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Toni 1 Trust Case Provides Roadmap to DAPT Failure

April 18, 2018

We’ve said it before and we will say it again, Domestic Asset Protection Trusts (“DAPTs”) are not reliable. Can they work sometimes? Of course. Would you use a seatbelt that worked sometimes? Of course not. As if additional evidence of this was needed, the Bertrans and their Toni 1 Trust have come along to provide a laundry list of asset protection faux pas. Settlors of all Asset Protection Trusts (“APTs”), be warned!

Our judgment debtors in this case are Donald and Barbara Tangwell, and Barbara’s mother, Toni Bertran. Shortly before a judgment was entered against them, Mrs. Tangwell and Ms. Bertran transferred jointly-owned real estate to the Toni 1 Trust, an Alaska DAPT.

Mistake 1: Regardless of the jurisdiction, any asset protection structure is stronger when established prior to the lawsuit or claim arising.

Mistake 2: The Debtors settled their asset protection in Alaska, a situs over which other state and all Federal courts can obtain jurisdiction.

Mistake 3: The Debtors transferred real estate located in the United States to a trust, rather than undertaking ancillary planning techniques, such as equity stripping.

The judgment arose from a Montana state court action against the couple. The judgment creditor brought a fraudulent transfer action in Montana, under Montana law, seeking to reverse the transfers. Neither the Debtors nor the Trust responded to the fraudulent transfer action, and a default judgment was entered.

Mistake 4: The Debtors did not respond to the fraudulent transfer suit, and allowed a default judgment to be entered. This is especially dangerous in asset protection trust cases, as the judgment creditor allegations often include incorrect assertions that the debtors have control of the asset protection trust (see our writings on the Anderson Case).

The judgment creditor took possession of the Mrs. Tangwell’s portion of the transferred real estate. In an attempt to retain control of her portion, Mrs. Bertran filed for bankruptcy.

Mistake 5: Filing for bankruptcy shortly after establishing an APT often results in unfavorable outcomes for settlors. Bankruptcy is also a common way judgment creditors pierce DAPTs (10 year statute of limitations in bankruptcy).

The trust was administered by Mr. Tangwell as trustee. Mr. Tangwell brought suits against the judgment creditors, as well as the bankruptcy trustee, alleging ineffective service of process, and seeking to have the Montana judgments vacated.

Mistake 6: The settlors utilized a family member in the United States as a trustee. This is problematic for several reasons. First, it is easy for a U.S. court to get jurisdiction over the U.S. trustee. Second, the trustee may not be experienced in dealing with APT issues.

The judgment debtors did not defend the Montana judgment, and instead, filed a fraudulent transfer claim in bankruptcy proceeding, which was of course granted.

Not having his copy of the U.S. Constitution on hand, Mr. Tangwell then sought an action in Alaska state court seeking to overrule the Bankruptcy court and Montana court actions. He took his case all the way to the Alaska Supreme Court, who managed to locate their copy of the Full Faith and Credit Clause, as well as acknowledging that State courts cannot restrict Federal Court jurisdiction, and sent Mr. Tangwell packing.

Attorneys interested in reading the full Alaska court opinion, which puts the final nails in the coffin for their own DAPTs statutes, should read Toni 1 Trust v. Wacker, 2018 WL 1125033 (Alaska, Mar. 2, 2018).

It’s important to note that many, but not all, of these mistakes would have been cured by the use of a properly implemented offshore asset protection trust. Settlors of foreign asset protection trusts should be wary of filing for bankruptcy or permitting default judgments. Attorneys experienced with these matters can guide clients on the best course of action, not only in the planning stage, but as claims arise.