Is Jail Time the Nuclear Attack that Creditors have Against Offshore Asset Protection Trusts?

Jun 5, 2018

There has been a recent rash of discussions on whether foreign trusts are truly better for asset protection purposes than DAPTS (domestic asset protection trusts), especially DAPTs created by someone who does not reside in one of the states that has enacted DAPT law.

The popular press on DAPTs (again especially for those living outside of a DAPT state) has been covering cases that may lead readers to feel that these trusts are “not as advertised” with respect to being the formidable barrier to creditors seeking a debtor’s assets. The proponents of the offshore asset protection trusts point out that the foreign nature of the offshore trusts avoids many of the arguments used to invade the DAPTS (such as offshore trusts not being vulnerable to arguments of (1) federal law trumping state law (2) one state court having to give full faith and credit to another state’s rulings and (3) fraudulent transfer analysis being applied under the non-DAPT state law instead of the law selected under the DAPT agreement).

The proponents for the DAPTS may in turn point out that it seems to only be in the offshore trust context that the courts are finding the debtor to be in contempt of court, and therefore subject to some jail time until the debtor figures out how he or she can get the creditor paid.

Take a step back, and you may conclude that the contempt threat (the nuclear attack here) is applied mostly in the offshore trust scenarios because the DAPTs have succumbed to creditor actions without having to pull all stops that proceed to the contempt level to force the debtor’s compliance to a court order. No matter what the reason, further analysis of the cases will reveal that the contempt remedy for creditors is typically only in situations where there is a close nexus in time between (1) the person creating and funding the offshore trust (or having control and access to the trust assets) and (2) the legal process being engaged by the plaintiff in pursuing the debtor.

Take for example the recent order in the FDIC v. Lewis matter. The debtor guaranteed certain debt obligations when he had a net worth of more than $100 million. In 2008, the borrowers were no longer solvent and therefore unable to satisfy the underlying loans. The guarantor created an offshore trust in September of 2008. The timing of the creation of the trust makes the fraudulent transfer aspect of this matter suspect. When a person engages in an “asset protection” strategy at a time that a creditor is already expected or known to exist, this creates a close tie or nexus to the legal action that is being initiated to recover those assets. It is therefore no surprise that a court is willing to hold the debtor in contempt (although still no jail time at this point for Mr. Lewis) for creating his own impossibility to gain access to the assets, when such maneuver was implemented at a time that the connection to the plaintiff’s action was so evident.

Case Cite: FDIC v. Lewis (2016 WL 589666), Case No. 2:10-cv-00439-JCM-VCF (United States District Court, D. Nevada) Contempt Order dated: March 23, 2018.

*The information in this article is provided for general informational purposes only, and may not reflect the current law in your jurisdiction. No information contained in this post should be construed as legal advice from Greenspoon Marder LLP or the individual author(s), nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this Post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.

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Is Jail Time the Nuclear Attack that Creditors have Against Offshore Asset Protection Trusts?

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