Toni 1 Trust v. Wacker Case Analysis

In Toni 1 Trust v. Wacker, 413 P.3d 1199 (Alaska 2018), the Alaska Supreme Court held that Alaska’s statute claiming exclusive jurisdiction over suits against Alaska asset protection trusts cannot bind a Montana court or a federal bankruptcy court. Both courts’ fraudulent transfer judgments against the trust stood.

The court decided only the jurisdiction question. It assumed without deciding that the Toni 1 Trust was an Alaska trust covered by the statute, and it did not revisit whether the transfers were fraudulent. Montana’s judgment rested on Montana’s own fraudulent transfer law and the bankruptcy court’s on the federal Bankruptcy Code, and the Alaska statute could displace neither.

How the Toni 1 Trust Came to Face Judgments in Two Other Courts

Donald Tangwall sued William and Barbara Wacker in Montana state court in 2007. The Wackers counterclaimed against him, his wife Barbara Tangwall, his mother-in-law Margaret “Toni” Bertran, and several trusts and businesses the family owned or ran, and over the following years the Montana court entered several default judgments against the family.

In 2010, before the last judgment was entered, Bertran and Barbara Tangwall transferred two parcels of real property to the Toni 1 Trust, which the family described as an Alaska trust. The Wackers sued again in Montana, this time under Montana’s fraudulent transfer act, alleging the transfers were made to avoid the judgments. That court entered default judgments against Barbara Tangwall, Bertran, and the trust itself.

The Wackers bought Barbara Tangwall’s interest in one parcel at a sheriff’s sale for $50,000, in part satisfaction of their $137,551.47 judgment. Before they could buy the remaining half interest, Bertran filed chapter 7 bankruptcy in Alaska, which put her interest in the trust property under a federal bankruptcy court’s control.

In December 2012 Tangwall, as trustee, sued the Wackers and the bankruptcy trustee, Larry Compton, in the bankruptcy court. He argued, among other things, that the trust had never been properly served in the Montana action, which would make that judgment void. Compton did not litigate the service question. He instead brought his own fraudulent transfer claim against Tangwall under the Bankruptcy Code and won a default judgment; Tangwall’s appeals from it were dismissed.

Tangwall then filed the Alaska superior court suit that produced this decision. The trust, he argued, contained a transfer restriction, the clause that keeps a beneficiary’s interest from being transferred before the trustee pays it out. That restriction, under AS 34.40.110(k), gave Alaska courts exclusive jurisdiction over any claim based on a transfer into the trust. He asked the court to declare every out-of-state judgment against the trust void and to bar any new action because the limitations period had run. The superior court dismissed the complaint.

On appeal, the supreme court treated most of his arguments as waived for lack of legal authority but reached the one he had preserved: that the Montana and federal judgments were void because those courts lacked subject matter jurisdiction. A separate argument under Alaska’s trust-administration statute failed at the outset, because the judgments concerned fraudulent transfers rather than the trust’s internal affairs.

The court asked the parties for supplemental briefing on whether any court must follow a statute claiming exclusive jurisdiction over a fraudulent transfer action. Because the issue could implicate the statute’s constitutionality, it also notified Alaska’s attorney general and invited the State to file. Tangwall and Compton filed briefs; the Wackers and the State did not. Justice Bolger wrote for the court, and no justice wrote separately.

What Alaska’s Exclusive-Jurisdiction Clause Says

Alaska’s asset protection trust statute, AS 34.40.110, lets a settlor create an irrevocable trust, remain a beneficiary, and bar creditors from the trust assets through a transfer restriction. When the trust instrument provides that a beneficiary’s interest cannot be transferred, voluntarily or involuntarily, before the trustee pays it out, the statute prevents existing and later creditors alike from satisfying claims out of that interest. About twenty states now have a statute of this kind.

A creditor of the settlor has one cause of action against the trust property. Under subsection (b)(1), the creditor must prove by clear and convincing evidence that the settlor transferred the property with intent to defraud that creditor. The claim must be brought within the statute’s limitations period, generally four years after the transfer. The statute adds that a settlor’s stated intention to protect trust assets from future creditors is not evidence of intent to defraud.

Subsection (k) then adds two limits. The first sentence bars any action attaching trust property or avoiding a transfer unless the creditor brings it under (b)(1) and within that limitations period, which makes the (b)(1) claim the only route to the property. The second sentence gives Alaska courts “exclusive jurisdiction” over any action “based on a transfer of property to” a trust covered by the statute.

The court called Tangwall’s argument “not frivolous.” A judgment entered without subject matter jurisdiction is void, and the clause does purport to give Alaska courts exclusive jurisdiction over fraudulent transfer claims against Alaska self-settled spendthrift trusts. Having read the legislative history, the court had “no doubt” the legislature meant to keep “other state and federal courts from exercising subject matter jurisdiction over fraudulent transfer actions against such trusts,” and the question was whether the clause could do that. The court held it could not.

Can an Alaska Statute Take Jurisdiction Away from a Montana Court?

No. An Alaska statute cannot take a Montana court’s jurisdiction away, because each state sets the limits of its own courts’ jurisdiction, and the U.S. Supreme Court said so more than a century ago. In Tennessee Coal, Iron & Railroad Co. v. George, 233 U.S. 354 (1914), the Court held that full faith and credit does not force a state to honor a sister state’s claim of exclusive jurisdiction over a transitory action.

The 1914 case posed the same question. An employee sued his employer in Georgia under an Alabama statute, and the employer answered that the Alabama code kept such suits in Alabama courts and that Georgia must honor that limit. The Supreme Court disagreed. Jurisdiction “is to be determined by the law of the court’s creation,” it held, and another state’s statute cannot defeat it “even though it created the right of action.”

Alaska’s clause crosses that line because it claims exclusive jurisdiction over a transitory action. A fraudulent transfer action is transitory: the transfer that founds it can happen anywhere, even when the property is land, so the claim can be heard wherever a court has jurisdiction over the defendant.

The court acknowledged the analogy was imperfect. Montana’s judgment rested on Montana’s own fraudulent transfer act rather than on any cause of action Alaska had created. That difference made Tangwall’s position weaker. A state that cannot keep its own causes of action at home has even less claim over another state’s.

The court also explained why decisions in other states honoring similar clauses did not control. Some rested on the distinction between local and transitory actions, which cuts against Alaska because fraudulent transfer actions are transitory. Others declined to hear such cases and never addressed Tennessee Coal; one of them, a Virginia trial court, reasoned from comity.

Comity, the court answered, “is not a legal rule”; it is a principle of deference, so a court may follow a statute like Alaska’s without being compelled to. Alaska’s clause, moreover, reaches every fraudulent transfer action concerning an Alaska trust, including actions under another state’s law.

Tangwall pointed to several Delaware statutes with exclusive-jurisdiction clauses, among them Delaware’s asset protection trust statute, and to courts in other states that had treated those clauses as binding. The Alaska court answered with the Court of Chancery’s own 2014 decision, IMO Daniel Kloiber Dynasty Trust, 98 A.3d 924 (Del. Ch. 2014). That court acknowledged that courts outside Delaware were divided. It sided with the courts that still heard such cases, because Delaware “cannot unilaterally preclude a sister state from hearing claims under [that state’s] law.”

The Alaska court agreed. The principle of Tennessee Coal “has not changed in the last century,” it wrote, and the clause therefore did not make the Montana fraudulent transfer judgment void for lack of subject matter jurisdiction. In a footnote the court added that an Alaska statute “cannot prevent Montana courts from applying Montana fraudulent transfer law.”

Can a State Statute Limit a Federal Bankruptcy Court’s Jurisdiction?

No. A state has no power to enlarge or contract federal court jurisdiction, and the Alaska court applied the U.S. Supreme Court’s 2006 decision in Marshall v. Marshall to hold that Alaska’s clause could not reach the bankruptcy court’s judgment.

In Marshall, 547 U.S. 293 (2006), Texas probate courts had claimed exclusive jurisdiction over a transitory tort claim arising under Texas law. Relying on Tennessee Coal, the Supreme Court held that a state’s effort to limit federal jurisdiction fails “even though [the state] created the right of action.”

The fit was again imperfect, because the bankruptcy court’s judgment rested on the Bankruptcy Code’s fraudulent transfer section rather than a state claim, but the Alaska court held that Marshall controlled anyway. Tangwall cited federal decisions treating state exclusive-jurisdiction clauses as binding, but none addressed Marshall or Tennessee Coal. The court found the opposite line more persuasive, including the Sixth Circuit’s holding that “a state may not deprive a federal court of jurisdiction merely by declaring in a statute that it holds exclusive jurisdiction.”

The court closed with the Supremacy Clause. Under 28 U.S.C. § 1334(a), federal district courts have “original and exclusive jurisdiction of all cases under title 11,” the Bankruptcy Code, whose fraudulent transfer section the trustee had used. The Alaska clause claims every fraudulent transfer action against an Alaska trust, and federal law gives federal courts some of them. A state law that cannot be obeyed alongside federal law is preempted. A statute read to deny parties access to federal court without those courts’ consent, the court noted, “might well run afoul of the Supremacy Clause.”

What Toni 1 Trust v. Wacker Did Not Decide

The Alaska Supreme Court assumed the Toni 1 Trust was covered by the statute and never reached the merits of the fraudulent transfer claims. The Wackers and Compton argued that the trust was not an Alaska trust and had not been created in compliance with the statute. The superior court never resolved those questions, and the supreme court proceeded on that assumption without deciding them. The clause applies only to a trust “that is the subject of this section.”

The court noted that Tangwall could have argued the first sentence of subsection (k) makes the statute’s own creditor claim the exclusive means of reaching trust property, and that he may have tried to in supplemental briefing. It did not need to resolve that argument, because an Alaska statute cannot make a Montana court apply Alaska’s law in place of Montana’s. Nor did it revisit whether the 2010 transfers were fraudulent. The Montana and federal judgments on that question stood as entered.

The judgments were then enforced. In June 2016 the bankruptcy court authorized Compton to sell the estate’s half interest in the Montana ranch. The Wackers had already bought Barbara Tangwall’s half, and because they joined the motion, the court approved a sale of the ranch as a whole, free and clear. A district court affirmed the bankruptcy court’s authority to order it, and the Ninth Circuit dismissed Tangwall’s further appeal as frivolous on February 28, 2018, two days before the Alaska Supreme Court ruled.

The Alaska bankruptcy court declared Tangwall a vexatious litigant in 2017 and required him to obtain permission before filing anything further, and the appellate panel affirmed that order in April 2018. Federal district courts in Alaska and Montana entered pre-filing orders of their own in 2018 and 2019.

What Toni 1 Trust v. Wacker Means for a DAPT’s Exclusive-Jurisdiction Clause

Domestic asset protection trusts only reliably work for people who live in a state that has enacted a DAPT statute, and Toni 1 Trust v. Wacker closes off the statutory clause written to change that. A domestic asset protection trust is a self-settled irrevocable trust: the settlor funds it, stays a beneficiary, and relies on a state statute to bar the settlor’s creditors. A creditor sues where the debtor lives, and a court in a state without a DAPT statute will likely apply its own law rather than the trust state’s.

Alaska’s clause was meant to force the creditor into an Alaska courtroom, where the statute’s own rules, including its clear-and-convincing standard, would govern. After Toni 1, the clause binds Alaska’s own courts and no one else. An out-of-state creditor can do what the Wackers did: sue at home under home-state fraudulent transfer law, take a judgment, and enforce it against the trust property. Once a transferor is in bankruptcy, as Bertran was, the bankruptcy trustee can bring the Bankruptcy Code’s own fraudulent transfer claim, and the clause cannot block that either.

The court that hears the claim also chooses the law that governs it. The court in In re Huber, 493 B.R. 798 (Bankr. W.D. Wash. 2013), applied Washington law rather than Alaska law because the settlor, the creditors, and every trust asset but a $10,000 certificate of deposit were in Washington. Toni 1 adds that the forum cannot be forced to Alaska either. In the court decisions testing domestic asset protection trusts, the trusts that held up were defended in their own state’s courts.

Delaware’s statute still carries a clause giving its Court of Chancery exclusive jurisdiction, and the court in Toni 1 listed South Dakota’s and Utah’s statutes among those with similar clauses. Every DAPT state faces the same constitutional limits: full faith and credit does not make a home-state court apply the trust state’s law, and no state statute can contract federal bankruptcy jurisdiction. A settlor choosing a trust state for the strength of its exclusive-jurisdiction clause is choosing something the courts of every other state need not follow.

An offshore trust avoids the jurisdiction problem geographically rather than by statute. The trustee and the trust assets sit outside every U.S. court’s jurisdiction, so a valid home-state judgment against the settlor still leaves the creditor with no U.S. court that can order the foreign trustee to pay. That structure carries its own cost: settlors who kept control of offshore trusts have been held in contempt personally.

A resident of a DAPT state who cannot justify offshore planning is better off with a domestic trust than without one, but the trust is not a substitute for an offshore trust. A settlor who puts a trust in Alaska and gets sued in Montana will be heard in Montana, and the judgment that follows is as valid as any other.