The Domestic Asset Protection Trust (DAPT) and the Full Faith and Credit Clause: Some practical considerations

Charles E. Rounds, Jr.
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Assume that a debtor has established with all his property a trust in a DAPT state. Assume also that the creditor owns a judgment against the debtor that has emanated from the court of a non-DAPT sister state. Is the creditor entitled under the Full Faith and Credit Clause of the U.S. Constitution to have the judgment satisfied from the assets of the DAPT via a secondary action brought in the courts of the DAPT state? It would seem that it depends upon whether the action in the non-DAPT state had been a transitory one, see generally appendix below, such as whether the DAPT had been funded via a fraudulent conveyance. If there is an out-of-state judgment to that effect then the property ostensibly in the DAPT would be accessible to the settlor’s out-of-state judgment creditors. Moreover, a unilateral effort by the legislature of the DAPT state to grant its courts exclusive jurisdiction over such out-of-state fraudulent-conveyance claims would not be entitled to respect under the Full Faith and Credit Clause.

On the other hand, had the property lawfully found its way into the hands of the DAPT trustee, then, going forward, a judgment out of the DAPT jurisdiction that the property in the DAPT trust is unreachable by the settlor’s creditors. both domestic and out-of-state, would likely be entitled to the respect of the out-of-state courts by virtue of the Full Faith and Credit Clause.

Bottom line: The debtor-friendly terms of a statutory DAPT are likely enforceable, provided (1) funding had not been via a fraudulent conveyance, (2) the settlor-debtor was and is a resident of the DAPT state, (3) the settlor-debtor is not subject to another state’s personal jurisdiction, and (4) the Bankruptcy court is not in the picture. Otherwise, caveat emptor. See generally Chapter 2 of the free-standing 169-page mid-year supplement to the 2021 Edition of Loring and Rounds: A Trustee’s Handbook, which supplement, released June 22, 2021, is entitled Trust-Related Property Rights and the U.S. Constitution: Some Critical Areas of Intersection. Chapter 2 is reproduced in its entirety in the appendix immediately below.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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