What We Learned From The Mortensen Case

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shock 150x150 What We Learned From The Mortensen Case

Recently there has been a lot of commentary on the internet and various estate and asset protection planning listserves about the Mortensen Case.  The Case was originally decided on May 26, 2011, by the United States Bankruptcy Court for the District of Alaska and there was a Memorandum denying a Motion for Reconsideration by the same Court issued on July 8, 2011.  The actual citations for the Case are found at the end of this Article.

Here are some of the things I think we can learn from Mortensen:

1.         Lay persons should not draft their own Trusts.

2.         Clients with assets should avoid filing for bankruptcy.  Any estate and risk minimization planning is subject to extremely broad and very far reaching powers of a bankruptcy judge.  Mortensen obviously did not understand all of the legal consequences of filing for Bankruptcy (the “self help” syndrome at work again).

3.         So called “asset protection planning” should be strongly consolidated with estate planning.  In fact, asset protection planning is really a component of estate planning.  In this regard, it should be pointed out that the creation of corporations has been promoted, fostered and universally sanctioned for asset protection planning purposes for centuries.  Limited liability companies have also been around for several decades.  Moreover, there are now 13 states who have adopted Self Settled Spendthrift Trust legislation in many ways similar to Alaska’s.  Asset protection in and of itself is not wrong or unlawful.

4.         It is probably a good idea for the Settlor of a Self Settled Trust in any of these 13 states to utilize a professional Trustee.

5.         Many clients do not wish to make a completed gift to their Self Settled Trust.  These incomplete gift transfers can still presumably be strongly protected outside of bankruptcy.

6.         My experience and that of many colleagues with whom I have interacted is that the establishment of a Domestic Self Settled Trust in the proper factual context can be a substantial barrier against creditor claims.

7.         The Mortensen Case does, however, illustrate that Offshore Planning may provide better results for those interested in greater protection.

8.         The Judge specifically pointed out that the establishment of the Trust presumably as an “Asset Protection Trust” was not the sole reason for his decision.  There were “badges of fraud” present which may not be relevant in other cases.

9.         The Case was ultimately settled as almost all cases involving these types of Trust have been.  When cases settle, both sides have to compromise.  Most of the time, the debtor will have much more leverage in the settlement process, if he/she engages in well advised, advanced legal planning.

The Case:

Mortensen was an Alaska resident with a Masters Degree in Geology who was involved in the management of environmental aspects of construction projects.  Mortensen and his wife were involved in a very acrimonious divorce in 1998.  As part of the divorce proceedings, Mortensen received approximately 1.25 acres of remote unimproved real property located near Seldovia, Alaska, a picturesque fishing community.

In 2005, Mortensen using a template he had found, drafted a self settled Alaska Trust called “The Mortensen Seldovia Trust (An Alaska Asset Preservation Trust) ”.  Mortensen said he had the Trust document reviewed by an attorney but that only minor changes were suggested by the reviewing lawyer.  Mortensen subsequently transferred the Seldovia property and $80,000 in cash into the Trust (the cash was a gift from his mother).

In 2009, Mortensen filed for Chapter 7 Bankruptcy without declaring the assets in the Trust as part of the bankruptcy estate.  Subsequently, the Bankruptcy Trustee attacked the Trust alleging that Mortensen was, in fact, insolvent when he settled the Trust in violation of Alaska law.  The Bankruptcy Judge rejected this argument and made a specific finding that Mortensen was, in fact, solvent when he set up the Trust.

The Bankruptcy Trustee also asserted that the transfer should be avoided under Bankruptcy Code Section 548(e) which provides that a Self Settled Trust can be avoided in bankruptcy if the debtor transfer assets to such a Trust or similar device within ten (10) years from the date of the Petition and “with actual intent to hinder, delay or defraud any entity to which the debtor was or became, on or after the date that such transfer was made, indebted.”

The Bankruptcy Judge found that the transfers by Mortensen to the Trust were done for the express purpose to protect the Trust assets from creditors and that both the establishment of the Trust and the transfer to it could manifest the same intent.  The Judge made it clear, however, that this was not the only evidence upon which he based his decision.  In his Memorandum on the Defendant’s Motion for Reconsideration, the Judge talked about several “badges of fraud” and stated that he found sufficient “badges of fraud” to determine that Mortensen did indeed intend to hinder, delay and defraud his creditors when he transferred the Seldovia property to the Trust.

As an aside, after a Notice of Appeal was filed, I understand that the parties settled the Case and that the debtor actually bought the property from the Bankruptcy Trustee for the tax assessed value.  I am indebted to my colleague, Richard H. Foley of Anchorage, Alaska, for this interesting additional information about the Case.

Battley v. Mortensen, et. al.

Adv. Bk. Dist of Alaska

No. A09-90036.DMD

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