Asset protection attorneys who are involved in defending against post judgment discovery and related collection activity have long been aware that debtors are required to submit to creditor examinations and provide information. Nonetheless, many debtors refuse to comply with court orders, transfer assets to third parties in defiance of such orders and take whatever actions they deem necessary to frustrate the efforts of the collection attorney. It is at this stage that the collection attorney will ask the court to issue a permanent injunction ….. a very powerful equitable tool used by the court to impose its will on the recalcitrant party.
In FDIC as Receiver for AmTrust Bank v. Rex H. Lewis (Nevada Federal District Court February 10, 2016) the judgment creditors’ request for a permanent injunction was denied despite a fairly compelling factual showing that the debtor, whose net worth previously exceeded $100,000,000, currently claims he is worthless. The creditors also contended that the debtor was transferring millions of dollars to his children and to offshore trusts and laundering funds through various corporations. In responses to creditors’ inquiries debtor refused to answer any questions regarding transactions that occurred before a certain date that he arbitrarily selected.
The court imposed sanctions and threatened to hold judgment debtor in contempt after he disregarded court orders and attempted to frustrate the creditors’ proper efforts to obtain information regarding his assets. The creditors were able to obtain a memorandum prepared by debtor’s asset protection attorney (why this wasn’t protected by the attorney client privilege was not disclosed) which discusses what appears to be a typical offshore asset protection trust the debtor settled in St. Vincent and the Grenadines…typical in the sense that it contained a duress clause (instructing the trustee to ignore orders of any government, tribunal or administrative body) and a spendthrift provision to protect the assets from the claims of settlor’s (debtor’s) creditors. The offshore trust owned LLC’s domiciled in the Isle of Man. These LLC’s have begun repatriating funds to a trust established by judgment debtor for the benefit of his 6 children.
When having read only the first couple of pages of the decision my suspicion was that the court would readily issue the sought after injunction. It turned out I was completely wrong. The court instead launched into an analysis of the tests to be met before a permanent injunction would issue. These tests are well-known: irreparable injury, inadequate remedies at law, the equitable remedy of injunction being warranted after balancing the hardships of the plaintiff and defendant and the public not being disserved if the injunction issues. The court found that the request for such a dramatic remedy is premature.
In support of its position, the creditors cited F.T.C. v. Affordable Media, a decision very well known to those of us in the asset protection world. In that case the Ninth Circuit upheld the District Court’s issuance of a preliminary injunction to repatriate assets as well as its civil contempt order when the defendants failed to adhere to that injunction. I would have thought this would be a strong precedent in the creditors’ favor…especially since the instant case was in the Ninth Circuit. However, the court pointed out that under Federal Trade Commissions Act the injunction standard to be applied is far more lenient than it is for other parties. Accordingly, even though the circumstances were similar a different result is called for in the instant case.
The creditors also cited United States v. Grant where the court did in fact issue a permanent injunction against a defendant for failing to repatriate the assets of two offshore trusts. But the court pointed out that in Grant the injunction issued only after the parties had exhausted all other legal recourse. Before the Grant court issued the permanent injunction, the judgment debtor therein had ignored a repatriation order, a show cause order and been held in civil contempt. In the instant case the court observed that the judgment debtor was currently contesting by way of an appeal to the Ninth Circuit the basis upon which the creditors pending motions seek relief. I smelled an implication that if the Ninth Circuit rules in the judgment creditors’ favor, it may no longer be premature for the District Court to issue the requested injunction.
The takeaway from this case is that aggressive and well-funded debtors can make the creditors case extremely difficult, time-consuming and expensive. However, eventually it all catches up with the debtor when all court decisions become final and no more appeals are available. Some debtors will fight till the end…perhaps it is a matter of principle or ego for them. The better advised debtor will use the leverage the system provides to negotiate the best possible deal at the most opportune time and not wait for a 14th round knockout.