Creditors’ Remedies Under Michigan’s Domestic Asset Protection Trust Statute

Michigan enacted the Qualified Dispositions in Trust Act (the “Act”) effective March 8, 2017 becoming the 17th state to enact asset protection trust legislation. A more general description of the Act was provided in an earlier blog. The purpose of this blog is to point out how the drafters of this legislation very deliberately included provisions geared to blocking creditors’ access to assets held in a Michigan Asset Protection Trust (hereafter “MAPT”).

Creditors can only reach assets held in an MAPT by bringing an action under Michigan’s Voidable Transactions Act (which has now superseded the Michigan Fraudulent Transfers Act). To prevail on a cause of action for a claim that arose after a qualified disposition to the MAPT (a transfer to the MAPT meeting the requirements of the Act), the creditor must prove the transfer was made with actual intent to defraud the creditor. In addition, the claim must be brought within two years after the qualified disposition was made.

If the claim arose before a qualified disposition, the creditor must prove that the transfer was fraudulent because of (i) actual fraud on the part of the transferor (intent to hinder, delay or defraud creditors), (ii) constructive fraud on the part of the transferor (transfers made without receiving reasonably equivalent value), or (iii) a transfer being made when the transferor was insolvent or where the transferor became insolvent as a result of the transfer. The statute of limitations for bringing the claim is the later of (a) two years after the qualified disposition was made or the obligation was incurred, or (b) one year after the qualified disposition or obligation was or could reasonably have been discovered by the claimant, if the debtor fraudulently concealed the existence of the claim or the identity of any person who is liable for the claim.

In a bankruptcy case, a longer ten year statute of limitations may apply to transfers to a MAPT.

The allegations must be proved by clear and convincing evidence. This is a high proof standard and creates another obstacle to the creditor getting a favorable decision.

Assuming a creditor is successful in getting a judgment against the MAPT, what remedies are available for collection? Not surprisingly, the remedies are very debtor friendly.  If a creditor is successful in proving that a qualified disposition was fraudulent and should be avoided, then the qualified disposition may be avoided only to the extent necessary to satisfy the amount of the obligation to the creditor. When determining the amount of the transferor’s obligation to the creditor, factors such as present value and the uncertainty of the applicable debt are taken into consideration.  Confirming the amounts attributable to these factors will create another significant impediment that must be faced by a creditor seeking to liquidate a claim. Think about the leverage the debtor has even after a creditor has successfully navigated the obstacles in obtaining its judgment. The creditor still has the burden of proof as to the dollar value of a tort claim that has not been reduced to judgment. It is conceivable that the requirement of a creditor having to prove the certainty of a claim will put pressure on the creditor to settle for substantially less than might otherwise be warranted. Indeed, the combination of first having to prove the existence of a voidable transaction and, second, having to prove the certainty of the claim to determine the liquidated amount, will be powerful factors in the parties reaching a debtor favored settlement.

Except with regard to property transferred to a trust by a married couple who held such property as tenants by the entireties, the sole remedy available to a creditor who successfully avoids a qualified disposition is an order directing the trustee to transfer to the transferor the amount necessary to satisfy the transferor’s debt to the creditor. The Act does not provide that the trustee is required to pay the creditor directly. Instead, the Act merely requires the trustee to pay to the transferor the amount necessary to satisfy the obligation to the creditor. The creditor would need to find a way to reach the property that is paid over to the transferor by the trustee. Unless otherwise restricted by a court order, it appears that once the property is in the possession of the transferor, it can be spent or even transferred to another creditor. In addition, it is unclear what happens if the only property held by the trust consists of illiquid assets, such as interests in closely held entities. In such a situation, the trustee may have to distribute the illiquid assets to the transferor in satisfaction of the required amount, or, alternatively, the court could order an entity to sell property and make a distribution to its members/partners/shareholders (including the trust) so the trustee will have the necessary cash required to pay to the transferor.

If a married couple makes a qualified disposition of property that was held as tenants by the entireties, the property continues to be treated as entireties property in the hands of the trustee and, in an action by a creditor against one or both spouses with regard to that transfer, the sole remedy is to have the trustee transfer the property back to both spouses as tenants by the entireties. As a result, if only one spouse is the debtor, both spouses will enjoy the protections they are entitled to as a result of owning the property as tenants by the entireties.

It will be extremely interesting over the years to come observing how courts interpret the Act and how judges apply the law in actual situations.

If you are interested in a Michigan asset protection trust or are in need of an asset protection planning attorney, please feel free to contact me.

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