditors.”); see also In re Goff, 812 F.2d 931, 933 (5th Cir.1987) (indicating creditors of settlors-beneficiaries were limited to attaching whatever interest the settlors retained under the trust and, therefore, could not obtain a lien on real property conveyed into the trust because settlors’ interest was equitable rather than legal); Bogert § 223 (“If the settlor creates a trust for the settlor for life, with a restraint on voluntary or involuntary alienation of his interest, and with a remainder interest in others at his death, his creditors can reach his life interest but not the remainder, unless he has also reserved a general power of appointment.”); Griswold § 475 (indicating creditors could reach a settlor’s life interest, but not the remainder if vested in another).11 As illustrated in the Restatement (Second) of Trusts:
A transfers property to B in trust to pay the income to A for life and to pay the principal on A’s death to C. By the terms of the trust it is provided that A’s interest under the trust cannot be transferred or reached by his creditors. A can transfer his interest; his creditors can reach his interest.
Restatement (Second) of Trusts § 156 cmt. a, illus. 1.
This result makes sense. Although the spendthrift provision of a trust is void as against a settlor-beneficiary’s creditors, the trust itself remains valid. See, e.g., In re Goff, 812 F.2d at 933 (holding spendthrift provision was void as against creditors based on self-settlement, but trust itself was valid); Liberty Nat. Bank v. Hicks, 173 F.2d 631, 634-35 (D.C.Cir.1948) (holding settlor-beneficiary was bound by terms of trust, even though its spendthrift provision was ineffective as against his creditors); see also 76 Am.Jur.2d Trusts § 128 (1992) (“[W]here there is a provision in the terms of the trust imposing restraint on the transfer by a beneficiary of his interest and the provision is illegal, the provision fails, but the whole trust does not fail, since provisions like this can ordinarily be separated from other provisions without defeating the purpose of the settlor in creating the trust.”). Thus, although a settlor-beneficiary’s creditors are not bound by a trust’s spendthrift clause, the assets subject to attachment are circumscribed by the trust agreement.
By establishing an irrevocable trust in favor of another, a settlor, in effect, gives her assets to the third party as a gift. Once conveyed, the assets no longer belong to the settlor and are no more subject to the claims of her creditors than if the settlor had directly transferred title to the third party. Where the settlor retains a right to income payments, however, there is a limited interest created in favor of the settlor. It is this limited interest, and not the entire trust assets, which may be attached by the settlor’s creditors:
Life interest in settlor with remainder over to a named or designated person. The settlor may reserve to himself only the income from the property transferred during his life and may by the transfer give a vested remainder after his death to some named person or persons. This situation arises in the following typical case: A conveys property to T on trust to pay the income to A during A’s life, with restraints against anticipation, assignment, and the rights of creditors, and with a further provision that on the death of A the property shall be conveyed to B. Such a conveyance creates in B a present vested remainder, and if the transfer is not a fraudulent conveyance, the interest of B can not, of course, be reached for A’s debts. The remainder may be to a class, as to the children of the settlor. It may likewise be contingent until the death of the settlor. In any of these cases, if the settlor has reserved no power over the remainder, and the transfer is not fraudulent, the conveyance of the remainder constitutes a present gift and is just as much beyond the reach of creditors as any other completed gift.
Griswold § 475.
In this case, Appellee transferred assets of $250,000 into a charitable trust. The transfer was irrevocable, and the charities listed in the trust became vested in the corpus of the trust, subject only to divestment through redesignation of other charitable remaindermen. Appellee retained no rights to the trust principle. In establishing the ICRUA, however, Appellee granted herself an interest in the trust in the form of a right to receive 7% income from the trust for life. As a result, Appellee’s income stream is subject to the reach of her creditors.12 The corpus of the trust, having irrevocably been conveyed to the trust for the benefit of others, is not likewise subject to the claims of her creditors.
B. The ICRUA as a Support Trust
In addition to claiming the ICRUA’s spendthrift provision is effective against her creditors, Appellee asserts the trust is exempt from her bankruptcy estate as a support trust. “A support trust is one where the trustee is directed to pay to the beneficiary only so much income or principal, or both, as is necessary for the beneficiary’s support and education.” In re McLoughlin, 507 F.2d 177, 185 (5th Cir.1975). Support trusts, by their nature, are non-transferrable. Id.; see also Bogert § 229 (“If a trustee is directed to pay or apply trust income or principal for the benefit of a named person, but only to the extent necessary to support him, and only when the disbursements will accomplish support, the nature of the interest of the beneficiary makes it not transferable and not subject to the claims of creditors.”).
As an initial matter, the structure of the ICRUA is not in the form of a support trust. Nowhere in the ICRUA is there a mention of payments by the trustee for the support of Appellee. Although the monthly income payments are used by Appellee for her own support, the ICRUA does not limit disbursements to that effect. Rather, the trustee is merely obligated to pay 7% of the value of the trust to Appellee each year. The trustee may not pay Appellee more than the 7% income if her needs exceed that amount; likewise, the trustee may not limit payments to less than the 7% income. Appellee is entitled to the income payments regardless of need and may dispose of the funds as she chooses. The ICRUA, therefore, does not constitute a support trust.
Even if the ICRUA qualified as a support trust, Appellee’s interest in the trust would not be shielded from her creditors. As with the ICRUA’s spendthrift provision, a support trust created by a settlor for her own benefit is ineffective as against her creditors. See Restatement (Second) of Trusts § 156(2) (“Where a person creates for his own benefit a trust for support or a discretionary trust, his transferee or creditors can reach the maximum amount which the trustee under the terms of the trust could pay to him or apply for his benefit.”); II Scott § 156.1 (“The policy which prevents a person from creating a spendthrift trust for his own benefit also prevents his creating a trust under which his creditors are precluded from reaching the income or principal which is to be applied for his support.”).
IV. CONCLUSION
When establishing the ICRUA, Appellee made an irrevocable charitable gift of the trust corpus. By including the right to receive income payments for life, Appellee retained a portion of the assets for herself. Whatever interest Appellee retained is her own property, subject to the claims of her creditors. Accordingly, Appellee’s right to an income stream is not exempt from her bankruptcy estate and may be reached by her creditors. The corpus of the trust, however, may not be reached by Appellee’s creditors.
AFFIRMED IN PART and REVERSED IN PART.
FOOTNOTES
1. The income payments to Appellee’s daughter will be due under the ICRUA as long as the daughter survives Appellee, unless Appellee revokes and terminates the interest of the daughter through testamentary instruction. If the daughter’s interest is revoked and terminated, the ICRUA will treat the daughter as having predeceased Appellee.
2. The ICRUA states any charity serving as a beneficiary under the trust must qualify as an organization described in 26 U.S.C. §§ 170(b)(1)(A), 170(c), 2055(a), 2522(a) (1994).
3. Appellee’s interest in the ICRUA was assigned a value of “0.00.”
4. On appeal to this Court, Appellee argues the ICRUA is exempt from her bankruptcy estate as an annuity. This issue, however, was not raised before the district court; nor was it raised by Appellant as an issue on appeal to this Court. Whether the ICRUA qualifies as an exempt annuity, therefore, is not properly before the Court. See generally Depree v. Thomas, 946 F.2d 784, 793 (11th Cir.1991) (“We have long held that an issue not raised in the district court and raised for the first time in an appeal will not be considered by this court.”).
5. See Lichstrahl v. Bankers Trust (In re Lichstrahl), 750 F.2d 1488, 1490 (11th Cir.1985) (stating the term “applicable nonbankruptcy law” in 11 U.S.C. § 541(c)(2) refers to state spendthrift trust law), abrogated on other grounds by Patterson v. Shumate, 504 U.S. 753, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992); see also Rep. of the Comm’n on the Bankr.Laws of the U.S., H.R. Doc. No. 93-137, at 193 (1973) (discussing recommendations to change the bankruptcy laws to include spendthrift trusts within a debtor’s bankruptcy estate).
6. This principle is not unique to Florida law. See, e.g., John Hancock Mut. Life Ins. Co. v. Watson (In re Kincaid), 917 F.2d 1162, 1166-67 (9th Cir.1990) (stating Oregon and Massachusetts laws hold a “settlor cannot create a spendthrift trust for his own benefit”); Herrin v. Jordan (In re Jordan), 914 F.2d 197, 199-200 (9th Cir.1990) (applying Washington law and holding trust funded by beneficiary’s personal injury settlement was not excludable from his bankruptcy estate as a valid spendthrift trust); Dzikowski v. Edmonds (In re Cameron), 223 B.R. 20, 24 (Bankr.S.D.Fla.1998) (“It is axiomatic that under New York Law, self-settled trusts are void against both present and future creditors and a debtor may not avoid his creditors, or future creditors, by placing his property in trust for his own benefit.”); In re Spenlinhauer, 182 B.R. 361, 364-65 (Bankr.D.Me.1995) (applying Maine law and holding settlor-beneficiary’s interest in trust was not protected from creditors), aff’d, 101 F.3d 106 (1st Cir.1996); Jensen v. Hall (In re Hall), 22 B.R. 942, 944 (Bankr.M.D.Fla.1982) (applying Ohio law and holding creditors could reach settlor-beneficiary’s interest in spendthrift trust); Speed v. Speed, 263 Ga. 166, 430 S.E.2d 348, 349 (Ga.1993) (applying Georgia law, and holding spendthrift provision in trust created by quadriplegic husband from his insurance benefits was not enforceable where the husband was both settlor and beneficiary); Bank of Dallas v. Republic Nat’l Bank of Dallas, 540 S.W.2d 499, 501-02 (Tex.App.1976) (applying Texas law, and holding settlor who created spendthrift trust and made herself a beneficiary thereof could not protect her interest in the trust from her creditors).
7. In Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir.1981) (en banc), this Court adopted as binding precedent all decisions of the former Fifth Circuit handed down prior to close of business on September 30, 1981.
8. Sources setting forth the common law of trusts frequently are cited by Florida courts for guidance regarding construction of spendthrift and other trusts. See, e.g., Bacardi v. White, 463 So.2d 218, 222 (Fla.1985) (citing Restatement (Second) of Trusts regarding spendthrift trusts); Waterbury, 32 So.2d at 605 (citing Bogert’s Trusts & Trustees and Griswold’s Spendthrift Trusts regarding spendthrift trusts); Gilbert v. Gilbert, 447 So.2d 299, 301 (Fla.App.1984) (citing Scott’s The Law of Trusts regarding spendthrift trusts).
9. The fact that Appellee cannot exercise dominion over the trust assets is irrelevant to this analysis. The issue of self-settlement is separate from the issue of control, and either can serve as an independent ground for invalidating a spendthrift provision. See, e.g., In re Spenlinhauer, 182 B.R. at 363 (declining to address beneficiaries’ control over trust where the trust was self-settled and, therefore, the spendthrift provision was ineffective on that basis alone); In re Wheat, 149 B.R. at 1004 (“However, the Debtor’s degree of control is irrelevant in this case since one cannot create a spendthrift trust for oneself in Florida.”); Walro v. Striegel (In re Walro), 131 B.R. 697, 701 (Bankr.S.D.Ind.1991) (holding self-settlement prevented agreement from qualifying as a spendthrift trust, although beneficiary did not have any control over assets).Although some cases appear to intertwine the issues of self-settlement and control, those cases are distinguishable because their facts supported invalidity of the spendthrift trusts at issue under both grounds. See, e.g., Fehlhaber v. Fehlhaber, 850 F.2d 1453, 1455 (11th Cir.1988) (citing In re Witlin and other cases for the proposition that a settlor who creates a trust for his own benefit cannot protect his interest under the trust from his creditors, but also stating a settlor who exercises dominion over the trust cannot protect the trust from creditors); Lawrence v. Chapter 7 Trustee (In re Lawrence), 251 B.R. 630, 641-42 (Bankr.S.D.Fla.2000) (invalidating spendthrift provision where trust was self-settled and the beneficiary exercised control over the trust), aff’d, 279 F.3d 1294 (11th Cir.2002); In re Cattafi, 237 B.R. 853, 855-56 (Bankr.M.D.Fla.1999) (same). In those cases, there was no need to address the issues as separate grounds for invalidation.
10. Some limited exceptions to this general rule exist which do not apply in this case. For example, creditors of a settlor-beneficiary who has reserved only a right to income may reach both the income and the corpus of a trust if the trustee has discretion to invade the corpus for the benefit of the settlor. See, e.g., Miller v. Ohio Dept. of Human Servs., 105 Ohio App.3d 539, 664 N.E.2d 619, 621 (Ohio App.1995) (holding entire amount of trust was available to Medicaid even though settlor was given only income for life, where the trustee in his discretion could expend the principal on her behalf). Likewise, creditors may reach the corpus of a trust where the beneficiary is given not only an income stream for life, but also the ability to designate remaindermen. See, e.g., Bank of Dallas, 540 S.W.2d at 502 (holding income as well as corpus of an irrevocable spendthrift trust created by the settlor for her and her children’s benefit was subject to garnishment by creditors where the settlor received all the income from the corpus and held a general power of appointment exercisable at death); Restatement (Second) of Trusts § 156 cmt. c (“If the settlor reserves for his own benefit not only a life interest but also a general power to appoint the remainder by deed or will or by deed alone or by will alone, his creditors can reach the principal of the trust as well as the income.”). In this case, the trustee of the ICRUA does not have discretion to invade the corpus of the trust for Appellee’s benefit. Additionally, Appellee does not have a general power of appointment regarding remaindermen; rather, her right to redesignation is strictly limited to substituting other Internal Revenue Code qualified charities.
11. See also Greenwich Trust Co. v. Tyson, 129 Conn. 211, 27 A.2d 166, 173-74 (Conn.1942) (“While we have found few cases dealing with a situation where the settlor of the trust, after reserving to himself the income for life, creates vested indefeasible interests, to take effect at his death, we have found none which subjects such interests to the demands of the settlor’s creditors, and on principle there is no question that the creditors cannot reach those interests. Over them the settlor has no dominion, and his creditors have no more right to reach them than they would any interests in property formerly owned by him which has passed into the ownership of another.”); Henderson v. Sunseri, 234 Ala. 289, 174 So. 767, 770 (Ala.1937) (holding settlor’s creditors could only reach the income stream reserved to the settlor, and not the remainder which was vested in the settlor’s children); Dillon v. Spilo, 275 N.Y. 275, 9 N.E.2d 864, 866 (N.Y.App.1937) (holding settlor’s reserved life estate was subject to reach by her creditors, but not the remainder of the trust); Egbert v. De Solms, 218 Pa. 207, 67 A. 212, 212-13 (Pa.1907) (holding settlors’ creditors could reach income from trust which was reserved for settlors’ benefit, but could not reach the remainder of the trust which was vested in the settlors’ children).
12. Likewise, her interest vests in her bankruptcy trustee. See II Scott § 147.1 (“Where a beneficiary of a trust becomes bankrupt, his interest under the trust vests in the trustee in bankruptcy, unless either by the terms of the trust or by statute there is a restraint on the alienation of his interest. If his interest is assignable by him or if his creditors can reach it, it vests in the trustee in bankruptcy.”).
BLACK, Circuit Judge:
Fairstar: Utah Court Ignores State of Filing for Charging Order Purposes
American Institutional Partners, LLC v. Fairstar Resources, Ltd., 2011 WL 1230074 (D.Del., Mar. 31, 2011)
United States District Court,
D. Delaware.
AMERICAN INSTITUTIONAL PARTNERS, LLC, et al., Plaintiffs,
v.
FAIRSTAR RESOURCES LTD., and Goldlaw Pty Ltd., Defendants.
C.A. No. 10–489–LPS.
March 31, 2011.
Theodore Allan Kittila, Esq. of Elliot Greenleaf, Wilmington, DE, for Plaintiffs.
David E. Wilks, Esq. of Wilks, Lukoff & Bracegirdle, LLC, Wilmington, DE, for Defendants.
MEMORANDUM OPINION
STARK, District Judge.
*1 Pending before the Court is the Motion to Dismiss or Transfer Venue filed by defendants Fairstar Resources LTD (“Fairstar”) and Goldlaw PTY, LTD (“Goldlaw”) (collectively, “Defendants”). (D.I.4) Plaintiffs American Institutional Partners, LLC (“AIP”), AIP Lending, LLC (“Lending”), AIP Resort Development, LLC (“AIP RD”), Peninsula Advisors, LLC (“Peninsula”), and Mark Robbins (“Robbins”) (collectively, “Plaintiffs”) oppose the motion. (D.I.7) For the reasons discussed below, the Court will grant in part and deny in part Defendants’ motion.
I. BACKGROUND
A. The Parties
AIP, Lending, Peninsula, and AIP RD are limited liability companies organized under the laws of Delaware. (Am.Coml.¶ 3–6) AIP is the holder of 100% of the membership interest in and the managing member of Lending, and also is the holder of 55% of the membership interest in and manager of AIP RD. ( Id. ¶¶ 3, 16) Robbins is the manager of AIP, holder of 100% of the membership interest in and the managing member of Cavalion Group LLC (“Cavalion”)-a Delaware limited liability company which holds 100% of the membership interest in Peninsula-and former owner of 49% of the membership interest in and current manager of Seven Investments LLC, a Utah LLC which, in turn, holds 100% of the membership interests in AIP. ( Id. ¶¶ 7, 14)
Fairstar is a diversified exploration company organized under the laws of Australia, with its principal place of business in Osborne Park, Western Australia. (D.I. 4 at 9; Am. Compl. ¶ 8 ) Goldlaw is a corporation also organized under the laws of Australia, with its principal place of business in Osborne Park, Western Australia. (D.I. 4 at 9) Plaintiffs allege that Goldlaw is controlled by Fairstar. (Am.Compl.¶ 9) Fairstar and Goldlaw are judgment creditors of AIP, AIP Lending, and Robbins. (D.I. 4 Ex. B ¶ 2)
B. Out–of–State Proceedings
This dispute stems from litigation in a Utah state court. Defendants brought an action in the Third Judicial District of Utah against AIP, Lending, and Robbins (“the Utah Action”), in which Defendants prevailed.FN1 The Utah court entered judgment for Defendants in the amount of $2,296,651.38 and, upon Defendants’ request, issued numerous charging orders over various corporate interests held by Robbins.FN2 (D.I. 4 at 13; Am. Compl. Ex. C) FN3 The orders charge the various companies with payment of the unsatisfied judgment plus interest, attorney fees, and costs, as well as order the foreclosure and constable sale of the corporate interests to satisfy the judgment. (D.I. 4 Ex. A; D.I. 7 Ex. B) The Utah court specified the constable sales would result in payment to Defendants’ counsel in the Utah Action, and buyers would acquire all rights in a purchased company if AIP, Lending, or Robbins was the company’s sole member. ( Id.)
FN1. The Utah Action is captioned Fairstar Resources Ltd. and Goldlaw Pty. Ltd. v. American Institutional Partners, LLC, AIP Lending, LLC, and Mark Robbins, Civil No. 080916464.
FN2. The record contains thirty charging orders. (D.I. 4 Ex. A; D.I. 7 Ex. B) Neither party specifies the total number of charging orders entered by the Utah court.
FN3. The Complaint in this action appears in the record only as an attachment to Defendants’ Motion to Dismiss or Transfer. (D.I. 4 Ex. A) The Court, therefore, will cite to the Complaint in this manner, with no reference to a specific docket item number.
The record contains three objections filed by AIP, Lending, and Robbins to some of these charging orders, dated March 18, 2009, April 2, 2009, and May 22, 2009, respectively. (D.I. 4 Ex. F) In all three, AIP, Lending, and Robbins raised, among other things, the same contention: that Delaware law applies to the charging proceedings because the charged corporations are Delaware entities. ( Id.) AIP, Lending, and Robbins also filed a motion on May 16, 2010 for stay of the constable sales pending resolution of the instant action. (D.I. 4 Ex. G) The Utah court issued three orders in response. The first is dated April 16, 2009 (“the April 16 Order”) and denied objections to the constable sale of Peninsula. (D.I. 4 Ex. E) The court stated “that Utah law applies to all execution proceedings in this matter, including the foreclosure of a member’s interest in a limited liability [company], whether such company is domestic or foreign.” ( Id.) In the second, dated April 23, 2009 (“the April 23 Order”), the court summarily denied an objection to the sale of interests in Cavalion. ( Id.) Finally, in a June 4, 2010 order (“the June 4 Order”), the Utah court denied a motion to stay the pending constable sales until the resolution of the instant action, finding that the court had already ruled on arguments raised by AIP, Lending, and Robbins, including the assertion that Delaware law controlled the proceedings. (D.I. 4 Ex. H)
*2 A series of related litigations are also taking place in other states concerning the sale of a Utah ski resort known as The Canyons (“the Canyons Actions”). (Am.Compl.¶ 17) Peninsula has been involved in several of these actions, including one in the Colorado state courts (“the Colorado Action”). FN4 (D.I. 7 at 2) Fairstar and Goldlaw are not parties to the Canyons Actions. (D.I. 4 at 6) Plaintiffs, however, assert that Defendants have taken control of Peninsula’s actions in the Colorado Action, going so far as to sue Robbins. (D.I. 7 at 4)
FN4. The Colorado Action is captioned Vail Resorts, Inc. v. Peninsula Advisors, Case No. 07 CV 7264. (D.I.7 at 2)
C. Procedural History
Plaintiffs filed suit in the Delaware Court of Chancery on May 14, 2010, seeking a declaratory judgment that Defendants’ foreclosures upon Plaintiffs’ membership interests in eight Delaware limited liability companies (“the Subject LLCs”),FN5 which took place in Utah pursuant to a Utah court’s charging orders, are invalid under Delaware law, and a declaration of the identity of the members and managers of the Subject LLCs. (Am.Compl.¶¶ 25–28, 34–37) Plaintiffs also requested an injunction to prevent Defendants from obtaining confidential and privileged documents through assertion of membership and managerial interests in the Subject LLCs. ( Id. ¶¶ 2, 30–32) Defendants removed the action to this Court on June 4, 2010. (D.I.2) Defendants filed their Motion to Dismiss or Transfer Venue on July 13, 2010. (D.I.4) Plaintiffs filed their Opposition on August 12, 2010, and Defendants filed their Reply on August 25, 2010.
FN5. The eight Subject LLCs are AIP, AIP Lending, AIP RD, Peninsula, Cavalion, Smarthedge, LLC, Talisker Canyons Acquisition Co., LLC, and Pelican Equity, LLC. (Am.Compl.¶ 21)
Plaintiffs also filed a Motion for a Temporary Restraining Order and Preliminary Injunction on August 24, 2010, on which it requested to be heard. (D.I.10) The Court held a teleconference on the emergency motion on August 26, 2010, during which the Court denied the motion. This ruling was memorialized in a written Order issued on August 30, 2010. (D.I.14)
The Court held oral argument on the motion to dismiss or transfer on November 5, 2010. See Hr’g Tr., November 5, 2010 (D.I.15) (hereinafter “Tr.”).
D. The Parties’ Contentions
By their motion, Defendants seek dismissal of the complaint on the grounds that: (1) pursuant to Federal Rule of Civil Procedure 12(b)(2), this Court lacks personal jurisdiction over them because the Delaware implied consent statute, 6 Del. C. § 18–109(a) (“the Implied Consent Statute”), is inapplicable, and exercising personal jurisdiction would fail to comport with Due Process; (2) pursuant to Federal Rule of Civil Procedure 12(b)(6), the Complaint fails to state a claim on which relief can be granted because the Rooker–Feldman doctrine precludes this Court from considering Plaintiffs’ claims; and (3) pursuant to Federal Rule of Civil Procedure 12(b)(6), the Complaint fails to state a claim on which relief can be granted because, under the doctrine of res judicata, a decision by a Utah state court bars Plaintiffs’ claims. (D.I. 4 at 4–9, 10–11, 15–16) In the alternative, Defendants seek a transfer of venue pursuant to 28 U.S.C. § 1404(a) to the United States District Court for the District of Utah. (D.I. 4 at 17–20)
*3 Plaintiffs respond that Defendants are subject to personal jurisdiction under the Implied Consent Statute and that Defendants have minimum contacts with Delaware, making the exercise of personal jurisdiction proper under the Due Process Clause. (D.I. 7 at 6–11) They argue, in the alternative, that this Court has jurisdiction pursuant to 6 Del. C. § 18–110(a), which gives Delaware courts jurisdiction to determine who is entitled to serve as a manager of a Delaware limited liability company. ( Id at 11–14) They also contend that neither res judicata nor the Rooker–Feldman doctrine bar their claims. ( Id. at 16–22) Finally, Plaintiffs assert that a transfer of venue to Utah is inappropriate. ( Id. at 23–24)
II. LEGAL STANDARDS
A. Motion to Dismiss Pursuant to Rule 12(b)(2)
Federal Rule of Civil Procedure 12(b)(2) directs the Court to dismiss a case when it lacks personal jurisdiction over the defendant. Determining the existence of personal jurisdiction requires a two-part analysis. First, the Court analyzes the long-arm statute of the state in which the Court is located. See IMO Indus., Inc. v. Kiekert AG, 155 F.3d 254, 259 (3d Cir.1998). Next, the Court must determine whether exercising jurisdiction over the defendant in this state comports with the Due Process Clause of the Constitution. See id. Due Process is satisfied if the Court finds the existence of “minimum contacts” between the non-resident defendant and the forum state, “such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice.” Int’l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945) (internal quotation marks omitted).
Once a jurisdictional defense has been raised, the plaintiff bears the burden of establishing, by a preponderance of the evidence and with reasonable particularity, the existence of sufficient minimum contacts between the defendant and the forum to support jurisdiction. See Provident Nat’l Bank v. Cal. Fed. Sav. & Loan Ass’n, 819 F.2d 434, 437 (3d Cir.1987); Time Share Vacation Club v. Atl. Resorts, Ltd., 735 F.2d 61, 66 (3d Cir.1984). To meet this burden, the plaintiff must produce “sworn affidavits or other competent evidence,” since a Rule 12(b)(2) motion “requires resolution of factual issues outside the pleadings.” Time Share, 735 F.2d at 67 n. 9; see also Philips Elec. N. Am. Corp. v. Contec Corp., 2004 WL 503602, at *3 (D.Del. Mar. 11, 2004) (“After discovery has begun, the plaintiff must sustain [its] burden by establishing jurisdictional facts through sworn affidavits or other competent evidence.”).
If no evidentiary hearing has been held, a plaintiff “need only establish a prima facie case of personal jurisdiction.” O’Conner v. Sandy Lane Hotel Co., 496 F.3d 312, 316 (3d Cir.2007). A plaintiff “presents a prima facie case for the exercise of personal jurisdiction by establishing with reasonable particularity sufficient contacts between the defendant and the forum state.” Mellon Bank (E.) PSFS, Nat. Ass’n v. Farino, 960 F.2d 1217, 1223 (3d Cir.1992). On a motion to dismiss for lack of personal jurisdiction, “the plaintiff is entitled to have its allegations taken as true and all factual disputes drawn in its favor.” Miller Yacht Sales, Inc. v. Smith, 384 F.3d 93, 97 (3d Cir.2004). A court is always free to revisit the issue of personal jurisdiction if it later is revealed that the facts alleged in support of jurisdiction are in dispute. See Metcalfe v. Renaissance Marine, Inc., 566 F.3d 324, 331 (3d Cir.2009).
B. Motion to Dismiss Pursuant to Rule 12(b)(6)
*4 Evaluating a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) requires the Court to accept as true all material allegations of the complaint. See Spruill v. Gillis, 372 F.3d 218, 223 (3d Cir.2004). “The issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims.” In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1420 (3d Cir.1997) (internal quotation marks omitted). Thus, the Court may grant such a motion to dismiss only if, after “accepting all well-pleaded allegations in the complaint as true, and viewing them in the light most favorable to plaintiff, plaintiff is not entitled to relief.” Maio v. Aetna, Inc., 221 F.3d 472, 481–82 (3d Cir.2000) (internal quotation marks omitted).
However, “[t]o survive a motion to dismiss, a civil plaintiff must allege facts that ‘raise a right to relief above the speculative level on the assumption that the allegations in the complaint are true (even if doubtful in fact).’ ” Victaulic Co. v. Tieman, 499 F.3d 227, 234 (3d Cir.2007) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). While heightened fact pleading is not required, “enough facts to state a claim to relief that is plausible on its face” must be alleged. Twombly, 550 U.S. at 570. A claim is facially plausible “when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, ––– U.S. ––––, 129 S.Ct. 1937, 1949 (2009). At bottom, “[t]he complaint must state enough facts to raise a reasonable expectation that discovery will reveal evidence of [each] necessary element” of a plaintiff’s claim. Wilkerson v. New Media Tech. Charter Sch. Inc., 522 F.3d 315, 321 (3d Cir.2008) (internal quotation marks omitted). “[W]hen the allegations in a complaint, however true, could not raise a claim of entitlement to relief, this basic deficiency should … be exposed at the point of minimum expenditure of time and money by the parties and the court.” Twombly, 550 U.S. at 558 (internal quotation marks omitted). Nor is the Court obligated to accept as true “bald assertions,” Morse v. Lower Merion Sch. Dist., 132 F.3d 902, 906 (3d Cir.1997) (internal quotation marks omitted), “unsupported conclusions and unwarranted inferences,” Schuylkill Energy Res., Inc. v. Pa. Power & Light Co., 113 F.3d 405, 417 (3d Cir.1997), or allegations that are “self-evidently false,” Nami v. Fauver, 82 F.3d 63, 69 (3d Cir.1996).
C. Motion to Transfer Venue Pursuant to 28 U.S.C. § 1404(a)
Under appropriate circumstances, transfer of a case from one federal court to another is authorized by 28 U.S.C. § 1404(a). Section 1404 provides: “For the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought.” 28 U.S.C. § 1404(a). The burden of demonstrating that such a transfer is appropriate rests with the moving party. See Jumara v. State Farm Ins. Co., 55 F.3d 873, 879 (3d Cir.1995). In evaluating such a motion, courts consider a nonexclusive list of six private factors and six public factors articulated in Jumara:
*5 (1) plaintiff’s foram preference as manifested in the original choice;
(2) the defendant’s preference;
(3) whether the claim arose elsewhere;
(4) the convenience of the parties as indicated by their relative physical and financial condition;
(5) the convenience of the witnesses-but only to the extent that the witnesses may actually be unavailable for trial in one of the fora;
(6) the location of books and records (similarly limited to the extent that the files could not be produced in the alternative forum);
(7) the enforceability of the judgment;
(8) practical considerations that could make the trial easy, expeditious, or inexpensive;
(9) the relative administrative difficulty in the two fora resulting from court congestion;
(10) the local interest in deciding local controversies at home;
(11) the public policies of the fora; and
(12) the familiarity of the trial judge with the applicable state law in diversity cases.
Id. at 879–80.
In considering a motion to transfer venue and determining “whether, on balance, the litigation would more conveniently proceed and the interests of justice be better served by a transfer to a different foram,” it bears emphasis that “the plaintiff’s choice of venue should not be lightly disturbed.” Id. at 879. Hence, “unless the balance of convenience of the parties is strongly in favor of defendant, the plaintiff’s choice of forum should prevail.” Shutte v. Armco Steel Corp., 431 F.2d 22, 25 (3d Cir.1970) (internal quotations omitted). “Because a plaintiff’s choice of forum is accorded substantial weight and venue is transferred only if the defendant truly is regional (as opposed to national) in character, a defendant has the burden of establishing that the balance of convenience of the parties and witnesses strongly favors the defendant. Therefore, defendants [seeking transfer] must prove that litigating in Delaware would pose a unique or unusual burden on their operations.” L’Athene, Inc. v. Earthspring LLC, 570 F.Supp.2d 588, 592 (D.Del.2008) (internal citations and quotation marks omitted).
III. DISCUSSION
A. Personal Jurisdiction
Plaintiffs bear the burden of adducing facts which, at a minimum, “establish with reasonable particularity” that personal jurisdiction exists over Defendants. See Provident Nat’l Bank, 819 F.2d at 437. Plaintiffs assert two bases for exercising personal jurisdiction over Defendants. First, Plaintiffs rely on the Implied Consent Statute. Second, they rely on 6 Del. C. § 18–110(a), a provision that gives Delaware courts jurisdiction to determine who is entitled to serve as manager of a Delaware limited liability corporation. Under either basis, the exercise of personal jurisdiction must also comport with the Due Process Clause of the Constitution. See IMO Indus., 155 F.3d at 259; PT China LLC v.. PT Korea LLC, 2010 WL 761145, at *5 (Del. Ch. Feb. 26, 2010) (“Even if one is served pursuant to § 18409(a), personal jurisdiction must still be consistent with due process.”). This requirement is met, Plaintiffs advert, because Defendants have the requisite minimum contacts with Delaware.
*6 The Court concludes that Plaintiffs have made an adequate showing under the Implied Consent Statute to justify the exercise of personal jurisdiction over Fairstar, and that with respect to Fairstar the requirements of Due Process are satisfied. However, no adequate showing has been made for Goldlaw. Also, asserting personal jurisdiction over either Defendant pursuant to § 18–110(a) would be inappropriate.
1. Implied Consent Statute
Delaware’s Implied Consent Statute provides a basis for exercising personal jurisdiction over an out-of-state citizen who is a manager, or participates in the management, of a Delaware limited liability company. The provision states:
(a) A manager … of a limited liability company may be served with process in the manner prescribed in this section in all civil actions or proceedings brought in the State of Delaware involving or relating to the business of the limited liability company … whether or not the manager … is a manager … at the time suit is commenced…. Such service as a manager … shall signify the consent of such manager … that any process when so served shall be of the same legal force and validity as if served upon such manager … within the State of Delaware…. As used in this subsection (a) …, the term “manager” refers (i) to a person who is a manager as defined in § 18–101(10) of this title and (ii) to a person, whether or not a member of a limited liability company, who, although not a manager as defined in § 18–101(10) of this title, participates materially in the management of the limited liability company; provided however, that the power to elect or otherwise select or to participate in the election or selection of a person to be a manager as defined in § 18–101(10) of this title shall not, by itself, constitute participation in the management of the limited liability company.
6 Del. C. § 18–109 (emphasis added).
Defendants argue that the Implied Consent Statute is inapplicable because the Complaint does not involve or relate to the business of the Subject LLCs. FN6 (D.I. 4 at 4) Defendants emphasize that, while the complaint alleges they are purporting to act as managers, the Implied Consent Statute applies only to actual managers or entities actually participating in management. (Id) If Plaintiffs are correct (i.e., Defendants are wrongfully exercising management rights), Defendants argue, the basis for jurisdiction under the Implied Consent Statute (material participation in management) “falls out” of the case, making jurisdiction improper. ( Id.)
FN6. This argument is unpersuasive. “An action involves or relates to the business of an LLC if: (1) the allegations against the manager focus centrally on his rights, duties and obligations as a manager of a Delaware LLC; (2) the resolution of this matter is inextricably bound up in Delaware law; and (3) Delaware has a strong interest in providing a forum for disputes relating to the ability of managers of an LLC formed under its law to properly discharge their respective managerial functions.” Vichi v. Koninklijke Philips Elecs. N.V., 2009 WL 4345724, at *8 (Del. Ch. Dec. 1, 2009) (internal quotation marks omitted). A dispute regarding the identity of the proper members and managers of an LLC clearly relates to the business of that LLC. See Cornerstone Techs., LLC v.. Conrad, 2003 WL 1787959, at *12 (Del. Ch. Mar. 31, 2003) (“Clearly, the question of whether [one of the defendants] was properly removed as a manager, CEO, and President of the Companies relates to the business of the Companies…. [T]he issue as to who owns what part of [the Companies] … is related in some respect to the management disputes underlying this case—i.e., it relates to the business of the Companies…. In view of the importance of these issues to the capital structure and control of closely-held Delaware LLCs, they obviously relate to the business of those Companies and fall within the literal terms of § 18–109.”).
Defendants also assert that Plaintiffs’ factual claims are insufficient to establish jurisdiction under the Implied Consent Statute. In the Complaint, Plaintiffs assert that Defendants have acted as managers of Peninsula, one of the Subject LLCs, in two ways. First, Defendants’ counsel in Utah—who does not represent them here—sent a letter to Peninsula’s former counsel in Utah—who does not represent Peninsula here—on April 20, 2010, demanding that the latter turn over all files related to its representation of Peninsula.FN7 (D.I. 7 Ex. A) Second, Plaintiffs allege that Defendants, purportedly acting on behalf of Peninsula, have made filings in the Colorado Action reversing Peninsula’s prior litigating positions. ( Id. ¶ 19)
FN7. This demand was renewed in an August 16, 2010 letter, spurring Plaintiffs to file the motion for a temporary restraining order and preliminary injunction discussed above in Section I.C.
*7 Defendants contend that the April 20, 2010 letter was not sent on Defendants’ behalf and does not represent Defendants as Peninsula managers. (D.I. 4 at 5) Defendants also emphasize that they never executed on any membership interest in Peninsula, although Fairstar admits to owning 100% of the membership interest in Cavalion, which is the sole member of Peninsula and which appointed Peninsula’s sole manager. ( Id. at 6) Given what Defendants characterize as “limited activity” related to Peninsula, Defendants assert they could not have orchestrated Peninsula’s reversal of positions in the Colorado Action. ( Id. at 7)
In response, Plaintiffs argue that the Implied Consent Statute applies when a defendant participates materially in management, whether or not the participation is proper. (D.I. 11 at 7) The Court agrees. The statute indicates that a manager is subject to personal jurisdiction “whether or not the manager … is a manager … at the time suit is commenced.” 6 Del. C. § 18–109(a). Undoubtedly, this provision contemplates the situation where a former manager, who is no longer a manager at the start of the suit, is being sued. However, the language also encompasses actions against purported managers who may never have been actual managers. At this stage, the Court need not decide the propriety of Defendants’ alleged assertion of managerial interests. Instead, the Court is merely concluding that Defendants’ alleged assertion of managerial interests is sufficient to justify haling Defendants into a Delaware court, as Plaintiffs have established with reasonable particularity that Defendants materially participated in management of the Subject LLCs, making personal jurisdiction proper under the Implied Consent Statute.
Plaintiffs rely on four factual allegations to establish material participation in management: (1) Fairstar’s assertion of a 100% ownership interest in Cavalion, which owns Peninsula, and the accompanying power to appoint managers of both entities; (2) Defendants’ Utah counsel’s demand for Peninsula documents; (3) Defendants’ alleged court filings on behalf of Peninsula in the Colorado Action; and (4) Fairstar’s filings in a bankruptcy proceeding in the United States Bankruptcy Court for the District of Utah (the “Utah Bankruptcy Proceeding”).FN8 Fairstar’s asserted ownership interest FN9 is a sufficient basis for jurisdiction only if the ownership interest, or the accompanying power to appoint managers, equates to material participation in management. Generally, an ownership interest does not (by itself) imply managerial control—a point the statute makes explicitly. See 6 Del. C. § 18–109(a); see also Fisk Ventures, LLC v. Segal, 2008 WL 1961156 (Del. Ch. May 7, 2008) (finding no material participation in management where member had right to appoint two of five managers, and entity he owned was member with power to appoint third manager); Nolu Plastics, Inc. v. Ledingham, 2005 WL 5654418 (Del. Ch. Dec. 17, 2005) (finding no material participation in management where defendant had right to elect manager of LLC); Palmer v. Moffat, 2001 WL 1221749 (Del.Super.Ct. Oct. 10, 2001) (finding three members were not managers even though members were authorized to appoint majority of managers). But Defendants have done more than just own Cavalion and, through it, Peninsula. Here, Fairstar, as sole owner of Cavalion, appointed Cavalion’s sole manager. (D.I. 4 Ex. C ¶ 4) Further, Cavalion, which wholly owns Peninsula, has appointed Peninsula’s sole manager. ( Id.) The only case addressing the issue of material participation in management in the context of a sole member/sole manager LLC—which, as best as this Court can discern from the record, is the situation here—is a ruling from this District, in which personal jurisdiction was exercised. See Christ v. Cormick, 2007 WL 2022053 (D.Del. July 10, 2007) (holding that defendant materially participated in management by forming LLC in Delaware and serving as sole initial member). FN10 Although an entity that wholly owns an LLC and appoints its sole manager likely participates materially in its management, the corporate structures of Cavalion and Peninsula are not clearly established in record.
FN8. The Utah Bankruptcy Proceeding and the motion brought by Fairstar in that proceeding were first brought to the attention of the Court at the hearing held on November 5, 2010. ( See Tr. at 18–20) Defendants did not object to the Court’s consideration of this evidence. ( See id. at 44–45)
FN9. Defendants emphasize, at great length, that Fairstar has acquired a membership interest in Cavalion, but not in Peninsula. (D.I. 11 at 5–8) While it is true Cavalion is not a party to this action, Cavalion is one of the Subject LLCs for which Plaintiffs request a declaration. (Am.Compl.¶ 21) Therefore, if Plaintiffs establish that Defendants participated in Cavalion’s management, personal jurisdiction is proper under the Implied Consent Statute.
FN10. Plaintiffs also argue that there was an interim period prior to the appointment of the Cavalion manager when Fairstar served as the corporation’s sole member and manager. (D.I. 7 at 9) This interim period, Plaintiffs assert, is sufficient to warrant jurisdiction under the Implied Consent Statute. ( Id.) Given the Court’s above finding, the Court need not address this unestablished interim period.
*8 Plaintiffs offer more to justify the exercise of personal jurisdiction. Plaintiffs allege facts that support a finding of material participation in management by Fairstar (e.g., the allegation that Defendants directed the mailing of the demand letter and the Colorado Action filings that switched Peninsula’s litigating positions). Defendants’ Utah counsel, Mr. David Walquist, is an employee of Kirton & McConkie, the law firm that made the demand for the Peninsula documents. (D.I. 4 Ex. E, Ex. H) At this stage, the Court must construe disputed facts in favor of Plaintiffs and, thus, draw the inference that Fairstar retained Kirton & McConkie to represent its newly acquired entities, Cavalion and Peninsula (which it owns through Cavalion). See Metcalfe, 566 F.3d at 330 (“[A] court is required to accept the plaintiff’s allegations as true, and is to construe disputed facts in favor of the plaintiff.”). Plaintiffs also point to action by Fairstar in the Utah Bankruptcy Proceeding. ( See Tr. at 18–20) Fairstar filed a motion in that proceeding in which it asserted that it acquired all membership interest in AIP RD and appointed AIP RD’s manager. See Memorandum in Support of Ex Parte Joint Motion of Fairstar Resources Ltd. and Petitioning Creditors AD Capital, LLC and Lockhart & Munroe for Order Pursuant to Bankruptcy Rule 1007(d) Directing Moving Parties to Prepare and File the Debtor’s Statements and Schedules by August 13, 2010 at 2, In re AIP Resort Dev. LLC, Bankruptcy Case No. 10–25027 (Bankr.D.Utah July 15, 2010). Notably, Fairstar stated that AIP RD failed to make a required filing because Fairstar—not AIP RD—lacked the necessary information to prepare the filing. Id. at 4 (“The Debtor’s Statements and Schedules and the List of 20 Largest Creditors were not filed by the Debtor [AIP RD] within the deadlines outlined in Bankruptcy Rule 1007 because the financial information needed to prepare the Statements and Schedules and this List was not in the possession or control of Fairstar, which now holds all of the membership interests in the Debtor [AIP RD].”). Assuming the document demand and Colorado Action filings were made at the behest of Fairstar, along with Fairstar’s 100% ownership interest in Cavalion and the accompanying authority to designate its sole manager, as well as Fairstar’s representations in the Utah Bankruptcy Proceeding, the Court finds the exercise of personal jurisdiction over Fairstar proper.
With respect to Goldstar, however, the only basis Plaintiffs assert for exercising personal jurisdiction over Goldlaw is an unsubstantiated contention that Fairstar controls Goldlaw. (Am.Compl.¶ 9) This allegation is insufficient to support the inference that Goldlaw was behind the document demand or court filings in the Colorado Action and the Utah Bankruptcy Proceeding. The inferential gap is simply too large. Plaintiffs, therefore, have failed to justify the exercise of personal jurisdiction over Goldlaw under the Implied Consent Statute.
2. 6 Del. C. § 18–110(a)
*9 Plaintiffs argue, in the alternative, that jurisdiction is proper under 6 Del. C. § 18–110(a), a provision that grants Delaware courts jurisdiction to determine the rightful managers of a Delaware limited liability company. (D.I. 7 at 11) If personal jurisdiction over Defendants is lacking, Plaintiffs ask that the Court drop them from the case, realign the parties, and exercise jurisdiction under § 18–110(a). ( Id. at 12) This realignment would be much more extensive than the realignment that occurred in the authorities Plaintiffs cite. Plaintiffs want Defendants dropped completely from the case and AIP, AIP Lending, AIP RD, and Peninsula realigned as defendants, turning the action into a dispute between Robbins and the LLCs over his ouster as member and manager. This does more than realign the parties; it changes the entire theory of the case.
The three cases Plaintiffs cite involve realigning parties to determine if there is complete diversity of citizenship, allowing the federal courts to assess whether they had subject matter jurisdiction. See Indianapolis v. Chase Nat’l Bank, 314 U.S. 63, 69 (1941); Employers Ins. v. Crown Cork & Seal Co., 905 F.2d 42, 46 (3d Cir.1990); Polak v. Kobayashi, 2005 WL 2008306 (D.Del. Aug. 22, 2005). The Court finds these cases to be inapposite. Given the case Plaintiffs chose to file, the changes Plaintiffs request simply ask too much.
3. Due Process Analysis
Fairstar asserts that it lacks minimum contacts with Delaware. (D.I. 4 at 8 ) The accused conduct, Fairstar contends, was the execution of the Utah judgment, which occurred in Utah and was not action directed at Delaware. ( Id.) The only ties Fairstar has to Delaware are the membership interests it gained through the foreclosure sales. ( Id.) Fairstar emphasizes that it is an Australian company, which has transacted no business in Delaware and has no offices, employees, telephones numbers, or bank accounts here. ( Id.) Plaintiffs respond that Fairstar purposefully availed itself of Delaware law by acquiring the management interest in Delaware LLCs through the foreclosure sales. (D.I. 7 at 10) The Court agrees with Plaintiffs.
Fairstar, by foreclosing on Delaware LLCs and taking ownership rights in them, has purposefully availed itself of Delaware law. Fairstar cannot be surprised it has been haled into a Delaware court for a dispute over the governance of these Delaware LLCs. See Cornerstone Techs. v. Conrad, 2003 WL 1787959, at *13 (Del. Ch. Mar. 31, 2003) (holding that due process requirements were met because defendant purposefully availed himself of Delaware law and cannot be surprised to face lawsuit in Delaware). There is nothing unfair or unjust about exercising personal jurisdiction over Fairstar. See PT China, 2010 WL 761145, at *8 n. 44 (finding that exercise of personal jurisdiction over Chinese individual comported with due process, fairness, and substantial justice because individual submitted himself to jurisdiction by taking management position in Delaware LLC, and claims asserted related to his obligations as manager). Since Plaintiffs’ claims involve the management rights of Peninsula, among other Delaware LLCs, they relate to Fairstar’s obligation as a member who participates materially in management. Due process requirements are, thus, satisfied. See id. (finding due process requirements satisfied for specific claim because it pertained to defendant’s rights, duties, and obligations as manager of Delaware LLC); Palmer, 2001 WL 1221749, at *4 (“The Court finds that [the defendant] could reasonably have anticipated being subject to Delaware jurisdiction under these circumstances to answer for his actions as a manager and that exercise of jurisdiction would not offend traditional notions of fair play and substantial justice.”); Assist Stock Mgmt. LLC v.. Rosheim, 753 A.2d 974, 981 (Del. Ch.2000) (finding exercise of personal jurisdiction proper under Due Process Clause “because: (1) the allegations against [defendant] Rosheim focus centrally on his rights, duties and obligations as a manager of a Delaware LLC; (2) the resolution of this matter is inextricably bound up in Delaware law; and (3) Delaware has a strong interest in providing a forum for disputes relating to the ability of managers of an LLC formed under its law to properly discharge their respective managerial functions”) (internal quotation marks omitted).
B. Failure to State a Claim
1. Res Judicata
*10 When deciding whether a party’s claim is precluded by a prior state court judgment, this Court must give the judgment “the same preclusive effects” that a court from “the state in which the judgment was entered[ ] would.” Turner v. Crawford Square Apartments III, L.P., 449 F.3d 542, 548 (3d Cir2006). The Court, therefore, applies the law of Utah, the state where the allegedly preclusive orders were issued. In Utah, for a claim to be precluded by a prior ruling, (1) “both cases must involve the same parties or their privies;” (2) “the claim that is alleged to be barred must have been presented in the first suit or be one that could and should have been raised in the first action;” and (3) “the first suit must have resulted in a final judgment on the merits.” Snyder v. Murray City Corp., 73 P.3d 325, 332 (Utah 2003).
Defendants argue these three elements are met. (D.I. 4 at 15–17) First, AIP, AIP Lending, Robbins, Fairstar, and Goldlaw were all parties to the Utah Action; and AIP RD and Peninsula, Defendants assert, are privies of AIP and Robbins, as they have identical legal interests. ( Id. at 15) Second, Defendants contend that Plaintiffs raised the same issue in the Utah Action: whether Delaware law controlled and prohibited the constable sales. ( Id. at 16) Finally, the April 16 Order and the April 23 Order were substantive rulings qualifying as final judgments on the merits. ( Id. at 17)
Plaintiffs counter that Peninsula and AIP RD were neither parties nor privies to the Utah Action, relying on the bedrock principle of a corporation’s separate legal existence. (D.I. 7 at 18) Defendants respond that the parties have identical interests and represent the same legal rights, making them privies under Utah law, (D.I. 11 at 15) Plaintiffs also contend that the April 16 Order has no bearing on this litigation since it denied an objection to a charging order on Peninsula, but Defendants never executed on that order. (D.I. 7 at 16) Defendants argue that the April 16 Order extended beyond the charge on Peninsula; the Utah court ruled that Utah law, not Delaware law, applied to all execution proceedings in the Utah Action. (D.I. 11 at 12) Even assuming Utah law—specifically Utah Code Ann.1953 § 48–2c–l 103(6)—controls, Plaintiffs advert, Defendants’ assertion of control over Peninsula is still improper. (D.I. 7 at 17)
Finally, Plaintiffs argue the claims here are broader than those resolved in the April 16 Order and the April 23 Order. ( Id. at 19) Those orders decided whether the constable sales in Utah should proceed. Here, Plaintiffs want a declaration of the proper members and managers of the Subject LLCs subsequent to those sales, and a ruling that Defendants have no right to demand the production of Peninsula files. ( Id.)
In the June 4 Order, the Utah court denied a stay of the foreclosure sales pending resolution of this action. ( Id. at 20) Plaintiffs assert this ruling in no way validates the foreclosures. ( Id.) Defendants disagree, pointing to the Utah court’s statement that it was denying the motion because the court had “already ruled on the issues presented,” reincorporating the prior ruling that Utah law controls, under which the charging orders are proper. (D.I. 11 at 13)
*11 Plaintiffs do not challenge the finality of the April 16 Order, April 20 Order, or June 4 Order. (D.I. 7 at 15–21). Only the first and second elements of claim preclusion are in dispute.
a. Same parties or privies
Under Utah law, a privy is “a person so identified in interest with another that he represents the same legal right.” Searle Bros. v. Searle, 588 P.2d 689, 691 (Utah 1978). “Thus, privity depends mostly on the parties’ relationship to the subject matter of the litigation.” Press Pub. Ltd. v. Matol Botanical Intern. Ltd., 37 P.3d 1121, 1128 (Utah 2001) (internal citations omitted). In Press Publishing, the Supreme Court of Utah found that affiliates and subsidiaries of an entity, Matol Botanical International Ltd. (“MBI”), were its privies because, in a prior bankruptcy proceeding, the sister corporations had defended MBI in their affiliate capacity. Also, the causes of action in the earlier bankruptcy proceeding “stem[med] from the same alleged conduct, obligations, and legal theory.” Id. But in a more recent case, the Utah Supreme Court emphasized that, to comport with Due Process requirements, a finding of privity for claim preclusion as opposed to issue preclusion—between corporate affiliates requires “additional findings establishing the appropriateness of the transfer” of judgment. See Brigham Young Univ. v. Tremco Consultants, Inc., 110 P.3d 678, 686–88 (Utah 2005). The parties must have a relationship that “is sufficiently close to justify preclusion,” which cannot be based on corporate affiliation alone. Id. at 688. A theory such as alter ego or veil piercing must be established to ensure the “substantive precepts of corporate law” are respected. Id. (“In cases involving liability between and among corporations, findings of alter ego or a piercing of the corporate veil, for example, could suffice to establish the appropriateness of extending or transferring the liability of one corporate entity to another…. Absent such a finding, however, liability cannot be imposed upon the second entity without displacing substantive precepts of corporate law.”).
Although language in Press Publishing, which Defendants cite (D.I. 11 at 15), implies a finding of privity was made based on an entity’s status as an affiliate, putting it at odds with BYU, an examination of the facts there reveals no tension. MBI originally filed suit against Press Publishing Ltd. (“Press”) for breach of contract. Press responded with counterclaims of misappropriation against MBI and various affiliates and subsidiaries. Press Publishing, 37 P.3d at 1123. As part of its misappropriation claims, Press argued that the counterclaim-defendants acted “in concert and as agents and alter egos” to carry out a scheme to destroy Press, and there was no distinctness among any of them. Id. at 1124. MBI then dropped its breach of contract claim, leaving only Press’ counterclaims, and the MBI affiliates moved to dismiss the counterclaims as being barred by a prior bankruptcy ruling. Id. at 1126. MBI was a party to that bankruptcy proceeding and the affiliates argued they were MBI’s privies. Id. In response, Press argued the affiliates were not alter egos of MBI, the complete opposite of its prior assertion. Id. The Supreme Court of Utah held that the affiliates were privies because of their status as sister corporations, their defense of MBI (as affiliates) in one of the bankruptcy proceedings, and the fact that the two causes of action arose from the same conduct, obligations, and legal theory, all of which combined to create an identity of legal interests between the parties. Id. at 1128. The court emphasized that MBI’s “attempt to retract its previous allegation of privity” based on an alter-ego theory was disingenuous, indicating it was holding MBI to its earlier position. Id. The Press Publishing ruling, therefore, involved an assertion (and perhaps establishment) of an alter ego theory, meeting the requirement clarified in BYU.
*12 Here, Defendants raise no basis to disregard the separate legal existence of AIP RD and Peninsula, and in fact argue the separate existence is “beside the point.” (D.I. 11 at 15) They merely rely on the ownership interests the parties to the Utah Action have in AIP RD and Peninsula, citing authority from the Tenth Circuit and the Southern District of New York. ( Id. at 16) But in Utah “additional findings establishing the appropriateness of the transfer” of judgment are required, which Defendants have failed to present. The claims brought by AIP RD and Peninsula, therefore, are not barred.
Since the remaining Plaintiffs were parties to the Utah Action, the Court must turn to the second requirement for claim preclusion with regard to their claims.
b. Claim presented, or should have been presented, in the first suit
In Utah, for purposes of claim preclusion, “[c]laims or causes of action are the same as those brought or that could have been brought in the first action if they arise from the same operative facts, or in other words from the same transaction.” Mack v. Utah State Dep’t of Commerce, Div. of Sec., 221 P.3d 194, 203 (Utah 2009). The Utah Supreme Court stated in Mack that it has “moved toward the transactional theory of claim preclusion espoused by the Restatement (Second) [of Judgments]” and moved away from requiring the causes of action to “rest on the same state of facts” or that the necessary evidence be of the “same kind or character.” FN11 Id. In Press Publishing, the same claims were involved because the causes of action “stem[ed] from the same alleged conduct, obligations, and legal theory” as those in the prior proceeding. 37 P.3d at 1128.
FN11. Plaintiffs rely on the “sameness of evidence” rationale, arguing Defendants have attempted to control Peninsula only after the Utah rulings, and Plaintiffs could not have raised claims based on these future facts. (D.I. 11 at 20) In making this argument, Plaintiffs rely on Macris & Assocs., Inc. v. Neways, Inc., 16 P.3d 1214 (Utah 2000). But, in Mack, the Utah Supreme Court explained that the holding in Macris turned on a transactional theory; there was no preclusion because the claims arose from different transactions. See Mack, 221 P.3d at 203–04.
This action and the Utah Action involve one transaction: the constable sales of the Delaware LLCs. In the Utah Action, AIP, Lending, and Robbins challenged the future sales preemptively through objections that resulted in the April 16 Order and April 20 Order. Here, these entities challenge the consummated sales after-the-fact by requesting a declaration that Defendants do not own any interest in the Subject LLCs, are not entitled to any property owned by the Subject LLCs, and are not members or managers of the Subject LLCs. (Am.Compl.¶¶ A, B, D, E) Granting relief requires a finding that the sales were invalid. The challenge is based on Delaware law, making it identical to the challenge raised in the Utah Action. The Utah court resolved this claim in the April 16 Order by holding that Utah law controlled; this holding was later incorporated into the June 4 Order.FN12
FN12. Plaintiffs emphasize the fact that the April 16 Order was a challenge to a charging order that was never executed on, but the Utah court clearly incorporated its holding there into the June 4 Order, leaving no doubt as to the finality of the holding. (D.I. 4 Ex. H)
Plaintiffs also challenge acts by Defendants which Plaintiffs argue are attempts to control Peninsula (the document demand, the Colorado Action filings, and the Utah Bankruptcy Proceeding filing). But they do so by requesting an injunction. To issue the injunction, the Court must find that the foreclosure sales are void. The claim is based, somewhat, on conduct occurring after the Utah rulings, but it is still premised on the same transaction: the constable sales. Plaintiffs argue that even under Utah law, Defendants could gain no managerial rights in Peninsula. (D.I. 7 at 17) Plaintiffs have progressed from challenging the acquisition of membership rights under Delaware law to challenging the acquisition of managerial rights under Utah law. Although this claim was not raised in the Utah Action, it “could and should have been.” When Plaintiffs received the unfavorable ruling refusing to stop the sales, they could and should have asked the Utah court for a declaration (as they do here) clarifying the rights Defendants would acquire through the sales. If they had done this, they would have asked a Utah court (not a Delaware court) for a ruling under Utah law.
2. Rooker–Feldman Doctrine
*13 The Rooker–Feldman doctrine, by removing subject matter jurisdiction, prevents district courts from reviewing and rejecting state court decisions in federal actions brought by the party that lost in the state forum. See Turner v. Crawford Square Apartments III, L.P., 449 F.3d 542, 547 (3d Cir.2006). The scope of this doctrine, however, is very narrow. See id. (“[T]he [Supreme] Court … [has] emphasized the narrow scope of the Rooker–Feldman doctrine, holding that it ‘is confined to cases of the kind from which the doctrine acquired its name: cases brought by state-court losers complaining of injuries caused by state-court judgments rendered before the district court proceedings commenced and inviting district court review and rejection of those judgments.’ “) (quoting Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280, 284 (2005)). In fact, “a district court is not divested of subject-matter jurisdiction simply because a party attempts to litigate in federal court a matter previously litigated in state court. Id.
Here, Plaintiffs raise issues not presented in the Utah Action (i .e., the challenge under Utah law and the challenge to the demand for Peninsula documents). They request a declaration of corporate rights in the aftermath of the Utah rulings. They do not seek a stay of the sales—the remedy prayed for in Utah-or damages for harm caused by the denial of a stay; this action is not framed as an appeal of the Utah ruling. See 18B C. Wright & A. Miller, Federal Practice and Procedure § 4469.1 (2d ed. 2010) (“The most obvious occasions to apply Rooker–Feldman principles arise in the occasional actions that are expressly framed as attempted appeals from a state-court judgment to a federal district court.”). When, as here, additional claims are asserted in the federal forum, the Rooker–Feldman doctrine is no bar, even if the claims contradict a legal conclusion made by the state court. See Exxon Mobil Corp., 544 U.S. at 1527 (“If a federal plaintiff presents some independent claim, albeit one that denies a legal conclusion that a state court has reached in a case to which he was a party, then there is jurisdiction and state law determines whether the defendant prevails under principles of preclusion.”) (internal citations omitted). The Rooker–Feldman doctrine is, therefore, inapplicable.
C. Transfer of Venue
Since the claims asserted by AIP RD and Peninsula against Fairstar survive the analysis above, the Court must consider Defendants’ request to transfer venue to the District of Utah. Defendants’ request arises pursuant to 28 U.S.C. § 1404(a), which permits transfer of “any civil action to any other district or division where it might have been brought.” Venue is proper in the District of Utah under 28 U.S.C. § 1391(a)(2) because it is the “judicial district in which a substantial part of the events … giving rise to the claim occurred,” namely, the constable sales. No party contends venue is improper in Delaware. See 28 U.S.C. § 1391. Since two proper venues have been identified, the Court must consider the factors identified by the Third Circuit in Jumara v. State Farm Insurance Co., 55 F.3d 873, 879 (3d Cir.1995). Having done so, the Court concludes that Defendants have failed to meet the high burden imposed on them by the law of this Circuit, which requires a showing that convenience and fairness strongly favor transfer.
*14 Specifically, the Court makes the following findings with respect to each of the Jumara factors, (i) Plaintiffs have clearly manifested their preference for Delaware as a forum by filing the Amended Complaint in this jurisdiction, (ii) Defendants prefer an alternative forum: the District of Utah. The Court notes that Defendants are Australian companies with their principal places of business in Osborne Park, Western Australia. (D.I. 4 at 9) The only tie to Utah the Court can discern from the record is Defendants’ choice to file the Utah Action there, presumably because that is where AIP and Lending have their principal places of business. (D.I. 4 Ex. B. ¶ 3) FN13 This connection is weaker than Defendants’ tie to this forum: their asserted ownership (and possible managerial) interest in various Delaware LLCs, (iii) Plaintiffs’ claim did arise in Utah. The basis for their claims are the foreclosure sales through which Defendants executed on the Subject LLCs, which occurred in Utah pursuant to Utah law and a Utah court’s charging orders.
FN13. Defendants’ Utah counsel states in an affidavit attached to Defendants’ motion that he “personally entered the Plaintiffs’ AIP LLC, AIP Lending, and Peninsula’s principal place of business which was located in Utah.” (D.I. 4 Ex. B ¶ 3) Plaintiffs do no challenge this assertion.
(iv) The record contains little information about the physical and financial conditions of the parties,FN14 and nothing about the convenience of litigating in Utah as opposed to Delaware. (v) Although some witnesses reside in Utah, there is no indication that any witness would be unavailable in Delaware. The convenience of witnesses is not, therefore, highly pertinent. (vi) While Defendants assert that documentary evidence is located in Utah, they do not suggest it would be difficult to produce this evidence in Delaware. Hence, these considerations do little to offset the heavy weight afforded to Plaintiffs’ choice of forum, as they show no unusual burden presented by litigation in Delaware. See, e.g., Tsoukanelis v. Country Pure Foods, Inc., 337 F.Supp.2d 600, 604 (D.Del.2004) (“This court … has denied motions to transfer venue when the movants were unable to identify documents and witnesses that were unavailable for trial.”); Wesley–Jessen Corp. v. Pilkington Visioncare, Inc., 157 F.R.D. 215, 218 (D.Del.1993) (“[T]echnological advances have substantially reduced the burden of having to litigate in a distant forum.”).
FN14. The Court notes that on March 18, 2011, a suggestion of bankruptcy was filed in this case informing the Court that AIP filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code, 11 U.S.C § 11, in the United States Bankruptcy Court for the District of Delaware. (D.I.16)
(vii) There is no suggestion that a judgment would be unenforceable in either District. (viii) Defendants argue that practical considerations such as ease and expense of trial favor transfer to Utah because evidence and witnesses are located there. But shipment and travel costs for proceeding in Delaware are not compared to those for litigating in Utah, providing no indication of the weight this factor should be given.
(ix) Notwithstanding the heavy caseload carried by the judges in this District, and the ongoing judicial vacancy, the Court is not persuaded that administrative difficulties due to court congestion favor transfer. See Textron Innovations, Inc. v. The Taro Co., 2005 WL 2620196, at *3 (D.Del. Oct. 14, 2005) (“[T]he court is not persuaded that any disparity in court congestion, to the extent there is any, will be so great as to weigh strongly in favor of a transfer.”).
*15 (x) Both venues have a local interest in deciding the controversy and (xi) public policy considerations favoring resolution there. Delaware clearly has a substantial interest in resolving lawsuits pertaining to the ownership and control of Delaware LLCs. Also, when Defendants executed on Delaware LLCs, they were fully cognizant of the possibility of being sued here. By taking ownership, Defendants “received the benefits of Delaware incorporation” and cannot now complain that they have been sued here. See Auto. Techs Int 7, Inc. v. Am. Honda Motor Co. Inc., 2006 WL 3783477, at *2 (D.Del. Dec. 21, 2006). That being said, Utah has a significant local interest also. The Subject LLCs are registered to do business in Utah and have their principal places of business there. This dispute requires an examination of the implications of a Utah court’s ruling and constable sales that took place in Utah. Since both Delaware and Utah can assert significant local interests and public policy concerns related with this lawsuit, this factor favors neither venue.
Finally, (xii) a district judge in the District of Utah undoubtedly has more occasion to apply Utah law than a district judge here. But there is no reason to believe that this Court is unable to render an informed ruling under Utah law. Further, application of Delaware law is likely also required, as the action is brought under a provision of Delaware corporate law. Hence, this final factor favors neither venue.
At bottom, this analysis turns on a balance between the first and third factors: the great weight given to the Plaintiffs’ choice of forum and the origin of the claim in Utah. The Court concludes that the latter factor does not outweigh the presumption that a case should be litigated in the forum chosen by the plaintiff. Defendants have failed to meet the heavy burden of demonstrating that another forum clearly would be more convenient or otherwise more fair. Therefore, Defendants’ motion to transfer venue will be denied.
IV. CONCLUSION
For the reasons set forth above, Defendants’ motion to dismiss or transfer venue is GRANTED IN PART and DENIED IN PART. The claims against defendant Goldstar are dismissed for lack of personal jurisdiction. The claims asserted by AIP, Lending, and Robbins are barred under the doctrine of claim preclusion and, thus, dismissed. Defendants’ motion to transfer venue is DENIED. This suit will proceed as an action by AIP RD and Peninsula against Fairstar.
ORDER
At Wilmington, this 31st day of March 2011, for the reasons set forth in the Memorandum Opinion issued this date, IT IS HEREBY ORDERED that:
1. The Motion to Dismiss or Transfer Venue (D.I.4) filed by Defendants Fairstar Resources Ltd. and Goldlaw Pty Ltd. is GRANTED to the extent it challenges personal jurisdiction over Goldlaw Pty Ltd. and to the extent it asserts the claims of American Institutional Partners LLC, AIP Lending LLC, and Mark Robbins are barred under the doctrine of claim preclusion, and DENIED to the extent it challenges personal jurisdiction over Fairstar Resources Ltd., asserts the claims of Peninsula Advisors LLC and AIP Resort Development LLC are barred by the doctrine of claim preclusion or the Rooker–Feldman doctrine, and requests transfer of venue to the United States District Court for the District of Utah.
*16 2. The Clerk of Court is directed to DISMISS American Institutional Partners LLC, AIP Lending LLC, Mark Robbins, and Goldlaw Pty Ltd. This action will proceed as Peninsula Advisors LLC and AIP Resort Development LLC against Fairstar Resources Ltd.
Law and Precedent Supporting The 541 Trust™
STATEMENT OF THE LAW
The 541 Trust™ is built on two irrefutable legal principles:
1. With respect to an irrevocable trust, a creditor of the settlor may reach the maximum amount that can be distributed to or for the settlor’s benefit. See Uniform Trust Code Section 505; RESTATEMENT (SECOND) OF TRUSTS Section 156(2) and RESTATEMENT (THIRD) OF TRUSTS Section 58(2). This principle has been adopted in hundreds of cases throughout the country and many states have enacted statutes with this identical language. For example, see Alabama Code Section 19-3B-505; Ariz. Rev. Stat. Ann. §14-7705; Cal. Prob. Code § 15304; Ga. Code Ann. § 53-12-28(c); Florida Trust Code Section 736.0505(b); Ind. Code Ann. § 30-4-3-2; Kan. Stat. Ann, §33-101; La. Rev. Stat. Ann.§2004(2); Michigan Code Section 7506(c)(2), Mo. Ann. Stat. § 456.080.3(2); Mont. Code Ann. § 72-33-305; N.Y. Civ. Prac. L. & R. § 5205(c); Ohio Code Section 5805.06; Okla. Stat. Ann. tit. 60, §175.25G; Pennsylvania Code Title 20 §7745; R.I. Gen. Laws § 18-9.1-1; Tex. Prop. Code Ann. §112.035(d); Utah Code Section 75-7-505(b); Virginia Code Section 55-545.05 ); W. Va. Code §36-1-18 (1985); Wis. Stat. Ann. §701.06(1).
2. A settlor can retain a special power of appointment without subjecting the trust to the claims of creditors. See RESTATEMENT (THIRD) OF PROPERTY: WILLS AND OTHER DONATIVE TRANSFERS Section 22.1; US Bankruptcy Code Section 541(b)(1), California Probate Code Section 681; Delaware Code Section 3536; Georgia Code Section 23-2-111; New York Code 10-7.1; Also see cases set forth below.
APPLICATION OF LAW TO THE 541 TRUST™
The 541 Trust™ is an irrevocable trust that includes the following features:
1. The settlor is not a beneficiary and no distributions can be made to or for the settlor’s benefit.
2. The settlor retains a “special power of appointment” which allows the settlor to change the trustees, the beneficiaries, or the terms of the trust at any time (except that the assets cannot be distributed to or for the settlor’s benefit). In addition, the settlor can appoint assets to any other person at any time.
Creditors have no claim against the trust because no distributions can be made for the settlor’s benefit. The cases and statutes set forth below show that these powers of appointment do not give creditors any claim against the trust. There are no statutes, cases, secondary sources or commentaries to the contrary.
COURT CASES
In re Jane McLean Brown, D. C. Docket No. 01-14026-CV-DLG (11th Cir. 2002) - Defendant funded irrevocable trust and retained an income interest and a special power of appointment over principal. 11th Circuit analyzes creditor’s access to an irrevocable trust. The trust principal was not included in the defendant’s bankruptcy estate. To read the case, follow this link: In re Jane McLean Brown
In Estate of German, 7 Cl. Ct. 641 (1985) (85-1 USTC Par 13,610 (CCH)) - Assets of an irrevocable trust were not subject to the creditors of the settlor despite the fact that the trustees and beneficiaries had power to appoint the assets to the settlor.
Shurley v. Texas Commerce Bank, 115 F.3d 333 (5th Cir. 1997) – 5th Circuit Court holds that the portion of the trust that was not self-settled is not included in the bankruptcy estate, and assets subject to a special power of appointment are excluded from the bankruptcy estate. To read this case, click Shurley v. Texas Commerce Bank
In re Hicks, 22 B.R. 243 (Bankr. N.D.Ga.1982) – A court cannot compel the exercise of a special power of appointment and the assets of the trust were not included in the bankruptcy estate of a permissible appointee. To read this case, click In-re-Hicks
In re Knight, 164 B.R. 372 (Bankr.S.D.Fla.1994) - The interest of a contingent beneficiary was included in the bankruptcy estate, but the interest of a permissible appointee of a power of appointment was too remote to be property and was not included in the bankruptcy estate.
To read this case, click In re Knight
In re Colish, 289 B.R. 523 (Bankr.E.D. N.Y. 2002) - The interest of a contingent beneficiary was included in the bankruptcy estate. The court distinguished this from Knight and Hicks where the interest of a permissible appointee under a power of appointment was not included.
To read this case, click Colish-v-United-States
Cooley v. Cooley, 628 A.2d 608 (1993) – A special power of appointment is not a part of the marital estate that can be awarded in a divorce action. As one of the possible objects of the defendant’s power, the plaintiff possesses no more than a mere expectancy.
To read this case, click Cooley-v-Cooley
Cote v. Bank One, Texas, N.A., No. 4:03-CV-296-A, 2003 WL 23194260 (N.D. Tex. Aug. 1, 2003) – Permissible appointee is not an “interested person” with standing to sue the trust. This is relevant because if the permissible appointee has no standing to sue the trust, neither should a creditor of a permissible appointee.
Avis v. Gold, 178 F.3d 718 (1999) – Permissible appointee had no interest which could be included in the bankruptcy estate, or to which an IRS tax lien could attach, prior to the time the power was exercised in favor of the debtor.
Horsley v. Maher, U.S. Bankruptcy Ct. Case No. 385-00071 (1988) – debtor was a permissible appointee of Trust A and a beneficiary of Trust B. Trust A was not included in the bankruptcy estate because “the debtor holds no interest in Trust A.” The assets of Trust B were included in the bankruptcy estate.
U. S. v. O’Shaughnessy, 517 N.W.2d 574 (1994) - Assets subject to discretionary special power of appointment not subject to tax lien
Spetz v. New York State Dep’t of Health, 737 N.Y.S. 2d 524 (Sup. Ct. Chautauqua Co, Jan. 15, 2002) – New York Supreme Court holds that special power of appointment does not cause trust assets to be taken into account for purposes of Medicaid qualification
Verdow v. Sutkowy, 209 F.R.D. 309 (N.D.N.Y. 2002) – Assets subject to special power of appointment not taken into account for purposes of Medicaid qualification
United States v. Baldwin, 391 A.2d 844 (1978) – Assets subject to special power of appointment not subject to tax lien
Estate of Ballard v. Commissioner, 47 BTA 784 (1942), aff’d, 138 F.2d 512 (2nd Cir. 1943) – Assets of trust not included in husband’s estate merely because wife had the power to return the assets to the husband.
Kneeland v. COMMISSIONER OF INTERNAL REVENUE, 34 BTA 816 – Board of Tax Appeals (1936) - Assets of trust not included in husband’s estate merely because wife had the power to return the assets to the husband.
Helvering v. Helmholz, 296 US 93 (Supreme Court 1935) – Assets of trust not included in wife’s estate merely because the beneficiaries had the power to terminate the trust and return the assets back to the wife.
Price v. Cherbonnier, 63 Atl 209 (1906) – Creditors of the donee of a special power of appointment cannot reach the assets subject to the power.
Gilman v. Bell, 99 Ill. 194 (1881) – Assets subject to power of appointment not subject to claims of creditors.
Jones v. Clifton, 101 US 225 (1879) - Assets subject to power of appointment not subject to claims of creditors.
Holmes v. Coghill, 33 Eng. Rep 79 (1806) - Assets subject to power of appointment not subject to claims of creditors.
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For an excellent summary of the law supporting this kind of trust (from an unrelated law firm), see Asset Protection Planning with Trusts – A Practical Overview by Alexander A. Bove, Jr. published in Journal of Practical Estate Planning (CCH Inc., April-May 2002).
Building a Better Asset Protection Trust/ as published in Estate Planning Magazine
Estate Planning Journal (WG&L)
Volume 38, Number 01, January 2011
Use ‘Powers’ to Build a Better Asset Protection Trust, Estate Planning Journal, Jan 2011
Use ‘Powers’ to Build a Better Asset Protection Trust
A creatively drafted special power of appointment can be used to increase flexibility, asset protection, and anonymity of a trust.
Author: LEE S. McCULLOUGH, III, ATTORNEY
LEE S. McCULLOUGH, III practices exclusively in the areas of estate planning and asset protection in Provo, Utah. He also teaches estate planning as an adjunct professor at the J. Reuben Clark Law School at Brigham Young University
An asset protection trust can provide a person with security and peace of mind by ensuring that some assets are protected against future potential liabilities. State and federal laws support the use of an asset protection trust that is designed and funded in an ethical manner. Fraudulent transfer laws prevent the use of an asset protection trust to hinder, delay, or defraud a creditor.
For the past several decades, most asset protection trusts have been based on the concept of a self-settled trust. 1 Historically, the general rule has been to deny asset protection to a self-settled trust. 2 This began to change when laws were passed in offshore jurisdictions, such as the Cook Islands and the Isle of Man, which protect the assets in a self-settled trust. Beginning with the Alaska Trust Act in 1997, 13 states now offer some degree of asset protection for a self-settled trust:
(1) Alaska.
(2) Colorado.
(3) Delaware.
(4) Hawaii.
(5) Missouri.
(6) Nevada.
(7) New Hampshire.
(8) Oklahoma.
(9) Rhode Island.
(10) Missouri.
(11) Tennessee.
(12) Utah.
(13) Wyoming.
Although this concept has dominated the discussion and the practice of designing asset protection trusts, it is not the only option. The special power of appointment, an old reliable tool, can be implemented to replace and improve on the concept of a self-settled trust.
The special power of appointment is perhaps the most powerful and unappreciated tool in estate planning and asset protection. While most estate planners regularly use special powers of appointments to add flexibility to trust documents, most fail to recognize many of the most powerful uses of this tool. Whether designing a trust solely to protect against potential creditors, or to protect against estate taxes as well, a special power of appointment can be used to build a better asset protection trust.
Powers of appointment are nothing new
The concept of a power of appointment has been a part of the English common law for hundreds of years. This concept is well recognized in all 50 states and in the federal tax laws. 3 Although some minor variations in the law pertaining to powers of appointment have occurred over time, the basic principles, which form the basis of this article, have never varied. These basic principles are summarized below.
Key terminology. Familiarity with the following terms is crucial to an understanding of the strategies discussed below:
A power of appointment is a power that enables the donee of the power, acting in a nonfiduciary capacity, to designate recipients of beneficial ownership interests in the appointive property. 4The “donor” is the person who created the power of appointment.The “donee” is the person on whom the power is conferred (and who may exercise the power).The “permissible appointees” or “objects” are the persons for whom the power may be exercised.An “appointee” is a person to whom an appointment has been made.A “taker in default of appointment” is a person who will receive the property if the power is not exercised. 5
A power of appointment is “general” to the extent that the power is exercisable in favor of the donee, the donee’s estate, or the creditors of the donee or the donee’s estate, regardless of whether the power is also exercisable in favor of others. 6 A power that is not general is referred to as a “special” or “nongeneral” power of appointment.
Basic rules pertaining to asset protection and estate tax inclusion. Property that is subject to a presently exercisable general power of appointment is generally subject to the creditors of the donee because it is a power that is equivalent to ownership. 7 On the other hand, property subject to a special power of appointment is exempt from claims of the donee’s creditors. 8 The donee of a special power of appointment is not considered to have a property interest in the property subject to the power because it cannot be exercised for the economic benefit of the donee. 9 Because the donee has no property interest, the property subject to the power of appointment is not included among the property of the donee for purposes of judgment collection, bankruptcy, 10 divorce, Medicaid eligibility, estate tax inclusion, 11 or other determinations that involve the property of the donee.
Similarly, a permissible appointee (including the donor) has no property interest in a power of appointment. 12 Any attempt to include the interest of a permissible appointee for purposes of judgment collection, bankrupty, divorce, Medicaid eligibility, estate tax inclusion, or other determinations that involve the property of the donee would be a logical and practical impossibility because most special powers of appointment include everyone in the world as a permissible appointee, except for the donee, the donee’s estate, and the creditors of the donee and the donee’s estate.
Replacing the self-settled asset protection trust
An irrevocable trust with a special power of appointment that includes the donor as a permissible appointee (referred to herein as a “special power of appointment trust”) can be used to replace and improve on the concept of a self-settled asset protection trust. Both the self-settled asset protection trust and the special power of appointment trust can be designed so that gifts to the trust are incomplete for gift tax purposes 13—and thus not subject to gift tax at the time of the initial transfer. Both of these trusts can also be designed as a grantor trust for income tax purposes so that income from the trust is taxed to the settlor. If the tax treatment for these two trusts is the same, and the ability to benefit the settlor is the same, what is the difference between a self-settled asset protection trust and a special power of appointment trust?
The pros and cons of these two alternatives may be summarized as follows:
(1) No case law supports the asset protection provided by a self-settled asset protection trust because the statutes that allow asset protection for a self-settled trust are relatively new and untested. On the other hand, the inability of a creditor of a permissible appointee to reach the assets of a special power of appointment trust is supported by centuries of common law that is consistent throughout all 50 states in addition to federal bankruptcy courts. 14 In addition, the asset protection provided by a special power of appointment trust is supported by the logical and practical impossibility of ascribing trust liability for all permissible appointees when that class includes every person on earth other than the donee, the donee’s estate, and the creditors of the donee and the donee’s estate.
(2) The common law rule, followed by the majority of states, is that the assets of a self-settled trust are available to the claims of the settlor’s creditors. 15 Many commentators believe that a state that does not grant asset protection for self-settled trusts will not uphold the laws of a state that does grant asset protection for self-settled trusts, because doing so would violate the first state’s public policy. 16 The asset protection provided by a special power of appointment trust is not dependent on the state where the parties reside or the state where the matter is adjudicated.
(3) Many commentators question whether a self-settled asset protection trust will hold up in a bankruptcy court. At least two bankruptcy courts have held that the recognition of an offshore self-settled trust would offend federal bankruptcy policies. 17 A person who files bankruptcy is typically required to disclose any trust in which he or she is included as a beneficiary. In addition, the 2005 changes to the Bankruptcy Code have created a new ten-year limitations period for transfers to self-settled trusts that are meant to hinder, delay or defraud creditors. 18 Even if a bankruptcy court is unable to bring the assets of a self-settled trust into the bankruptcy estate, the court could dismiss the debtor’s case and deny the debtor a discharge under the bankruptcy laws. In contrast, the special power of appointment trust should be irrelevant to a bankruptcy proceeding because the settlor has no beneficial interest in the trust.
(4) Many of the state statutes that grant some form of asset protection for a self-settled trust also include exceptions that allow creditors to seize the assets of a self-settled trust for child support, alimony, transfers made within certain time periods, government creditors, bankruptcy, or certain torts. 19 In contrast, no statutory exceptions allow a creditor of a permissible appointee to reach the assets of a special power of appointment trust.
(5) Plaintiff’s attorneys, creditors, and government agencies often ask if a person is a beneficiary of a trust in order to determine whether the trust assets may be attached or taken into account for various purposes. This opens the trust up to inspection and evaluation by an adverse party, and it may affect a person’s eligibility for certain programs or benefits. The special power of appointment trust is immune to this kind of scrutiny because the settlor is not a beneficiary, and most every person in the world is a permissible appointee.
(6) A self-settled trust governed by the laws of an exotic and foreign jurisdiction often carries with it a negative stigma and a perception of wrongdoing. Upon learning that a person is a beneficiary of a self-settled trust in a foreign jurisdiction, judges, juries, and government agencies are likely to view the person as a criminal who is attempting to avoid the law. In contrast, a special power of appointment trust established in a domestic jurisdiction for the benefit of a person’s family has the appearance of an ordinary measure established by a law-abiding citizen for estate planning purposes.
(7) The self-settled asset protection trust requires the appointment of a trustee or co-trustee in one of the jurisdictions where self-settled trusts are allowed (with some jurisdictions requiring the use of a corporate trustee 20); the special power of appointment trust does not require the appointment of a corporate trustee or a trustee that is located in a certain jurisdiction.
(8) One may argue that the self-settled trust is safer than the special power of appointment trust because the trustee has a fiduciary duty to the beneficiaries and this ensures that the trustee will not distribute the assets to the wrong people. 21 However, if the trustee has a discretionary power to sprinkle assets among the potential beneficiaries, there is still a chance that the trustee will not distribute the assets according to the wishes of the settlor. The settlor of a special power of appointment trust could use the following measures to ensure that the donee of the power does not exercise it inappropriately:
The settlor could appoint one or more co-donees who are required to act together.The settlor could limit the class of permissible appointees.The settlor could appoint a trust protector with power to approve or veto the exercise of a power of appointment.The settlor could grant a trust protector the power to remove and replace a donee.
To illustrate the differences between a self-settled asset protection trust and a special power of appointment trust, consider the following example:
Scenario 1. Dawn creates a self-settled asset protection trust naming her brother as the trustee. She names herself, her spouse, and her children as the beneficiaries. She gives her brother the power to withhold distributions or to sprinkle distributions among the beneficiaries as he determines in his sole and absolute discretion. Dawn funds her self-settled asset protection trust at a time and in a manner that is not considered a fraudulent transfer.
Scenario 2. Michael creates a special power of appointment trust naming his brother as the trustee. Michael names his spouse and children as the beneficiaries, but he does not include himself as a potential beneficiary. He gives his brother the same power to withhold distributions or to sprinkle distributions among the beneficiaries as he determines in his sole and absolute discretion. Michael also gives his brother a special power of appointment to appoint assets to any person other than himself, his estate, or the creditors of himself or his estate. Michael funds his special power of appointment trust at a time and in a manner that is not considered a fraudulent transfer.
In both scenarios, the brother of the settlor has power to withhold assets or sprinkle assets among the spouse and children of the settlor. In both scenarios, the brother of the settlor can transfer all, part, or none of the assets of the trust to the settlor at any time and for any reason.
Now assume that both Dawn and Michael are sued, and a judgment is entered against them. The creditor’s attorneys will ask both Dawn and Michael if either is the beneficiary of any trust. Michael will correctly answer that he is not a beneficiary of a trust. Even if creditors discover that Michael once created a trust, they will have no claim on the trust because Michael is not included as a beneficiary. Dawn, on the other hand, will have to reply that she is the beneficiary of a self-settled trust, and her creditors will then commence an examination of the trust and an attempt to confiscate its assets.
Improving an intentionally defective grantor trust
An intentionally defective grantor trust is a trust that is excluded from the settlor’s estate for gift and estate tax purposes but whose income is attributed to the settlor for income tax purposes. The name comes from the fact that the settlor intentionally includes a “defect” in the trust document that causes the income to be taxable to the settlor (or “grantor”). The purpose of an intentionally defective grantor trust is to protect assets from estate taxes in addition to protecting assets from the potential future creditors of the settlor. An intentionally defective grantor trust is typically used to own life insurance or other appreciating assets. In order to ensure that the assets of the trust are not included in the settlor’s estate, the settlor is not included as a beneficiary of an intentionally defective grantor trust.
The concept of an intentionally defective grantor trust can be greatly improved if the settlor grants a special power of appointment allowing a donee to appoint assets to any person other than the donee, the donee’s estate, or the creditors of the donee or the donee’s estate. The grant of a special power of appointment to a non-adverse party is one way to cause an irrevocable trust to be treated as a “grantor trust” for income tax purposes. 22 This power allows the donee potentially to appoint the assets of the trust back to the settlor. The donee should not be a person who is also a beneficiary of the trust, or the exercise of a special power of appointment may result in a taxable gift. 23 The fact that the settlor and the settlor’s spouse are included as permissible appointees is insufficient to cause the trust assets to be included in their taxable estate because most everyone in the world is a permissible appointee. 24
Example. Sarah and John both create an intentionally defective grantor trust, and both transfer significant assets to the trust by gift and by sale in order to remove the assets from their taxable estates. Sarah’s trust also includes a special power of appointment allowing her brother to appoint assets to any person other than himself, his estate, or the creditors of the brother or his estate. If the estate tax is repealed, if Sarah falls on hard times, or if she decides that she does not want her children to receive a large inheritance, Sarah’s brother can simply appoint the assets to her at any time. John’s trust does not include this special power. Thus, he has no way to benefit from the assets in the trust, and the trustee has no power to give them back to him.
This option to return assets to the settlor may be especially useful if Congress eventually increases the estate tax exemptions while maintaining the step-up in basis for property included in a decedent’s taxable estate. The special power of appointment that is included in Sarah’s trust would allow her brother to appoint sufficient assets back to her to take full advantage of the step-up in basis at her death to the extent of her available estate tax exemption.
Conclusion
Although a special power of appointment is an old familiar tool, it may be used in creative ways to add greater flexibility, greater asset protection, and greater anonymity to a trust. In fact, it may accomplish what was otherwise impossible in that it allows a person to make an irrevocable gift without giving up the possibility that the assets that were given might be returned.
1
A “self-settled” trust is one in which the settlor is included as a beneficiary of the trust.
2
See RESTATEMENT (SECOND) OF TRUSTS, section 156.
3
See RESTATEMENT OF PROPERTY sections 318-369 (1940), RESTATEMENT (SECOND) OF PROPERTY: DONATIVE TRANSERS sections 11.1-24.4 (1986), RESTATEMENT (THIRD) OF PROPERTY: WILLS AND OTHER DONATIVE TRANSFERS (Tentative Draft No. 5, 2006) section 17.1, and IRC Section 2041.
4
RESTATEMENT (THIRD) OF PROPERTY: WILLS AND OTHER DONATIVE TRANSFERS (Tentative Draft No. 5, 2006) section 17.1.
5
Id. at section 17.2.
6
Id. at section 17.3.
7
Id. at section 17.4.
8
Id. at section 22.1.
9
See RESTATEMENT (THIRD) OF TRUSTS section 56 comment b (2003).
10
See 11 U.S.C. section 541.
11
See Sections 2041 and 2514.
12
See RESTATEMENT (THIRD) OF PROPERTY: WILLS AND OTHER DONATIVE TRANSFERS (Tentative Draft No. 5, 2006) Section 17.2. Also see In re Hicks, 22 BR 243 (Bkrptcy. DC Ga., 1982) and In re Knight, 164 BR 372 (Bkrptcy. DC Fla., 1994).
13
A transfer to a trust is “incomplete” for gift tax purposes if the settlor retains a power to veto distributions proposed by the trustee. See Reg. 25.2511-2(c).
14
Supra note 12.
15
Supra note 2.
16
A trust is generally governed by the law of the jurisdiction designated in the trust agreement unless that jurisdiction’s law is contrary to a strong public policy of the jurisdiction having the most significant relationship to the matter at issue. See Uniform Trust Act section 107 and Restatement (Second) of Conflict of Laws sections 273 and 280.
17
See In re Portnoy, 201 B.R. 698, and In re Brooks, 217 B.R. 98.
18
11 U.S.C. section 548(e).
19
See Utah Code 25-6-14, Delaware Code Section 3573, Oklahoma Statutes Title 31, section 11.
20
See Utah Code 25-6-14; Oklahoma Statutes Title 31, section 11.
21
By definition, a trustee has a fiduciary duty to the beneficiaries of a trust, while a donee of a power of appointment acts in a nonfiduciary capacity and has no duty to the beneficiaries or permissible appointees. See RESTATEMENT (THIRD) OF PROPERTY: WILLS AND OTHER DONATIVE TRANSFERS (Tentative Draft No. 5, 2006) section 17.1.
22
See Section 674.
23
See Reg. 25.2514-1(b)(2).
24
Section 2042(2) provides that a reversionary interest could cause the trust assets to be included in the settlor’s estate if the value of the reversionary interest immediately before the insured’s death exceeds 5% of the value of the trust. Because the special power of appointment is exercisable in the donee’s absolute discretion, the value of the reversionary interest is less than 5% of the value of the trust. See Reg. 20.2042-1(c)(3). If it can be shown that the settlor and the donee had an express or implied understanding that distributions would be made to the settlor, then the assets of the trust could possibly be included in the settlor’s estate under Section 2036(a)(1).
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Why a 541 Trust™ is Better than an Offshore Trust
The 541 Trust™ is better than an Offshore Trust. The chart below explains in detail the flaws of Offshore Trusts and the benefits of our 541 Trust™. The chart includes an extensive list of court cases proving that Offshore Trusts don’t work. You can also click HERE for 10 reasons the 541 Trust™ is better for asset protection.
| Criteria | Offshore Trust | 541 Trust™ |
| Confidentiality | Interests in offshore trusts must be disclosed on a standard bankruptcy questionnaire; and failure to disclose can result in bankruptcy fraud and criminal penalties. | The 541 Trust™ is not required to be disclosed on a bankruptcy questionnaire. |
| Usefulness | It is a universally understood and accepted fact that an offshore trust is not effective at protecting onshore assets. See In re Brooks, 217 B.R. 98 (D. Conn. Bkrpt. 1998). | The 541 Trust™ can be used to protect any type of asset in any location. |
| Case Law | As shown in the cases set forth below, US Courts have established plenty of precedent to allow them to defeat an offshore trust:In re Colburn 145 B.R. 851 (Bkrpt E.D. Va. 1992). (For failing to disclose offshore trust, debtor was denied a discharge and accused of fraud).Brown v. Higashi, (Bkrpt Ak. 1995). (Assets of offshore trust included in bankruptcy estate).In re Portnoy, 201 B.R. 685 (S.D.N.Y. Bkrpt 1996) (Because of offshore money, discharge denied and debtor accused of fraud).FTC v. Fortuna Alliance (1997) (Debtors were arrested and funds were repatriated).Riechers v. Riechers, 679 N.Y.S. 2d 333 (1998) (Offshore trust assets included in marital estate for divorce purposes).Westrate v. Westrate (1998) (Husband accused of fraud and threatened with criminal penalties. Assets included in marital estate).In re Brooks, 217 B.R. 98 (D.Conn. Bkrpt. 1998) (Offshore trust disregarded and assets seized by US court).FTC v. Affordable Media, LLC, 179 F.3d 1228 (9th Cir. 1999). (Debtor jailed for refusing to repatriate assets).SEC v. Brennan, 230 F. 3d 65 (2nd Cir. 2000) (Debtor convicted of bankruptcy fraud).SEC v. Bilzerian, 131 F. Supp. 2d 10 (D.C. 2001). (Debtor jailed for refusing to repatriate assets).
In re Lawrence, 279 F.3d 1294 (11th Cir. 2002). (Debtor jailed for over six years for refusing to repatriate assets). Bank of America v. Weese, 277 B.R. 241 (D.Md. 2002) (Debtors paid settlement of over $12,000,000 in order to avoid incarceration). BankFirst v. Legendre (2002)(Debtor jailed for contempt of court until assets were turned over five days later). Breitenstine v. Breitenstine, 2003 WY 16, 62 P.3d 587 (Wyo. 2003) (Trust assets included in property division). U.S. v. Plath, 2003-1 USTC 50,729 (U.S. District Court, So. Dist. Fla. 2003) (Debtor held in contempt for refusing to obey court order to disclose details about offshore accounts despite the fact that there was no fraudulent transfer). Eulich v. U.S., (N.D.Tex. Case No. 99-CV-01842, August 18, 2004) (Debtor found in contempt, threatened with fines and jail time until assets repatriated). U.S. v. AmeriDebt, Inc., 373 F. Supp. 2d 558 (D Md. 2005) (Debtor found in contempt and threatened with jail time until assets repatriated). Morris v. Morris, Case Nos. 4D04-3812, 4D04-4621, 4D04-4763, aff’d Appeal No. SC05-1166 (Fla.S.Ct. April 13, 2006); Morris v. Wroble, Case No. CIV-O6-80479 (S.D. Fla.) aff’d Appeal No. 06-80452-CV-DTKH (11th Cir. Nov. 16, 2006). (Debtor jailed for contempt of court for refusing to repatriate assets). Barbee V. Goldstein, 2006 U.S.Dist. LEXIS 82945. (Goldstein funded offshore trust over a year before filing for bankruptcy. Bankruptcy Court ordered Goldstein to repatriate funds from Cook Islands Trust. Goldstein failed to comply and was jailed for contempt. Goldstein finally agreed to terminate the trust and repatriate the assets). Chadwick v. Green, Civ. No. 09-2134 (Del. County Ct. Com. Pl. July 10, 2009) (H. Beatty Chadwick was released after serving 14 years in jail for refusing to obey a court order to turn over $2,500,000 that a judge believed was hidden offshore. The court said that after 14 years, the contempt order “has lost its present coercive effect and that it is unlikely that the continued incarceration of Petitioner Chadwick will result in his compliance with [that order].”) Securities and Exchange Commission vs. Jamie Solow, 2010 WL 303959 (S.D. FL., Jan 22, 2010). (Debtor jailed for contempt of court for refusing to repatriate assets). FTC v. Direct Benefits Group, LLC, 2011 WL 3654469 (M.D.Fla., Slip Copy, Aug. 19, 2011). (Court ordered all offshore funds repatriated without regard to any documents or legal structures). Advanced Telecommunication Network, Inc. v. Allen, D.C. Docket No. 05-00770-CV-ORL-19-JA-DA (11th Cir. 2011) (Debtor funded Cook Islands trust which included duress clause and all the usual provisions; bankruptcy court found offshore trust against public policy and ordered debtor to repatriate funds; debtor claimed he had no power to comply; debtor was held in contempt and the court cited earlier cases holding that a self-created impossibility is not a defense; 11th circuit affirmed.) U.S. v. Rogan, 2012 WL 1107836 (N.D.Ill. 2012)(Peter Rogan transferred assets to an offshore trust in 1996. The Bahamas Trust included all the traditional offshore trust provisions and it gave no apparent control to Peter Rogan. In November of 2002 he was sued. Judgments were entered against him in 2006. The court held that Illinos law applied instead of the laws of the Bahamas, and Rogan was ordered to turn over the assets because Illinois law does not protect the assets of a self-settled trust. Rogan has since fled the country. Rogan and the attorney who helped create the trust have been indicted for perjury for claiming that they had no control over the trust. The court held that “Notwithstanding the terms used to create the trust, Rogan and Cuppy controlled the [Trust].” They were also indicted for obstruction of justice and conspiracy to obstruct justice.) In Indiana Investors, LLC v. Hammon-Whiting Medical Center, LLC No. 45D02-0807-CT-201 (Lake Superior Court, Lake County, Indiana); Indiana Investors v. Victor Fink, No. 12-CH-02253 (Circuit Court of Cook County, Illinois, Chancery Division), Victor Fink transferred assets to a Cook Islands trust provided by one of the popular asset protection providers found on the internet who claimed that the control could be shifted offshore in the event of duress. The plaintiffs were able to obtain temporary restraining orders which prevented the trustees and protectors from shifting the control to the offshore trustee (South Pac Trust International, Inc.) and the bank accounts were all frozen. US v. Grant, 2013 WL 1729380 (S.D.Fla., April 22, 2013)(Raymond Grant created two offshore trusts, one for his benefit and one for the benefit of his wife, and he funded them years before incurring substantial tax liabilities. Raymond later died and the IRS obtained a $36 million dollar judgment against Raymond’s wife Arline. The US moved to hold Arline in contempt of court for failing to repatriate funds. Initially, the court refused to do so, but later when it was proven that Arline had received funds from the trust through her children’s accounts, the court issued a permanent injunction prohibiting Arline and her children from ever receiving any benefits from the trusts.) |
For a listing of cases supporting the asset protection provided by a SPA Trust™, see Law-and-Precedent-Supporting-the-541-Trust™ |
| Appearances | Because there is no legitimate purpose for an offshore trust that cannot be accomplished with an onshore trust, the offshore trust includes a reputation associated with criminal activity and unethical conduct. If a judge, jury, or government agency learns that you have an offshore trust, they will view you as a criminal who is attempting to hide assets or evade the law. | The 541 Trust™ is an ordinary estate planning tool that people establish for legitimate purposes. It does not raise a red flag or indicate unethical or inappropriate activity. |
| Cost & Complexity | Offshore trusts are notoriously expensive to create, and they require annual payments to a foreign trust company in the range of $2000 to $3,500 per year.Offshore trusts require the completion of tax forms 3520, 3520-A, and 1041. Offshore accounts and investments must be reported on form TD F 90-22.1, which requires you to disclose the exact location, account numbers, and the maximum dollar amount in each account each year. Foreign accounts must also be reported on your personal income tax return, form 1040. Starting in 2011, Form 8938 also must be filed for all offshore accounts. Failure to properly report offshore trusts and accounts can result in criminal penalties and severe civil penalties which can exceed the amount in the offshore accounts. | The set-up cost of a 541 Trust™ is usually about one-third of the cost of an offshore trust. Because the 541 Trust™ is accepted and upheld in all jurisdictions, it may be possible to minimize or avoid significant annual fees. The tax reporting for a 541 Trust™ is minimal and very simple. |
Based on the precedent set forth above, this is how a US court can defeat an offshore trust:
1. The court will rule that a self-settled offshore trust is against public policy and the court will order the defendant to turn over the assets of the trust.
2. If the defendant refuses to obey the court order, the court will hold the defendant in contempt of court and send the defendant to jail until he complies.
The fact is that there are no court cases and absolutely no authority preventing a court from following the steps set forth above.
Those who make lots of money selling offshore trusts will tell you the following:
1. They will cite old Supreme Court cases (including Maggio v. Zeitz (1948) and Rylander (1983)) which say that impossibility is a defense to contempt of court. Those old cases are meaningless because all they do is state the general rule that impossibility is a defense. They ignore the fact that the law has developed over time and more recent cases have found that a self-created impossibility (such as an offshore trust) is not a defense.
The truth is that the Rylander case was cited by Lawrence and many of the recent cases where the courts have found that a self-created impossibility is not a defense. When Stephen J. Lawrence appealed to the Supreme Court citing the Rylander case, the Supreme Court refused his appeal.
2. They will claim that their trust agreement includes a duress clause or a flight clause that will solve the problem. The truth is that there is no clause that you can include in a trust agreement that will prevent a US court from finding that the settlor created those provisions, and that a self-created impossibility is not a defense.
3. They will claim that a US court cannot order you to repatriate the assets if you establish the trust in advance of a problem. The cases cited above clearly refute that idea.
4. They will cite the Raymond and Arline Grant case as authority that offshore trusts work. Recent developments in that case have turned that conclusion upside down (See Forbes, “The One Foreign Asset Protection Trust ‘Win’ Turns Out To Be A Dud” by Jay Adkisson, 4/25/13).
5. They will try to claim that a US court can use the same tools against an onshore trust that they can use against an offshore trust and this is completely false because the offshore trust fails to comply with US law and attempts to avoid the law, while the 541 Trust™ complies with the law and is upheld by the law.
6. They will claim that they have established many offshore trusts and none have been defeated by the US courts. This is like saying that I have never been robbed so my dog must be a great watch dog.
What the promoters can’t give you is one shred of authority to refute the fact that a US Court can order you to turn over the assets of your offshore trust or go to jail.
If you want to learn a better way to protect assets, click here: 10 Reasons 541 Trust™ is Better
Why the 541 Trust™ is Better than an FLP or LLC
The 541 Trust™” is better than a family limited partnership (“FLP”) or LLC for the following reasons:
| Criteria | FLP or LLC | 541 Trust™ |
| Confidentiality | An ownership interest in an FLP or LLC must be disclosed on the financial statements and tax return of each family member who owns an interest. This subjects the interest to scrutiny and attack in the event any family member is subject to a lawsuit, divorce, bankruptcy, or review by a government agency, including a review for eligibility for student loans or grants or other assistance. | The 541 Trust™ requires no disclosure by any family member on financial statements or tax returns. The 541 Trust™ is not discoverable through discovery of tax returns, or through a bankruptcy questionnaire. |
| Ownership | If you own something, then you can lose it in a lawsuit, divorce, bankruptcy, or a proceeding with a government agency. Each family member who has ownership in an FLP or LLC, has an asset that could be jeopardized. | Neither you nor any family member has any vested ownership interest in the 541 Trust™. Therefore, you have no asset that can be pursued or taken into account if you are sued, divorced, bankrupt, or subject to an examination by a government agency. |
| Flexibility | After you have given ownership away to family members, their ability or willingness to return the ownership is limited by gift tax laws, fraudulent transfer laws, and changing attitudes, wants and needs. If your child becomes estranged from you, or subject to a divorce or bankruptcy, there may be no way for you to take their ownership away. | The 541 Trust™ includes a power (called a “special power of appointment” or “re-write power”) which allows the terms, conditions, and potential beneficiaries or distributees to be changed at any time. If a family member is estranged from you or under financial attack, the special power of appointment can be used to remove the family member from the trust, and then reinstate them at a later date. |
| Case Law | Most states allow a creditor to foreclose and become the owner of an interest in an FLP or LLC. Some states limit the remedy of a creditor to a charging order. Some states allow a court to give a creditor a broad charging order that gives the creditor a right to an accounting or other directions and requirements against an FLP or LLC. All states allow a minority interest holder to enforce minority rights and fiduciary duties to ensure that the assets are managed for the benefit of all stake holders. Most charging orders result in a settlement payment to buy the creditor out at a reduced value. Most people do not enjoy having to buy a creditor out of their FLP or LLC. | Because no one has a vested interest in the 541 Trust™, neither do their creditors. For a listing of cases supporting the asset protection provided by a SPA Trust™, see Law-and-Precedent-Supporting-the-541-Trust™ |
| Tax and Family Complexities | You are required to file a partnership tax return for an FLP or LLC each year. You are also required to give each family member who owns an interest in an FLP or LLC a k-1 which indicates the portion of income attributed to their interest. This means that they cannot file their taxes until the partnership return is complete, and they may want to be reimbursed for their portion of the income each year. It also means that family members and in-laws are entitled to information about the assets, activities and income of the partnership. This can create significant tax complexities and family complexities. | The 541 Trust™ results in NO extra tax returns. Family members don’t even need to know about the existence of the 541 Trust™, except to the extent you choose to tell tem. |
Asset Protection – Stories from the Trenches
We talk a lot of theory about asset protection, and everyone seems to have their own opinion about what works and what doesn’t. These are some real-life experiences that have shaped my perspective:
1. I worked for a law firm that set up a lot of family partnerships. One client put a substantial amount of assets in his family partnership and made annual gifts to his children. One child had financial problems and went bankrupt. Because the child’s interest in the family partnership was included on her tax returns and among her assets, she had to include it as an asset on her bankruptcy questionnaire. The bankruptcy trustee demanded an accounting from the partnership and a liquidation of the partnership interest for the benefit of the child’s creditors. We insisted that the bankruptcy trustee was limited to a charging order, and the court agreed. The bankruptcy trustee continued to monitor the dealings of the partnership and question the actions of the general partners to ensure that they were fulfilling their fiduciary duties to the partners and not simply using the partnership for their own benefit. The client eventually negotiated a settlement and agreed to buy the child’s interest from the bankrutpcy trustee for a fourth of its real value. Even though the client was able to buy the child’s share for pennies on the dollar, the client said, “I lost tens of thousands of dollars to my child’s bankruptcy, and you call that asset protection!”
2. My friend from law school works for a law firm that is well known for promoting Cook Island Trusts. He tells how one client formed a Cook Islands Trust and transferred millions of dollars to the trust. Later, the client went bankrupt and failed to include the trust assets on his bankruptcy questionnaire. The Bankruptcy Court reviewed the client’s tax returns and easily discovered the offshore trust. The Bankruptcy Court said this was bankruptcy fraud & ordered the client to turn over the assets of the trust. The client claimed that he had no power to turn over the trust assets. The Court did not believe the client and said that if the client disobeyed its order, the Court would send the client to jail for contempt of court and impose a fine of $10,000 per day until the money was turned over. The client found a way to retrieve the money and threatened to sue the law firm for malpractice. The lawyers were also accused of conspiracy to commit fraud.
3. My client put $4,000,000 in a special power of appointment trust (“541 Trust™”) in 2004. In 2007, he entered into a business deal with a wealthy investor. The client and the investor agreed to share the risks and the profits. The deal went bad and they both lost all of the money that they had invested. The investor sued my client for millions of dollars. My client went to the pretrial conference and explained that he had no assets, and that if he lost the case, he would simply go bankrupt. The investor hired a private investigator who did an asset search and a review of his tax returns and found nothing. The case was dropped without going to trial and the assets continue under the protection of the 541 Trust™. My client feels that he acted honestly because he funded the trust well in advance of the deal, the investor went into the deal with an accurate understanding of the risks involved, and my client had every right to set aside assets for the security of his family before entering into that deal.
4. Another client set up a 541 Trust™ in 2003. He was recently sued and he had to give an asset statement under penalties of perjury. He also had to give tax returns for the past 3 years and sign an affidavit that he had not made any transfers in the past 3 years. The client answered everything honestly and the 541 Trust™ and its assets were never discovered.
In the two cases described above, an offshore trust would have been easily discovered in a review of the client’s tax returns. The offshore trust still may have worked, but it would have been frightening to explain and defend the offshore trust to the judge.
In my experience, the safest course is to do asset protection planning well in advance of a problem, do it in way that avoids any discovery, do it in a way that avoids tax problems or issues of any kind, do it in a way that can be easily amended, and do it in a way that is acceptable and defendable even if it is discovered. That is why I think the 541 Trust™ is the best asset protection solution.