Battley v. Mortensen: The DAPT That Followed the Rules and Lost

The offshore cases critics cite most - Anderson, Lawrence - share a pattern. The settlor funded the trust after the claim was in sight, or kept powers that let a court say he could still reach the money. The trust did not fail; the person did.

Battley v. Mortensen is the case that does not fit that pattern, and that is exactly why it matters. Thomas Mortensen was an Alaska resident who set up an Alaska trust under the Alaska statute, funded it when no creditor held a claim against the property, and filed the sworn affidavit the statute asks for. A bankruptcy court avoided the transfer anyway. It is the first entry in our record of domestic asset protection trust failures.

What Happened

In 1994 Mortensen and his then-wife bought 1.25 acres of remote, unimproved land near Seldovia, Alaska for $50,000 cash. He kept it in their 1998 divorce.

In early 2005 he heard about Alaska's asset protection trust statute in casual conversation, researched it, and drafted the Mortensen Seldovia Trust himself from a template he found. He had an attorney look it over, and the attorney suggested only minor changes. The trust was registered on February 1, 2005, and the quitclaim deed was recorded two days later. His brother and a personal friend were trustees; his mother was named Protector with power to remove and appoint successor trustees. The beneficiaries were Mortensen and his three children. The parcel was worth roughly $60,000 at transfer.

As AS 34.40.110(j) requires, he filed an affidavit swearing he owned the property, was financially solvent, had no intent to defraud creditors, and faced no pending or threatened proceedings.

His finances then deteriorated. In August 2009 - about four and a half years later - he filed Chapter 7 with roughly $251,000 in credit card debt spread across twelve cards and about $8,000 in medical debt. Bankruptcy trustee Kenneth Battley sued to unwind the 2005 transfer. On May 26, 2011, Judge Donald MacDonald IV ruled for the trustee and avoided the transfer under section 548(e).

The Part That Should Worry Anyone Relying on a DAPT

Read the opinion looking for the settlor's mistake and you will have trouble finding the usual one. There was no eve-of-judgment transfer: no creditor held a claim against the Seldovia parcel in February 2005. There was no forum shopping; he lived in the state whose statute he used. He did not hide the trust - he disclosed its creation on his statement of financial affairs. And the court expressly declined to void the trust on the trustee's argument that he had been insolvent when he created it, accepting that it "was created in accordance with Alaska law."

He lost on a different question entirely. Ordinarily state law defines what a debtor owns, but the judge held that Congress had legislated otherwise here:

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.

Section 548(e) was added by the 2005 bankruptcy amendments and, as the court put it, was aimed at the small group of states that had authorized self-settled trusts - Alaska among them. So Alaska's short seasoning period, the feature that makes the statute attractive in the first place, did no work. The clock that mattered was the federal ten years, and Mortensen was four and a half years in.

That is the structural point. A domestic asset protection trust has no protective feature independent of its statute. Where the deciding court declines to apply that statute, there is nothing underneath it.

How the Purpose Clause Was Used Against Him

Section 548(e) still required actual intent to hinder, delay, or defraud, proved by a preponderance of the evidence. The court began with the trust instrument itself, which recited that its purpose was "to maximize the protection of the trust estate or estates from creditors' claims," and concluded:

I conclude that a settlor's expressed intention to protect assets placed into a self-settled trust from a beneficiary's potential future creditors can be evidence of an intent to defraud. In this bankruptcy proceeding, AS 34.40.110(b)(1) cannot compel a different conclusion.

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 of annual overhead, and he already carried between $49,711 and $85,000 in credit card debt when the trust was created - so while he cleared the statute's solvency affidavit, the court found he was "well under water" in substance.

The detail that did him the most damage came after the transfer. His mother sent him two $50,000 checks, both referencing the Seldovia property. He did not pay down his credit cards. He moved $80,000 of it into the trust and began speculating in the stock market.

What the Case Does Not Establish

Two limits, because a case is worth less when it is oversold.

It does not mean section 548(e) stops at the water's edge. The provision reaches transfers to self-settled trusts, and an offshore trust is a self-settled trust. The real distinction is enforcement: a U.S. court can order a domestic trustee to turn assets over and expect compliance, while it cannot compel a licensed foreign trustee, and Cook Islands courts do not enforce U.S. judgments. We set that comparison out in Cook Islands Trust versus DAPT.

It does not mean a DAPT is useless. It means the protection is conditional on the forum, which matters most where bankruptcy is a realistic prospect rather than a remote one. A settlor with no plausible path into Chapter 7 faces a different risk profile than one carrying six figures of unsecured consumer debt.

It is also one bankruptcy decision, and its intent findings are fact-bound. It earns its place because the settlor's compliance was unusually clean, not because a single case settles the question.

What a Planner Takes From It

Three things worth carrying into any conversation about a domestic structure.

Ask which court decides. Not which statute governs on paper - which forum is likely to hear a future dispute, and whether that forum is bound by the statute the plan depends on. In bankruptcy the answer is no.

Watch the drafting. A purpose clause announcing that the trust exists to defeat creditors is not neutral boilerplate. In this case it was the first piece of evidence the court reached for. That is a reason to have planning documents drafted by counsel who has read the case law, not assembled from a template.

Mind what happens after funding. The transfer was in 2005; the facts that established intent included what he did with money that arrived afterward. Conduct in the years following a transfer is evidence about that transfer.

Our full case-by-case record of domestic trusts defeated in court, updated as more decisions are reviewed, is at DAPT Facts. The offshore counterpart - every circulating list of supposed offshore trust failures, reviewed decision by decision - is at Offshore Trust Case Law, Reviewed.

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.