Offshore Estate Planning Haven for International Insolvency Litigation
In the late 1940s and early 1950s, as baby boomers emerged, international insolvency litigation was in its infancy and a foreign concept to American bankruptcy practitioners. In today's world the emergence of companies transacting business on a global basis has produced, as a by-product, cross-border insolvencies, for which today's American bankruptcy practitioner must be prepared to represent creditors on an international basis.
Added to the advent of cross-border insolvencies is the utilization of "offshore estate planning," which has emerged as an additional problem area for the practitioner representing creditors. The acceptable boundaries, if any exist, and the resultant liabilities of "offshore estate planning" are being defined by both legislation and litigation. In today's practice, asset protection trusts, international special interest legislation (as in the Cook Islands), offshore jurisdictions, tax havens and shelf companies have become part of the vocabulary in which international bankruptcy practitioners must be conversant. Also, non-traditional insolvency areas, such as matrimonial disputes, now involve the transfer of assets offshore by a spouse attempting to frustrate their marital partner in planned dissolution proceedings. As a result, international insolvency practitioners are often retained to evaluate the basis for and a determination of the locale where to institute fraudulent conveyance actions against the now insolvent spouse.
In response to "offshore estate planning," insolvency practitioners (and their malpractice carriers) who assist individual companies in the transfer of assets into foreign jurisdictions have become an additional source of recovery for creditors. Such practitioners are also faced with the related ethical considerations associated with such transfers. The emergence and continued growth of cross-border insolvencies has generated a demand by the world bar to establish uniform procedures in the handling of international insolvency proceedings. The scope of this article is to examine the current efforts to achieve this goal and proposals under consideration to help further the process which has begun.
If a proceeding is based in Switzerland, the United Kingdom or Mexico or other foreign jurisdictions, the desire of the insolvency practitioner has been to achieve a uniform result as would be expected in the United States. In the past this was far from true. As a result, Committee J of the Section on Business Law of the International Bar Association developed the cross-border insolvency Concordat, which the IBA approved in September 1995. The Concordat established a protocol to create uniformity in cross-border insolvency proceedings. The protocol did not take long to be utilized as in the Everfresh Beverages Inc. and Sundance Beverages Inc.2 proceedings pending in both the United States and Canada. In those cases, a stipulation following the principles enunciated in the Concordat was entered into and approved by both the American and Canadian courts.
Not long thereafter, in 1997 in Vienna the United Nations Commission on International Trade Law adopted the UNCITRAL Model Law on Cross-Border Insolvency. This truly international effort was a further attempt to implement a set of uniform principles that could be incorporated into each respective country's legislation to address cross-border insolvency proceedings. The underlying provisions of both the Concordat and UNCITRAL have been addressed in recent articles3 and presentations.
The Next Decade
Despite the current political environment and the disruptions with legislative issues, a near consensus has arisen between the Bankruptcy Review Commission and Congress in at least one area. Specifically, a new chapter 6 of the Bankruptcy Code adopting the principles elaborated in UNCITRAL has been proposed and is currently pending before Congress. Other countries are considering the implementation of UNCITRAL in their respective legislatures in order to adopt and help to establish uniform procedures in the international community. In support of this effort, many jurists and attorneys have participated in the development of new bankruptcy laws and procedures, especially in eastern Europe and in the Pacific Rim.
Another major development has been the effort by the State Department to expand and enlarge the Hague Convention to provide for the reciprocity of American judgments with other countries. As bankruptcy practitioners are painfully aware, current lack of recognition and reciprocity of American judgments by foreign countries are frustrating and require the filing of "fresh" actions that result in substantial expense and delay. While there are many complicated, complex and thorny issues to be resolved prior to such a convention being enacted, the momentum of the Concordat and UNCITRAL will help to move this matter forward into the 21st Century. Individuals involved in both the Concordat and UNCITRAL were faced with similar challenges attempting to establish uniform procedures for both civil and common law countries. Issues such as punitive damages, default judgments and other aspects of American legal procedure must be carefully weighed and contrasted with public policy issues in many foreign jurisdictions.
The Dark Side
Notwithstanding substantial efforts by the international community to help establish and create a uniform procedure, a dark side has arisen. A growing industry of "asset protection planners" has developed. The asset protection planner includes not only attorneys, but also accountants, trust companies and numerous other entities. The basic concept of the asset protection planner is to transfer assets into jurisdictions and utilize either trusts or corporations to make the recovery or collection of judgments or debt obligations extremely difficult. The whole concept of the asset protection planner is to avoid the payment of valid obligations. Inasmuch as a basic concept in insolvency proceedings is to attempt to either liquidate existing debt or restructure debt within established guidelines, the asset protection planner establishes elaborate instructions that make insolvency proceedings extremely difficult and more costly.
Travel magazines and countless seminars, as well as newspapers and television advertisements, continually market asset protection structures. Several asset protection planners have boldly emphasized that billions of dollars have been placed into jurisdictions for the purpose of asset protection. As a result, many overseas tax havens have developed in the Caribbean and Netherlands Antilles, along with more traditional jurisdictions such as Switzerland, Liechtenstein, the Isle of Man and the Cayman Islands.
Although the Financial Services Commissions of offshore jurisdictions and the legislatures in their respective countries have established procedures to uncover fraud and to extricate assets, many of the issues must ultimately be resolved through litigation. Litigation will invariably include the asset planners, accountants, attorneys and other participants in the overall fraud. Many practitioners are not aware that by submitting themselves to overseas jurisdictions by utilizing foreign asset protectio n devices, they and their clients may well be submitting themselves to that jurisdiction. Decisions such as Agip Ltd. v. Jackson,4 decided in the United Kingdom, clearly recognize the liability of fiduciaries assisting in the overseas transfers of funds. Fiduciaries can be held personally liable along with their insurance carriers for such transfers. Recently published articles address the personal liability of counsel, both criminal and civil, of participating in and assisting in the transfer of assets to overseas jurisdictions.5
New offshore jurisdictions are being created every day. In 1997, the Montana State Legislature became the first state to offer offshore banking services to foreigners. The Legislature passed the Montana Foreign Capital Depository Act (Chapter 382, 1997) in which foreign capital depositories were given chartering status serving individuals, corporations, trusts, limited liability companies, associations and partnerships.6 While there may not be a rush to set up a foreign depository in Montana, obstacles have been established by the legislature to make tracing and recovery of funds more difficult. The depository is required to furnish the customer with competent legal counsel and to underwrite the latter's defense in litigation matters. All proceedings are held in camera and to initiate such an action, a filing fee of $2,500 must be paid. If the judgment is not recognized, then the plaintiff must pay all costs and attorney fees incurred, and the court may award damages up to $1 million to compensate for the customer's loss of privacy. To establish or to become a depository a person must be in good character and be financially sound. The chartering fee is $50,000 and the renewal fee may not exceed $10,000. The depository is exempt from state corporate tax until 2012 but is assessed one-half percent annually on the total value of assets on deposit. Along with the recent enactment by Delaware and Alaska of special interest trust legislation to help attract funds, international insolvency practitioners will need to be conversant with and seek the implementation of legislation to address the entire problem of offshore estate planning.
Thus, in an age of computerization and the resultant loss of personal identity, the practice of the international insolvency practitioner remains a complex and interesting area of practice that constantly presents new challenges.
2 Everfresh Beverages Inc., 95 B 45405, (Bankr. S.D.N.Y Dec. 20, 1995) (Order Approving the Stipulation Regarding Cross-Border Insolvency); Sundance Beverages Inc., 95 B 45406 (Bankr. S.D.N.Y. Dec. 20, 1995) (Order Approving the Stipulation Regarding Cross-Border Insolvency) and In re Everfresh Beverages Inc., Ontario Court of Justice, Toronto (32-077978, Dec. 20, 1995). Return to article
5 See, e.g., T. Moers Mayer, "Will the Lawyers Pay? Counsel's Ethical, Civil and Criminal Exposure for Creating Offshore Asset Protection Trusts", (Spring Meeting of the Business Law Committee of the ABA, April 5, 1997); R. Citron and M. Steiner "Asset Protection Trust—Promise or Threat?" Private Client Business, 1994, No.2, p.96-106. Return to article