Huber v. Huber
Not Reported in F.Supp.2d (2013)
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Rule of Law:
Under federal choice-of-law rules, a court will disregard a trust's designation of a foreign state's law if its application would violate a strong public policy of the state with the most significant relationship to the trust. A debtor's transfer of assets into a self-settled trust is considered a fraudulent conveyance if accompanied by sufficient "badges of fraud" indicating an actual intent to hinder, delay, or defraud creditors.
Facts:
- Donald G. Huber was a real estate developer in Washington State for over 40 years.
- Beginning in 2007, the real estate market deteriorated, placing Huber's many personally guaranteed loans and development projects under severe financial distress.
- In August 2008, after a failed attempt to raise $55 million in capital, Huber's son emailed an attorney on his behalf stating, 'My father has some assets that he would like to protect and shield.'
- On September 23, 2008, Huber established the Donald Huber Family Trust, a self-settled asset protection trust, under the laws of Alaska.
- Huber then transferred substantially all of his valuable assets—including his residence, his primary business (UWD), and interests in over 25 other entities—into the Trust for no consideration.
- The only connection the Trust had to Alaska was one of its trustees and a $10,000 certificate of deposit; all other assets, beneficiaries, and the debtor himself were in Washington.
- After creating the Trust, Huber continued to live in his residence and the Trust paid for his personal expenses, his children's educational costs, and provided him with a monthly income of $14,500.
Procedural Posture:
- Donald G. Huber (Debtor) filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Western District of Washington on February 10, 2011.
- A creditor filed a motion for appointment of a trustee or conversion of the case to Chapter 7.
- The court appointed an examiner to investigate the Debtor's pre-petition transfers.
- Following the examiner's report, the case was converted to a Chapter 7 bankruptcy on October 21, 2011.
- Mark D. Waldron was appointed as the Chapter 7 Trustee for the bankruptcy estate.
- The Trustee filed motions for summary judgment against the Debtor, seeking to invalidate the transfers to the trust and deny the Debtor's discharge.
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Issue:
Does a debtor's transfer of substantially all of his assets to a self-settled asset protection trust, established under Alaska law, constitute a void or voidable fraudulent transfer when the debtor, his assets, and his creditors are almost exclusively located in Washington, a state with a strong public policy against such trusts?
Opinions:
Majority - Snyder, Bankruptcy J.
Yes, the debtor's transfer of assets to the trust is both void under Washington state law and voidable as a fraudulent conveyance under federal bankruptcy law. Applying federal choice-of-law rules, the court found Washington had the most significant relationship to the trust, not Alaska. Washington's strong and long-standing public policy against self-settled trusts (RCW 19.36.020) renders such transfers void as against creditors. Separately, the court found the transfers were made with actual intent to hinder, delay, or defraud creditors under 11 U.S.C. § 548(e)(1). This intent was established through overwhelming evidence of multiple 'badges of fraud,' including the threat of litigation, the transfer of substantially all of the debtor’s assets, the debtor's insolvency, the special relationship with the transferee trust, and the debtor's retention of control and benefit of the assets after the transfer.
Analysis:
This case serves as a crucial precedent for debtors attempting to use domestic asset protection trusts (DAPTs) from states like Alaska to shield assets from creditors in states where such trusts are void. It strongly affirms that a bankruptcy court will apply a 'most significant relationship' test in its choice-of-law analysis, preventing debtors from simply 'shopping' for favorable state laws. The court's application of the 'badges of fraud' provides a clear analytical framework for trustees to claw back assets, demonstrating that circumstantial evidence can be sufficient to prove the fraudulent intent required to avoid a transfer. This decision significantly limits the effectiveness of DAPTs for individuals who do not have substantial connections to the DAPT-sponsoring state.
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