In a recent Federal court case (in the Southern District of Florida), a North Carolina bank attempted to reach the assets sequestered by a debtor in an offshore trust. The bank’s attempt was thwarted by the District Court. A limited liability company borrowed money from the bank, and the loan was guaranteed by the LLC’s members. The bank obtained a judgment against one of the members, Bellinger, for defaulting on the personal guaranty, to the tune of almost $5 million.
After the lawsuit was filed against Bellinger, but before the judgment was entered, Bellinger moved $1.7 million to a newly-created Cook Islands trust to “protect his future financial security.” Bellinger then testified that he had no ability to comply with the judgment entered against him. When the bank moved to hold Bellinger in contempt of court, Bellinger argued that he had no control over the trust. He apparently tried to have the trustee to release the funds from the trust to pay the judgment but the trustee refused. If Bellinger’s argument works, then he cannot be held in contempt of court for failure to repatriate the funds. When a court-ordered action is an impossibility, there is no contempt. The bank’s follow-up argument was that Bellinger’s impossibility was self-created and could not be used as a defense against contempt. This is an argument that has been successfully used by creditors in several other cases.
The court noted that civil contempt is a “drastic remedy” and the burden of proof lies heavily on the plaintiff. The bank was unable to prove that Bellinger had control over the trust, that the impossibility was self-created, or that Bellinger created the trust to protect his assets. Consequently, the bank’s motion for contempt failed. While this case is a good result for all debtors who have established offshore asset protection trusts, its facts are somewhat troubling. The bank did not attempt to argue that the funding of the trust was a fraudulent transfer. The bank also did not attempt to argue that the trust is Bellinger’s alter ego. It is likely that the bank saw the last-minute transfer of assets to a Cook’s trust as an obvious fraudulent transfer and assumed that the court would see it the same way. We advise all clients to set up their asset protection structures not only before there is a lawsuit, but even before there is an existing claim. However, the Bellinger case is a good illustration that from a practical standpoint, even last minute asset protection planning may achieve a good result. We know with certainty that if Bellinger attempted to do nothing to protect his $1.7 million, he would have lost all of it to the bank’s judgment.
Here is the full citation for the Bellinger decision if you would like to read the full case: Branch Banking & Trust Co. v. Hamilton Greens, LLC, 2014 WL 1493086 (S.D. Fla. Mar. 24, 2014).