Sixth Circuit Approves Asset Protection Through Trusts

Introduction

Earl and Margaret Blasingame filed bankruptcy seeking the discharge of over $7.7 million in debt. They claimed to have monthly income below $900 and total assets of less than $6,000. However, Earl and Margaret lived in a “28-acre gated compound” with a heated swimming pool and lighted tennis courts.¹ The residence was adjoined by thousands of acres of “prime farmland.”² In addition to benefiting from other trust assets, Earl and Margaret were able to run businesses and receive benefits from business profits through a series of trusts and corporations. The trusts, established by Earl’s mother, allowed the trustees (Earl and Margaret) to make distributions for their maintenance and support free of creditors’ claims.³

Church Joint Ventures, L.P. (“CJV”) purchased the right to pursue certain claims against the Blasingames, the trusts, and the corporations from the bankruptcy trustee. Although CJV initially sought to proceed in bankruptcy court,⁴ CJV eventually filed suit in federal district court. After dismissal of many of CJV’s claims and other adverse pre-trial rulings against CJV, the case was tried with only minimal remaining issues. Ultimately, CJV prevailed on few remaining issues and appealed the pre-trial losses.

Background

In the early 1990s, Earl and Margaret defaulted on their bank loans. In order to assist her family, Earl’s mother created several trusts for Earl, Margaret, and their children, naming Earl and Margaret as trustees. There was no dispute that these trusts were established to provide for the Blasingames while protecting assets from creditors. In addition, several corporations were owned by members of the Blasingame family and/or the trusts. The nature of the action was an attempt by CJV to access trust and corporate assets to satisfy its claims.⁵

CJV raised multiple arguments that transactions involving Earl, Margaret, the trusts, and family-controlled corporations constituted fraudulent transfers. However, prior to trial, the court dismissed or granted summary judgment on many of these claims for failure of CJV to produce sufficient evidence. Some of the issues raised by CJV included:

• There was a “clearing” bank account in the name of Earl Blasingame, Jr. into which personal, trust, and corporate funds were deposited and commingled. CJV argued this commingling should cause the trust and corporations to be disregarded and/or result in fraudulent conveyances from Earl and Margaret to the trusts and corporations. The court held there was insufficient evidence to show with specificity that any fraudulent transfers were made by use of the clearing account and dismissed those claims. CJV could not show “the source, destination, or nature of any of the deposits.”⁶
• CJV alleged that transfers between the trusts and corporations constituted fraudulent transfers by the Blasingames allowing CJV to recover. The court determined that CJV held claims against Earl and Margaret. However, even if a trust was to have made a fraudulent transfer, it would not be set aside with respect to debts of Earl and Margaret since the trust is not the debtor.⁷
• There was $225,000 purported loan to a family entity, Flozone Services, Inc. (“Flozone”). CJV sought to reclassify this as a fraudulent transfer to Flozone The Blasingames were granted summary judgment because CJV could not “adduce concrete evidence on which a reasonable juror could return a verdict in its favor.”⁸
• Earl provided significant services to family businesses operating through corporations without compensation. Rather, the corporations made distributions to trusts which used those distributions to support Earl and his family. CJV argued this diversion of income constituted a fraudulent transfer. However, the court found that uncompensated services are not “property” which are transferred for purposes of fraudulent transfers. ⁹
• Following the death of Earl’s mother (settlor of the relevant trusts), the sale of property of her estate and deposit of the proceeds into one of the relevant trusts was argued to be a fraudulent conveyance to the trust. The court, however, found CJV failed to plead with adequate specificity stating that “nothing here isolates the timing or amount of any specific transfer.”¹⁰

When the smoke cleared, the trial court held there were only two remaining issues for trial.¹¹

1. Whether and to what extent deposits by Margaret of annuity payments payable to her and her personal paycheck into a trust bank account constituted fraudulent transfers (a total of $29,555.36); and
2. Whether and to what extent the conveyance of certain real property into trust by Earl and Margaret constituted a fraudulent transfer.

CJV prevailed on both issues. The annuity payments, payroll checks, and property deeded to trust by Earl and Margaret were found to have constituted fraudulent transfers. Those assets were to be available to CJV in satisfaction of its claims. However, CJV appealed many of the pre-trial issues arguing as follows:¹²

1. The district court erred in failing to rule that Tennessee courts would recognize reverse veil piercing and reverse alter ego;
2. The district court erred in failing to grant CJV’s motion to certify the question of whether Tennessee would recognize reverse veil piercing and reverse alter ego to the Tennessee Supreme Court;
3. The district court erred in dismissing CJV’s fraudulent transfer claims relating to Flozone; and
4. The district court erred in denying appellant’s motion for leave to amend its Complaint to add arguments that the relevant trusts were “self-settled.”¹³

Sixth Circuit Opinion¹⁴

The Sixth Circuit Court of Appeals addressed CJV’s arguments one-by-one, agreeing with the Blasgames on all issues. Here, I will discuss the alter ego, veil piercing, and Flozone arguments.

The Court noted the facts here would give rise to a reverse alter ego or veil piercing case since CJV was attempting to hold the trusts liable for personal debts rather than traditional alter ego or veil piercing where the individual is held liable for an entity’s debts. Reverse veil piercing is rare and controversial.¹⁵ Tennessee has only recognized reverse veil piercing in the parent-subsidiary context.¹⁶

After setting this stage, the Court said “to be sure, the Blasingames, along with their children and the web of corporations and trusts at their disposal, have engaged in extensive, complex asset protection measures. On the other hand, asset protection is a legitimate, legally sanctioned objective; though one that has limitations of its own… Even assuming Tennessee were to recognize reverse veil piercing, whether the Blasingames have gone too far is not immediately apparent. CJV paints a compelling picture and makes broad claims of abuse, but many of the allegations are either unsupported or of only moderate severity. Further, there is a lack of uniformity between the Blasingames and the relevant trusts and corporations, which is an important factor in jurisdictions that allow reverse piercing” (emphasis added).

In analyzing the claim regarding Flozone, the Sixth Circuit found that CJV failed to specifically provide sufficient proof of this claim for it to survive. As to the additional claims relating to transfers among various entities, the Court held that “nothing offered supports a transfer from the Blasingames to Flozone that would satisfy the elements of a fraudulent conveyance claim.”

In a concurring opinion, one of the judges noted the differences between corporations and trusts, essentially arguing CJV was at fault for having sought to pursue its claims based on corporate law concepts such as alter ego and veil piercing. Some of the important quotes from the concurrence include:

• “A corporation and a trust are not one of a kind. A corporation is a ‘distinct legal entity,’ with ‘legal rights, obligations, powers, and privileges’ independent of the “natural individuals who created it.’ … A trust isn’t an entity at all; it is a ‘fiduciary relationship between multiple people.’ A trust lacks many characteristics of corporate personhood. It normally can’t sue or be sued in its own name.”
• “How could one ‘pierce the veil’ of a trust? It doesn’t have a veil, much less any form to pierce into. And what could it mean for a trust to be a beneficiary’s ‘alter ego’? An ‘alter ego’ is simply an entity’s ‘second self.’ … as a non-entity, a trust can’t be a ‘self’ of any sort—secondary or otherwise.”
• “Better, in my view, to call a problematic trust what it is: invalid because its ‘purpose is unlawful,’ because it is ‘contrary to public policy,’ or because it is a self-settled spendthrift trust. Trust law has a vocabulary of its own. Departing from it invites confusion, and risks leading courts to ‘disregard the form of a trust’ even where it isn’t ‘formed for an illegal purpose,’ and even where ‘there is the requisite separation between beneficiary and trustee.’”

This concurring opinion clearly shows that litigants should be cautious to distinguish trusts from other legal arrangements. A trust is not a corporation, LLC, partnership, or otherwise. It is a separate, fiduciary relationship with its own body of laws that apply.

Conclusion

In this case, the Sixth Circuit recognized a number of important items. First, the Court recognized that “asset protection is a legitimate, legally sanctioned objective.” The protections offered by beneficiaries of spendthrift trusts created by third parties (here, Earl Blasingame’s mother) is long standing and well recognized.¹⁷ Second, a trust is not to be confused with a corporation or other entity, but rather has its own body of applicable law. Third, creditors pursuing fraudulent transfer claims are under difficult pleading and evidentiary burdens, requiring specific proof of fraud rather than circumstances which give the appearance of fraud.

This opinion does not answer what would have happened if CJV could have been able to present more specific, admissible evidence on its claims. Also, by dismissing CJV’s motion to amend its Complaint to allege the trusts were self-settled, this case did not resolve how the Court would have handled those allegations. Presumably, although CJV only would recover to the extent of assets contributed or deemed contributed into the trusts by the Blasingame’s, CJV would have faced a lower hurdle than the specificity required to prove fraud. Perhaps that would have changed the outcome Regardless, this opinion stands for the proposition that the use of trusts for asset protection is legitimate. Properly structured trusts can provide significant creditor protection benefits for their beneficiaries, while also using trust assets to support the beneficiaries. There certainly were facts not favorable to the Blasingame’s, but the creditor’s burden is very high to overcome spendthrift protections offered through a trust.

S. Gray Edmondson, J.D., LL.M.

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1. See In re Blasingame, 920 F.3d 384 (6th Cir. 2019).
2. Id.
3. See, e.g., Tenn. Code Ann. § 35-15-502(e).
4. Id.
5. Although not the subject matter of this writing, Earl and Margaret Blasingame did not disclose the existence of these trusts in their “statement of financial affairs” filed with the bankruptcy court. As a result, they were denied a discharge for concealing assets. Also, the bankruptcy court sanctioned the Blasingame’s trust attorney for advising them he did not feel the assets needed to be disclosed. For a number of reasons, the sanctions imposed on the Blasingame’s attorney were reversed on appeal. See In re Blasingame, 709 Fed.Appx. 363 (6th Cir. 2018).
6. Church Joint Venture, L.P. v. Blasingame, 2016 WL 3248044 (W.D. Tenn 2016). Fed. R. Civ. Pro. 9(b) states that “in alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.”
7. Id.
8. Id.
9. Church Joint Venture, L.P. v. Blasingame, 2016 WL 6810873 (W.D. Tenn 2016).
10. Id.
11. Church Joint Venture, L.P. v. Blasingame, 2017 WL 943961 (W.D. Tenn 2017).
12. Church Joint Venture, L.P. v. Blasingame, 2019 WL 171488 (W.D. Tenn 2019).
13. Interestingly, CJV did not argue the trusts were self-settled until an attempt to amend its Complaint for the second time, which request was denied. Instead, CJV relied on fraudulent transfer and veil piercing arguments. CJV also tried this in bankruptcy court, late in the game as well, and the issue was found to have been properly dismissed. See In re Blasingame, 920 F.3d 384 (6th Cir. 2019).
14. Church Joint Venture, L.P. v. Blasingame, 947 F.3d 925 (6th Cir. 2020).
15. Id. citing Reagan v. Connelly, 2000 WL 1661524 (Tenn. Ct. App. Nov. 6, 2000).
16. Id. citing Floyd v. IRS, 151 F.3d 1295, 1299-1300 (10th Cir. 1998) and Cont’l Bankers Life Ins. Co. of the S. v. Bank of Alamo, 578 S.W.2d 625, 632 (Tenn. 1979).
17. See Restatement (Third) of Trusts § 58.