“Pernicious nonsense!” exclaims Professor J. Frank Parnell, the ill-fated nuclear physicist in the 1984 movie Repo Man. It is wonderful little phrase, which is well suited to application in litigation briefs. It is a phrase which is also good as applied here, to an argument that has recently arisen at the intersection of trust and fraudulent transfer law.
The collision occurs between two old English statutes. The first is the Statute of Henry VII, ch. 3 of 1487, which declared to the effect that self-settled trusts — a trust that one creates for its own benefit — “be void and of none effect.” The second is the Fraudulent Conveyances Act of 1571, commonly known as the Statute of 13 Elizabeth. Both statutes formed the basis for what has developed into the contemporary American laws which, respectively, allow creditors to penetrate to the assets of a self-settled trust, and to set aside voidable transactions.
The law for which these statutes formed the basis have considerably changed over the years, to where these statutes are little more than historical oddities and late-night fodder for either the chronic insomniac law professors or amateur researchers of legal history like myself. The rule of 3 Henry VII, ch. 3 of 1487 about self-settled trusts has evolved from outright avoidance to one where the settlor/beneficiary’s beneficial interest is available to creditors. Similarly, the Statute of 13 Elizabeth has likewise metastasized from a primarily penal statute into a complex but purely civil body of law (although rarely-enforced criminal laws for fraudulent conveyances separately linger).
So who does care? The answer is that there are some folks who are opposed to part of a particular comment in the new Uniform Voidable Transaction Act (UVTA), namely the Reporter’s Comment to section 4, the relevant part of which comment follows:
2. Section 4, unlike § 5, protects creditors of a debtor whose claims arise after as well as before the debtor made or incurred the challenged transfer or obligation. Similarly, there is no requirement in § 4(a)(1) that the intent referred to be directed at a creditor existing or identified at the time of transfer or incurrence. For example, promptly after the invention in Pennsylvania of the spendthrift trust, the assets and beneficial interest of which are immune from attachment by the beneficiary’s creditors, courts held that a debtor’s establishment of a spendthrift trust for the debtor’s own benefit is a voidable transfer under the Statute of 13 Elizabeth, without regard to whether the transaction is directed at an existing or identified creditor. Mackason’s Appeal, 42 Pa. 330, 338-39 (1862); see also, e.g., Ghormley v. Smith, 139 Pa. 584, 591-94 (1891); Patrick v. Smith, 2 Pa. Super. 113, 119 (1896). Cf. Restatement (Third) of Trusts § 58(2) (2003) (setting forth a substantially similar rule as a matter of trust law).