Our second decision comes from the Supreme Court of Alaska. This decision is a core illustration of the potential problems with establishing a domestic asset protection trust (DAPT) for a resident of a state that does not allow DAPTs.
The case involves a lawsuit between the Wacker family and Tangwall family. After litigation between the families, a series of default judgments were issued against the Tangwall family in Montana state court. As the last of the default judgments came down, the Tangwalls transferred their Montana real estate into an Alaska DAPT. The Wackers alleged the transfer was fraudulent and sued to unwind the transfer to the Alaska DAPT. In response to the suit challenging their transfer, the Tangwalls argued that Alaska law (Alaska Statute 34.40.110) mandated that any fraudulent transfer actions against an Alaska DAPT must be brought in Alaska. The Alaska Supreme Court agreed in its reading and indicated that the statute did purport to grant exclusive jurisdiction to Alaska Courts to hear fraudulent transfer claims against Alaska DAPTs.
However, the Court found that Alaska cannot limit the scope of other states’, or of a federal court’s, jurisdiction. The Court relied on a 100 year old Supreme Court precedent as relevant authority in its holding. Accordingly, the Court held that the Tangwalls could be sued in Montana state court to unwind their (pretty clearly) fraudulent transfer.
In examining this case, we again see that a creditor’s principal weapon against a DAPT is unwinding the transfer of property to the trust as fraudulent. And furthermore, we gain from Toni 1 that a debtor with property in a Non-DAPT state cannot establish a DAPT in some distant state like Alaska and force a creditor in their home state to bring a fraudulent transfer action in the state where the DAPT resides. Accordingly, clients and attorneys should again be wary of both a) attempting to use a DAPT when claims already exist, and b) establishing a DAPT for a non-DAPT state resident.