Offshore Asset Protections Diminished

New Court Case Minimizes the Protections Offered by Offshore Asset Protection Entities with U.S. Offices

At Sutton Law Center and Corporate Direct we don’t provide offshore asset protection, so if you want to use the Cayman Islands or Switzerland or wherever else – well, you should go somewhere else. However, we will help our clients understand and use the excellent onshore benefits of Wyoming and Nevada entities.

If you do want expensive offshore protection (which is being chipped away by the courts), a new court case illustrates that you really should go offshore to get it. In Sergeeva vs. Tripleton, a provider of offshore services with a U.S. office, Trident Corporate Services, was dealt a stinging blow by the courts.

The Case

In the case, Anna Sergeeva sued her husband in Moscow after their 16 year marriage dissolved. Anna claimed her husband was using offshore companies to hide assets. She believed that the Trident office in Atlanta had documents proving such concealment. Anna’s attorney’s went to a U.S. Court demanding Trident in Atlanta provide all documents of companies and trusts that Trident set up offshore through their network of non-U.S. offices.

Trident’s response was understandable. They believed they didn’t have an obligation to turn over documents that were not located in the United States.

The Eleventh Circuit Court of Appeals disagreed, and they upheld over $230,000 in contempt of court sanctions assessed by the District Court for failing to turn over the foreign documents. While this case in particular dealt with a foreign person seeking legal documents, the holding is applicable to Americans wanting to discover offshore holdings.

A full discussion of the case follows, but the lessons are clear:

  1. If you want complete offshore asset protection don’t use a company that has offices in the USA.
  2. You might be able to get better protection just by choosing the right state for asset protection.

The Facts of Sergeeva, Trident, and Tripleton

After dissolving their sixteen-year marriage in Russia, former spouses Mikhail Leopoldovich Dubin (“Mikhail”) and Anna Sergeeva (“Anna”) commenced a proceeding in the District Court of Moscow for division of their marital assets. In the Russian dispute, Anna claimed that Mikhail was concealing and dissipating marital assets through and with the assistance of offshore companies in countries around the world, including Cyprus, Latvia, Switzerland, the British Virgin Islands, the Bahamas, and the United States.

In the United States, Anna sought information from Gabriella Pugh (“Ms. Pugh”) and her employer in Atlanta, Georgia, Trident Corporate Services, Inc. (“Trident Atlanta”). She expected information from Trident Atlanta would reveal Mikhail’s beneficial ownership of Bahamian corporation, Tripleton International Limited (“Tripleton”).

When Anna met with resistance, she initiated a 28 U.S.C. § 1782 discovery action in the Atlanta division of the District Court. On referral, the Magistrate Judge granted Anna’s ex parte application and authorized service of two subpoenas. One of which demanded the production of documents possessed by Trident Trust entities located outside the United States, including Trident Bahamas, and instructed Trident Atlanta to furnish all responsive documents in its “possession, custody, or control, regardless of whether such documents or materials are possessed directly by [Trident Atlanta] or by any of [Trident Atlanta’s] agents, representatives, attorneys, or their employees or investigators.”

Trident’s Resistance

Trident Atlanta objected to the subpoena on numerous grounds, including that it sought documents located outside the United States, and filed motions to vacate the Magistrate Judge’s Order and to quash the subpoena. The Magistrate Judge denied the motions and granted Anna’s motion to compel, and required production of all documents responsive to the subpoena that were within the “possession, custody, or control” of Trident Atlanta.

A few months later, the Magistrate Judge also denied Trident Atlanta’s request for reconsideration of the Magistrate Judge’s Order.

Ultimately, Trident Atlanta produced only twenty-three pages of documents from its office in Atlanta and objected to the Magistrate Judge’s production and reconsideration orders. The District Court overruled Trident Atlanta’s objections and approved the orders entered by the Magistrate Judge. Several months later, the District Court declined to reconsider its order and noted that Trident Atlanta’s obligation to respond to the subpoena was clear. Trident Atlanta then filed its first appeal and requested stays, which were denied by the District Court and by the Eleventh Circuit.

Anna Seeks Sanctions

While the first appeal was pending before the Eleventh Circuit, Anna sought sanctions against Trident Atlanta for its failure to produce documents responsive to the subpoena. The District Court determined that it retained jurisdiction concerning the sanctions issue, accepted additional evidence and briefing, and conducted an evidentiary hearing.

The District Court granted the sanctions motion, held Trident Atlanta in contempt, awarded Anna her attorney’s fees and costs, and ordered Trident Atlanta to produce responsive documents or pay a sanction of $500 a day for up to sixty days of any continued non-compliance. Later, the District Court rejected Trident Atlanta’s request for relief from the sanction and entered partial final judgment, awarding $234,983.58 to Anna as sanctions; whereupon, Trident Atlanta filed its second appeal. The Eleventh Circuit consolidated the two appeals for hearing.

The Decision in Sergeeva

In a case of first impression, the Eleventh Circuit affirmed the District Court, and concluded that 28 U.S.C. § 1728 provides a district court of the district in which a person resides the authority to order that person to produce documents for use in a proceeding before a foreign or international tribunal in accordance with the Rule 45 of the Federal Rules of Civil Procedure (which authorize extraterritorial document production).

The two primary issues on appeal were: (1) whether the District Court erred in affirming the subpoena requiring the production of documents under 28 U.S.C. § 1782; and (2) whether the District Court erred in imposing contempt sanctions on Trident Atlanta. The Eleventh Circuit affirmed the District Court on both issues.

1. The Subpoena

Trident Atlanta’s seminal argument was that 28 U.S.C. § 1728 does not reach documents located in foreign countries, because American courts were not intended to serve as clearinghouses for requests for information from courts and litigants all over the world. The Eleventh Circuit disagreed, and concluded that the location of responsive documents does not establish a per se bar to discovery under 28 U.S.C. § 1728.

The Court noted that 28 U.S.C. § 1728 was the product of congressional efforts over a span of nearly 150 years to provide federal-court assistance in gathering evidence for use in foreign tribunals.28 U.S.C. § 1728 authorizes, but does not require, district courts to provide judicial assistance to 28 U.S.C. § 1728 applicants. The Court agreed with the District Court that the exterritorial issue should be decided under Rule 45 of the Federal Rules of Civil Procedure, as required by 28 U.S.C. § 1728, which requires the subpoenaed parties to produce designated documents, electronically stored information, and tangible things in the parties’ possession, custody, or control. The only geographical limitation imposed by Rule 45 is the act of production itself.

Therefore, the Eleventh Circuit basically agreed with the District Court that the location of responsive documents and electronically stored information—to the extent a physical location can be discerned in this digital age—does not establish a per se bar to discovery under 28 U.S.C. § 1728; and that to hold otherwise would categorically restrict the discretion Congress afforded federal courts to allow discovery under 28 U.S.C. § 1728 in accordance with the Federal Rules of Civil Procedure.

2. The Contempt Sanctions

Trident Atlanta also argued that it did not have control over the documents requested in the subpoena. The Eleventh Circuit disagreed, and concluded that “control” may be defined as “the legal right to obtain the documents requested upon demand.” The Eleventh Circuit also concluded that the District Court did not abuse its discretion in imposing sanctions upon Trident Atlanta, and noted that the record presented clear and convincing violations of the District Court’s many orders.

The Court approved the District Court’s rationale, that the legal right to obtain the documents was established when affiliate companies share documents with one another in the normal course of their business dealings. The Court pointed out that, although Trident Atlanta denied having any legal right to documents or information from other members of the Trident Group, it was apparent that client liaison members could not possibly perform their intended functions for Trident Group clients absent the ability to obtain information and documents from production company members.

Therefore, the Eleventh Circuit basically agreed with the District Court, that significant circumstantial evidence established that Trident Atlanta had “control” over responsive documents in the physical possession or custody of Trident Bahamas.

3. The Company Agent

Trident Atlanta argued that the contempt sanctions of $234,983.58 and $500 per day were not supported by the evidence. The Eleventh Circuit disagreed. The Court pointed out that Trident Atlanta was afforded ample opportunity to show the court why it should not be held in contempt and sanctioned, and the District Court had conducted an additional hearing, accepted additional evidence, and accepted extensive legal briefing on this issue.

In addition, the Court noted that the record included a copy of correspondence authored by Ms. Pugh that seemingly conceded Mikhail’s beneficial ownership of Tripleton, and that Trident Atlanta had admitted that Trident Bahamas actually provided Ms. Pugh with corporate information concerning Tripleton. The Court stated that Trident Atlanta also conceded that it and Trident Bahamas were members of a group–the “Trident Group”–which offered clients “international financial planning services” through “production” and “client liaison” companies around the world; that production companies in the Trident Group referred client requests to client liaison companies for communication purposes; that Trident Atlanta was a client liaison company; and that Trident Bahamas was a production company.

Therefore, the Eleventh Circuit agreed with the District Court that significant “circumstantial evidence” established that Trident Atlanta had “control” over responsive documents in the physical possession or custody of Trident Bahamas, and that Trident Atlanta had not established that these violations occurred despite “all reasonable efforts to comply” in good faith with the District Court’s Orders. The Eleventh Circuit unequivocally stated that “this fulsome record evinced clear and convincing violations of the District Court’s many orders, which violations complemented discovery-avoidance efforts in other jurisdictions, exerted–sometimes by shared counsel–on behalf of [Mikhail], Tripleton, Trident Bahamas, and other members of the Trident Group.”

Brief Discussion

On the one hand, the Eleventh Circuit’s recent decision in Sergeeva is helpful to litigants from other countries who seek relevant discovery in the United States.*

On the other hand, the Eleventh Circuit’s recent decision in Sergeeva clearly is hurtful to multi-national corporate/trust service providers who have any type of connection with the United States. These providers are subject to the jurisdiction of United States courts, and any qualified 28 U.S.C. § 1728 applicant can secure information on clients and companies anywhere in the world.

It should be noted that the Eleventh Circuit’s recent decision in Sergeeva did not specifically address the issue of whether a local United States defendant may be required by 28 U.S.C. § 1728 to produce witnesses for deposition, if the witnesses resides outside of the United States, but the witnesses arguably are under the control of the local United States defendant.

Conclusion

The Eleventh Circuit made it clear in Sergeeva that just because documents are outside of the United States does not mean that the documents are immune to a court order for their production.

Indeed, a district court will not hesitate to demand information from a multi-national corporate/trust service provider that has any type of connection with the United States, and the physical location of the documents will not be a bar to the exercise of the district court’s power to order production of the documents.

For these reasons, it might be preferable for those wanting offshore help to use an offshore company, rather than a worldwide service provider with U.S. contacts, or simply protect their assets in states with strong protections.


*2: The following four prima facie requirements must be established before a district court may exercise its authority under 28 U.S.C. § 1728:  (1) the request must be made “by a foreign or international tribunal,” or by “any interested person”; (2) the request must seek evidence, whether it be the “testimony or statement” of a person or the production of “a document or other thing”; (3) the evidence must be “for use in a proceeding in a foreign or international tribunal”; and (4) the person from whom discovery is sought must reside or be found in the district of the district court ruling on the application for assistance.
If these four requirements are met, then, upon consideration of the following four factors identified by the United States Supreme Court in Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241, 264-65, 124 S.Ct. 2466, 159 L.Ed.2d 355 (2004), the district court has discretion whether and how to grant an applicant’s 28 U.S.C. § 1728 request:  (1) whether aid is sought to obtain discovery from a participant in the foreign proceeding; (2) the nature of the foreign tribunal, the character of the proceedings underway abroad, and the receptivity of the foreign government or the court or agency abroad to U.S. federal-court judicial assistance; (3) whether the applicant is attempting to use 28 U.S.C. § 1728 to circumvent foreign proof-gathering restrictions or other policies of a foreign country or the United States; and (4) whether the discovery requests are unduly intrusive or burdensome.

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