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ASSET PROTECTION TRUST SURVIVES ATTACK

Offshore asset protection trust law typically provides for a relatively short period of time within which a claimant can institute a fraudulent transfer action against the settlor or against the trustee. This “statute of limitations” factor is but one factor that in general makes offshore trusts all the more protective when compared to domestic trusts. But this is not to say that domestic asset protection trusts are devoid of similar protections, especially when compared to the option of doing no protective planning at all.

The January 22, 2015 decision of Trustco Bank and Ore Property Two, LLC vs. Susan M. Mathews, et al. involves a Delaware trust and a New York-based lender. In this Delaware case, the lender argued that New York’s longer statute of limitations should apply. The Delaware Court of Chancery ruled, however, that the shorter Delaware statute of limitations applied and not the longer statute of limitations under New York law.

The effect of this ruling allowed for a Delaware self-settled trust to defeat a plaintiffs’ claim that the plaintiffs had a longer allowable period to bring an action to unwind transfers to the trust as being “fraudulent transfers.”

In reaching its decision, the court not only determined that Delaware’s borrowing statute (the law applied in this case) clearly mandated using the shorter statute of limitations period, but it also stated that this Delaware law applied even if New York had been determined to have had the more significant relationship to the underlying fraudulent transfer claim. That being said, the court did go on to say that New York’s relationship to the claim did not “reveal [such] a strong New York-centric relationship between the parties” as to “dominate the focus of this action.” As such, the opinion states that “even if I found that New York law should apply, there is nothing in this set of facts that would lead me to conclude that application of the Delaware borrowing statute would be inequitable.” In essence, New York did not have such a strong overbearing “significant relationship” connection to the case that would have made it inequitable to apply the Delaware “borrowing statute” law that applies Delaware’s shorter statute of limitation period. As a result, the applicable shorter statute of limitation period clearly barred the plaintiffs’ fraudulent transfer claim.

The Delaware court also stated that if the borrowing statute had not been applicable for any reason, the court could still apply Delaware’s instead of New York’s statute of limitation law if the court determines that Delaware has the more significant relationship to the underlying claims. Delaware’s conflict of law rules direct that the Delaware court determine the “more significant relationship” by following the Restatement (Second) Conflict of Laws. The factors set forth in this Restatement when the claim sounds in contract include (a) the place of contracting, (b) the place of negotiation of the contract, (c) the place of performance, (d) the location of the subject matter of the contract, and (e) the domicile, residence, nationality, place of incorporation and place of business of the parties. When a tort claim is involved, the factors include (a) the place where the injury occurred, (b) the place where the conduct causing the injury occurred, (c) the domicile, residence, nationality, place of incorporation and place of business of the parties and (d) the place where the relationship, if any, between the parties is centered. The court concluded that Delaware had the more significant relationship as compared to New York.

--Barry Engel and Edward Brown

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April, 2017 - CELESQ
“An Asset Protection Planning Primer for Estate Planning, Tax and Creditors Rights Lawyers”
Live Web Cast
May 31 – June 1, 2017 - 

SOUTHPAC TRUST OFFSHORE PLANNING INSTITUTE CONFERENCE 2017, “Asset Protection in a Changing World” (31 May 2017) and “Questions & Answer Panel on Industry Challenges to Asset Protection Structures” (1 June 2017)
Las Vegas, Nevada

 

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Barry S. Engel
Email: info@engelreiman.com