Members can own different ownership percentages in an LLC. Generally, ownership percentages are based off the member’s capital contributions.
Are You a California Resident?
Many people believe that as long as they are outside the state of California for six months and a day they are not residents of California. And thus don’t have to pay California’s high income taxes. But the state of California is both broke and arrogant. And they make the rules the way they want.
Design Your Asset Protection Plan
You design a lot of things in your life. The layout of your house, the flow of your business, the requirements on your children, and many more scenarios are all elements of conscious design. Asset protection is no different. There is an architecture, a cohesive...
Does Asset Protection Trump the US Constitution?
An Alaska Supreme Court Rules on Alaska Domestic Asset Protection Trusts Created to Protect Assets from a Montana Lawsuit
Court Case: Toni 1 Trust, by Tangwall v. Wacker 2018 WL 1125033
For fraudulent conveyances,
Can one state assert exclusive jurisdiction over another?
Does asset protection trump the U.S. Constitution?
Several years ago Alaska put forth a legislatively strong asset protection statute. It was modeled after the popular asset protection trusts found in the Cook Islands and similarly small Caribbean island nations. These offshore trusts allowed you to both be the grantor (the person setting up the trust) and the beneficiary (the one benefitting from the trust.) Self settled trusts weren’t allowed in old England, the birthplace of common law. They were bad form. You can’t set up your own trust to protect your own assets was the guiding rationale. A ‘self-settled trust’ was akin to cheating. But Britain’s island dependencies needed an industry besides tourism. And the rich needed an island to park their money.
The foreign asset protection trusts became so popular that a number of U.S. states considered them. Alaska was first. Delaware, Nevada and 13 other states followed with their own domestic asset protection trusts (DAPT.) After a holding period where transfers into a DAPT could be challenged (Nevada’s is two years) the trust can’t be breeched or pierced.
Or can it?
In the Toni 1 case (decided on March 2, 2018) the Alaska Supreme Court had to take a hard look at their asset protection scheme. During a Montana lawsuit the Tangwalls transferred Montana real estate to an Alaska DAPT. A Montana court found the transfer was fraudulent under Montana law. (You can’t put assets out of reach once you have been sued or even threatened with litigation.)
Tangwall sought relief in the Alaska court arguing that only Alaska courts had jurisdiction over an Alaska DAPT. But when the transfer of Montana property was involved the Alaska Supreme Court under the full faith and credit clause of the U.S. Constitution could not limit Montana’s jurisdiction.
A full discussion of the case is below. The takeaway, however, is that asset protection-as we’ve noted before-is an ever changing area of the law.
What are the potential impacts of the recent Alaska Supreme Court decision in Toni 1 Trust, by Tangwall v. Wacker 2018 WL 1125033 (Alaska, March 2, 2018), on asset protection trusts?
Alaska Statue 34.40.110(k) (the “Alaska statue”), which purports to grant Alaska courts exclusive jurisdiction over fraudulent transfer claims against Alaska self-settled spendthrift trusts, cannot unilaterally deprive other state and federal courts of jurisdiction.
The Facts of Toni
After a Montana state court issued a series of judgments against Donald Tangwall and his family, the family members transferred two pieces of property to the “Toni 1 Trust,” a trust allegedly created under Alaska law. A Montana state court and an Alaska bankruptcy court found that the transfers were made to avoid the judgments and were, therefore, fraudulent. Tangwall, the trustee of the Trust, then filed suit in the Alaska state court, arguing that Alaska state courts have exclusive jurisdiction over such fraudulent transfer actions under the Alaska statute. However, the Alaska Supreme Court concluded that this statute could not unilaterally deprive other state and federal courts of jurisdiction, and the Court affirmed the Alaska state court’s judgment dismissing Tangwall’s complaint.
More specifically, in 2007 Donald Tangwall sued William and Barbara Wacker in Montana state court. The Wackers counterclaimed against Tangwall; his wife, Barbara Tangwall; his mother-in-law, Margaret “Toni” Bertran; and several trusts and businesses owned or run by the family. In the ensuring years, several default judgments were entered against Tangwall and his family. In 2010, before the last of these judgments was issued, Bertran and Barbara Tangwall transferred parcels of real property to an Alaska trust called the “Toni 1 Trust” (the Trust). The Wackers filed a fraudulent transfer action under Montana law in Montana state court, alleging that the transfers were made to avoid the judgments. Default judgments in the fraudulent transfer action were entered against Barbara Tangwall, the Toni 1 Trust, and Bertran. After the fraudulent transfer judgments were issued, the Wackers purchased Barbara Tangwall’s interest in one of the parcels at a sheriff’s sale, as part satisfaction of their judgment against Tangwall and family. But before they could purchase the remaining half interest, Bertran filed for Chapter 7 bankruptcy in Alaska. Her interest in the trust property was therefore subject to the jurisdiction of a federal bankruptcy court. In December 2012, Donald Tangwall, as trustee of the Trust, filed a complaint in the bankruptcy court against the Wackers and bankruptcy trustee Larry Compton. Among other things, Tangwall alleged that service on the Trust in the Montana fraudulent transfer action was defective, rendering the judgment against the Trust void. Rather than litigate whether service in Montana was proper, Compton elected to bring a fraudulent transfer claim against Tangwall under the federal bankruptcy fraudulent transfer statute. A default judgment in Compton’s action was entered against Tangwall, who appealed from this judgment of dismissed.
Tangwall next sought relief in Alaska state court, where he filed the complaint that led to his later appeal. The crux of his argument was that the Alaska statute granted courts exclusive jurisdiction over any fraudulent transfer actions against the Trust. Specifically, he argued that the Trust contained a provision restricting the transfer of the beneficiary’s interest, and that the Alaska statute granted Alaska courts “exclusive jurisdiction over an action brought under a cause of action or claim for relief that is based on a transfer of property to a trust” containing such transfer restrictions. On this basis, Tangwall sought a declaratory judgment stating that all judgments against the Trust from other jurisdictions were void and that no future actions could be maintained against the Trust because the statute of limitations had run. The superior court dismissed the complaint, and Tangwall appealed. Most of Tangwall’s arguments on appeal were supported by little or no citation to relevant legal authority and were, therefore, waived. However, he preserved his argument that the state and federal judgments against the Trust were void for lack of subject matter jurisdiction under the Alaska statute.
The Decision in Toni
A. Under the Full Faith and Credit Clause, an Alaska statute cannot prevent Montana courts from applying Montana fraudulent transfer law.
The Alaska Supreme Court concluded that the Alaska statute, AS.40.110(k), which purported to grant Alaska courts exclusive jurisdiction over fraudulent transfer claims against Alaska self-settled spendthrift trusts, could not limit the scope of a Montana court’s jurisdiction over a fraudulent transfer action against a trust allegedly created under Alaska law, and thus, a fraudulent transfer judgment entered against a trust in a Montana court was not void for lack of subject matter jurisdiction. The Alaska Supreme Court noted that fraudulent transfer actions were transitory actions, and the Full Faith and Credit Clause did not compel states to follow another state’s statute claiming exclusive jurisdiction over actions and purporting to deprive other states of jurisdiction over all fraudulent transfer actions concerning Alaska trusts, even if the actions arose under other states’ laws.
B. The Bankruptcy Court’s judgment was based upon a cause of action arising under federal law, and states cannot restrict federal jurisdiction; furthermore, a federal statute specifically grants federal courts jurisdiction over fraudulent transfer claims.
Likewise, the Alaska Supreme Court concluded that the Alaska statue could not limit the scope of a federal bankruptcy court’s jurisdiction over fraudulent transfer claims against the trustee of a trust allegedly created under Alaska law, and this a fraudulent transfer judgment entered against a trustee in bankruptcy court was not void for lack of subject matter jurisdiction. In addition, the Court noted that the Alaska statue was preempted by the Federal fraudulent conveyance statute, 11 U.S.C. § 548(a)(1)(A), which permits trustees to avoid fraudulent transfers.
The Rationale of Toni
A. The Alaska statute, AK 34.40.110(k), cannot limit the scope of other states’ jurisdiction.
Initially, the Alaska Supreme Court recognized that the Alaska statute, AK 34.40.110(k), purported to grant Alaska courts exclusive jurisdiction over fraudulent transfer claims against Alaska self-settled spendthrift trusts. The Alaska Supreme Court stated that, “having reviewed the legislative history of AS 34.4.0110(k), we have no doubt the Alaska legislature’s purpose in enacting that statute was to prevent other state and federal courts from exercising subject matter jurisdiction over fraudulent transfer actions against such trusts.”
The Alaska Supreme Court noted that, more than 100 years ago, the United States Supreme Court held in St. Louis, Iron Mountain & S. Ry. Co. v. Taylor, 210 U.S. 281, 285, 28 S. Ct. 616, 52 L.Ed. 1061 (1908), that each state may, subject to the restrictions of the Federal Constitution, determine the limits of the jurisdiction of its courts, the character of the controversies which shall be heard in them, and, specifically, how far it will, having jurisdiction of the parties, entertain in its courts transitory actions where the cause of action has arisen outside its borders. The Alaska Supreme Court further noted that, just a few years later, the United States Supreme Court held in Tenn. Coal, Iron, & R.R. Co. v. George, 233 U.S. 354, 360, 34 S.Ct.587, 58 L.Ed.997(1914), that states are not constitutionally compelled to acquiesce to sister states’ attempts to circumscribe their jurisdiction over such actions.
In Tennessee Coal, an employee sued his employer in a Georgia court, relying on an Alabama statutory cause of action. His employer countered that Alabama state courts retained exclusive jurisdiction over the suit under the Alabama Code, and that the Full Faith and Credit Clause compelled Georgia courts to respect Alabama’s assertion of exclusive jurisdiction. The United States Supreme Court found the “Full Faith and Credit” does not require states to go quite so far. Instead, jurisdiction is to be determined by the law of the court’s creation, and cannot be defeated by the extraterritorial operation of a statute of another state, even though it created the right of action.
After discussing the facts of Tennessee Coal, the Alaska Supreme Court concluded that the Alaska statute crossed the limit recognized by Tennessee Coal by purporting to grant Alaska courts exclusive jurisdiction over a type of transitory action against Alaska trusts. Acknowledging that the analogy was imperfect, the Alaska Supreme Court held, nevertheless, that Tennessee Coal controlled. The Alaska Supreme Court pointed out that the Tennessee Coal court held that the Full Faith and Credit Clause did not compel states to follow another state’s statute claiming exclusive jurisdiction over suits based on a cause of action even though the other state created the right of action. The Alaska Supreme Court stated that the clear implication was that the constitutional argument rejected in Tennessee Coal would be even less compelling were a state to assert exclusive jurisdiction over suits based on a cause of action it did not create. Applying this rationale to the facts of Toni, the Alaska Supreme Court observed that, in seeking to void the Montana court’s judgment for lack of jurisdiction, Tangwall effectively was arguing that the Alaska statute could deprive Montana courts of jurisdiction over cases arising under Montana law. The Alaska Supreme Court rejected Tangwall’s argument and stated that it was a more extreme interpretation of the “full faith and credit” principle than the interpretation considered and rejected by the United States Supreme Court in Tennessee Coal.
Finally, the Alaska Supreme Court noted that the basic principle articulated in Tennessee Coal had not changed in the last century, and concluded, therefore, that the Alaska statue’s assertion of exclusive jurisdiction did not render a fraudulent transfer judgment against an Alaska trust from a Montana court void for lack of subject matter jurisdiction.
B. The Alaska statue, AK 34.40.110(k), cannot limit the scope of a federal court’s jurisdiction.
Similarly, the Alaska Supreme Court denied Tangwall relief from the federal judgment. The Alaska Supreme Court noted that, while Tennessee Coal addressed only a state’s ability to restrict the jurisdiction of its sister states, the more recent United States Supreme Court decision in Marshall v. Marshall, 547 U.S. 293, 314, 126 S.Ct. 1735, 164 L.Ed 480 (2006), had confirmed that the Tennessee Coal rule also applied to claims of exclusive jurisdiction asserted against federal courts.
In Marshall, the United States Supreme Court considered whether Texas probate courts could retain exclusive jurisdiction over a transitory tort arising under Texas law. Relying on Tennessee Coal, the court concluded that they could not, and that state efforts to limit federal jurisdiction were invalid, even though the state created the right of action giving rise to the suit.
Acknowledging that the analogy was imperfect, the Alaska Supreme Court held, nevertheless, that just as Tennessee Coal should control whether the Alaska statute could restrict state court jurisdiction, Marshall should control whether the Alaska statute could restrict federal court jurisdiction. The Alaska Supreme Court concluded that, just as a state could restrict federal jurisdiction, even though the state created the right of action, a state also could not restrict federal jurisdiction over suits based on a cause of action it did not create. In addition, the Alaska Supreme Court pointed out that, if the Alaska statute were interpreted to deny parties access to the federal courts without those courts’ consent, then the statute might well run afoul of the Supremacy Clause, which ultimately precludes state courts from limiting federal jurisdiction.
Observations by the Alaska Supreme Court in Toni
A. Observations on related state court decisions.
In reaching its decision in Toni, the Alaska Supreme Court acknowledged that the Alaska legislature’s attempt to grant Alaska courts exclusive jurisdiction over a class of claims in some circumstances was hardly unique, and that several other sister states had concluded that similar statutes do, in fact, restrict their jurisdiction. See, e.g., Carbone v. Nxegen Holdings, Inc., 2013 WL 5781103, at *4-5 (Conn. Super,. Oct. 3, 2013); Wilson v. Celestial Greetings, Inc., 896 S.W.2d 759, 761-62 (Mo.App.1995); State ex rel. U.S. Fid. & Guar. Co v. Mehan, 581 S.2d 897, 840 (Mo.App. 1979); Foti v. W. Sizzlin Corp., 2004 WL 2848398, at *1-2 (Va.Cir., Feb. 6, 2004).
The Alaska Supreme Court noted that those courts relied on reasoning that was not applicable to the Alaska statute. For example, the Alaska Supreme Court pointed out that some state courts had applied state-law distinctions between local and transitory action to make discretionary decisions whether to stay or dismiss an action in favor of another forum. However, the Alaska Supreme Court observed that Tennessee Coal had established that a state cannot create a transitory cause of action and at the same time destroy the right to sue on that transitory cause of action in any court having jurisdiction, which suggested that states are not barred from asserting exclusive jurisdiction when the cause of action is local rather than transitory; that the Alaska statute granted Alaska courts exclusive jurisdiction over fraudulent transfer actions against Alaska trusts; and that fraudulent transfer actions were transitory actions.
In addition, the Alaska Supreme Court pointed out that other state courts had declined to hear cases on the basis of an exclusive jurisdiction provision without addressing the Tennessee Coal rule. For example, in Foti, supra, a Virginia Circuit Court elected to respect an assertion of exclusive jurisdiction because “comity suggests that limitations one state’s legislature places on its own laws be universally acknowledged.” However, the Alaska Supreme Court noted that comity is not a legal rule; rather it is a principle under which the courts of one state give effect to the laws of another state out of deference or respect. In other words, while courts may elect to follow a statute like the Alaska statute out of comity, they are not compelled to do so. Furthermore, the Alaska Supreme Court pointed out that the Alaska statute is more than a limitation Alaska’s legislature placed on its own laws; instead, it purports to deprive other states of jurisdiction over all fraudulent transfer actions concerning Alaska trusts, even those based on causes of action arising under that state’s own law.
Finally, the Alaska Supreme Court noted that in IMO Daniel Kloiber Dynasty Trust, 98 A.3d. 924 (Del.Ch.2014), the Delaware Court of Chancery had concluded that Delaware could not unilaterally preclude a sister state from hearing claims under that state’s law, citing Tennessee Coal.
B. Observations on similar related court decisions.
In reaching its decision in Toni, the Alaska Supreme Court noted that several federal courts had concluded that state law “exclusive jurisdiction” provisions did, in fact, deprive them of jurisdiction. See, e.g., Lynch v. Basinger, 2012 WL 6213781, at *5(D.N.J.,Dec. 12, 2012); Yale S. Corp v. Eclipse Servs., Inc., 2010 WL 2854687, at *3-4 (ND.Okla., July 19, 2010); Reserve Sols., Inc. v. Vernaglia, 438 F.Supp.2d 280, 288-89 (S.D.N.Y 2006). However, the Alaska Supreme Court pointed out that only one of these cases was reported, and that none of them addressed either Marshall or Tennessee Coal. Furthermore, the Alaska Supreme Court pointed out that other federal courts had reached the opposite conclusion. See, e.g., Superior Beverage Co. v. Schieffelin & Co., 448 F. 3d 910, 917 (6th Cir. 2006)(“a state may not deprive a federal court of jurisdiction merely by declaring in a statute that it holds exclusive jurisdiction”); Begay v. Kerr-McGee Corp., 682 F.2d 1311, 1315 (9th Cir. 1982) (states “have no power to enlarge or contract the federal jurisdiction”), quoting, Markham v. City of Newport News, 292 F.2d 711, 716 (4th Cir.1961); Duchek v. Jacobi, 646 F.2d 415, 419 (9th Cir. 1981)(same). The Alaska Supreme Court state that the reasoning in these latter cases was both persuasive and consistent with the approach set out in Marshall.
The following observations apply to the Alaska Supreme Court’s decision in Toni:
1. To date, sixteen (16) states have enacted asset protection trust legislation, and thirty-four (34) states have not. As such, conflict of law questions may arise concerning the ability of an asset protection trust to protect trust assets from the claims of a trust settlor’s creditors.
2. Toni involved a blatant fraudulent transfer of property to an asset protection trust. The transfers in Toni were made only after most of the default judgments were already entered by the Montana state court.
3. All fifty (50) states, including Alaska, interdict the fraudulent transfer of property. Indeed, Alaska statute AK 34.40.110(b) specifically provides that, “[i]f a trust contains a transfer restriction allowed under (a) of this section [asset protection trusts], the transfer restriction prevents a creditor existing when the trust is created or a person who subsequently becomes a creditor from satisfying a claim out of the beneficiary’s interest in the trust unless the creditor is a creditor of the settlor and…the settlor’s transfer of property in trust was made with the intent to defraud that creditor…”
4. It may be advisable to use a foreign asset protection trust rather than a domestic asset protection trust.
5. Asset protection trust works better when the settlor is a resident in the state with asset protection legislation.
6. Asset protection trust work better when the action is outside of bankruptcy.
7. Asset protection trusts work better when the settlor can avoid personal jurisdiction in a state without asset protection legislation.
8. Asset protection trusts work better when the asset transfer occurs more than ten (10) year limitation period set forth in 11 U.S.C. § 548(e).
9. The federal bankruptcy courts may not always recognize the asset protection features of a state with asset protection legislation, because these assets generally are regarded as property of the bankruptcy estate under 11 U.S.C. § 541.
10. The bankruptcy trustee always is free to commence a fraudulent transfer action under 11 U.S.C. § 548, assuming that the transfer to the asset protection trust occurred within ten (10) years prior to the commencement of the bankruptcy case.
Although states with asset protection legislation may purport to hold exclusive jurisdiction over asset protection trusts, this may not always be true when another state has personal jurisdiction over the debtor. However, as long as the funding of an asset protection trust is not voidable, it does not appear that the decision in Toni damages the usefulness of asset protection planning; rather, the decision in Toni stresses the importance of asset protection planning well before the need for an asset protection trust arises.
How LLCs Can Protect Doctors
Doctors are frequent targets of medical malpractice suits. This is why many of them have malpractice insurance to cover these claims. But what happens when the insurance does not cover the full amount?
Multi-Member LLCs: Structure and Issues
Members can own different ownership percentages in an LLC. Generally, ownership percentages are based off the member’s capital contributions.