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Delaware Attachment Law Reinforces Asset Protection

A long-standing but underappreciated statute that protects banks and trust companies from having their deposits attached also helps depositors avoid claims.

TRISHA W. HALL

his past summer, Wonder and asset protection laws and some This means that in addition to Woman became one of the of these reinforcements are well having to break through the vari - highest grossing box office known. Less attention has been ous obstacles a Delaware trust or releases of all time. The plot paid, however, to a procedural pro - entity would present to a creditor T 1 centers around Princess Diana’s vision that can enhance the credi - of a beneficiary, member, or share - quest to seek out and defeat the god tor protection of assets held in a holder, a creditor could still leave Ares, bringing peace to humankind. Delaware trust or entity. This law Delaware empty-handed if the As those who experienced the has existed since 1871 and is con - trust’s or entity’s deposits were held movie know, Diana is a formida - sidered in Delaware to be a signif - in a Delaware bank or trust com - ble foe in her own right—extreme - icant shield against the attacks of pany. After all, a well-designed asset ly strong, brave, and agile. She also creditors. protection plan is one that is imple - travels with several pieces of arma - mented as far in advance of any ment critical to her success—a lasso Protective statute potential creditor claim as possible of truth, indestructible bracelets, a Fundamentally unchanged since its and that is multi-layered in its con - sword, and a shield. enactment nearly 150 years ago, struct—involving insurance, cred - Delaware’s trust and asset pro - 12 Del. C. § 3502(b) reads: itor-protected investment vehicles tection laws are similarly fortified. Banks, trust companies, savings such as life insurance and retire - Strong and agile in and of them - institutions and loan associations, ment accounts, homestead laws, selves, they are reinforced by other except only as to a wage attach - asset titling, entities, and trusts. ment against the wages of an aspects of Delaware’s legal and trust employee of the bank, trust com - The more obstacles a creditor will industry: its venerable Court of pany, savings institution or loan find itself having to break through Chancery, the quality and bench association, shall not be subject to to successfully enforce a claim, the the operations of the attachment strength of its trusts and estates laws of this State. higher the likelihood the creditor professionals and its lawyers more will settle its claim in the first generally, and several asset pro - instance, preserving assets for the TRISHA W. HALL is a partner of Connolly Gallagher tection and other laws that apply LLP in Wilmington, Delaware. She practices in the client. both to trusts and more broadly. areas of estate and trust planning and administra - The purpose of § 3502 is to “aid The strength of Delaware’s trust tion. Copyright ©2018, Trisha W. Hall. [banks and trust companies] in the 39 ETPL-18-04-39-hall_ETPL-ARTICLE TEMPLATE 4/6/18 1:57 PM Page 40

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performance of their duties, and sued the debtor for repayment of of assets to compel a court appear - mainly by preventing the attach - funds and added the debtor’s ance. ment of their deposits,” and not to bank—Wilmington Trust Compa - The sequestration in Garretson

assist debtors in avoiding claims. 2 ny—as a defendant seeking to did not involve the bank restrict - However, for a trust with a bene - enjoin it from allowing funds to be ing access to an account or trans - ficiary who is particularly vulner - removed from the debtor’s account. ferring the assets of an account to able to potential creditors, or an The court opined that an injunc - another person; rather, it resulted LLC for a business exposed to a tion is the substantial equivalent of in the bank paying to the court trust higher-than-average level of risk, a garnishment in light of the poli - income that it otherwise would have distributed to the beneficiary. holding the trust’s or LLC’s cash cy behind § 3502 (even though it 6 account in a Delaware bank or trust would not result in a lien on the Further, a sequestration to com - company (if it is a depository insti - pel an appearance is intended to be property being enjoined, as would tution) would add an extra layer of a temporary hold on assets, not a a garnishment) and, as such, would protection. permanent transfer to a third party. not enjoin the account. In so hold - Case law ing, the court recognized the result was seemingly unfortunate given In the case of Provident Trust the facts: Co. v. Banks , § 3502 was applied 3 Nonresidents to funds held in a self-settled spend - In the circumstances thus shown, the utility to plaintiff of the relief establishing thrift trust (before they were rec - sought is apparent and, indeed, Delaware trusts ognized by statute in Delaware in assuming those facts to be true, the or entities should 1997). In this case, Adelaide Banks common-sense appeal of simply arrange for a cash account had two judgments entered against freezing the money that Partial is at a depository her in the Superior Court of now wrongfully retaining until legal rights in it may be determined institution located Delaware, neither of which she is powerful. Unhappily for plain - in Delaware. paid. She received proceeds from tiff, however, the granting of relief an insurance policy upon the death sought is, in my opinion, preclud - Additionally, the policy under - of her husband, which she deposit - ed by the legislative policy reflect - lying § 3502 has not been extend - ed in the statute that exempts banks ed into an account at Wilmington in the state from the operation of ed to broker-dealers. In fact, Trust Company. Later, Ms. Banks the attachment and garnishment Delaware courts have expressly transferred the funds to a trust with laws of this state. declined to apply § 3502 to broker dealers. Because the policy behind Wilmington Trust Company as Unlike Diana’s shield in Wonder 7 trustee from which she would Woman , which can deflect machine the law is to protect a bank’s or trust company’s deposits, it also receive the income for her life, and gun fire, the shield offered by at her death, any remaining assets likely would not extend to securi - § 3502 is not completely impervi - would be distributed to her issue. ties even if they are held at a bank ous to attack. For example, in Gar - The court found that although retson v. Garretson ,5 the Delaware assets held in a trust created by a “Wonder Woman Becomes Top Earning Supreme Court allowed for the 1 debtor for his or her own benefit Summer Movie at the Domestic Box Office,” sequestration of a beneficiary’s Variety , 7/23/2017. are usually subject to seizure by a Tekstrom, Inc. v. Savla, 2007 WL 3231632, *3 income interest in a trust as part of 2 creditor (again, before the recog - (Del. Com. Pl. Ct. 2007). proceedings involving the validity 3 9 A.2d 260 (Del. Ch. 1939). nition of self-settled spendthrift of a Mexican divorce between the 4 517 A.2d 259 (Del. Ch. 1986). trusts), because the assets were held 5 306 A.2d 737 (Del. 1973). parties. In Garretson , the court in a bank, they were not subject 6 Garretson does not stand for the proposition that a Delaware spendthrift trust is vulnera - to attachment, whether at law or declined to apply § 3502 to the ble to the claims of former spouses as cred - request for sequestration of trust itors. Garretson involved a husband who aban - in equity. doned his still current wife, and as such owed Delaware courts have also income, because sequestration is to her an obligation of support, and was not a creditor. Former spouses can be consid - extended § 3502 to motions to an equitable remedy available only ered creditors of the other under Delaware in the Court of Chancery and not law, subject to Delaware’s spendthrift laws. enjoin deposits in a bank account See Jocelyn Borowsky and Jennifer Wallace from being withdrawn, transferred, a remedy at law (as are attachment on In re Garretson , Asset Protection Planning Newsletter #221 (2/28/2013), at or encumbered. In Delaware Trust and garnishment). As noted in http://www.leimbergservices.com/. See Lawrence E. Mergenthaler v. Triumph Company v. Partial ,4 the creditor Delaware Trust Company v. Par - 7 Mortgage Corp., 2017 WL 1550252, *8 (Del. bank—Delaware Trust Company— tial , Garretson is limited to a seizure Super. Ct. 2017).

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or trust company. 8 Further, § 3502 parties. 11 The expectation of the will often determine the tax report - will not prevent the discovery of person opening an account will fac - ing. funds held in a Delaware bank or tor heavily in any such determina - One of the risks sometimes asso -

trust company in litigation. 9 tion. Opening an account at an ciated with a non-Delaware resi - institution with locations only with - dent establishing a Delaware trust Implications for nonresidents in the State of Delaware would cer - or Delaware entity is that if a case What does it mean to have deposits tainly provide clarity on the ques - were brought attacking it in the

held in a Delaware bank or trust tion. 12 Doing so, however, is not the local jurisdiction, a judge may institution for a nonresident of sole means of ensuring the account apply the substantive law of the Delaware? It has been said that is located in Delaware. The insti - local forum citing that jurisdiction’s monies held in a bank are merely tution does not have to be state- strong public policy regarding the communications whose location chartered for the law to apply: A particular issue in question to comes down to a conflict-of-laws creditor’s ability to attach an breach the trust or entity. 14 Even account at a national or regional analysis. 10 Key to the analysis will if this were to occur, § 3502 would likely be a determination of which bank when Delaware law applies still be applied when the creditor will not be preempted by federal state has the “most significant rela - attempted to execute on the judg - banking law. tionship” to the account and the 13 ment against the Delaware In the case of a trust with a account. 15 Therefore, having a trust 8 See Sterling v. Tantum, 94 A. 176 (Del. Super. Delaware non-depository trustee 1915) (“In 1871 when the attachment statute or entity hold its cash deposits at a was passed there were very few banks in this that arranges for a cash account at Delaware bank or trust company state, and they were doing a purely banking a depository institution in business. Practically all the property they held can mitigate against this potential that could be attached were deposits of Delaware, the trust’s situs in money, and manifestly such was the proper - risk. ty the legislature meant to exempt. The excep - Delaware will weigh heavily in tion of moneys and credits that were in no way favor of a finding that the cash connected with banking, but held in other and Conclusion separate departments of a modern trust com - account is in Delaware. Nonresi - pany, could not have been contemplated at When creating or transferring a all. In the light of conditions existing at the dents establishing Delaware enti - time it may be fairly assumed that all the law ties should arrange for a cash trust to Delaware, or when estab - making body sought or intended to do was to lishing a Delaware entity, taking exempt deposits connected with banking account at a depository institution business.”) located in Delaware rather than the extra step of opening a depos - 9 See Tekstrom . itory account at a bank in the State 10 Sommer, “Where is a Bank Account? ,” opening the account at a location 57 Md. L. Rev. 1 (1998), available at: outside of Delaware (even if that of Delaware has the benefit of rein - http://digitalcommons.law.umaryland.edu/mlr/ vol57/iss1/4. institution has locations in forcing the creditor protection of 11 Restatement (Second) of Conflict of Laws Delaware). After an account has the structure, with little to no § 222 (1971). downside. If the structure comes 12 For a list of such institutions, go to been opened, other considerations http://banking.delaware.gov/wp-content/ may apply, for example, how and under attack at some point in the uploads/sites/73/2017/06/Bank-Assets- Deposit-Income-2016.pdf. where the interest is reported for future, whether or not Delaware 13 12 C.F.R. § 7.4007. tax purposes. If a Delaware trust substantive law is applied, this 14 This risk is cited most frequently when dis - cussing how it is often bad facts that make or entity is the account holder, its additional precaution may prove bad law. address should be the one associ - an invaluable shield and a last layer 15 Restatement (Second) Conflicts of Laws §§99 and 122. ated with the account. This, in turn, of defense. n

APRIL 2018 VOL 45 / NO 4 ASSET PROTECTION