Tuesday, June 25, 2013

Is the transfer of assets to a revocable trust by a terminally-ill settlor a fraudulent transfer or a constructively fraudulent transfer under the District of Columbia Uniform Fraudulent Transfer Act (DC-UFTA)? Can a bank that is a decedent’s creditor enjoin the decedent’s widow or other trust beneficiary from selling assets she received from the decedent? Can a decedent’s creditor collect a decedent’s debt from the decedent’s widow and beneficiary of the decedent’s revocable trust? These are among the issues the Federal District Court in the District of Columbia decided in TD Bank, N.A. v. Pearl, 891 F. Supp. 2d 103 (D.D.C., Sept 19, 2012). What is amazing is that this case was filed, given the outcome and the somewhat humorous dress-down the Court gave the bank.

In September of 2010, Mr. Pearl’s company borrowed $17.5 Million in an unsecured loan from TD Bank, N.A. (“Bank”), and Mr. Pearl guaranteed the loan. About a year after the loan was closed, Mr. Pearl was diagnosed with late stage lung cancer, causing Mr. Pearl to get his affairs in order, which included the creation of a revocable trust, with his wife as the beneficiary, funded with his interest in the company. At the same time, Mr. Pearl sought to restructure the loan with the Bank. The opinion reflects that the terms of the loan restructuring were finally agreed to and the new loan was closed with Mr. Pearl about 9 days after he died (although this may have been a typo in the opinion). In the paperwork documenting the loan restructuring, Mr. Pearl represented and warranted that “he had good and marketable title to all of his assets.”

Interestingly, death of the guarantor was an event of default under the loan, so the Bank filed a claim against the Pearl estate seeking repayment of the loan. The Bank then filed this action against the widow in which it sought a money judgment from her as a beneficiary of the decedent’s trust and recipient of property from the decedent, and an injunction to prevent her from disposing of any of her own assets that could be used to pay any such money judgment. In order for the Court to grant a preliminary injunction, the Bank would have to establish that it is likely to succeed on the merits against the widow, and that absent the injunctive relief, the Bank would likely suffer “irreparable harm.” In the Court’s view, the Bank failed miserably in doing either.

As the basis for injunctive relief, the Bank alleged that the decedent’s funding of his revocable trust immediately prior to his death, which left his probate estate insufficient to satisfy the claims of his creditors, constituted a fraudulent transfer or a constructive fraudulent transfer, and was therefore invalid as to the Bank. The Court commented that the transfer at issue was to a revocable trust, which itself is subject, under applicable state law, to the claims of the decedent’s creditors to the extent that the decedent’s probate estate was insufficient to satisfy all claims, and could not be said to hinder recovery. Mr. Pearl’s death “after suffering from lung cancer” could not seriously be considered a “badge of fraud” under the DC-UFTA. If Mr. Pearl intended to “stymie the claims of creditors”, there were far better tools available to him than the creation of a revocable trust, the assets of which continued to be available to creditors under applicable state law. Because there was little likelihood of success on the merits, and because the Bank had other remedies it could pursue, such as filing a claim against the trust, there was no possibility of irreparable harm, the Court denied the request for injunctive relief.

 

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