Intro. This posting is about a gratuitous entrustment by transfer that somehow unjustifiably disadvantages the settlor’s creditors. The independent sole-trustee and trust beneficiaries neither knew nor should have known that the entrustment would have that effect. Settlor has reserved no beneficial interest and no powers. As between the creditors and the innocent beneficiaries, the former should prevail. The common law (as enhanced by equity) and statute each affords the creditors a possible path to restitution. Pleading in the alternative may be advisable.

Equity. This cannot be in equity’s bailiwick. “Where the equities are equal the law shall prevail” goes the maxim. Lord Mansfield, however, introduced via Moses v. Macferlan (Eng. 1750) a critical exception to the maxim, namely unjust enrichment. Long before the Restatement of Restitution (U.S. 1936) and Stone v. White (U.S. Sup. Ct. 1937), unjust enrichment doctrine had been woven into the fabric of U.S. equity. Our innocent trust beneficiaries have been unjustly enriched and our innocent disadvantaged creditors are entitled to equitable restitution. The entrustment being gratuitous, neither trustee nor beneficiary qualifies as a BFP. The creditors will want the innocent express trustee to be judicially morphed into a constructive trustee now for their benefit. The creditors will have a reasonable period after having become aware of the unjust enrichment to bring suit for restitution. Ref. Equity’s doctrine of laches. Whether the settlor intended to disadvantage his creditors is irrelevant. That there has been a consequential unjustifiable enrichment suffices.

Fraudulent conveyance/transfer statutes. The “precursor” to modern fraudulent transfer statutory jurisprudence is the “Statute of 13 Elizabeth” (1571). See David J. Slenn, The Fraudulent Transfer of Wealth 4 (ABA 2022). In the U.S. we have the Unif. Fraudulent Conveyance Act (1918), Unif. Fraudulent Transfer Act (1984), and Unif. Voidable Transactions Act (2014) or UVTA. Prior to 1918 fraudulent-conveyance legislation state to state was nonuniform. The UVTA declares a transfer made with actual intent to hinder, delay, or defraud creditors to be fraudulent. A transfer made without adequate consideration that disadvantages creditors is constructively fraudulent. Here the debtor’s actual intent is irrelevant. In either case, the statute of limitations is 4 years from date of transfer. In the case of actual fraud, the creditors also have a year from when they discovered or reasonably should have discovered the fraud. UVTA’s remedies are primarily equitable.

Practice tip. UVTA is exclusively fraud-based, whether actual or constructive, while unjust- enrichment jurisprudence is less restrictive. It will even remediate an innocent mistake where insolvency not an issue. Thus we have two relatively independent causes of action. That having been said, UVTA may possibly tweak equity’s unjust enrichment jurisprudence in the fraudulent conveyance context by replacing laches’ “unreasonable delay” time bar with a fixed 4 year/1 year time bar. Cf., e.g., Donell v. Keppers, 835 F. Supp. 2d 871, 878-79 (S.D. Cal. 2011). Conversely, in egregious situations laches may short-circuit UVTA’s fixed time bar. See UVTA §12, cmt. In any case, the UVTA is about supplementing, not supplanting: “Unless displaced by the provisions of this [Act], the principles of law and equity, including the law merchant and the law relating to principal and agent, estoppel, laches, fraud, misrepresentation, duress, coercion, mistake, insolvency, or other validating or invalidating cause, supplement its provisions.” UVTA §12. Though the two causes of action, one equitable the other statutory, are independent, disadvantaged creditors may not double dip: “He who seeks equity must do equity.”

Cross ref. The fraudulent conveyance/transfer to an out-of-state trustee of a domestic asset protection trust (DAPT) is taken up in §9.28 of Loring and Rounds: A Trustee’s Handbook (2023), the relevant portions of which section are set forth in the appendix below. The Handbook is available for purchase at https://law-store.wolterskluwer.com/s/product/loring-rounds-trustees-hanbook-2023e/01t4R00000Ojr97QAB.