DAPT Facts: The Structure That Fails on Its Own Merits

Most published discussion of asset protection case law asks whether offshore trusts hold up. The mirror question gets far less attention: what happens when a domestic asset protection trust is tested by a court that is not bound by the statute it was built on. This page is the record of those cases, and it will grow as our attorneys work through further decisions.

The distinction that matters is not whether a settlor behaved badly. Our review of the offshore case law found that adverse offshore outcomes trace to conduct and timing: funding after a claim arose, retaining control, concealment, or underlying crime. The DAPT cases are different in kind. In the leading decision, the settlor did substantially what the statute asks and lost anyway, because a federal court declined to apply the state law the entire structure depends on.

Why a DAPT Can Fail on Its Own Merits

A domestic asset protection trust is a self-settled spendthrift trust: the settlor funds it and remains a beneficiary, and a state statute instructs courts not to let the settlor's creditors reach it. At common law that trust would not have protected anyone. The protection is entirely a creature of the enacting state's statute.

That is the vulnerability. The statute binds the courts of the state that passed it. It does not bind a federal bankruptcy court applying the Bankruptcy Code, and it does not automatically bind the courts of another state with a closer connection to the dispute. Where the deciding court declines to apply it, there is no fallback: the structure has no protective feature independent of the statute. Our broader survey of what U.S. courts have said about DAPTs collects the recurring themes; this page documents the individual defeats. For how this record sits alongside the foreign one, see our overview of both kinds of asset protection trust.

The Case Record

Each entry is written from the court's own decision, with the primary source linked so the reasoning can be checked directly.

1. Battley v. Mortensen (Bankr. D. Alaska 2011)

Battley v. Mortensen (In re Mortensen), Adv. No. A09-90036-DMD, 2011 WL 5025249 (Bankr. D. Alaska May 26, 2011). The court's memorandum decision is published by the District of Alaska bankruptcy court.

The structure. Thomas Mortensen, an Alaska resident, created the Mortensen Seldovia Trust under AS 34.40.110 and registered it on February 1, 2005. He funded it with a remote 1.25-acre parcel near Seldovia, Alaska, worth roughly $60,000 at the time. His brother and a personal friend served as trustees; his mother was named Protector with power to remove and appoint successor trustees. He drafted the document himself from a template he had found and then had an attorney review it, and the attorney suggested only minor changes.

What he did right. He was a resident of the DAPT state using that state's own trust. No creditor held a claim against the parcel when he transferred it. He filed the affidavit AS 34.40.110(j) requires, swearing he owned the property, was financially solvent, had no intent to defraud creditors, and faced no pending or threatened proceedings. The court accepted that the trust "was created in accordance with Alaska law" and declined to void it on the trustee's state-law insolvency theory.

What happened. Mortensen's finances deteriorated over the following years. In August 2009, about four and a half years after funding the trust, he filed Chapter 7 with roughly $251,000 in credit card debt across twelve cards and about $8,000 in medical debt. The bankruptcy trustee sued to avoid the 2005 transfer, and the court found for him under section 548(e): the transfer fell within the ten-year window, went to a self-settled trust of which the debtor was a beneficiary, and was made with actual intent to hinder, delay, and defraud creditors.

How the court found intent. It started with the trust's own language. The instrument recited that its express purpose was "to maximize the protection of the trust estate or estates from creditors' claims," and the court held that this purpose was itself to hinder, delay and defraud present and future creditors. It then added the surrounding facts: Mortensen's earnings had averaged about $11,644 a year over the four preceding years against roughly $60,000 in annual overhead, and he already carried credit card debt somewhere between $49,711 and $85,000 when the trust was created. After the transfer his mother sent him $100,000 in two checks, referencing the Seldovia property. He did not pay off his credit cards. He moved $80,000 of it into the trust and began speculating in the stock market.

Why it is a DAPT failure. Because the state statute did not decide the case. Mortensen argued that Alaska's shorter limitation period should control; the court refused, reasoning that it "would be a very odd result for a court interpreting a federal statute aimed at closing a loophole to apply the state law that permits it," and that "Congress has codified a federal interest which requires a different result." Section 548(e), the court noted, was added by the 2005 bankruptcy amendments and aimed squarely at the handful of states that had authorized self-settled trusts, Alaska among them.

Full write-up. We walk through the decision in detail - what he did right, how the court found intent, and what the case does not establish - in Battley v. Mortensen: The DAPT That Followed the Rules and Lost.

The rule it establishes. A DAPT's seasoning period is only as good as the forum. In bankruptcy, the relevant clock is the federal ten years, and the trust's own asset-protection recital is available to the trustee as evidence of the intent that provision requires.

What This Page Does Not Claim

Two limits are worth stating plainly, because a comparison that overstates its case invites the obvious rebuttal.

Section 548(e) is not a DAPT-only provision. It reaches transfers to self-settled trusts generally, and an offshore trust is a self-settled trust. Anyone who tells you the ten-year reach-back stops at the water's edge is misreading the statute. The difference between the two structures on this point is enforcement, not text: a U.S. court can order a domestic trustee to turn assets over and expect that order to be obeyed, while it cannot compel a licensed foreign trustee, and Cook Islands courts do not enforce U.S. judgments. That jurisdictional separation is the whole design of a Cook Islands Trust. We set that comparison out in full in Cook Islands Trust versus DAPT.

One case is not a body of law. Mortensen is a bankruptcy court decision, and its reasoning on intent is fact-bound. It is included here because the settlor's compliance with the statute makes it unusually clean, not because a single decision settles the question. Additional entries will be added to this page as they are reviewed, and any that cut the other way will be recorded too.

If You Are Considering a Domestic Trust

None of this makes a DAPT useless. It makes its protection conditional in a way that is worth understanding before you rely on it, particularly if bankruptcy is a realistic possibility rather than a remote one. The questions worth asking are which court is likely to decide any future dispute, whether that court is bound by the statute the trust depends on, and what remains of the structure if it is not. A hybrid structure does not resolve the issue where the trust is functionally self-settled.

If you want a candid read on whether a domestic structure fits your exposure, or whether it does not, talk to our attorneys.

This article is provided for general educational purposes and does not constitute legal advice. Reading it does not create an attorney-client relationship. Asset protection planning depends on your individual circumstances, and you should consult a qualified attorney before acting. Blake Harris Law, The Offshore Asset Protection Law Firm. Attorney Advertising.