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LAWSUITS IN THE COOK ISLANDS: PROPER TRUST STRUCTURING SAVES THE DAY (and the trust)!

April 26, 2018

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OUR 26th YEAR OF PUBLICATION!

Volume XXV • Number 1 • May 2018

© 2018 Donlevy-Rosen & Rosen, P.A.

    INTRODUCTION.  We have often stated that the only way for a creditor to “get at” the assets held in a properly structured Cook Islands asset protection trust is for the creditor to bring a case in the Cook Islands. Why? The Cook Islands court is the only court which has jurisdiction (power) over the trustee, which, under trust law, is the holder of legal title to trust assets. The prospect of bringing a case in the Cook Islands is extremely daunting to most creditors; after all, unfamiliar Cook Islands counsel (and possibly also unfamiliar New Zealand counsel) would need to be retained (the U.S. lawyer cannot appear in the Cook Islands court), a very short statute of limitations would preclude the commencement of most of such cases, and, under new Cook Islands legislation (to be enacted shortly) a significant cash bond would be required to be posted. Nevertheless, it does happen – every so often, a very motivated and/or angry creditor will bring a case in the Cook Islands. This is the account of such a case brought against a Cook Islands asset protection trust settled by one of our clients, and how the proper structuring of the trust saved the day. Certain immaterial facts have been changed due to confidentiality concerns.

    BACKGROUND.  In 2015, Mr. Smith sought our counsel in establishing an asset protection trust. At that time, there were no suits or litigation threats against Mr. Smith. The trust was established in the Cook Islands with an independent trust protector in Nevis. The trustee opened financial accounts in both the Cook Islands and Switzerland. The Cook Islands account was a very small account, with a majority of the liquid assets held in the Swiss account.

    WHAT HAPPENED NEXT. About one year after the trust was established, Mrs. Smith, the settlor’s wife, filed for divorce (in a non-community property state), and, in the most aggressive move we have ever seen, simultaneously retained counsel in both the Cook Islands and in New Zealand. Based upon a very stretched legal argument, the High Court of the Cook Islands issued a Mareva injunction (like our temporary restraining orders) on the Cook Islands trustee, forbidding the trustee from taking any action with respect to the trust. The Nevis protector became aware of this development, and, in executing its powers and duties as trust protector under our trust document, the protector immediately fired the Cook Islands trustee and appointed a successor trustee in another country. The removal and appointment documents were prepared in such a way that the Cook Islands trustee only knew that it had been fired, but it did not know who the successor trustee was, and, because of the protector powers in our trust document, it did not need to know that. The result of this? The Cook Islands trustee told the court that it had been fired and that it did not know who its successor was. The plaintiff was now in court in the wrong country, and, significantly, they did not know what the “right” country was or who they should sue.

    THE RESULT. Where did this leave the plaintiff? Way out of luck. They had essentially wasted the legal fees they paid to Cook Islands and New Zealand counsel (those folks won’t take the case on a contingency basis – they require upfront payment) so the plaintiff had to settle. And settle they did.

    CONCLUSION. First, foremost, and most importantly, all trusts are NOT created equal. Our trust documents are the product of more than four decades of our experience, development and “fine tuning”, so nothing, absolutely nothing, is left to chance. Once again, we say that the most important factors to consider in hiring a law firm to implement an effective asset protection structure for you are the experience and the qualifications of the lawyers.