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Grupo Mexican de Desarrollo S.A. v. Alliance Bond Fund Inc.

Ref.: US Supreme Court recognizes overseas asset protection trusts as a

legitimate planning tool to protect against future creditors

The US Supreme Court, in a 5-4 decision, recently held that the District Court lacked authority to issue a preliminary injunction preventing the defendants from disposing of their assets pending adjudication of the plaintiffs’ claim for money damages - the general rule being that a judgment fixing a debt is necessary before a court of equity will interfere with the debtor’s property.

This opinion is now the law of the land and will, in the future, prevent plaintiffs from obtaining preliminary injunctions and freezing assets before judgment (unless state statutory requirements are met). This may have some significance for non-US resident structures where the situs of the assets is the United States.

The majority opinion in the Supreme Court was that Mareva injunctions may be the law in the United Kingdom, but certainly not in the United States.

However, what makes this decision even more interesting is the following statement by the majority opinion:

“Despite the [dissenting opinion’s] allusion to the increasing complexities of modern business relations and to the bygone age of slow-moving capital and comparatively immobile wealth, we suspect there is absolutely nothing new about debtors trying to avoid paying their debts. ... or even about their seeking to achieve these ends through sophisticated [foreign-haven judgment proofing] strategies (emphasis added). The law of fraudulent conveyances and bankruptcy was developed to prevent such conduct; an equitable power to restrict a debtor’s use of his unencumbered property before judgment was not.”

Which was in response to the minority opinion:

“Chancery may have refused to issue injunctions of this sort simply because they were not needed to secure a just result in an age of slow-moving capital and comparatively immobile wealth. Moreover, increasingly sophisticated foreign-haven judgment proofing strategies coupled with technology that permits the nearly instantaneous transfer of assets abroad, suggests that defendants may succeed in avoiding meritorious claims in ways unimaginable before the merger of law and equity.”

The concept of overseas asset protection trusts has been legitimatized by the United States Supreme Court.

Notwithstanding this fact, professionals need to complete their due diligence and a solvency calculation to be assured that no fraudulent transfer or bankruptcy laws are being broken; and to be aware that too much control over the trust by a grantor can render the trust a sham. If these precautions are taken, it seems this Supreme Court case can be used as precedent in relying on the effectiveness of overseas asset protection trusts along with other legal forms such as corporations, limited liability companies, limited partnerships, etc.

This case will be reviewed by J. Ben Vernazza CPA PFS of California and Jim Bennett Esquire of Texas in the next issue of Trusts and Trustees.

See Grupo Mexican de Desarrollo S.A., et al. v. Alliance Bond Fund Inc., et al No. 98-231. You can find the decision at http://laws.findlaw.com/US/000/98-231.html