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Using Contempt Power to Force Repatriation of Offshore Trust Assets

Posted in Bankruptcy, Special Assets Litigation

Offshore asset protection trusts (OAPT) typically have the following characteristics: (1) the trust is governed by the laws of a foreign jurisdiction that does not recognize the judgments or orders of courts of the United States; (2) the trustee is a foreign entity that cannot be sued in the United States because it lacks sufficient “minimum contacts” with the United States; (3) the trust utilizes a “trust protector” who has the authority to replace the trustee, exclude beneficiaries, and change the governing law and location of the trust; (4) the trust contains a “duress provision” which states that the trustee may ignore any directive by the Grantor or trust protector made under compulsion of a court order; (5) the trust protector or trustee is automatically removed in the event that litigation is commenced against him or her; and (6) none of the provisions of the trust may be used to benefit creditors of any beneficiary or the grantor.

Plainly, an OAPT with these characteristics is designed to make it as difficult as possible for a creditor to reach funds held in trust. The trustee is not subject to suit in the United States and the trust jurisdiction does not recognize the judgments and orders of United States’ courts; therefore, even if the creditor obtains a judgment that the funds in the trust are subject to levy and execution, there is no way to enforce it against the trust. The trust’s jurisdiction may provide a mechanism for avoiding fraudulent transfers and reaching the trust assets; however, the statute of limitations is short, the standard of proof is “beyond a reasonable doubt” (the criminal standard), and the creditor is unlikely to find local counsel willing to take the case.

Even though an action directly against the trustee of an OAPT would be difficult, there may be a way to achieve the same result in an action against the grantor or trust protector. Courts have routinely issued orders directing the grantor to “repatriate” funds fraudulently transferred into an OAPT. Importantly, courts are also willing to coerce compliance with their repatriation orders through the court’s contempt powers. Typically, the grantor will claim that he is unable to comply with the repatriation order because of one or more of the OAPT provisions. The grantor may claim that, pursuant to the “duress provision,” the trustee or trust protector has decided to ignore his request to repatriate the trust assets. The grantor may also state that he does not have the authority under the trust to direct the trust to make a distribution. Further, the grantor may argue that his or the trust protector’s rights of appointment or right to control or receive distributions terminated upon the commencement of litigation. 

These arguments have not been met with much success. Perhaps the most extreme example is that of the case of Stephan J. Lawrence. Two months before a $20 million arbitration award was entered against him, Lawrence created an OAPT in the Republic of Mauritius and transferred $7 million into it. When Lawrence filed a chapter 7 bankruptcy, the bankruptcy trustee obtained a turnover order requiring Lawrence to repatriate the funds from the OAPT.  Under the trust documents, Lawrence had the ability to remove and replace the trustee. The court found that Lawrence’s explanation that he was unable to repatriate the funds due to the duress provision in the trust was not credible. Additionally, the court concluded that, although inability to comply with an order is a defense to contempt, the defense is unavailable where the impediment is self-imposed. In other words, because Lawrence had established the OAPT for the purpose of avoiding his creditors and had established the duress provision and other provisions that removed his ability to control the trust, the defense of inability to comply was not established. The bankruptcy court’s contempt and incarceration orders were upheld by both the district court and the Eleventh Circuit Court of Appeals. In re Lawrence, 238 B.R. 498 (Bankr. S.D. Fla. 1999); In re Lawrence, 251 B.R. 630 (S.D. Fla. 2000); In re Lawrence, 279 F.3d 1294 (11th Cir. 2002).

Lawrence spent more than seven years in prison. The court finally ordered his release after it concluded that his continued incarceration had “lost its coercive effect.” It could be said that the OAPT was a success for Lawrence, in that he succeeded in keeping the trust money from his creditors. It only cost him 7 years in prison.