After Finding That The Statute Of Limitations Had Run, Delaware Court Of Chancery Dismisses The Lion’s Share Of Plaintiff-Creditors’ Claims For Allegedly Fraudulent Transfers Against Self-Settled Delaware Asset Protection Trusts And Beneficiaries

TrustCo Bank v. Mathews, C.A. No. 8374-VCP (January 22, 2015)

          On January 22, 2015, in this case, Vice Chancellor Parsons of the Delaware Court of Chancery dismissed as time-barred most of the creditor-plaintiffs’ claims against three Delaware asset protection trusts (that one of the beneficiaries herself had created) and the trust beneficiaries.  The key issue facing the court was whether New York’s longer statute of limitations controlled (which perhaps would have saved the claims) or whether Delaware or Florida’s statute of limitations applied. Delaware and Florida’s statute of limitations for fraudulent transfers is four years after the transfer was made or one year after the transfer was or could reasonably have been discovered, whichever is longer.

          The court first examined Delaware’s Borrowing Statute (10 Del. C. § 8121), which states “[w]here a cause of action arises outside of this State, an action cannot be brought in a court of this State to enforce such cause of action after the expiration of whichever is shorter, the time limited by the law of this State, or the time limited by the law of the state or country where the cause of action arose, for bringing an action upon such cause of action. Where the cause of action originally accrued in favor of a person who at the time of such accrual was a resident of this State, the time limited by the law of this State shall apply.”

          The court confirmed that the Borrowing Statute should not be allowed to be manipulated to constitute a “sword” to defeat claims that would not be otherwise time-barred.  To get around Delaware’s borrowing statute, the plaintiffs claimed that this case involved an exclusively New York dispute. But, the court conducted a most significant relationship test and found that Florida and Delaware both had a more significant relationship to the facts of the case than had New York.  The court concluded that Florida had the most significant contacts, which contacts included that the real estate foreclosed on was in Florida and that Florida businesses were involved. The court found that Delaware had the second most contacts; Delaware’s contacts included the fact that the transfers at issue were made to Delaware trusts governed by Delaware law and that the trustee of the three trusts is a Delaware entity. In contrast, the court found New York’s contacts minimal in comparison.

          Importantly, the court also wrote, “[n]otably, even if I did conclude that New York has the most significant relationship, the preceding analysis shows that that relationship certainly does not dominate the focus of this action. That is, the totality of the relevant factors does not reveal a strong New York-centric relationship between the parties and the dispute before this Court. Accordingly, even if I found that New York law should apply, there is nothing in this set of facts that would lead me to conclude that application of the Delaware Borrowing Statute would be inequitable.”

          The court then concluded that, “[r]egardless of which of these three states has the most significant relationship with this case, therefore, I conclude that Plaintiffs still would be subject to a statute of limitations equivalent to Delaware’s of four years from the time the transfer was made or one year from when discovery of the transfer occurred or reasonably should have occurred, whichever is longer.”

          Plaintiffs had also contended that the restrictions of Delaware’s Qualified Disposition in Trust Act (“QDTA”) were inapplicable because the settlor had maintained impermissible control over the property transferred to the trusts. But the court wrote that it had “concluded that Plaintiffs’ claims relating [to the majority of the transfers at issue] are barred because of either the most significant relationship choice of law analysis, which points to the use of Florida or, perhaps, Delaware law, or Delaware’s Borrowing Statute, which requires the application of Delaware’s statute of limitations even if New York had been found to have the most significant relationship to this case. As a result, I find it unnecessary to resolve the question of whether in this case the QDTA requires application of Delaware’s fraudulent transfer statute of limitations without regard to the normal choice of law analysis or the Borrowing Statute.”

          Regarding the QDTA, the court stated that “[t]he QDTA limits a creditor’s available remedies when attempting to avoid a ‘qualified disposition.’ A ‘qualified disposition’ is a ‘disposition by or from a transferor . . . to 1 or more trustees, at least 1 of which is a qualified trustee, with or without consideration, by means of a trust instrument.” The court also noted that “[t]he QDTA requires that any claim by a creditor—a term defined to include Plaintiffs—to avoid a qualified disposition must be brought pursuant to 6 Del. C. §§ 1304 or 1305, Delaware’s fraudulent transfer statutes” and that “[t]he QDTA also specifically provides that a creditor’s claim will be extinguished unless, as relevant here, it is brought within the time constraints of 6 Del. C. § 1309, Delaware’s statute of limitations for fraudulent transfers.”  But, as it was unnecessary, the court “decline[d] to reach the question of whether the QDTA requires application of 6 Del. C. § 1309.”

          The end-result was that the assets in the three Delaware asset protection trusts were protected against the plaintiffs' claims.

Note: This law firm represents the trustee in this case