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Trust Law/Level VI · Protection/6.1 Spendthrift to self-settled/Lesson 7

Real cases: when shields held and when they failed

What US courts actually held in leading asset protection trust cases, and the lessons commentators draw about timing, control, connection and the court’s contempt power.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Fund any protective structure years before trouble and while solvent: every failed trust in these cases was funded as debts mounted or claims loomed. Catch: §548(e) still reaches actual-intent transfers to self-settled trusts for 10 years, as in Battley v. Mortensen (2011).
  2. Give up control for real: in FTC v. Affordable Media (1999) and In re Lawrence (2002), retained protector or appointment powers meant contempt and jail. Catch: impossibility you created yourself is no defence to a repatriation order.
  3. Keep the trust genuinely connected to its chosen state, or rely on your home state’s own exemptions; In re Huber (2013) applied Washington law to a Washington resident’s Alaska trust. Catch: Toni 1 Trust v. Wacker (2018) lets other courts hear the claim.
  4. Lean first on what courts routinely honor: homesteads, ERISA plans (Patterson v. Shumate, 1992) and third-party spendthrift trusts. Catch: published cases record mostly failures, so no case proves a self-settled shield will hold for you.

MaterialsThe opinions discussed, free to read online (links in the sources below)Lesson 6.1.3, on domestic asset protection trusts, and lesson 6.2.3, on duress clauses and contemptThe text of 11 U.S.C. §548(e), free on law.cornell.edu

Wonder

  1. Why can a court jail a settlor when the money is held by a foreign trustee?
  2. What made a court set aside a trust’s choice of Alaska law?
  3. Why do published cases record more failures than successes?

Explore

  1. In FTC v. Affordable Media, 179 F.3d 1228 (9th Cir. 1999), Michael and Denyse Anderson had placed commissions from a telemarketing venture the court described as a Ponzi scheme in a Cook Islands trust. When a US court ordered them to bring the assets back, the foreign trustee treated the order as duress under the trust’s terms and refused. The district court held them in civil contempt and had them taken into custody. The Ninth Circuit affirmed: they had not proved compliance was impossible, because as the trust’s protectors they still controlled it. It left open whether a genuine inability to comply could ever be a defence.
  2. In In re Lawrence, 279 F.3d 1294 (11th Cir. 2002), Stephan Lawrence settled an offshore trust worth about $7 million in January 1991, soon moved its governing law to Mauritius, and about two months later an arbitration award of about $20.4 million was entered against him. After he filed for bankruptcy in 1997, the bankruptcy court ordered him to turn the trust assets over and held him in contempt when he did not. The Eleventh Circuit affirmed: he kept the power to appoint trustees who could restore him as a beneficiary, and an impossibility he had created himself was no defence. He was jailed for years for civil contempt.
  3. Domestic trusts have failed too. In Battley v. Mortensen (Bankr. D. Alaska 2011), an Alaska resident had put a parcel of Alaska land into an Alaska DAPT in 2005 and filed for bankruptcy about four and a half years later. The court avoided the transfer under 11 U.S.C. §548(e), finding actual intent to hinder, delay or defraud, drawing on the trust’s stated purpose of protecting assets from creditors and on his finances at the time. It held that an Alaska rule saying such a stated purpose is not evidence of fraud did not govern the federal question. It is an early decision under §548(e).
  4. In In re Huber, 493 B.R. 798 (Bankr. W.D. Wash. 2013), a Washington real estate developer facing mounting debts set up an Alaska trust in 2008, with an Alaska trust company as co-trustee, and moved most of his assets into it. Because the settlor, assets, beneficiaries and creditors were in Washington, the court applied Washington law, under which transfers to a self-settled trust are void against creditors, and also avoided the transfers under §548(e). In Toni 1 Trust v. Wacker, 413 P.3d 1199 (Alaska 2018), after Montana and federal bankruptcy courts set aside transfers to an Alaska trust as fraudulent, the Alaska Supreme Court held that Alaska’s exclusive-jurisdiction statute could not override those courts.
  5. Commentators draw several lessons from these cases. Timing: each trust was funded when debts or claims existed or were foreseeable. Control: in the contempt cases, powers the settlors kept, as protectors or to appoint trustees, defeated their claim that compliance was impossible. Connection: a trust whose only real link to the chosen state is a trustee there may be judged under the home state’s law. Reach over people: a court that cannot reach assets abroad can still reach the people within its jurisdiction, and civil contempt can mean jail until the order is obeyed or the court is satisfied compliance will never come.
  6. The record is lopsided. Trusts that are never challenged, or end in private settlements, leave no published opinion, so the case law shows how shields fail more clearly than how often they hold. In these cases the shields broke for reasons the law states openly: voidable transfer rules, §548(e), conflict-of-laws principles and contempt power. Commentators disagree about how broadly some decisions apply; Huber, for example, turned partly on Alaska’s thin connection to the trust. This lesson reports what the courts held; it does not suggest creating any trust.

Key facts

  • FTC v. Affordable Media, 179 F.3d 1228 (9th Cir. 1999): settlors who were protectors of their Cook Islands trust were held in civil contempt for not repatriating its assets.
  • In re Lawrence, 279 F.3d 1294 (11th Cir. 2002): contempt was affirmed against the settlor of a Mauritius trust; self-created impossibility was no defence.
  • Battley v. Mortensen (Bankr. D. Alaska 2011): a transfer to an Alaska DAPT was avoided under 11 U.S.C. §548(e) for actual intent to hinder, delay or defraud.
  • In re Huber, 493 B.R. 798 (Bankr. W.D. Wash. 2013): a Washington resident’s Alaska trust was judged under Washington law and the transfers were avoided.
  • Toni 1 Trust v. Wacker, 413 P.3d 1199 (Alaska 2018): Alaska’s exclusive-jurisdiction statute could not bar Montana or federal courts from deciding fraudulent transfer claims.
  • 11 U.S.C. §548(e) lets a bankruptcy trustee avoid transfers to a self-settled trust made within 10 years with actual intent to hinder, delay or defraud.

Exercise nine, six, three, one

9CollectList up to 9 facts from one of the cases in this lesson (some lists are shorter), such as when the trust was funded, what debts or claims existed then, who was trustee and protector, which law the trust chose, where the settlor lived and what the court ordered.
6ClusterSort them into 6 categories: timing, the settlor’s finances, control and roles, governing law and location, the court’s reasoning, and facts you are unsure about.
3DistillReduce the 6 categories to 3 groups: facts the court relied on, facts that might have mattered under another state’s law, and questions the opinion leaves open.
1CrystallizeWrite 1 sentence explaining, in your own words, why a court that cannot reach assets abroad may still hold their settlor in contempt.

Fact check

Dates, figures and claims checked against the published sources listed below.

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