December 4, 2018 Matthew Smith



In recent editions of INsight, we’ve acquainted ourselves with the Fletchers and some of the problems Nate Fletcher had encountered in relation to the Cook Islands trust he had established 20 years earlier (the ‘Trust’). For full details of the Trust and the problems it currently faces, click here.

In the third part of our case study, we will look at the risk of lawsuits faced by the Trust which have been brought by Nate’s brother David, whether David will be able to make a successful claim against the Trust and whether the situation could have been avoided.

The Litigation Issue

A few months after Nate and his brother David’s business dealings have (again) turned sour, David issued a number of lawsuits against David in which he has accused him of stealing and profiting from some business startup ideas that he claims were his own.

After being served, about 10 months ago, Nate decided that the safest thing to do with the $12m being claimed by David under the lawsuits was to place it in the Trust’s investment account, which is domiciled in the US. In doing so, Nate called to mind the words of his attorney 20 years earlier: ‘no safer harbour than a Cooks Trust, Nate’. And when the storm hits, where else to go but safe harbour? Nate feels confident that, if it comes to it, the court will side with him, but there are few safe bets when it comes to litigation these days and he knows that it is possible that David may prevail. If that happens, though, he feels safe in the knowledge that his funds are protected by the Trust.

But is he right? Let’s look at the law first.

The Cook Islands International Trusts Act 1984 (the ‘Act’), and specifically section 13B of the Act, is the reason Cook Islands asset protection trusts have such an unparalleled reputation and set the gold standard for asset protection trusts. If a creditor is looking to break open a trust and force a distribution from it, they need to satisfy section 13B. And section 13B is very hard to satisfy for a number of reasons. For a start, there’s the logistical side: because foreign judgments are not enforceable in the Cook Islands, the creditor needs to bring proceedings there. The Cook Islands is one of the most geographically remote nations on the planet, sitting a 10-hour flight from the US west coast and 4 hours from New Zealand on the other side of the Pacific. Bringing proceedings there entails serving the Cook Islands trustee company, and finding a local attorney (from a very small pool) who specialises in asset protection and is not prevented from acting because of previous dealings with one or more of the local trustee companies. And this side of things is due to get even harder soon, as an amendment to the Act is going through the Cook Islands Parliament which will require a bond of USD250,000 to be paid into court by any creditor bringing proceedings against a trust prior to those proceedings commencing.

Those bars alone are sufficient to deter many a creditor, but those with sufficient appetite to take matters further have to satisfy a series of stringent criteria laid down by section 13B of the Act. This is because the only way a court can force a Cook Islands international trust to make payments to a creditor from its trust fund is to find that a fraudulent settlement has taken place. To be satisfied of this, the court must make 5 crucial findings:

  • That the property the creditor claims was settled fraudulently was settled into the trust within two years of the creditor becoming entitled to bring the claim ie the date their cause of action accrued;
  • That the creditor brought proceedings in a court anywhere in the world with jurisdiction to entertain the claim within one year of their cause of action accruing;
  • That the creditor has initiated the Cook Islands proceedings within two years of the date of the disputed settlement;
  • That the settlement of the claimed property was made by the settlor with principal intent to defraud – and the court must be satisfied of this beyond reasonable doubt ie to the criminal standard of proof; and
  • That the settlement rendered the creditor insolvent – so if the creditor holds assets in excess of the value of the claim, then their claim will fail on this ground.

If any of these five conditions are not satisfied, the claim will fail, so any creditor must be certain from the outset that they have a strong claim, and they must act quickly to bring it.

But even section 13B is not bulletproof. Of course, it sets out some high hurdles that a creditor needs to clear to stand a chance of success, but some creditors have the patience, determination, luck and deep pockets (but not too deep – see condition 5 above) they need to be able to jump higher than others.

Let’s add some dates into the mix now. It is now November 2018. David claims in his lawsuits that his cause of action accrued in June 2017. He served Nate in January 2018. He seeks damages of $10m, and has approximately $1m in assets available to him at present. Nate made the additional settlements to the Trust in March 2018. So based on these facts alone, conditions 1, 2, 3 and 5 are satisfied. If David can satisfy the court beyond reasonable doubt that Nate had a fraudulent intent, then Nate is in trouble.

Where did Nate go wrong?

Firstly – and principally – in settling the additional $12m into the trust too late. If he had placed those funds into the trust before David’s cause of action had accrued, they would have been 100% protected by the Act. Waiting for the storm to hit first before pulling into port was a serious error. Cook Islands international trusts are perfect asset protection vehicles for individuals who have no major creditors, or do not expect to have any. They can also work for persons whose circumstances are such that they might face a creditor claim. They do not work so well for persons already facing a claim, unless that person is able to leave sufficient assets outside of the trust to satisfy the claim, or makes specific provision within the trust deed for payments to the creditor in question to be made (this is known as a Jones clause).

As discussed in Parts 1 and 2, one of Nate’s major concerns also lies in the fact that Brenda, his former friend and now David’s wife, is the Trust Protector and has the power to change the Trustee of the Trust but cannot be removed against her will without an application to the court in the Cook Islands. As a result, she could feasibly remove the Cook Islands Trustee, bring the Trust onshore and appoint David as sole Trustee, who could then order that the Trust distribute the disputed sums to himself.

Nate should also have kept the Trustee appraised of the developing situation with regards to the litigation. The earlier the Trustee was informed, the more it might have been in a position to take action to secure the Trust Fund.

The Solution

At the very least, Nate needs to notify the Trustee of the lawsuits. Once the Trustee is aware that an event of duress has developed, they will be in a position to refuse any distribution requests. Depending on how the Trust Deed has been drafted, once an event of duress has been declared, any attempt by Brenda to remove the Trustee may be invalid. It may also be possible, depending on the drafting, for the Trustee to change the governing law of the Trust to that of a jurisdiction with similarly stringent asset protection trust rules, such as Nevis. While this will not solve the problem of Brenda being the Protector, it will at least make it more difficult, time-consuming and expensive for David to pursue his claim against the Trust.

As mentioned previously, Nate should have secured Brenda’s retirement before the acrimony between them started, and made arrangements to appoint an independent third party as Protector (ideally one domiciled outside the US). Clearly this is no longer possible, but there may be a way forward: if David brings proceedings in the Cook Islands against the Trust, the Trustee may make an application to the court, in the course of those proceedings, for the court to exercise its inherent jurisdiction to replace a Trust Protector. If the court finds that Nate’s settlements into the Trust Fund were not fraudulent within section 13B of the Act, it may be easily persuaded that it is appropriate to replace a Protector who is clearly hostile towards the other parties to the Trust and cannot be trusted to discharge her duties as Protector for the good of the Beneficiaries.


This scenario shows how important it is for trust settlors to be proactive, stay ahead of the curve and deal with potential threats to the integrity of the trust fund before they arise, rather than having to spend time, money and energy firefighting them after they have arisen and pose a clear and present threat to the trust. As the saying goes, an ounce of prevention is better than a pound of cure. It is best for additional settlements to a trust fund to be made before an event of duress hits, and in any event before the cause of action of any potential creditor accrues, to ensure that those settlements can remain properly protected.

It is also another example of the importance of keeping the trustee in the loop to ensure that they can take appropriate action in a timely manner when necessary. Settlors can sometimes make the mistake of thinking that a trust and its assets belongs to them and that the trustee plays only a minor role, whereas the role of the trustee is key, as legal ownership of the trust fund lies with them and the beneficial ownership with the beneficiaries. Indeed, asset protection trusts work best when settlors divest themselves of as many powers as possible. The trustee is an essential part of the jigsaw and it is imperative to work with them in the administration of any trust rather than cutting them out of the picture.

Matthew Smith

Matthew Smith joined Southpac in March 2017 and works as Legal Counsel based in the New Zealand head office. Matthew is a dual-qualified attorney, having been admitted as a Solicitor of the Senior Courts of England and Wales in 2008 and as a Barrister and Solicitor of the High Court of New Zealand in 2017
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