A case in the Southern District of Florida involved an individual who had guaranteed to a bank the repayment of about $5 million in debt obligations. The guarantor learned that the primary obligors on the debt were defaulting on the loan. Afterwards, the guarantor created, and transferred about $1.7 million in various securities and cash assets to, a Cook Islands trust.
Claim Brought by the Bank Against the Guarantor: Once the lender realized that it would need to seek judicial assistance to collect any of the $5 million-plus debt, the lender brought a court action seeking redress from the guarantor. One remedy sought by the lender was to have the guarantor held in contempt (which carries the possibility of serving some jail time) if he did not repatriate the $1.7 million so that those funds could be applied toward to loan.
Ruling: The court held that no contempt can be found here because (1) the guarantor showed that he had no ability to force a Cook Islands trustee to hand over the funds in the trust, and (2) there is an absence of proof that the guarantor acted with “willful disobedience.” The court went on to say that there was insufficient evidence that the guarantor created the trust in order to dodge the lender (even though the guarantor knew the loan was in default at the time be created and funded the trust). The guarantor testified he had other reasons for creating the trust. Specifically, he had testified that his reasons included: (1) the unusual nature of the guarantor’s marital settlement agreement with his ex-wife, which he thought she may violate and seek more money from him; (2) end-of-life medical expenses that he anticipated because of his mother’s recent passing from Alzheimer’s disease; (3) exposure to risk from new and uncertain business ventures in commercial property; and (4) a desire to secure his retirement. As such, the creation and funding of the trust in this situation did not rise to level of being an “actionable claim” of someone being unable to satisfy a debt through self-created means.
The court also said that even if it had determined that the guarantor should be held in contempt, the court still could not impose any jail-time because the guarantor was unable to comply with any order to pay the lender (notwithstanding that the guarantor had received $200,000 in distributions from the trust). Since the guarantor therefore did not “carry the key of his prison in his own pocket,” ordering any jail time would have been punitive, and that is not appropriate in debt collection actions.
As a result, the funds in the trust remain protected. The case discussed above is: Branch Banking & Trust Co. v. Hamilton Greens, LLC, 2014 WL 1493086 (S.D. Fla. Mar. 24, 2014), 2016 WL 3365270 (S.D. Fla., Jan. 3, 2016) and 2016 WL 3251165 (S.D. Fla. June 14, 2016).