In recent years, investigative journalism1 and international corruption prosecutions2 have trained a spotlight on the world of offshore finance, frequently used by ultra-high net worth individuals to insulate their assets from their personal liabilities and fend off creditors and prosecutors alike.
One of the underlying premises of this strategy is to spread assets across as many corporate shell companies incorporated in as many jurisdictions as possible, with the goal of intensifying the headache faced by creditors and prosecutors seeking to recover assets. This strategy is often aided by courts' application of corporate and trust law principles that, while having legitimate uses, are a boon to those who would misuse them.
One of these debtor-friendly doctrines that makes a frequent appearance in U.S. litigation is the so-called "internal affairs" rule. Under that doctrine, the legal obligations between a corporate entity and its owners'including, in some circumstances, alter ego claims'are generally assessed under the law of incorporation of the entity. In reliance on this doctrine, recalcitrant debtors who are subject to jurisdiction in the U.S. can, in a matter of minutes, incorporate shell companies in overseas jurisdictions with no or very limited alter ego doctrines, and place their assets in these shell companies. With the benefit of this juridical separation, they then feel insulated from U.S. courts attempting to recover assets for the benefit of victims or creditors. Indeed, the internal affairs doctrine can be used not only to avoid substantive relief afforded by U.S. courts, but is often invoked by debtor-affiliated corporate entities trying to avoid U.S. jurisdiction (and discovery) entirely.
That is what happened in the case of Despins v. ACA Capital Group Ltd. et al. (In re Kwok) in the U.S. Bankruptcy Court for the...
