CASES INVOLVING FOREIGN ASSET PROTECTION TRUSTS
The litigation history of the Foreign Asset Protection Trust is often intentionally or negligently misrepresented by promoters selling their cookie-cutter offshore trust structures. Follows are a list of the cases in chronological order (based on the date of the most important decision in the case), and a summary of their results.
In re Colburn, 145 B.R. 851 (Bkrpt E.D.Va. 1992), did not involve incarceration for contempt, but the bankruptcy debtor who did not disclose his interest in a Bahamas trust was denied his discharge and the court suggested that the debtor had engaged in fraud.
Brown v. Higashi (Bkrpt Ak. 1995), involved an Alaska CPA who with his wife set up a Belize trust and then later was hit with a tort judgment. Although the case didn’t involve incarceration for contempt, it did consider whether the assets of the Belize trusts should have been included in the bankruptcy estate, and the court ruled that those assets were in fact included. The court included the following unflattering language about FAPTs: “The fact that the trusts were established in Belize, a country notorious for its anti-creditor policies, rather than Alaska or Washington, indicates an intent to hinder, delay or defraud on the part of the defendants.”
In re Portnoy, 201 B.R. 685 (S.D.N.Y. Bkrpt. 1996), involved a debtor, Portnoy, who entered into personal guarantees with a Bank to benefit his business, but then shortly before those personal guarantees were called by the Bank he set up a trust in the Isle of Jersey off the French coast and transferred nearly all his wealth to the trust. Soon thereafter, Portnoy filed for bankruptcy and filed a motion for summary judgment seeking to discharge the Bank’s claims. However, the bankruptcy judge stated that he simply did not believe that Portnoy had any control over the Jersey trust (regardless of what the language of the trust said), and denied Portnoy’s motion, suggesting in his opinion that Portnoy had made potentially fraudulent misrepresentations in his filings.
FTC v. Fortuna Alliance (1997), was a harbinger of things to come. The FTC while tracking an alleged pyramid scheme was able to get a U.S. District Court to issue arrest warrants for those running Fortuna Alliance, after which the defendants immediately agreed to return approximately $5 million from their Antigua offshore trust accounts. But because the case was a settlement and not reported, it was simply ignored by the offshore trust pundits.
Riechers v. Riechers, 679 N.Y.S.2d 233 (1998), involved a physician who tried to cheat his wife (who had helped him get started in his practice) out of her portion of $4 million of their marital assets by forming (ostensibly to protect against potential medical malpractice claims) a Colorado limited partnership that was owned by a Cook Islands trust. The New York state court said that although the wife could and should purse the assets in the Cook Islands, that the $4 million was part of the divorce estate and the wife would thus be awarded $2 million satisfied by both the trust and other marital assets in the U.S.
Westrate v. Westrate (1998), was a Florida divorce case where the husband transferred almost 90% of the couple's wealth to a Cook Islands Trust some four months after he first met with a divorce lawyer. The case quickly settled when the judge in the case found sufficient facts to invoke the crime-fraud exception to attorney client privilege between the husband and his lawyers and ordered those lawyers to answer interrogatories.
In re Brooks, 217 B.R. 98 (D.Conn. Bkrpt. 1998), involved a husband who transferred certain stock shares to an offshore trust formed in the Isle of Jersey by his wife, ostensibly for estate planning purposes. A year later, the husband was forced into bankruptcy. The bankruptcy court considered the self-settled nature of the Jersey trust, and found (after an extensive discussion of the subject) that it was incompatible with Connecticut law that forbid such trusts. The bankruptcy court then simply deemed the stock shares to be a part of the bankruptcy estate. This case is an excellent example of how a U.S. court can simply ignore the existence of an offshore trust for purposes of determining ownership to assets in the United States.
FTC v. Affordable Media, LLC, 179 F.3d 1228 (9th Cir. 1999) (a/k/a “Anderson case”), was the first case where the intense dislike by federal judges of foreign asset protection trusts finally bubbled over, and resulted in the Andersons, a couple who were pursued by the Federal Trade Commission for their participation in a telemarketing scheme, being incarcerated for six months after they claimed that they could not comply with a repatriation order from the federal court to bring back to the United States certain assets they had sent to their Cook Islands foreign asset protection trust. Later, the Andersons’ trust company paid a $1 million settlement to the Andersons, and the Federal Trade Commission continues to pursue the Anderson for the balance of the judgment against them. Although the FAPT pundits would later claim that this case is a “bad facts make bad law” situation, they overlook that the Andersons formed and funded their offshore trust a year before the Andersons even got involved in the telemarketing scheme.
Because the Andersons spent only six months in jail, a theory quickly developed that six months was the longest that the court could hold the settlor of an offshore trust in contempt. Also, the Anderson case was seen by some planners as an anomaly – a case from the “liberal 9th Circuit” that was unlikely to be repeated. The next case, the Lawrence case, answered the issue regarding contempt and showed that the Anderson result was the way that FAPTs would henceforth be treated by the federal courts.
SEC v. Brennan, 230 F.3d 65 (2nd Cir. 2000), involved a Gibraltar trust that was formed in 1994 and funded with $5 million by a notorious securities fraud artist. Later, when Brennan filed for bankruptcy in 1995, the foreign trustee exercised the flight clause in the trust and moved it first to Mauritius in the Indian Ocean, and then to Nevis in the Caribbean. Brennan did not include the trust assets in his initial bankruptcy petition, but later (apparently fearful of criminal bankruptcy fraud) amended his petition to include the offshore trust assets. The U.S. District Court then ordered Brennan to repatriate the trust assets back to the U.S. under penalty of contempt, but Brennan appealed to the U.S. Court of Appeals for the Second Circuit on the technical issue that the District Court’s order violated the automatic stay provision of the bankruptcy laws, and won on a narrow 2-1 decision. Before anything further could happen in the case, Brennan was convicted of bankruptcy fraud and sent to jail for a very long prison term for bankruptcy fraud not related to the offshore trust (such as claiming that he had no assets while maintaining a box in a Las Vegas casino that held $500,000 in chips). From an asset protection perspective, the Brennan case thus resolved nothing other than showing that FAPTs could and would be used by hardened securities fraudsters to hide their ill-gotten gains.
SEC v. Bilzerian, 131 F. Supp. 2d 10 (D.C. 2001), like the Brennan case also involved a notorious securities fraudster. Bilzerian, a one-time corporate raider who had been convicted of insider trading, also tried to hide his assets from the SEC, and sought protection under the bankruptcy laws, but his discharge was denied by the District Court and affirmed the Eleventh Circuit, In re Bilzerian, 153 F.3d 1278 (11th Cir. 1998). Thus, the SEC’s pursuit of Brennan’s asset continued, and the District Court issued a broad order to Bilzerian to present financial information on the numerous “Bilzerian entities”, including his family trust formed in the Cook Islands. Although Bilzerian argued that under the trust documents he had no power to obtain the financials, and the Cook Islands trustee refused to present them, the District Court ordered Bilzerian incarcerated anyway.
In re Stephen J. Lawrence, 279 F.3d 1294 (11th Cir. 2002), involved a derivatives trader who had suffered a margin call from Bear, Stearns securities resulting from the 1987 market crash. Only weeks before the results of his arbitration with Bear, Stearns was announced, Lawrence sent most of his wealth to an offshore trust. After the arbitration went against him, Lawrence continued to litigate against Bear, Stearns, but eventually (apparently weary of the costs) filed a voluntary petition in bankruptcy. After discovering the offshore trust, the bankruptcy court obtained an order compelling Lawrence to turn over the trust assets. When Lawrence refused, the federal bankruptcy judge ordered him incarcerated, and eventually the 11th Circuit (known for being very conservative, unlike the 9th Circuit) affirmed the incarceration. Lawrence’s Writ of Certiorari to the U.S. Supreme Court was later denied, and as of August, 2003, Lawrence was attempting to argue that his contempt was really criminal in nature, thus entitling him to a jury trial to attempt to get out of jail.
The Anderson and Lawrence cases are “1-2 punch” that knocked out the (in retrospect, ridiculous) belief that U.S. courts would wilt in impotence against foreign asset protection trusts even when they had the settlors within their powers. Even today, the Anderson and Lawrence cases are an extremely sore spot with the planners who then championed FAPTs as the ultimate weapon against creditors, and who were later severely discredited when these cases turned out precisely opposite of how they had predicted.
BankFirst v. Legendre (2002), involved a Florida businessman who set up an offshore trust with the assets managed by Paine Webber. After being sued by BankFirst, Legendre filed for bankruptcy, but the U.S. bankruptcy judge order to him to jail for contempt and after only five days in the pokey, Legendre saw the light and according to press reports, “the businessman actively is assisting in unraveling the financial details of the Yawn Trust and Master Works, and turning the assets over to trustee Henkel for disbursement to creditors -- including, presumably, BankFirst.”
J.W. v. Allvest, Inc., (Alaska Sup. 3rd Dist. No. 3AN-97-7192-CIV, 2002) involved a bizarre and stupid attempt by a person who ran a private prison and had lost an inmate lawsuit to engage in a series of transfers to drain the corporation which had suffered the judgment of its assets by way of bogus transfers to a series of shell companies, and then to transfer the assets to an offshore trust. When the plaintiff in the underlying lawsuit sued everybody involved in the transfers, including the owner of the private prison, the trust, the Alaska Trust Company, and even the attorneys who created this planning abortion, for civil conspiracy and fraud, the case reportedly settled for 100 cents on the dollar. A stellar example of how asset protection can be wrongly used to defraud legitimate creditors, and the remedies that a plaintiff can employ to stop such illegitimate subterfuges.
Bank of America v. Weese, 277 B.R. 241 (D.Md. 2002), involved debtors who in a brazen attempt to defraud their creditors established a Cook Islands trust and transferred their assets to it, and later were forced into an involuntary Chapter 7 liquidation after which a settlement of $12 millon was paid to the creditors.
Breitenstine v. Breitenstine, 2003 WY 16, 62 P.3d 587 (Wyo. 2003), was the Wyoming Supreme Court’s consideration of a Bahamas FAPT that the Husband attempted to use to shield marital assets from his wife. The Court allowed a marital division based on the assets in the offshore trust, commenting in a footnote that “the use of such trusts to avoid alimony, child support, and a fair division of marital property upon divorce is reprehensible to us.”
Nastro v. D'Onofrio, 263 F.Supp.2d 446, 50 UCC Rep.Serv.2d 888 (D.Conn.2003), involved an attempt by a debtor to transfer certain stock shares and other assets to a trust in the Isle of Jersey. The court entered an injunction preventing the transfers to prevent creditor fraud, and held that the fact that the court could not assert personal jurisdiction over the offshore trustee would not keep the action from going forward.
Eulich v. U.S., (N.D.Tex. Case No. 99-CV-01842, August 18, 2004), involved a Bahamas offshore trust that was created a by a U.S. Settlor who later was investigated by the IRS. When the IRS served a formal request for documents from the trust, the Settlor refused to provide the documents and claimed that he had no control over the trust and had exhausted his powers to try to get the documents. The District Court disagreed, holding that the Settlor could still attempt to get the documents from the trust by appointing new administrators and by filing a lawsuit in the Bahamas. At any rate, the Court stated, it was not going to recognize the Settlor’s “impossibility defense” because the impossibility was self-created, i.e., the Settlor’s own drafting caused the impossibility. The Court found the Settlor in contempt and imposed a fine of $5,000 per day on the Settlor, to be increased to $10,000 per day after 30 days, and then after 45 days the Court would consider incarcerating the Settlor until the documents appeared.
U.S. v. AmeriDebt, Inc., 373 F. Supp. 2d 558 (D. Md. 2005), involved a defendant who was already under investigation by the Federal Trade Commission for running a credit counseling scam. Shortly after discovering information of the investigation set up, defendant started transferring assets to a series of foreign asset protection trusts. Citing the Anderson case (FTC v. Affordable Media), the Court ordered the defendant under penalty ofcontempt to repatriate the assets to the U.S. so that they could bemarshalled by a receiver.
U.S. v. Grant, S.D.Fla. (W.Palm Case No. 00-CV-8986), 2005, dealt with the tax liability of the settlors of offshore trusts created over 20 years ago. The court entered the repatriation order anyhow, stating that the trust assets must be returned to satisfy the tax assessment. The court refused to hold the taxpayer in contempt, however, on the basis that the trust was set up by the deceased husband of the taxpayer and there was no evidence that she had anything to do with setting up the trust or any current control over it. This latter holding has been held up as "proving that offshore trusts work" which it did in this extraordinary and unique facts -- but if the husband had created an irrevocable domestic trust for his wife, it would have protected her assets just as well in this scenario.
Foreign Trust Opinions
There have been a number of opinions of foreign courts, such as the Cook Islands and Nevis, relating to foreign asset protection trusts involving U.S. persons or assets. Most of the opinions rather predictably validate the trust laws of those jurisdictions (it would be very bad business not to), but a few exceptional cases are worth mention:
Grupo Torras S.A. and Culmer v. Al Sabah and Four Others, (Bahamas, 06/13/2003)
515 South Orange Grove Owners Assoc. v. Orange Grove Partners, 208/94 (Cook Islands 1995) (a/k/a “Orange Grove case”).
Grupo Torras S.A. v. Sheik Fahad Mohammed Al Sabah, (Bahamas, 1995).