AK Bankruptcy Court Avoids Transfer to AK DAPT
In the May 26, 2011 Alaska Bankruptcy Court decision of In re Mortensen, the court avoided a transfer of real property of the debtor to an Alaska Domestic Asset Protection Trust (DAPT). The judge held that under Section 548(3) of the Bankruptcy Code, any transfer to a DAPT for less than full and adequate consideration is, by definition, with the intent to "hinder, delay, or defraud" creditors despite state law providing otherwise, and that such DAPT asset are part of the bankruptcy estate if made within the 10 year look back period in Section 548(e)(1). 548(e)(1)(D) states that the intent to defraud relates to future potential creditors as well as any present creditors: "the debtor made such transfer with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made, indebted." [emphasis added]
Although this case was decided in Bankruptcy Court in Alaska, there is no reason to doubt that the decision would be any different in North Carolina or any other state as it hinged on federal, not state, law.
Bottom line is do whatever you can to avoid filing bankruptcy within 10 years of funding a DAPT. Also make clear that any other applicable reasons for the DAPT, such as estate tax planning, are well-documented. Finally, don't try to do the legal work yourself!
For those interested, here is a copy of the Complaint filed by the Bankruptcy Trustee, along with related Motions. Below are some pertinent facts, nicely outlined by Alaska attorney Richard Foley:
• The debtor is a geologist/engineer. The debtor tried to do most of his legal work himself when he established the trust and filed for bankruptcy.
• The debtor drafted his own trust. Although he consulted with an attorney to review the trust document, the legal analysis of doing this trust was apparently minimal.
• The debtor initially filed his own petition in bankruptcy without consulting with a lawyer. Prior to filing the petition, it is doubtful the debtor understood the issues regarding the 10-year bankruptcy statute of limitations on DAPTs.
• Much of the debt in this case was credit card related. It is likely there was an opportunity for credit-card workout arrangements other than filing bankruptcy.
• Prior to the creation of the DAPT, the debtor had come off a contentious divorce and his income had been sporadic. He had credit card debt at the time the DAPT was created which became worse over time. Between the divorce, the sporadic income and existing credit card debt, the court had sufficient facts upon which to reach the conclusion that the trust was intended to hinder, delay or defraud future creditors.
• After a notice of appeal was filed, the parties settled. The debtor received financial help from other family members and the debtor “purchased” the property from the bankruptcy trustee for the tax assessed value.• This property is located in Seldovia, a picturesque fishing community that is not accessible by road. It has become a popular “get-away” spot for tourists and city dwellers in Anchorage. The debtor really did want to protect this property for future generations and was willing to pay money to the trustee to make sure it was not lost.
