Proponents of offshore trust suggest that a U.S. creditor could not obtain jurisdiction over the offshore trust or its trustees. Many of my own clients believe that because a U.S. court has not jurisdiction over the offshore trust the court has no way to either discover trust assets or to obtain a judgment against the offshore trust compelling the repatriation of the debtor’s interest. A California appeals court disagreed and held that California courts do have personal jurisdiction over an offshore trust.
Personal jurisdiction disputes are dependent upon the facts of each case. Jurisdiction over an out-of-state entity depends upon the degree of contact the entity has with the forum state. This particular case involved a California debtor who created a New Zealand trust with AsiaTrust Company and then fraudulently transferred assets to the offshore trust.
The creditor served a subpoena on the AsiaTrust Company as trustees of the debtor’s offshore trust. The Trustee, through its California attorney, tried to quash service because the AsiaTrust Company had no assets or offices in California, and none of its agents had done any business in California including activities with regard to the particular trust.
The appeals court held that California does have personal jurisdiction over AsiaTrust because Asia trust “(1) created continuing obligations between itself and California residents, (2) purposefully directed … activities towards California residents, and (3) purposefully derived … benefits form its activities in California.”
Even if AsiaTrust is subject to domestic court jurisdiction, a creditor would have great difficulty holding forcing this offshore company to return assets or collecting a money judgment against the company because it received the debtor’s fraudulently transferred property.
Still, this is not a good result for the debtor and offshore trust planning. Offshore trusts may increase their fees for trust established if they could be made defendants in U.S. court proceedings. Offshore trust may become more selective in their customer choice and less willing to accept U.S. clients currently involved in legal disputes. The offshore trust agreements include indemnification for the trustee’s legal fees, and debtors may find their trust assets drained to pay high-price attorneys hired by trust companies to represent the trustee in U.S. court proceedings. It will be interesting to see if creditors attempt to sue offshore trustees in states other than California; I find that California law is relatively creditor- oriented compared to Florida especially in regard to fraudulent transfer remedies.