As attorneys with our practice concentrating in offshore asset protection planning, a question we often hear is, “Will I go to jail if I set up an offshore trust?” The short answer continues to be “no.” The more complete answer is: “not if the trust is competently prepared and properly implemented.”
Case in point: Branch Banking & Trust v. Hamilton Greens. The decision in this 2014 case reaffirms the right of individuals and businesses to engage in asset protection planning without fear of being incarcerated for contempt.
In 2006, the predecessor of the plaintiff bank made a loan to a company with which Bellinger was involved, obtaining personal guarantees from him and two others. The individuals had agreed to indemnify Bellinger should his personal guarantee be called upon. They had made good on previous indemnifications, and Bellinger believed they would continue to honor their agreements.
The loan went into default in February 2011, and Bellinger and the others were sued by the bank on their personal guarantees in May 2011. On Nov. 30, 2011, Bellinger created a Cook Islands Trust, funded with approximately $1.7 million in assets. It is always best to set up an asset protection trust before a claim arises, because depending on the specific circumstances, it is often not possible to set up a trust after a claim arises. In this case, the claim arose when the loan went into default.
The bank won the case in January 2013, and the court entered a final judgment against Bellinger for more than $4.9 million. The bank then sought to collect its judgment from Bellinger, but was unable to do so. Bellinger, as ordered by the court, requested the Cook Islands trustee to send back all of the funds in the trust to pay the judgment. The trustee considered his request and refused.
The bank then asked the court to incarcerate Bellinger for contempt, pointing out that “prior to the entry of the final judgment, but several months after [plaintiff] filed [its] lawsuit, Bellinger created an offshore Cook Islands trust.” The bank alleged that “Bellinger created the trust to shield his assets from the final judgment that was ultimately entered against him by this court.” The bank further asserted that Bellinger could not argue that it was impossible for him to comply with the final judgment because, by creating the trust, his inability to comply was self-created.
Bellinger argued the trust was lawfully created before any final judgment was entered against him, and that the bank was improperly seeking to have him held in contempt because he was unable to pay a civil judgment. Additionally, Bellinger argued that he should not be held in contempt because he lacked the power to have assets released from the trust in order to comply with the final judgment.
Bellinger explained that he established the trust because he was recently divorced, needed to revise and update his estate planning (quite customary), and, in particular, wanted to assure the financial security of his daughter. He testified that he could not compel payment of the judgment from the trust (he had asked and the trustee refused), that he could not replace the trustee, and that the trust was irrevocable.
The court found Bellinger to be a credible witness and concluded that he had adequately shown an inability to comply with its final judgment.
In reaching its decision, the court correctly relied on the controlling U.S. Supreme Court case of Maggio v. Zeitz: “Civil contempt orders are coercive in nature. To jail one for contempt for omitting an act he is powerless to perform would reverse [that] principle and make the proceeding purely punitive, to describe it charitably. Contempt orders will not be issued if the court finds no willful disobedience but only an inability to comply.” Bellinger was (properly) not held in contempt.
The court stated that the bank appeared to assert a fraudulent transfer allegation in support of its contempt motion. However, even if the bank had won a fraudulent transfer argument, it would have been to no avail. Since the trustee refused to return trust assets when Bellinger was faced with contempt incarceration, it is very likely to have refused to honor a “return the assets” order of a U.S. federal court.
After all, no U.S. court has jurisdiction over a Cook Islands trustee (as it would with a domestic trustee), and, in order for any fraudulent transfer finding to have effect, a court must have jurisdiction over the transferee (in this case, the trustee) so it can enforce its return order with threats of sanctions.