Other Professionals' Comments About Anderson

From Arnold L. Cornez, J.D., 27 June 1999

U.S. courts have expressed greater and greater frustration and distaste with the concept of the APT. They don't like them philosophically since they are from the onset intended to hinder, frustrate and delay judgment creditors! This case is indeed tangible evidence of the first high profile backlash from the Courts towards the concept of asset protection.

But putting that issue aside, Anderson raises a new spine chilling concept from the Bench, that of "the intentional frustration and impeding of the power and administration of the Courts" by the Andersons. This new and unique language was repeated in various manners at least three times in the case and it is of most urgent significance to any client or his or her service providers. That newer test has nothing to do with the usual buzz words of hinder, frustrate, delay and fraudulent conveyances. There is now a "new test" in the 9th Circuit!

Consider the following language:

• "[T]he provisions of the trust were intended to frustrate the operation of domestic courts . . .." [Part I, Para. 5]

• "Given the Andersons' history of spiriting their commissions away to a Cook Islands trust, which was intentionally designed to frustrate United States courts' powers to grant effective relief to prevailing parties . . .." [Part II, Section B, Para. 3]

• "The 'asset protection' aspect of these foreign trusts arises from the ability of people, such as the Andersons, to frustrate and impede the United States courts by moving their assets beyond those courts' jurisdictions . . .." [Part III, Para. 5].

The foregoing language speaks not in terms of impairing the rights of creditors -- which are hardly mentioned -- but does speak in terms of obstructing the due administration of the justice meted out by U.S. courts.

Having said that, I caution all you who are offshore service providers and continue to utilize the APT and pose the following question: "If a planner forms a foreign asset protection trust for asset protection reasons, is the planner potentially liable to criminal charges of obstruction of justice?"

We are in a new paradigm. The service provider clearly can have exposure and liability under the new doctrine of the Anderson case. Caveat! Other U.S. Circuits may also follow suit. This no time to be an ostrich and ignore the inevitable, the APT has been greatly emasculated by the Anderson case.

The APT lacks credibility to the Bench as long as APT seminars continue to preach: "You can have your assets and the beneficial use and control of those assets for many purposes, except for when a creditor comes along and then you just claim you don't."

The APT lacks further credibility to the Bench when the Judge comments:

"While it is possible that a rational person would send millions of dollars overseas and retain absolutely no control over the assets, we share the district court's skepticism." [Part III, Para. 10].

Does the Anderson case put the Cook Islands out of business? I doubt it.

But you will see people tread lightly and more and more better quality due diligence before assets are moved offshore to APTs. You will also see fewer APTs and more alternatives being utilized.

arnie...

Arnold L. Cornez, J.D., international business consultant/author: "The Offshore Money Book", 288 pgs., Publisher: NTC/Contemporary Publ. Co., ISBN: 0-8092-2880-7, www.amazon.com, for the EU: www.amazon.co.uk, credit card orders 1-800-551-2141, at Borders Books & fine book stores.

Dr. Arnold S. Goldstein, 23 June 1999

Three comments:

• This will bring more bad press for Offshore Trusts

• Other courts are likely to rely on this precedent

• We need substitutes for the Trust (Nevis LLC's, Bahamanian FLP's, etc.

Arnold S. Goldstein

Attorney Mark R. Thierman, 28 June 1999

Its not a sure thing that the Ninth Circuit opinion when adopted by other courts will not find its way into the supreme court and then be overruled.

I think the worse facts were that the US government was going after the Anderson, rather than a normal creditor. The Andersons were protectors and/or joint trustees. And they played games after the court ordered them to repatriate the money. such as saying they were doing under court order, thereby signaling the distress provisions.

What ever happened to a legitimate spendthrift trust? Only the rule that says a settlor can not be a beneficiary makes the typical spendthrift trusts useless for most adults.

I am sure there will be further developments. Until then, nothing is certain.

73's Mark R. Thierman
120 Green St., San Francisco, CA 94111 USA
Tel: (415) 391-9200 fax (707) 313-2262

Attorney Alex Espenkotter, 26 June 1999

[Posted to the American Bar Association listserv for estate planning and trust administration]

I think that the practitioner has to go a lot further than just checking the powers of the grantor/co-trustee/protector. It seems to me that the Court attacked the premise of the asset protection trust rather than the specific powers therein. Sure, the trust in Anderson should have been structured differently (e.g. giving only negative powers to protectors) but I doubt that that would have changed the outcome. The court mentions time and again that the Andersons created this trust with the express intention to frustrate the ability of a domestic court to enforce its judgments. To me, this kind of language, albeit dicta, indicates that the premise of asset protection trusts may be the problem that needs to be addressed.

Alex Espenkotter
Miami/Ft. Lauderdale

Attorney Gideon Rothschild, 26 June 1999

[Mr. Rothschild is the very well-respected Chairman of the Asset Protection Planning Committee of the American Bar Association. His remarks are in response to Mr. Espenkotter's post to the ABA listserv, which is reprinted above. My response can be found on our Analysis page]

I believe that you and Jay Adkisson may be reading too much into this case. Let's not forget a few critical facts which make this case quite distinguishable from the offshore trusts that many planners create for their clients. First, this appears to have been engaged in with an eye towards committing an egregious fraud. Even if a trust is created in advance of a problem I don't believe it gives a license to anyone to steal or commit tortious acts. In fact I believe even the offshore courts would eventually deal with such transfers in a morally correct fashion. The use of an APT in likely furtherance of intentional fraud of thousands of innocent investors is far different from, say, the surgeon who is prudently concerned about potentially catastrophic malpractice liability or a contract creditor who never extended credit based on trust assets. The analogy should be to the corporate form; it is universally recognized as a legitimate device for limiting liability but in the appropriately egregious case a court will piece the corporate veil.

A second aspect to this case is that the trust was clearly structured poorly. Prudent asset protection planning would not have the client as trustee and would limit the client's powers as protector or alternatively eliminate the client as protector in favor of an independent, off-shore protector. By having named the Andersons as trustees and protectors added to the fact that they drew out $1 million without anyone else's consent, as well as the timing of their discharge as trustees it's not surprising that the court ruled that they had control over the trust. Furthermore, the trust provided affirmative protector powers allowing, for example, the Andersons to determine whether a certain action is an "Event of Duress". Accordingly, the court held that they had the ability to direct the repatriation of the assets.

Obviously, as can be expected, those who have criticized APTs in the past will latch onto this decision as the death knell to APTs. Although, some of the court's statements are , admittedly, quite critical of offshore trusts, they are merely dicta and, in my opinion, must be viewed in the context of this egregious case. What they ruled on was simply the issue of whether the trust, as written, supported the Anderson's defense of impossibility of performance. The court stated " we are unsure that we would find the Andersons inability to comply ... a defense to a civil contempt charge. We leave for another day the resolution of this more difficult question because we find the Andersons have not satisfied their burden of proving that compliance with the district court's order was impossible." (p.33)

I believe that, just as in the bankruptcy court decisions that have been rendered in this area, bad facts make bad law. This is a case where the participants appear to have knowingly defrauded investors. This is not hopefully the types of clients most attorneys in this establish APTs for (assuming we do the proper due diligence). As several judges have stated to me - there is nothing inherently wrong with asset protection planning (whether it be via an APT or transfers to spouses or other means) just as there is nothing wrong with prebankruptcy palnning. But, when it is used as an instrument to commit fraudulent acts, these transfers should not be protected. This case and the negative reactions thereto demonstrate further the importance that we must attach to conducting our practice in an ethical manner. If attorneys and offshore trustees continue to assist clients in these types of situations it will be only a matter of time before the backlash causes the end of the asset protection industry as we know it today. I implore those involved in this field to improve their client screening process so as to reduce the possibility that more of these cases reach this outcome.

-- Gideon Rothschild

Attorney Jim Bennett, 2 July 1999

Although you suggest that state law exemptions and charging order protection are asset protection tools that are superior to APTs, I submit that they are not.

I predict that domestic charging order protection will be eroded just like domestic spendthrift trust protection has been eroded (in Mississippi, for example. the state supreme court ruled that spendthrift protection didn't apply in tort cases). As for state law exemptions, many states have quite paltry exemptions, which protect very little property (Texas and Florida being noteworthy exceptions).

I agree that offshore LLC's with offshore charging order protection will be equal to APTs in protecting the assets themselves. I do not, however, believe that they will be any better than APTs in protecting the client from contempt. Let's face it -- if it talks like a duck and walks like a duck, it is a duck, be it a Nevis LLC or a Nevis APT. The judge won't like that he is frustrated in compelling compliance and contempt is sure to follow in either case. I never believed that the impossibility defense would work anyway, but that doesn't effect the protection of the underlying assets. In Anderson, there was never an asset seizure and the Cook Islands trustee never caved in, so the ASSETS remained in fine shape.

I think that any asset protection plan must have two strategies, protection of the assets and protection of the person. As long as the assets themselves aren't domiciled in a jurisdiction which allows pre-judgment seizure (e.g. Switzerland) protection of the ASSETS will be equally effective under either an offshore LLC or APT law.

Protection of the person is a different story. Contingency plans must be made to "take it to the wall", always offering a bone in settlement and then, if all else fails, either cave in if contempt is unavoidable or make a strategic departure from the USA. I'd rather be rich on a Caribbean island than bankrupt in the USA. 

Jim Bennett
Asset Protection Lawyer

3887 Lakeview Court
Addison, Texas 75001-7925

Tel: 972.241.9200
Fax: 214.853.5204
Email: jim@jim-bennett.com

Attorney Richard S. Levine, 2 July 1999

I find myself unenthusiastically drawn to agree with at least a portion of Jay's analysis.

When I did my first "in house" presentation to my law firm regarding APTs, there was a spirited debate as to whether judges in the US would tolerate this technique. At that time (several years ago), I agreed with the skeptics that there was a reasonable chance that a person would have to expatriate to obtain the full benefits of the APT. I remember discussing whether people would rather live in the US without their money or outside the US with their money. I argued that APTs were worthwhile in that at least they provided the client with two choices, whereas without asset protection planning only the "stay in US without funds" choice would be available.

I am not sure whether I agree with the immediacy of the risk to the adviser. To the extent that courts are saying "we don't believe it is really impossible for you to retrieve the funds from an APT, so we will hold you in contempt until you do so", there is no reason for the court to attack the adviser. On the other hand, to the extent that courts are saying "we don't like APTs and we think creating them is a per se obstruction of justice in the US", then obviously there is a real risk to the adviser in helping to set up the trust. Only with a few more cases in hand will we see which view

takes control.

Richard S. LeVine
D'Ancona & Pflaum LLC
111 E. Wacker Drive, Suite 2800
Chicago, Illinois USA 60601-4205
Tel: 312-602-2011 Fax: 312-602-3011
E-mail: rlevine@dancona.com

Attorney Robert L. Sommers

[Mr. Sommers is a respected and highly-credentialed tax attorney practicing in the San Francisco area, and he regularly publishes a column for the San Francisco Examiner. Mr. Sommers published the very excellent "Tax Prophet" website, which is found at http://www.taxprophet.com Mr. Sommers has authored three detailed web pages on the effect of Anderson on foreign asset protection trusts, and the following comments are from the "Conclusion" section of each web page.]

From "August, 1999 Hot Topics - part 1 of a 2-part series: Hot Topics: The Off-Shore Asset Protection Trust Industry -- An Expensive and Wasteful Exercise in Wishful Thinking / Introduction -- The Demise of an Industry" at http://www.taxprophet.com/hot/aug99.html

"Nice result! Spend thousands of dollars to form an asset protection trust and when you need its protection, you wind up in jail! [I wonder if the person selling them the trust disclosed this very real possibility]. The Andersons spent about six months in jail and appealed the court's order to the Ninth Circuit Court of Appeals. Instead of siding with the Andersons, the Ninth Circuit all but destroyed the asset protection industry with its ruling."

Copyright © 1999 Robert L. Sommers, all rights reserved.

From "September, 1999 Hot Topics - part 1 of a 2-part series: Hot Topics: The Off-Shore Asset Protection Trust Industry -- An Expensive and Wasteful Exercise in Wishful Thinking / The Ninth Circuit Weighs In" at http://www.taxprophet.com/hot/sept99.html

"Offshore asset protection never worked and now is dead. At the outset, it was the product of wishful thinking and theories that have never been adopted by any court. All court cases that have considered the offshore asset protection trust have ruled against it and the most recent court case, FTC v Anderson, has made it clear that those who fail to repatriate their assets to the U.S. under court order will be held in contempt of court, which means they'll sit in jail until they comply.

"The only real question left for the asset protection industry is how to bail their clients out of these worthless structures before their clients wind up in jail."

Copyright © 1999 Robert L. Sommers, all rights reserved.

From "The Demise of Off-Shore Asset Protection Trusts" appearing in the San Francisco Examiner, August 1, 1999, at http://www.taxprophet.com/faq/990801.htm

"An AP Trust is expensive to set up and maintain, offers no tax advantages (just costly reporting requirements) and little, if any, protection against lawsuits. It originated as the product of wishful thinking and untested legal theories. Those who have one should dissolve it immediately; otherwise, they can expect no legal protection of their assets, now that the Ninth Circuit has ruled. Instead, consider a limited liability company or a corporation; both are state-sanctioned ways to conduct business and offer solid creditor protection." 

Copyright © 1999 Robert L. Sommers, all rights reserved. 

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I will be glad to include the comments of other professionals. Please indicate that you desire that your comments to be published, and send them to me by our online form.

FTC v. Affordable Media, LLC (Anderson) -- Text of Actual Case
Yes, there was lots of theorizing about what would happen when "the rubber met the road" with regard to offshore trusts; now see for yourself what the U.S. Court of Appeals for the 9th Circuit says.

Other Professionals' Comments About Anderson
Letters to me from other asset protection planners discussing the Anderson decision.

Cook Islands Rule in Favor of Andersons
It didn't keep the Andersons out of jail in the United States, but at least the Andersons' assets are safe in the Cook Islands. An insightful glance at how the offshore courts view foreign asset protection trusts.

Andersons' Trust Company pays $1.2 million
AsiaTrust LImited has coughed up $1.2 million from the Andersons' Cook Islands trust to settle a lawsuit brought by the Federal Trade Commission against the Andersons' trust, while the FTC continues to pursue the Andersons on the $20 million judgment entered against them.