Case Law Supporting Foreign Asset Protection Trusts

by Jim Daloisio, Esq.

There is a lot of misinformation on foreign asset protection trusts (FAPTs). Movies portraying criminals utilizing offshore banking and offshore trusts for fraudulent purposes can promote a false impression.

Mobsters and drug cartels sometimes use offshore trusts.

Criminals also drive cars, buy homes, and dine out at restaurants.

This does not make these activities unethical or illegal, any more than criminals using trusts makes trusts unethical or illegal.

A trust is simply an agreement between a trustor (the person who creates and puts assets into the trust), a trustee (who manages the trust) and beneficiaries.

The fact is FAPTs (aka offshore asset protection trusts) are simply trusts in foreign jurisdictions.

They are hated by creditors and civil litigation attorneys because they are EXTREMELY effective at preventing a creditor or winning plaintiff from seizing assets that have been transferred into the trust. The fact that an attorney wins a large US Judgment against a trustor does not mean they will collect on the judgement.

These trusts are effective because they are operating in jurisdictions that have created trust laws designed to protect the trustor’s assets in the trust as a way of increasing trust business on their country.

Not being in the US, they are not under the jurisdiction of US Courts. They need not comply with US Court Orders. 17 states in the United States now offer Domestic Asset Protection Trusts (DAPTs). The trust legislation in these states was modelled after Cook Islands Trust Law.

DAPTs, however, are not as effective as FAPTs because they are subject to US court orders.

Other countries have also modelled trust legislation after Cook Islands law. There are differences, however. The best of these are also more effective than DAPTs because they are not under the jurisdiction of US courts and can reject US court orders. In these jurisdictions, creditors and attorneys with a US judgement must go to the country the trust is established in to sue there under their law.

These laws are much more favorable to the trustor (aka grantor or settlor). One would err badly to assume these laws are some sort of scam or artifice. They are just different and generally trace back to British common law. The attorneys and trust companies of trust-haven countries are part of the international community every bit as much as US attorneys and trust companies.

Evolution of Foreign Asset Protection Trusts

judge court 800

The evolution of the trust originated in ancient Roman and Greek law and was later refined in 12th century England into the modern trust we recognize today. The offshore trust was introduced around the 20^th century. The Cook Islands was the first to successfully amend its International Trust Law to include several provisions that were unfavorable to creditors, and specifically to allow for self-settled spendthrift trusts.[1]

A self-settled spendthrift trust is a trust designed to protect trust assets by having the trust hold the assets for the benefit of the beneficiaries and also allow the person who sets up the trust to be a beneficiary. Cook Island Law allows the person who founded the trust (called the trustor, grantor, or settler) to maintain significant control of the trust assets by being the manager of a Cook Island LLC under the trust.

The Cook Islands legislation was soon followed by similar laws in the Cayman Islands, Belize, Nevis, the Channel Islands, the Isle of Man, and numerous other trust-haven jurisdictions.

The US adopted domestic asset protection trusts in some states starting in 1997.

Alaska passed the first U.S. legislation allowing for irrevocable, discretionary, self-settled trusts. Ninety days later, Delaware followed suit, and as of this date several states have passed Domestic Asset Protection Trust (“DAPT”) legislation adopted from the Cook Islands trust legislation.[2]

A very popular method to protect one’s hard-earned (or inherited) assets is through the establishment of an irrevocable discretionary trust in a debtor-friendly foreign jurisdiction such as the Bahamas, Belize, Nevis, St Vincent or the Cook Islands.

Over time, offshore asset protection trusts have proven to be a fortress against US judgments.

FAPTs versus DAPTs

Asset Protection concept and businessman with thumbs up

The general idea is that FAPTs are stronger than DAPTs because they have an ability to ignore foreign court orders. A lot of plaintiffs’ attorneys in matters involving offshore trusts do not like FAPTs because they make it extremely difficult for them to collect money from the offshore trusts.

Also, US attorneys may prefer DAPTs over FAPTs as DAPTs do not require US attorneys to find attorneys in these trust havens to create FAPTs in compliance with legislation in these havens.

Case law on FAPTs in The Cook Island, Belize, St Vincent or Nevis is relatively scarce, mainly because a very limited number of trusts are attacked or taken to trial. In addition, the fact that FAPTs are private in nature makes it difficult for foreign judgments to thrive against them. Trust deeds in Belize, Cook Islands and other jurisdictions are not accessible to members of the public.

FAPTs are extremely difficult to penetrate. while DAPTs are exposed to US judgments. Through drafting of a trust deed, FAPTs are structured in such a way that the trustor can control assets of the trust through an LLC (linked to the trust) until a time when the trustor is being sued. When a lawsuit is enacted against the trustor, provisions of the trust deed instrument will automatically kick in to make another person other than the trustor responsible for managing assets. If a foreign (e.g. U S) court directs a trustee to transfer assets, the trustee will refuse the direction as a violation of the law of his jurisdiction and the trust deed. Lack of jurisdiction makes transfer of assets back to the US nearly impossible.

Enforcement of a foreign judgment on FAPTs is therefore extremely difficult. Even if the court orders the trustor to order the trustee to transfer the funds, the trustee will refuse.

The following is a discussion of case law on US judgments against FAPTs in various jurisdictions, and how they fail to execute said judgments on said FAPTs, showing the formidability of FAPTs against foreign creditors.

Case Law Analysis

Brown v. Higashi

The defendants, S. Wayne Brown, a certified public accountant and successful businessman and his wife Carrol created a series of self-settled trusts. One of these trusts was called the “CAW Family Trust.” This trust was formed in the United States and governed by American law. The defendants acted as trustees of this trust and admitted that its trust assets are property of their bankruptcy estate. Two other trusts were formed during this same period. These trusts were named the “Leones Company” and “American International Retail.” Each of these trusts deeds expressly declared that they were executed in the country of Belize and were to be interpreted and construed under the laws of Belize, formerly known as British Honduras.[3]

Each trust document provided for the establishment of an irrevocable trust controlled by a trustee who could make discretionary distributions of trust property. The defendant S. Wayne Brown signed the trust documents through an attorney-in-fact in Belize, one Gregory McDonald, who was the “creator” of the trust. A trust certificate for 100 trust units was executed in favor of Mr. Brown for each trust. Trust certificates are like stock shares. Mr. Brown, through his attorney-in-fact, immediately amended the trust certificates such that 50 were issued in his favor and 50 in favor of his wife in each trust. Immediately upon formation of the Leones Company, the defendants S. Wayne and Carrol A. Brown became the president and secretary, respectively, of the trust. The defendants filed for chapter 11 relief on March 31, 1995, after the plaintiff had obtained a judgment against them and their business corporation, Nome Commercial Company, for approximately $1.4 million. The defendants have submitted a joint chapter 11 plan for themselves and Nome Commercial Company. The plan initially went to hearing on confirmation on January 23, 1996. The confirmation hearing has continued pending resolution of this proceeding.

In the deliberation of the judgment, the court held that the policies that underlined the law of Belize are diametrically opposed to the fundamentals of American fraudulent transfer law. Belize is a popular trust jurisdiction precisely because it allows the types of fraudulent transfers that are unenforceable in America. The court also described Belize as a jurisdiction notorious for “anti-creditor” policies and pointed out that the lack of fraudulent transfer precepts in Belize makes the country a safe for asset protection.

Foreign asset protection trusts are so robust that even where a trust deed is not well-drafted, the FAPT can still protect assets from U.S. court orders because of the strong legal safeguards provided by FAPT legislation in various jurisdictions. Contempt of court arises not from setting up a trust but from disobeying a court order, something no attorney would recommend. This is discussed further in the case of FTC v Affordable Media LLC.[4]

FTC v. Affordable Media, LLC

The facts of the case are Denyse and Michael Anderson, through Financial Growth Consultants, LLC, ran a telemarketing scheme promoting media investments with promises of a 50% return, which turned out to be a Ponzi scheme. They funneled their commissions into a Cook Islands trust, claiming it was beyond U.S. court jurisdiction. When the FTC sued them for fraud, the Andersons argued they couldn’t repatriate the trust assets due to its structure and Cook Islands law

The key issue was whether the Andersons could be found in contempt for not obeying a court order to repatriate assets in a foreign trust, which the FTC aimed to recover for defrauded investors.

The FTC won the underlying Ninth Circuit appeal against Affordable Media, LLC, and sought to recover the Andersons’ assets. Typically, with a well-structured Cook Islands Asset Protection Trust (APT), U.S. courts would have little ability to access those assets, but since the Andersons were trustees, this created a possible recovery route. However, despite their poorly structured APT, the Andersons used a duress provision to block recovery. This provision removes the Andersons as co-trustees if an “event of duress” occurs, which helped them avoid U.S. court efforts to seize the assets.

Because the Andersons were subject to a temporary restraining order as part of the U.S. court’s preliminary injunction, the duress provision in their trust was activated, resulting in their removal as trustees. The U.S. courts then sought to repatriate the assets from the foreign trust, leading to the Andersons being held in contempt and jailed until they complied. They were eventually released after agreeing to instruct the trust to remove the overseas trustee and replace it with FTC, Inc., a corporation formed by the FTC, appoint FTC, Inc. as the new Protector of the trust; and amend the trust to remove the FTC as an “Excluded Person.”

The Cook Islands court ruled that: the documents intended to remove the current Cook Islands Trustee and appoint the FTC were an invalid use of the Protector’s powers; the attempted amendment to the document would be invalid, as it would benefit an “Excluded Person”, and the appointment of the FTC as Protector was also invalid for the same reason; and (4) costs were awarded against the FTC in favor of the Cook Islands Trustee.

The FTC ultimately decided to waive its appeal rights in the Cook Islands and settled with the Cook Islands Trustee. Although no formal judgment was issued by the Cook Islands High Court, the trustee concluded that settling was more prudent than continuing to drain trust resources through litigation. The FTC settled, releasing the trustee and the trust from any further liability. This case illustrates the far-reaching statutory protections of the Act, capable of protecting assets in an Asset Protection Trust (APT), even one as poorly structured as the Andersons’ APT, and in situations involving clear evidence of egregious criminal conduct.

Additionally, the case below highlights that when it comes to FAPT, the U.S courts do not have jurisdiction and trustees in foreign jurisdictions can refuse to return assets successfully.

Branch Banking & Trust Co. v. Hamilton Greens, LLC et al[5]

BB&T filed a breach of contract claim on May 5, 2011, against multiple parties, including Bellinger. On November 17, 2011, Bellinger began the process of creating a Cook Islands trust. According to Bellinger, the BB&T claim did not influence his decision to establish the trust because the property securing the $3 million loan from BB&T was valued at $15 million, his co-guarantors had a combined net worth of over $100 million, they had agreed to indemnify him for any liability related to the BB&T claim, and they had settled all of his other contingent liabilities from similar personal guarantees in the previous five years.

Although Bellinger was not held in contempt for failing to repatriate the trust funds, BB&T held a valid and unsatisfied writ of execution and met the requirements to begin supplementary proceedings.

In assessing whether Bellinger intended to defraud BB&T, the court determined that his primary motive was to preserve assets for retirement. The court also considered that Bellinger might have been under the mistaken belief that the collateral used for the BB&T loan was sufficient to cover his debts. Throughout the litigation, Bellinger consistently testified that he could not compel payment from the trust, as the Cook Islands Trustee had refused, and that he lacked the ability to remove the trustee.

However, between March 2012 and May 2013, Bellinger received monthly distributions from the Cook Islands APT for “overhead costs of support,” which were later reclassified as payments to his girlfriend. Unlike a domestic trust, Bellinger was able to continue benefiting from his trust throughout the process, protected by the provisions of the Act. Even if the U.S. court had ruled the transfers fraudulent, the Cook Islands Trustee would not have been required to comply with the U.S. court’s order or return the assets.

Furthermore, FAPTs in the Cook Islands, where there is legislation for fraudulent transfers in place, alleged fraudulent transfers must be proven in the Cook Islands courts, even where the US has already found the transfer in question fraudulent. The ruling of fraudulent transfer by a US court does not obligate a trustee in the Cook Islands to comply. This is shown fully in the case of In re: Smith.

In re Smith

The case is about an involuntary bankruptcy proceeding against Smith. On March 27, 2008, the state court issued a severance order to enter a final judgment against Smith. However, just three days prior, Smith had established a Cook Islands trust and transferred assets worth approximately $6 million into the trust without receiving any consideration in return.

On the night before the hearing regarding the creditors’ post-judgment turnover application in state court, Smith submitted a “pauper’s affidavit,” asserting that his net worth was “negative $2,041,486.24” and that he only had two creditors. The bankruptcy court noted that while Smith was keeping up with small, recurring payments as they became due, he was failing to pay 99% of his debts. This was largely due to his decision to transfer most of his assets into a Cook Islands Trust.

Involuntary bankruptcy proceedings usually need more than three creditors, but when a person takes steps to undermine creditors’ rights, the “special circumstances” exception can apply. Here, the creation of the Cook Islands Trust around the time creditors obtained summary judgment, the transfer of most of Smith’s assets into the trust, and the addition of a “spendthrift” provision to prevent creditors from accessing those assets indicate that the “special circumstances” exception is relevant. Therefore, the order for relief was properly issued under U.S. bankruptcy law.

The case of *In re Smith* illustrates a fraudulent transfer of assets into a Cook Islands Trust. If Smith had set up the trust and transferred assets well before the bankruptcy proceedings, creditors would have faced significantly more challenges in accessing those assets. However, the order for relief issued in this case holds no authority in the Cook Islands, and a properly structured Cook Islands Trust is not obligated to transfer Smith’s assets to creditors. To enforce this transfer, the fraudulent nature of the transaction would need to be established in the Cook Islands court system.

Furthermore, it can be deduced from the cases discussed above that assets in Belize or Cook Island are secure from U.S court jurisdiction compared to domestic asset protection trusts. Jurisdictional limitations prohibit U.S courts from attaching assets in foreign jurisdictions although the courts can reach the trustee and in certain instances control assets within the US. All this and more is discussed in the case of Rush University Medical Center v Sessions.

Rush University Medical Center v. Sessions[6]

Robert Sessions (defendant) established an irrevocable inter vivos trust, transferring most of his assets into it and designating himself as a lifetime beneficiary. This self-settled living trust (1) allowed the trustees to distribute assets and income to Sessions for his support and well-being during his life, (2) gave him full authority to decide who would serve as trustee during his lifetime and who would inherit the trust after his death, and (3) included a spendthrift clause preventing the trust assets from being used to pay off creditors of either Sessions or his estate. The trust held assets worth approximately $20 million.

After creating the trust, Sessions pledged $1.5 million to Rush University Medical Center (plaintiff) to fund the construction of a new residence for the university’s president, agreeing that any unpaid portion would be covered by his will, estate, or living trust. The hospital completed the residence and honored Sessions at the ribbon-cutting ceremony, but he never paid any of the $1.5 million during his lifetime. Later, Sessions was diagnosed with late-stage lung cancer, blamed the hospital for not diagnosing it sooner, and changed his will to revoke the $1.5 million pledge. He also transferred or gave away much of his wealth that was not already within the living trust.

When Sessions passed away, the hospital sought to recover the $1.5 million from his estate, but the estate’s only significant assets were in the living trust, which was shielded by the spendthrift provision. The trial court ruled that the spendthrift clause was invalid concerning Sessions’s creditors and ordered the trust to pay the hospital. The estate appealed the decision.

The plaintiffs’ claim relied on the common law principle that an individual cannot create a trust for their own benefit while protecting those assets from being used to settle debts. The Illinois Supreme Court found that Sessions was clearly a “debtor” due to his obligation to pay the plaintiff, even if the payment was to occur after his death. As a result, the common law requires the court to rule in favor of Rush University Medical Center, since Sessions cannot give preference to his heirs over his creditors without it being considered fraudulent.

The key issue in this case that undermined the protections of the Cook Islands Trust was that it owned assets subject to the court’s jurisdiction, specifically a Limited Illinois Trust. Without this connection, the plaintiff would have had no way to recover from the Cook Islands Trust.

Additionally, FAPTs in foreign jurisdictions also provide asset protection in contentious divorces too.

Rybolovlev v. Rybolovlev

The divorce between Elena and Dmitry Rybolovlev was highly contentious and probably the most expensive, though it ultimately turned out to be far less costly. In 2014, a Swiss court initially ruled that Russian oligarch Dmitry Rybolovlev must surrender half of his nearly $8 billion fortune to his ex-wife Elena. However, Dmitry’s assets were securely and legally protected within a Cook Islands Trust, prompting the Geneva Court of Appeals to overturn the original ruling. As a result, Elena was forced to seek alternative methods of recovery and for a much smaller amount.

Pursglove v. Oesterland

Cook Islands Trusts provide substantial asset protection, but transfers made under suspicious circumstances, such as in anticipation of a claim, can be challenged. Conversely, in such cases, the protection provided by Cook Islands statutes makes it difficult and costly to pursue a claim successfully.

Sarah Pursglove and Robert Oesterland instituted divorce proceedings against each other. Pursglove went to extreme measures to get as much as she could from her ex-husband after she discovered him to have an extramarital affair. Pursglove wanted access to Oesterland’s LLC, which was held in his Cook Islands Trust. Since the Cook Islands does not recognize foreign judgments, Pursglove endured going to the Cook Islands to sue in its courts for fraudulent conveyance, where she succeeded on merits.

The court held that Oesterland had transferred $45 million in assets to the Cook Islands Trust on the day his wife caught him having an extra-marital affair. This transfer seemed to be a fraudulent transfer, this led to Oesterland settling with his ex-wife. Had Oesterland transferred the assets in a manner that did not constitute a fraudulent transfer, Pursglove would have had no possible claim. Even so, it took an extremely spurned Pursglove, and millions of dollars, to find this fraudulent transfer and give Pursglove any ability of recovery.

Deductions

If a trust is formed properly under relevant legislation, (Belize, Cook Island, or Nevis) funded with non-domestic assets, and created without circumstances deemed a fraudulent transfer, the assets in trust are generally protected from attachment both in the host country and in other jurisdictions.

In general, Cook Islands, Belize, Nevis will not recognize judgements from other jurisdictions, as this would compromise judicial legitimacy of the countries whom U.S judgments are against. Therefore, any attack on FATPs must be done in the jurisdictions which the trusts find themselves in.

As a result of the strong protections of the legislation in these FAPTs havens, as well as the difficulty of recovery, many cases are never brought to collect against the FAPTs or are settled for a much lower amount.

Additionally, the unavailability of public records of trustors in these havens shows that not many U.S creditors are successful in claiming against FAPTs. The Anderson and Bellinger Cases show even when orders are entered in a foreign jurisdiction, a properly constructed APT will allow trustees to continue managing assets through threats of contempt or other U.S. court orders.

The lack of case law demonstrates the deterrent effect and just how few creditors are willing to test the act, particularly when those who do test it, are generally unsuccessful.