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Practice Update
Parrott Case
March 12, 2012
By Drew LaGrande, Jonathan Gopman, and David Slenn

In Parrott v. Sasaki (Filed Feb. 7, 2012, Transaction ID 42364247, Case No. 7227), a creditor filed suit against a defendant who was the grantor of a Delaware asset protection trust ("APT") alleging the fraudulent transfer of assets to the trust. Although there is still much to learn about the facts of this case, Parrott may serve as the initial test case regarding the efficacy of using a domestic APT in an asset protection plan.  The APT in Parrott is being attacked under the fraudulent transfer rules by potential creditors who have not yet secured a judgment against the grantor-defendant in a pending New York state court case.

Timothy Parrott and Bradley Reifler (collectively, the "Plaintiffs") filed suit in a Delaware state court against Peter G. Sasaki ("Sasaki"), the grantor of the APT, Edward A. Renn ("Renn"), the independent trustee of the APT, and Wilmington Fund Savings Bank, FSB ("Wilmington"), the administrative trustee of the trust. (Sasaki, Renn and Wilmington are collectively referred to herein as the "Defendants").  The Delaware action was filed in an effort to remediate alleged fraudulent transfers of assets from Sasaki's limited liability companies, Logos Capital Management, LLC and Quix Partners, LLC (collectively, the "LLCs") to Sasaki and thereafter to the APT.

Prior to initiating the suit in Delaware, the Plaintiffs sued Sasaki and the LLCs in New York state court for breach of contract, anticipatory repudiation, and breach of implied covenant of good faith and fair dealing.  According to the complaint, the Plaintiffs agreed to raise funds for the LLCs in exchange for interests in the LLCs. The Plaintiffs allege that such funds were raised, however, Sasaki refused to recognize the Plaintiffs' interest in the LLCs.  When the Plaintiffs attempted to sell their interests in the LLCs, Sasaki allegedly threatened to terminate the LLCs and liquidate each company.  Thereafter, the Plaintiffs commenced an action in New York state court and alleged that Sasaki purportedly caused the LLCs to distribute approximately $9 million to him.  Such distributions were labeled as "partner distributions."  The Plaintiffs allege that they were entitled to receive 20% of those distributions if Sasaki had properly recognized their interests in the LLCs in accordance with their agreements.

During the course of the litigation in New York, Sasaki retained Renn and his law firm, Withers Bergman, to assist him in establishing and funding the APT.  Saski was the grantor of the APT and was also included in the class of trust beneficiaries together with his spouse and his grandparents' descendants.  Renn was appointed as the initial independent trustee of the APT and Christiana Bank & Trust Company (which was subsequently acquired by Wilmington) was appointed as the initial administrative trustee to provide the proper nexus with Delaware so as to comply with the Qualified Dispositions in Trusts Act ("QDTA"), Delaware's asset protection trust statutory regime.  Saski's mother was appointed as the initial trust protector. As trust protector she was given the power to remove and replace the independent trustee and the administrative trustee.

The complaint alleged that Sasaki transferred all or part of the approximately $9 million he received as "partner distributions" from the LLCs to the APT. In the case pending in New York, Saski's litigation counsel apparently represented to the Plaintiffs that Sasaki had no ability to pay the judgment if the Plaintiffs were successful with their lawsuit in obtaining a judgment against Sasaki for the full amount possible.  (The action in New York sought "millions of dollars in damages.")  During the course of pre-trial discovery the Plaintiffs became aware of the existence of the APT.  Sasaki claimed that the assets in the APT were not within his control.

The Plaintiffs are asking the court in Delaware to enjoin Sasaki from transferring any further assets to the APT and enjoin the trustees from accepting any further contributions from Sasaki or making any distributions from the trust to any beneficiaries.  The Plaintiffs are also asking the court to avoid Sasaki's transfers to the APT to extent necessary to satisfy their judgment.

It should be noted that the complaint was only recently filed and neither Saski nor the trustees have filed a response to it yet.  It does appear, however, from the face of the complaint that Saski created and funded the trust during the course of defending the underlying lawsuit against the Plaintiffs in New York.  This case appears to be the first case filed in Delaware where a private plaintiff is attempting to pursue a fraudulent transfer action against a defendant who established a Delaware asset protection trust.

Parrott follows just after the decision in Battley v. Mortensen, et al., (In re Mortensen), Case No. A09-00565-DMD (May 26, 2011) a recent decision by a bankruptcy court in Alaska involving an APT established under the Alaska asset protection trust statutory regime. Mortensen involved the application of the 10-year fraudulent transfer rule related to self-settled trusts in bankruptcy cases under Section 548(e)(1) of the Bankruptcy Code.  Unlike Mortensen, however, Parrott will apply underlying principles of state law rather than bankruptcy rules.  Mortensen involved a number of bad facts and had an adverse result for the debtor.

As the initial pleadings in Parrott illustrate, it is important for attorneys and trust companies to conduct proper due diligence prior to assisting any client with the preparation and implementation of an APT structure.  In many cases it may be imprudent for an attorney and a trust company to assist with the implementation of such a structure while the proposed grantor is defending a pending lawsuit.  Until all of the facts of Parrott become public, if ever, one must be cautious to reach any conclusions regarding the propriety of an attorney and trust company assisting the defendant with the creation of the trust in this case.

In addition to the issue of whether estate planning counsel and the trust company acted appropriately in assisting the grantor in creating this trust structure, there are a number of other interesting questions to be answered.  For instance, questions regarding the appropriateness of the Delaware trust company's decision to accept this trust with the litigation pending in New York are certainly to be a hot topic of discussion as this case progresses.  Of course, it is equally important to note that the ultimate result of the underlying litigation in New York is unknown. It will also be interesting to learn if the Plaintiffs will be successful in disrupting the administration of the APT and Sasaki's (or any other beneficiary's) access to trust assets through discretionary distributions prior to the resolution of the case in New York.  Such pre-judgment interference would be unlikely to ever occur if this trust was established in an appropriate foreign asset protection jurisdiction.

Finally, it will also be interesting to see how the Plaintiffs' litigation strategy develops as this case progresses and whether §3572(g) of the QDTA (the statutory duress provision) becomes a factor.  This statute provides:

If, in any action brought against a trustee of a trust that is the result of a qualified disposition, a court takes any action whereby such court declines to apply the law of this State in determining the validity, construction or administration of such trust, or the effect of a spendthrift provision thereof, such trustee shall immediately upon such court's action and without the further order of any court, cease in all respects to be trustee of such trust and a successor trustee shall thereupon succeed as trustee in accordance with the terms of the trust instrument or, if the trust instrument does not provide for a successor trustee and the trust would otherwise be without a trustee, the Court of Chancery, upon the application of any beneficiary of such trust, shall appoint a successor trustee upon such terms and conditions as it determines to be consistent with the purposes of such trust and this statute.  Upon such trustee's ceasing to be trustee, such trustee shall have no power or authority other than to convey the trust property to the successor trustee named in the trust instrument in accordance with this section.

Similar to Mortensen, Parrott is more than likely to demonstrate that the implementation of a properly structured offshore APT structure will always be superior to using a domestic APT. Unlike Parrott, for instance, any attempt to attack an offshore APT will result in complex jurisdictional issues that need to be addressed, extremely high costs to the creditor seeking to breach the APT and payment of all legal fees incurred by the trust in its defense by the creditor if the creditor is unsuccessful in its assault on the APT.  As a result, offshore APTs offer far more certainty to those seeking to shelter wealth from the claims of future creditors assuming such a trust is created at an appropriate time and under appropriate circumstances.

Parrott does create one certainty as far as domestic APTs are concerned, that is, we are sure it will be monitored closely by both the creditors rights attorneys and by wealth preservation specialists.

This Akerman Practice Update is intended to inform firm clients and friends about legal developments, including recent decisions of various courts and administrative bodies. Nothing in this Practice Update should be construed as legal advice or a legal opinion, and readers should not act upon the information contained in this Update without seeking the advice of legal counsel.

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