In re Huber Case Analysis

In In re Huber, 493 B.R. 798 (Bankr. W.D. Wash. 2013), a bankruptcy court applied Washington law to a trust that designated Alaska law, held the transfers void, and avoided them again using the Bankruptcy Code’s ten-year rule for self-settled trusts.

The court did not question Alaska’s statute for Alaska residents; it held the statute never applied to Huber, because the settlor, the creditors, the beneficiaries, and all but $10,000 of the assets sat in Washington. Donald Huber had moved 71.1 percent of his assets into the trust, and the ruling unwound the transfers in full.

How Donald Huber Funded an Alaska Trust as His Loans Went Bad

Donald Huber developed real estate around Tacoma, Washington for more than 40 years, and he personally guaranteed many of the bank loans behind his projects. By 2008 those guarantees were turning into exposure. The housing market was collapsing, his loan maturities were being extended rather than paid, and a $55 million capital raise failed in October 2008.

His son Kevin emailed an estate planning attorney on August 19, 2008, saying his father “has some assets that he would like to protect and shield,” and the Donald Huber Family Trust was established on September 23, 2008. Follow-up correspondence described a principal goal: protecting a portion of Huber’s assets from his creditors.

Most of what Huber moved went through an Alaska limited liability company, DGH, LLC, formed on September 4, 2008, nineteen days before the trust itself. He transferred $10,000 in cash and his interests in more than 25 companies into DGH, LLC; the trust owned 99 percent of it, and Kevin owned 1 percent and managed it.

The shares of United Western Development, the company Huber had founded in 1968, went straight into the trust instead. His Tacoma residence went in through a separate Alaska entity, which then leased the house back to him. He received nothing in exchange for any of the transfers.

A domestic asset protection trust, or DAPT, is a self-settled trust: the settlor funds it, remains a beneficiary, and relies on a state statute to bar his creditors from the trust assets. Alaska enacted the country’s first such statute, and Huber’s trust named Alaska law and an Alaska trust company as a trustee. The trust’s only asset in Alaska was a $10,000 certificate of deposit. The bankruptcy examiner later calculated that 71.1 percent of Huber’s assets had gone into the trust.

Huber filed chapter 11 in February 2011, and the case converted to chapter 7 that October. The trust had been paying him $14,500 a month, and his distribution requests went through Kevin, who granted nearly all of them. The Alaska trust company, the court found, “did nothing to become involved” and was acting “merely in the nature of a straw man.” The chapter 7 trustee, Mark Waldron, sued to unwind the trust.

Why the Court Applied Washington Law Instead of Alaska Law

Washington law decided whether the trust was valid, because every connection that counted ran to Washington. Huber lived in Washington, his creditors and the trust beneficiaries were there, the drafting attorney practiced there, and every trust asset except the $10,000 deposit came from there.

Bankruptcy courts apply federal choice-of-law rules, and federal courts in the Ninth Circuit follow the Restatement (Second) of Conflict of Laws. The Restatement enforces the settlor’s designation only when the designated state has a substantial relation to the trust. Even a qualifying designation loses if it would offend a strong public policy of the state most closely tied to the dispute. Huber’s trust failed both parts of the test.

Alaska’s only connections were the place of administration and one of the three trustees, which the court called a minimal relation. Washington has voided transfers into self-settled trusts since 1854. The statute, RCW 19.36.020, voids transfers made “in trust for the use of the person making the same,” and it protects future creditors as well as existing ones. The court in In re Mastro, 465 B.R. 576 (Bankr. W.D. Wash. 2011), had applied the statute the same way two years earlier.

Alaska’s statute recognizes self-settled asset protection trusts, and the trust instrument named Alaska law to reach it. The court disregarded the designation, applied Washington law, and held every transfer into the trust void. Huber asked to certify the question to the Washington Supreme Court; the court refused, because the statute’s answer was clear.

Section 548(e) Reached Transfers the Ordinary Rules Could Not

Section 548(e) of the Bankruptcy Code lets a bankruptcy trustee avoid a transfer the debtor made into a self-settled trust during the ten years before the petition, when the debtor is also a beneficiary. The trustee must show the debtor transferred with actual intent to hinder, delay, or defraud creditors, including creditors he did not yet have.

The ten-year window is what caught Huber. His transfers came about two and a half years before his February 2011 petition, beyond the two-year reach of the Code’s ordinary fraudulent transfer section. Congress added the self-settled trust provision in 2005 to close what the legislative history called the self-settled trust loophole. Its window runs longer than every state waiting period; the longest, Virginia’s, is five years. The same ten-year lookback applies to transfers into offshore trusts.

Intent was the only contested element, and the court resolved it on summary judgment using the Ninth Circuit’s badges of fraud. All five were present: litigation was threatening when the trust was funded, the transfers covered substantially all of Huber’s property, his debt had become unmanageable, he was both settlor and beneficiary, and he kept using what he had given away.

Between October 2010 and July 2012, payments out of the trust totaled $571,332.81. The itemized expenses included his personal spending, groceries, loan payments, $17,000 in cash, $66,502.14 in education costs for his children and grandchildren, and $14,125.80 to his former spouse.

Huber’s defenses made the record worse. Reliance on counsel requires good faith, and a debtor who knows the transfer’s purpose cannot claim it; Huber had already shown he knew. When his business partner, Robert Terhune, threatened to move assets into a spendthrift trust of his own, Huber’s lawyer objected that such a trust would be fraudulent as to Huber, who considered himself Terhune’s creditor. His deposition explained the objection: “if he transferred them, I’d have nothing to secure me.”

The estate planning defense fared no better. The court held that estate planning and creditor shielding coexist as motives, and the claimed estate planning purpose raised no fact issue.

The court had already held the transfers void under Washington law, and section 548(e) was the second of three grounds. Washington’s fraudulent transfer act, brought in through section 544(b) of the Code, supplied the third. The state claim required “clear and satisfactory proof” of actual intent, a higher bar than the preponderance standard section 548(e) uses, and it ran through eleven statutory badges rather than the Ninth Circuit’s five. The trustee cleared that bar too.

Where the Bankruptcy Trustee Fell Short

Waldron, the bankruptcy trustee, came up short on three claims in the same ruling: the alter ego theory and two discharge claims. He had asked the court to declare the trust Huber’s alter ego and reverse-pierce it. No Washington court had applied the alter ego doctrine to a trust, and the bankruptcy court would not predict that one would; Waldron had cited no Washington authority for the extension. The court denied summary judgment on the claim and said it did not need to decide the question, because the transfers were already void.

The court also declined to strip Huber of his discharge on summary judgment. Huber had created the trust with counsel under Alaska’s statute, and discharge denial is construed in the debtor’s favor. Whether his spending of trust assets, both during the year before the petition and afterward, crossed the line was a question for trial.

A separate false-oath claim fell short the same way. The trustee said Huber had failed to schedule more than two million dollars his company owed him. The company’s chief financial officer testified that Huber made those loans without expecting repayment, and nothing showed an intent to deceive. Losing the assets did not decide the discharge. The decision itself is a bankruptcy court order, persuasive authority rather than binding precedent, though Washington’s appellate courts and federal courts elsewhere have since cited it.

What In re Huber Means for Anyone Considering a DAPT

Domestic asset protection trusts only reliably work for people who live in a state that has enacted a DAPT statute. A creditor sues where the debtor lives, and a court in a state without such a statute will likely apply its own law; the Huber court reached the same place through the federal choice-of-law rule that bankruptcy courts use. For a resident of a non-DAPT state, the structure is not a reliable strategy.

In the court decisions testing domestic asset protection trusts, the settlors who kept their assets were sued in the trust’s home state; those sued elsewhere, or in bankruptcy, lost.

Living in the trust state fixes only the choice-of-law problem. A bankruptcy filed within ten years of funding exposes the transfers under federal law, whatever the state statute says, if the bankruptcy trustee proves the settlor funded the trust intending to hinder, delay, or defraud a creditor. A creditor whose claim qualifies can file an involuntary petition, which puts a bankruptcy trustee and the ten-year rule in play.

Two years before Huber’s, in Battley v. Mortensen, Adv. No. A09-90036-DMD (Bankr. D. Alaska May 26, 2011), a bankruptcy court avoided the first domestic asset protection trust to fall under section 548(e). That settlor was an Alaska resident, his trust complied with Alaska law, and he was solvent when he funded it.

The ten-year avoidance power reaches offshore trusts on paper as well. The difference is enforcement: Huber’s trust property sat in the United States with trustees a court could order, so the estate took it, while a foreign trustee outside U.S. jurisdiction cannot be forced to hand assets back. That protection carries its own price, because offshore settlors who kept control of their trusts have faced contempt sanctions personally.

For a resident of a DAPT state who cannot justify offshore planning, a domestic trust is better than nothing. It holds up against creditors who sue at home and cannot force a bankruptcy, and only when the settlor meets the statute’s form, keeps no power to revoke, and funds the trust before creditors appear. For a settlor who lives in one state and puts the trust in another, Huber is what happens when a creditor tests the plan: the court at home applies its own law and unwinds the transfers.