5 minutes reading time (1048 words)

IS THE DECISION UNDER IN RE HUBER IMPORTANT TO ANYONE OTHER THAN MR. HUBER?

The April 2013 bankruptcy court decision in the Huber case has quickly produced some scholarly legal discussion and academic articles. It has also quickly degenerated into some sensationalism in the popular press.

Huber involved a Washington state real estate developer who settled an Alaska asset protection trust in 2009. Factually, not a lot more needs to be written; the reader has already surmised based on these few facts alone that this is a fraudulent transfer case and, yes, the transfers were found to be fraudulent transfers and were reversed.

Although unnecessary to the ultimate outcome of this decision, Huber also involved a conflicts of law question that is important in the asset protection planning setting. The question itself is what is important. The Huber decision is not nearly as important as it is being made out to be.

Why is that? Because Huber was decided on the wrong section of the right body of law. So, what is important remains to be seen; which is, how some future court in some future asset protection trust case involving this conflicts of law issue decides that case when the right section of the law is argued.

The right body of law that was argued is the Restatement (Second) Conflicts of Law (the “Restatement”). In the Bankruptcy Trustee’s Motion for Summary Judgment, the Bankruptcy Trustee properly pointed to the Restatement for guidance on the issue of whether the state law of the debtor’s domicile should govern (Washington) or the law of the state selected as the trust’s applicable law should govern (Alaska). As the reader either knows or can easily guess, a different result would come out of each state’s law. Hence, “conflicts” between competing bodies of law, and thusly enters the Restatement.

The caption on the bankruptcy trustee’s motion should have tipped off Huber in terms of where the legal argument was going and how to counter that argument. The caption reads, Plaintiff’s Motion For Summary Judgment…As To Claims Relating To…Invalidity of Trust.” (emphasis added). Most litigators and indeed most courts do not deal with matters of trust law with any regularity. It may be fair to say that most do not deal with matters of trust law except in rare circumstances. There therefore exists a tendency to use incorrect words or characterizations that can later take on a precise but incorrect meaning. Today, many pleadings and indeed many decisions refer to trusts that benefit the person who set up and funded the trust (known as a “self-settled trust”) as “illegal trusts” or as “invalid trusts” when in fact such trusts are absolutely legal and 100% valid. Neither legality nor validity is relevant to the inquiry. Consider the garden-variety revocable living trust, which is a self-settled trust. It is neither illegal nor invalid. Consider the typical trusteed IRA, which is a self-settled trust. It is neither illegal nor invalid. Consider the typical qualified retirement plan trust in the small business setting, which is a self-settled trust. It is neither illegal nor invalid.

What is relevant when a self-settled trust is involved is whether the trust will be enforceable as against the creditors of that person. Two things are relevant in this regard: (i) the terms of the trust itself; and (ii) the Restatement.

Section 273 of the Restatement is the relevant and applicable section. It deals with what state law is to apply when a person resident in a state without spendthrift trust law settles a trust in a state with self-settled trust law (about 15 of them do today, depending on how one characterizes state law). Section 273 was never, ever, mentioned, even in passing, in Huber.

Section 273 of the Restatement is entitled “Restraints on Alienation of Beneficiaries’ Interests” and provides, in pertinent part, that "[whether the interest of a beneficiary of a trust of movables is assignable by him and can be reached by his creditors is determined…(b) in the case of an inter vivos trust, by the local law of the state, if any, in which the settlor has manifested an intention that the trust is to be administered, and otherwise by the local law of the state to which the administration of the trust is most substantially related."

Importantly, there is no public policy exception. There is no balancing of interests or contacts unless the settlor has not made a designation of applicable law.

Contrast Section 273 of the Restatement to Section 270 of the Restatement, entitled “Validity of Trust of Movables Created Inter Vivos.” Section 270 provides in pertinent part, that "[a]n inter vivos trust of interests in movables is valid if valid (a)   under the local law of the state designated by the settlor to govern the validity of the trust, provided that this state has a substantial relation to the trust and that the application of its law does not violate a strong public policy of the state with which, as to the matter at issue, the trust has it most significant relationship under the principles stated in Section 6 [of the Restatement], or (b)   If there is no such effective designation, under the local law of the state with which, as to the matter at issue, the trust has its most significant relationship under the principles stated in Section 6 [of the Restatement].

In Plaintiff’s Motion for Summary Judgment, in arguing in its Part IV.B. that “The Trust Should Be Invalidated Under Washington Law,” the Plaintiff made reference to the Restatement generally, but made no reference to either Section 270 or Section 273. Plaintiff did argue that a most significant contacts approach as well as a most significant relationship test has been applied in fraudulent transfer cases, and so it should therefore this approach should apply to this choice of law question.

In Defendant Huber’s responsive pleading, Huber immediately resorts to a Section 270 validity argument under the Restatement. But validity is not the choice of law issue, as discussed above. Rather, the choice of law issue is whether the spendthrift provision of the self-settlor Alaska trust can access trust assets under the facts of the case. By defending on the basis of Section 270 rather than Section 273, Huber opened himself up to a number of needless and irrelevant variables that, at the end of the day, ended his day poorly.

--Barry Engel

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