Can a judgment debtor escape the judgment creditor by transferring their assets to a revocable trust?
The property of a revocable trust is subject to claims of the settlor's creditors during the lifetime of the settlor. (D.C. Code § 19–1305.05)
After the death of a settlor, the property of a trust that was revocable at the settlor's death is subject to claims of the settlor's creditors to the extent the settlor's residuary probate estate is inadequate to satisfy those claims (D.C. Code § 19–1305.05)
In TD Bank, N.A. v. Pearl, 891 F.Supp.2d 103 (D.D.C. 2012), a high net-worth settlor created a revocable trust during his lifetime to operate his interests in an LLC and affiliated entities and pay the proceeds to his wife, the defendant. The settlor died and the plaintiff, a bank that had created an unsecured credit facility for the settlor, became a creditor per the terms of its credit agreement with the deceased settlor. The defendant filed a petition for unsupervised probate. The plaintiff moved for a preliminary injunction enjoining the defendant from selling, transferring, encumbering, or in any other way disposing of any assets or property that she acquired from her husband without prior authorization from the bank or the court, as the plaintiff intended to eventually seek a money judgment against the defendant. The plaintiff argued that the creation and funding of the revocable trust was a fraudulent transfer under the District of Columbia Uniform Fraudulent Transfer Act of 1995 (the "DC-UFTA"). The United States District Court for the District of Columbia denied the plaintiff's motion. In the course of analyzing the preliminary injunction factor of likelihood of success on the merits, the Court emphasized that the trust was revocable and thus would not be a bar to recovery efforts by creditors should the residuary estate be insufficient to satisfy outstanding claims. Thus, the trust would not be a very effective vehicle for effectuating the purported fraud.
No other decisions were identified that discussed whether a debtor (judgment or non-judgment) can escape a creditor by transferring their assets to a revocable trust.
Per D.C.Code § 19–1305.05, the property of a revocable trust is subject to claims of the settlor's creditors during the lifetime of the settlor. After the death of a settlor, the property of a trust that was revocable at the settlor's death is subject to claims of the settlor's creditors to the extent the settlor's residuary probate estate is inadequate to satisfy those claims:
§ 19-1305.05. Creditor's claim against settlor
(a) Whether or not the terms of a trust contain a spendthrift provision, the following rules apply:
(1) During the lifetime of the settlor, the property of a revocable trust is subject to claims of the settlor's creditors.
(2) With respect to an irrevocable trust, a creditor or assignee of the settlor may reach the maximum amount that can be distributed to or for the settlor's benefit. If a trust has more than one settlor, the amount the creditor or assignee of a particular settlor may reach may not exceed the settlor's interest in the portion of the trust attributable to that settlor's contribution.
(3) After the death of a settlor, and subject to the settlor's right to direct the source from which liabilities will be paid, the property of a trust that was revocable at the settlor's death is subject to claims of the settlor's creditors, costs of administration of the settlor's estate, the expenses of the settlor's funeral and disposal of remains, and statutory allowances to a surviving spouse and children under sections 19-101.02, 19-101.03, and 19-101.04, to the extent the settlor's residuary probate estate is inadequate to satisfy those claims, costs, expenses, and allowances.
TD Bank, N.A. v. Pearl, 891 F.Supp.2d 103 (D.D.C. 2012) involved a situation where a high net-worth settlor created a revocable trust during his lifetime to operate his interests in an LLC and affiliated entities and pay the proceeds to his wife, the defendant. The settlor died and the plaintiff, a bank that had created an unsecured credit facility for the settlor, became a creditor per the terms of its credit agreement with the deceased settlor. The defendant filed a petition for unsupervised probate. The plaintiff moved for a preliminary injunction enjoining the defendant from selling, transferring, encumbering, or in any other way disposing of any assets or property that she acquired from her husband without prior authorization from the bank or the court, as the plaintiff intended to eventually seek a money judgment against the defendant. The plaintiff argued that the creation and funding of the revocable trust was a fraudulent transfer under the District of Columbia Uniform Fraudulent Transfer Act of 1995 (the "DC-UFTA"). The United States District Court for the District of Columbia denied the plaintiff's motion. In the course of analyzing the preliminary injunction factor of likelihood of success on the merits as to the bank's claim of actual fraud, the Court emphasized that the trust was revocable and thus would not be a bar to recovery efforts by creditors should the residuary estate be insufficient to satisfy outstanding claims. Thus, the trust would not be a very effective vehicle for effectuating the purported fraud (at 109-110):
Significantly, the Perseus Trust was, at the time of Mr. Pearl's death, revocable. See Richardson Decl., Ex. 7 (Perseus Trust Agreement dated Dec. 27, 2011) art. XV.A. Under the District of Columbia Uniform Trust Code, “the property of a trust that was revocable at the settlor's death is subject to claims of the settlor's creditors ... to the extent the settlor's residuary probate estate is inadequate to satisfy those claims.” D.C.Code § 19–1305.05(a)(3) (emphasis added).6 This provision “recognizes that a revocable trust is usually employed as a will substitute,” and “[a]s such, the trust assets, following the death of the settlor, should be subject to the settlor's debts.” Unif. Trust Code § 505, cmt.
The upshot is that the creation and funding of the Perseus Trust did not subtract from the assets actually available to Mr. Pearl's creditors. Before and after the transfer, the universe of reachable assets remained, for all practical purposes, exactly the same. For this reason, it is strange that TD Bank insists on arguing that Mr. Pearl, who by TD Bank's own account was a highly sophisticated financial actor, somehow intended to stymie the claims of creditors when he created the Perseus Trust. If that was Mr. Pearl's intent, there were far better tools at his disposal than a revocable trust, which, to reiterate, did not and could not operate to shield assets from the claims of his creditors under District of Columbia law. To the contrary, the weight of the evidence in the record would lead a reasonable factfinder to conclude—consistent with the principle that a revocable trust is a perfectly valid and appropriate estate management tool—that Mr. Pearl simply intended to fashion a structure for the efficient and orderly transfer of his ownership and management interests upon his death. See, e.g.,Richardson Decl. ¶¶ 9–10 & Ex. 7 (Perseus Trust Agreement) art. III.A.
Nor is the Court persuaded by TD Bank's suggestion that Mr. Pearl concealed the transfer of assets to the Perseus Trust. See D.C.Code § 28–3104(b)(3), (b)(7). As an initial matter, TD Bank elides over the critical difference between concealment and the absence of public disclosure; few people are likely to publicly disclose their estate management plans, or have any reason to do so. In any event, as TD Bank concedes, the Perseus Trust was subject to amendment and revocation during Mr. Pearl's lifetime; no assets were actually transferred until his death. See Pl.'s Mem. at 4. Upon his death, the trustees of the Perseus Trust filed a notice in the Superior Court alerting interested parties to the existence of the trust and affirmatively indicating that it “is subject to claims of [Mr. Pearl's] creditors ... to the extent [his] residuary probate estate is inadequate to satisfy those claims.” Def.'s Opp'n, Ex. B (Notice of Existence of Revocable Trust dated Sept. 5, 2012) at 1. In short, not only does the law render the assets of the Perseus Trust available to Mr. Pearl's creditors, but the trustees have publicly said as much. No assets have been concealed.
Under these circumstances, the Court concludes that TD Bank has failed to show a likelihood of success on the merits of its claim that the creation and funding of the
[891 F.Supp.2d 110]
Perseus Trust was actually fraudulent under D.C. Code § 28–3104(a)(1).
The Court rejected the plaintiff's claim of constructive fraud under the DC-UFTA as unlikely to succeed on the merits along similar reasoning as its analysis of the actual fraud claim. Namely, the Court emphasized that the purportedly fraudulent transfer did not diminish at all the assets that creditors could reach (at 110):
Under the DC–UFTA, a transfer is constructively fraudulent if, inter alia, “the debtor made the transfer ... without receiving a reasonably equivalent value in exchange ... and the debtor was insolvent at that time or ... became insolvent as a result.” D.C.Code § 28–3105(a). The central aim of this provision is to prevent debtors from making transfers that, regardless of the underlying intent, deplete the assets available to creditors. And consistent with this aim, the overarching question, distilled to its essence, is whether sufficient assets remain after a transfer to allow the debtor to “make good” on his debts.
In this case, the problem for TD Bank is that the transfer of assets from Mr. Pearl to the Perseus Trust did not make those assets any more or less available to Mr. Pearl's creditors. As explained above, because the Perseus Trust was a revocable trust, in the event Mr. Pearl's probate estate is “inadequate” to satisfy the claims of creditors, which at this point seems likely, then the property of the Perseus Trust “is subject to claims of [his] creditors.” D.C.Code § 19–1305.05(a)(3). In other words, practically speaking, the creation and funding of the Perseus Trust in no way subtracted from the assets available to Mr. Pearl's creditors upon his death. The same assets remain reachable by creditors, including TD Bank. On this record, the Court concludes that TD Bank has failed to show a likelihood of success on the merits of its claim that the creation and funding of the Perseus Trust was constructively fraudulent under D.C.Code § 28–3105(a). Cf. Matthews v. Serafin, 319 Ill.App.3d 72, 253 Ill.Dec. 201, 744 N.E.2d 934, 937 (2001).
No other decisions were identified that discussed whether a debtor (judgment or non-judgment) can escape a creditor by transferring their assets to a revocable trust.
TD Bank, N.A. v. Pearl, 891 F.Supp.2d 103 (D.D.C. 2012)
