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AsiaTrust Gets Hauled Into The California Courts

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[NOTE: Because I am an expert witness in this case for the creditors, I'm not going to go into much depth on the facts, and I'm going to steer well clear of the fraudulent transfer issues that I am involved with that were not really important to this Opinion anyway.]

The Plaintiffs alleged in essence that the Debtor, Cindy Dalrymple, had fraudulently transferred assets to AsiaTrust New Zealand Ltd., as the trustee of the CD PRT NZ Trust, which had been set up by Los Angeles attorney David Berardo so that the Debtor could evade collection by the Plaintiffs on their $3.2 million judgment against the Debtor.

The Orange County Superior Court granted AsiaTrust's Motion to Quash the service of a summons on it for lack of personal jurisdiction. The Plaintiffs appealed, and won a reversal.

The California Court of Appeals held that AsiaTrust was subject to jurisdiction in California, holding that AsiaTrust had contractual relationships with the Debtor and her niece (Sonia Dalrymple, who was also alleged by the Plaintiffs to have been involved in the fraudulent transfers), and AsiaTrust had conducted activities in California that submitted it to personal jurisdiction in the Golden State. Specifically:

The undisputed facts show Asiatrust (1) created continuing obligations between itself and California residents, (2) purposefully directed (and continues to direct) its activities towards California residents, and (3) purposefully derived (and continues to derive) benefits from its activities in California. AsiaTrust conducted due diligence on California resident Sonia, the trustee of Cindy's Retirement Trust. AsiaTrust sent promotional materials to Sonia and otherwise marketed to her the advantages of forming a New Zealand trust. AsiaTrust drafted the trust contract, negotiated the contractual terms with California residents Sonia and Berardo, and amended the contract. Sonia signed the amended contract, witnessed by Berardo, in California. AsiaTrust communicated by e-mail and telephone with Sonia and Berardo in California. AsiaTrust has invoiced Sonia in California for fees owed to AsiaTrust. AsiaTrust has received funds from Cindy's Retirement Trust in California and from a Swiss annuity that insures California resident Cindy. AsiaTrust has followed Berardo's instructions concerning the ownership of the Swiss annuity. AsiaTrust has wire transferred funds to Cindy's Retirement Trust's bank account in California in accordance with Sonia's instructions. Essentially, AsiaTrust has received compensation for accepting, investing, managing, disbursing, and shielding the assets of Cindy, a California judgment debtor, in a scheme that contemplates an ongoing contractual relationship for Cindy's lifetime.

AsiaTrust argued that its agents never physically visited California in relation to the Dalrymple matter. This argument fell on deaf ears, and the Court noted that in the modern age it is rarely necessary for transactions to be consummated in person, as opposed to by electronic communications:

Here there was a veritable 'latticework' of contacts linking [AsiaTrust] and the State of California: not one but many calls and other communications to California during the negotiations. The execution in California of the legal documents which formed the arrangement.... A continuing stream of payments from [AsiaTrust] to California." [] A continuing receipt by AsiaTrust of compensation from the California trustee of a California trust. AsiaTrust's acceptance from the California trust of money which AsiaTrust invested as directed by the California trustee and a California lawyer.

Additionally, the Court noted that AsiaTrust's contract contained an indemnification clause that amounted to evidence that AsiaTrust knew that it might face litigation in California. Moreover, the litigation arose directly from AsiaTrust's activities:

Here, the New Zealand Trust is the instrumentality by which the Dalrymple defendants have transferred Cindy's assets out of plaintiffs' reach and which enables Cindy to continue to enjoy a substantial income from her transferred assets. Although Cindy's assets are central to plaintiffs' lawsuit against her, half of her assets reside in an irrevocable trust or Swiss annuity in AsiaTrust's possession or under its control. This is a sufficient nexus to fairly subject AsiaTrust to California's jurisdiction.

The Court rejected AsiaTrust's arguments that to defend itself in California would impose an unreasonable burden, because AsiaTrust already had a lawyer in California and could seek indemnification from the Debtor for any legal fees incurred. The Court also rejected AsiaTrust's claim that it was an "innocent third party", noting that California "has a strong interest in enforcing its judgments".

ANALYSIS

One might say, "Who cares if the offshore trust company gets sued, because they have no assets in the U.S. anyway?" While sometimes that is true, in other cases the offshore trustee might be holding title to property or other assets in the U.S., and obtaining a judgment against the offshore trustee can make unwinding those transactions much easier.

But even beyond that, if a trust company loses a judgment in the U.S., then its reputation is potentially stained, future courts can note that the trust company was engaged in fraudulent transfers which will make it unattractive to use for asset protection planning, clients may balk at doing business with a company that can't or refuses to pay its debts, its credit rating may be diminished, local regulators may question unpaid judgments on its balance sheet, and numerous other ill effects can occur.

Here, AsiaTrust has now been formally written up in a court opinion as having assisted a debtor in post-claim planning; good luck to the next person who uses AsiaTrust and then tries to claim their planning had nothing to do with creditors. Probably not just a few attorneys will be scratching AsiaTrust off their list of potential offshore trustees.

It is also another way for a creditor to bring pressure on the debtor to settle, since the debtor will now not only be paying her own expensive legal fees, but effectively the trust's legal fees as well through the indemnification agreement.

Plus, there are creditors out there who sometimes decide to "make an example" out of a particular debtor, deliberately run their legal defense expenses up, and take the position that "if I can't have the money, then you can't have it either." While the creditor may be out-of-pocket in these scenarios (but usually only a very small percentage of the creditor's assets), the debtor is left ruined, since usually their misconduct in transferring assets offshore will effectively disqualify them from obtaining a discharge in bankruptcy, their credit will be wrecked, and their reputation utterly trashed.

So, by going after the Trust Company, a creditor both deters the Trust Company from taking similar cases and thus helping other debtors in financial distress, and effectively inflicts additional financial pain on the debtor, since the Trust Company will use the trust assets to make itself whole in the defense.

Note that under the Court of Appeals' rationale almost any offshore trust which is planned, documented, and signed in California, will result in the Trust Company being subject to personal jurisdiction in California. To avoid this result, a client (or her attorney) would have effectively no contact with the Trust Company in California, but would instead physically travel abroad to take care of the drafting and other arrangements for the new trust to be formed. How many clients are actually going to do that? But that is now critical if you don't want the trustee to be a co-defendant in the case and be forced to pay their defense costs.

Another thing to note is that in this case, the debtor's attorney (Berardo) was all of the planner in the case, the defense counsel for the debtor, and defense counsel for AsiaTrust. Talk about bad optics, and the Court of Appeals made note of the apparent coziness between the debtor and AsiaTrust. If a trust company is going to claim that it is somehow separated from the debtor, then at the very least it should have its own counsel.

Of course, this is a Court of Appeals case, and it may go up on appeal to the California Supreme Court.

So stay tuned.

CITE AS:

Gilmore Bank v. AsiaTrust New Zealand Ltd., 2014 WL 684377 (Cal.App.Distr. 4, Feb. 21, 2014). Full Opinion at http://goo.gl/6bRx3n

This article at http://onforb.es/1lkzU72 and http://goo.gl/1JAl44