ASSET PROTECTION PLANNING
AND CONTEMPT OF COURT

by
Barry S. Engel, Esq., F.O.I.
Eric D. Sanderson, Esq.
Edward D. Brown, Esq.
Engel Reiman & Lockwood pc
Attorneys at Law
Englewood, Colorado USA

Integrated estate planning trusts may raise issues relating to contempt of court.  The issue of contempt, however, must be considered under the test of impossibility.  The distinction between the complete defense and self-created impossibility is discussed in the light of two new cases.

"Whether an IEPT is offshore or onshore, issues relating to contempt of court principles have always been important."

Out of hundreds of challenges to structures that use trusts for protective planning, to date we have seen only the two contempt decisions ..."

"Contempt can be generally defined as an act of disobedience or disrespect toward a judicial or legislative body of government, or interference with its ordinary process ..."

"A wrongdoer may never know, at the time of his wrongful act, whether he has committed a civil or criminal contempt or what the form of sanction will be."

"Civil contempt that is indirect is the type of contempt that is an issue for persons settling offshore trusts."

"When determining whether an alleged contemnor has the ability to comply with a court's order, the court is generally limited to examining the facts and circumstances that exist at the time the order is issued that creates the impossibility on the part of the contemnor."

"In a well-drafted and administered protective trust, neither the settlor of the trust nor any of its beneficiaries will have the ability to comply with a court's order to repatriate assets."

"The Court further stated that no cases require a person to attempt to use physical force to obtain possession of documents or things not in the person's custody or under his control."

"In determining whether this exception to the impossibility of performance defense is to apply, courts have looked to factors such as whether the party has acted in good faith ..."

"The impossibility defense will not be recognized as a valid defense in those situations where the impossibility to perform was created by the defendant ..."

"An example of a case involving a finding of a self-created impossibility that resulted in the impossibility of performance defense being lost is Ex parte Coffelt."

" ... [a]t the time he disposed of the property, there was no order requiring him not to do so, and it is not, therefore, proper to punish him for contempt in selling it ..."

"... [t]he presumption of continued possession is only as strong as the nature of the circumstances permits."

"Among other things, the Maggio and Brune courts set forth the principal that courts should look to whether a remedy other than contempt of court ought to be applied."

"Under a properly drafted, properly implemented and properly administered planning structure, creation and funding will take place well in advance of any dispute or claim that may give rise to proceedings ..."

"American law is replete with other examples of situations wherein it is recognized that negative powers are not the same as positive powers, and that negative powers are not tantamount to control."

"While the duress clause itself renders powerless any person having a power (whether those powers are negative or affirmative in nature), the more cautious approach as litigation looms is for any power holder (protector or otherwise) to be in another jurisdiction."

"In September 1999, the Anderson court modified its contempt finding to provide an alternative to the repatriation of the funds."

"The Andersons thus created the performance impossibility in close nexus to (indeed, after) the Court issued its order; performance was not impossible at the time of the Court's order."

"... the Anderson court itself recognized the difference between the protector having negative powers, and the protector having affirmative powers such as the affirmative power to determine whether or not an event of duress had occurred."

"It is readily apparent that the Andersons' inability to comply with the district court's repatriation order is the intended result of their own conduct ..."

"Does this mean that a new, "natural consequences" standard now applies under 9th Circuit contempt law?  Or did the court possibly desire a chilling effect on the whole bunch due to one bad apple?

"Proper asset protection structures are designed to take contempt law into consideration.  It does not appear that such was the case with the trust the Andersons settled."

"The Court found Mr. Lawrence completed lacked any credibility whatsoever, and accordingly found it not credible that Mr. Lawrence was unable to obtain funds he claimed to have previously settled in trust."

"In each of the two prior instances in which the Debtor has testified before this Court, the Court has specifically made findings that the Debtor's testimony [is] not credible and not believable ..."

"A number of examples of Mr. Lawrence's lack of credibility are cited."

In some rather interesting language, the Court then states its findings are based as well on "... the Court's own common sense ..."

"Such plans do not so much involve one trusting a stranger in a distant land as they involve one trusting his or her professional team ..."

"Another interesting aspect of this Lawrence decision is how the Court, in dicta, misstates the law on contempt of court.

"There's case law to the effect that if we issue a compliance order that the respondent does not have the ability to comply with, that's punishment and violation of due process."

"One of these cases involves noncompliance when compliance could have taken place.  The other of these two cases involves a fraudster who was absolutely devoid of any believability."

"There is much a planner can do to protect a client again an improper plan design ..."

Asset protection planning is a process that includes reorganizing how assets are held so as to make them less vulnerable should a claim be made against the client. The asset protection plan should be designed and implemented at a time when the client has no claims pending, threatened or expected, and of course when there are no outstanding judgments. Much like a casualty insurance policy, it must be "taken out" before the "casualty" occurs.

Asset protection planning is often implemented as part of an overall, integrated estate plan in which the goal of preserving assets during the lifetime of the client is married with traditional, death-time estate planning goals. In this setting the "integrated estate planning trust" ("IEPT") is often utilized. An IEPT can either be domiciled under the laws of a foreign country or under the laws of one of the fifty states.

Whether an IEPT is offshore or onshore, issues relating to contempt of court principles have always been important. There is good reason for this – clients are most likely not very interested in being held in contempt of court

Some professionals have been quick on the draw, taking the position that two recent reported decisions spell the end for asset protection trusts, whether onshore or offshore. In these two cases, which are discussed in detail below, the trust settlors were incarcerated for contempt of court. Importantly, neither of the trusts involved has at the time of this writing been "busted" by the creditor. Other professionals are of the view that the trusts and the trustees in these cases have performed quite admirably, and prove the effectiveness of this type of trust, particularly in light of the extreme facts of these two cases. Regardless of which view one may adopt, what has to be remembered in any case is a basic maxim that all lawyers learned (or should have learned) in law school - that "each case must turn on its own facts and circumstances." After all, the marital deduction being denied in a marital deduction trust does not mean marital deduction planning does not work. What it means is that the marital deduction planning did not work under that particular plan, that particular design.

Others have commented that when it comes to protective planning through a trust, the client must be prepared to someday make a choice between being incarcerated or moving his person out of the country in order to avoid the same. Is this indeed the case? If the planning structure is properly drafted, properly implemented, and properly administered, the simple answer is "no".

The anecdotal evidence of this is the fact that protective planning through trusts has been in the mainstream for around a decade. Contempt of court principles are of course much older than that, and are tools that have been readily available to any court confronted with the issues described herein. Yet, out of hundreds of challenges to structures that use trusts for protective planning, up to now we have seen only the two contempt decisions mentioned above. And, as analyzed hereinbelow, these two reported cases involve the most egregious of circumstances as well as fact patterns that have little to do with the facts surrounding a typical plan.

The legal evidence of this is the analysis that follows.

"Contempt can be generally defined as an act of disobedience or disrespect toward a judicial or legislative body of government, or interference with its ordinary process, for which a summary punishment is usually exacted."¹ Contempt is not a matter between opposing litigants but an offense against the state.²

There are two types of contempt. The first is criminal contempt, wherein the primary injury is to the state. The purpose of the action is to preserve the dignity and authority of the court by penalizing past wrongful conduct.³

The second type of contempt is civil contempt. This is primarily remedial in nature, designed to coerce the contemnor to comply with the order.⁴

The requisite burden of proof for criminal contempt is "beyond a reasonable doubt," while the requisite burden of proof for civil contempt is generally "clear and convincing evidence."⁵  "Clear and convincing evidence" is a less stringent standard than "beyond a reasonable doubt," but is a more stringent standard than the "preponderance of the evidence" standard that is required in most civil actions.

In the words of one authority, over the years the two types of contempt "have been liquified to the point where one often washes into the other. As a result, one is left with but few and vague guidelines. A wrongdoer may never know, at the time of his wrongful act, whether he has committed a civil or criminal contempt or what the form of sanction will be."⁶

Contempt of either type may be "direct" or "indirect." In general, contempt is "direct" if it takes place in or near to the presence of the court. The judge, having witnessed the act, can summarily find the contemnor guilty with no defect of the conviction on due process grounds.⁷

Contempt is "indirect" if it takes place outside the presence of the court and generally is based upon a refusal to obey a court’s order.⁸

Civil contempt that is indirect is the type of contempt that is an issue for persons who establish offshore trusts when one of the various planning goals is the protection of the subject assets.

Both State and Federal Courts have broad discretion to impose sanctions on an individual found to be in contempt of court, whether civil or criminal. Sanctions can include fines, forfeiture of rights, and imprisonment.

Contempt proceedings are typically initiated when a party to a lawsuit is ordered to perform an act and the party so ordered fails to perform the act requested. The court will then hold a hearing and ask the party why he or she failed to comply with the order. If the party simply refuses to comply with the order, an order of contempt will issue.

If however, the party was factually not able to comply, a court may not hold the party in contempt.⁹  This is known as the "impossibility of performance" defense, which is a complete defense to a charge of contempt.¹⁰  Thus, when a court orders a defendant to pay money or produce documents, the defendant must have the present ability to pay the funds or produce the documents ordered at the time of the contempt proceedings before an order of contempt will stand.¹¹  If it is "impossible" for the party to perform, then subject to the discussion below on the "self-created impossibility," the party cannot be held in contempt of court. Under a properly designed, implemented and administered protective trust, and as would be the case with the vast majority of all irrevocable trusts of whatever label, it would not be possible for the party to raid the trust and turn over the assets.

Thus, in Maggio v. Zeitz,¹² a United States Supreme Court case that involved a turnover proceeding, the U.S. Supreme Court noted that such a proceeding "is one primarily to get at property rather than to get at a debtor."¹³  The Supreme Court also states:

The nature and derivation of the remedy make clear that it is appropriate only when the evidence satisfactorily establishes the existence of the property or its proceeds, and possession thereof by the defendants at the time of the proceeding…. [W]e do not consider resort to this particular proceeding appropriate if, at the time it is instituted, the property, and its proceeds have already been dissipated, no matter when that dissipation occurred. Conduct which has put property beyond the limited reach of the turnover proceeding may be a crime, or, if it violates an order of the referee, a criminal contempt, but no such acts, however reprehensible, warrant issuance of an order which creates a duty impossible of performance, so that punishment can follow.¹⁴  (emphasis added)

When determining whether an alleged contemnor has the ability to comply with a court’s order, the court is generally limited to examining the facts and circumstances that exist at the time the order is issued that creates the impossibility on the part of the contemnor.¹⁵  For example, in the Rylander case,¹⁶ the U.S. Supreme Court stated:

In a civil contempt proceeding such as this, of course, a defendant may assert a present inability to comply with the order in question. While the court is bound by the enforcement order, it will not be blind to evidence that compliance is now factually impossible. Where compliance is impossible, neither the moving party nor the court has any reason to proceed with the civil contempt action. It is settled, however, that in raising this defense, the defendant has a burden of production. (citations omitted)¹⁷

Note, however, that while the burden of proving impossibility may be on the party claiming impossibility, the Maggio court stated:

It is evident that the real issue as to turnover orders concerns the burden of proof that will be put on the trustee and how he can meet it. The Court has said that the turnover order must be supported by "clear and convincing evidence," Oriel v. Russell, 278 U.S. 358, and that includes proof that the property has been abstracted from the bankrupt estate and is in the possession of the party proceeded against. It is the burden of the trustee to produce this evidence, however difficult his task may be.¹⁸

Particularly when the sanction to be imposed is imprisonment, the court will require a present ability to perform as of the time of the contempt hearing. For example, in the Bowen case¹⁹ the Florida Supreme Court stated, "[b]ecause incarceration is utilized solely to obtain compliance, it must be used only when the contemnor has the ability to comply."²⁰

The impossibility of performance defense was outlined by the Second Circuit Court of Appeals in the case of Badgley v. Santacroce²¹ as follows:

The purpose of civil contempt, broadly stated, is to compel a reluctant party to do what a court requires of him. Because compliance with a court’s directive is the goal, an order of civil contempt is appropriate ‘only when it appears that obedience is within the power of the party being coerced by the order.’" Maggio v. Zeitz, 333 U.S. 56, 69, 92 L.Ed. 476, 68 S.Ct. 401 (1948). A court’s power to impose coercive civil contempt is limited by an individual’s ability to comply with the court’s coercive order. Shillitani v. United States, 384 U.S. 364, 371, 16 L.Ed. 2d 622, 86 S.Ct. 1531 (1966); Maggio v. Zeitz, supra, 333 U.S. at 72-73. A party may defend against contempt by showing that his compliance is "factually impossible." United States v. Rylander, 460 U.S. 752, 757, 75 L.Ed. 2d 521, 103 S.Ct. 1548 (1983).

In a well-drafted and administered protective trust, neither the settlor of the trust nor any of its beneficiaries will have the ability to comply with a court’s order to repatriate assets. Performance will be "factually impossible." As such, the impossibility of performance defense will be available as a complete defense to any charge of contempt for failing to comply with the court’s order.

These principles are well illustrated in Foust v. Denato²². Therein, the president of a metal construction company (Mr. Foust) was subpoenaed to appear before a grand jury with "all receipt books, receipt stubs and copies of receipts relating to payments of money to (the union) by all individuals assigned to work through said union,…" for a two year period.²³  Mr. Foust appeared before the grand jury without bringing the records and was cited for contempt.

At the hearing to show cause why he should not be punished for contempt, Foust testified that he did not have possession of or access to the records listed in the subpoena duces tecum on that date or any prior date. The requested records were in the exclusive care, possession, custody and control of the person who served as financial secretary, business agent and treasurer of the local union. Foust further testified he did not know where in the union hall the records were kept and that he did not have keys to the union hall or the financial secretary's desk. Foust also testified that he had no intention of disobeying the subpoena insofar as it was possible for him to obey it and that if he had access to the requested records, he "would gladly have brought them down there."²⁴

The court in this case overturned the contempt order on the basis that Mr. Foust had no control over the records and although he might have been able to get possession of the records through action of the executive committee, it was not necessary for him to do so in order to show a good faith effort to comply. The court further stated that no cases require a person to attempt to use physical force to obtain possession of documents or things not in the person’s custody or under his control. Finally, the court stated that the subpoena duces tecum should have been served upon the financial secretary who had the records in his custody and not on Mr. Foust.

Consider also the case of First National Bank of Cape Girardeau v. Lufcy,²⁵ which involves a trustee who offered to turn over all assets of the trust estate but who had insufficient assets in his hands to comply with the court order. Therein, it was determined that the trustee could not be imprisoned for contempt for such would be imprisonment for debt.

Another example is Falstaff Brewing Corp. v. Miller Brewing Co.,²⁶ wherein the defendant was not found in contempt for failing to produce documents over which it had no control. The defendant’s former counsel had taken direct physical possession of the documents during the litigation process and had subsequently lost the documents.


Self-Created Impossibility

As established above, a party cannot be held in contempt of court for failing to produce that which he cannot produce. An exception applies in the case of the self-created impossibility.

In determining whether this exception to the impossibility of performance defense is to apply, courts have looked to factors such as whether the party has acted in good faith; whether the party cooperated with the court by complying to the extent possible; whether the party self-induced the inability to comply at a time when the party anticipated the issuance of the order, and whether sufficient time has elapsed that would dissipate a presumption that the requested documents or assets were out of the possession or control of the party at the time of the contempt proceedings.

The time nexus factor is an important factor. The impossibility defense will not be recognized as a valid defense in those situations where the impossibility to perform was created by the defendant at or about the time the court’s order or subpoena issues.²⁷ In other words, the mere fact that the defendant created the impossibility is not of particular relevance. It is when the defendant created the impossibility that is important.

The court will examine the nexus in time between the date the impossibility was created and the date the court’s order issued. If a time nexus is found between these two dates such that it can be shown by the requisite burden of proof that the defendant knew at the time the impossibility was created that a court order would enter (or a subpoena would issue), the court will likely find that the inability to comply was self-created in bad faith and the impossibility of performance defense will be lost.

An example of a case involving a finding of a self-created impossibility that resulted in the impossibility of performance defense being lost is Ex parte Coffelt.²⁸  In Coffelt the Arkansas Supreme Court found the defendant’s claim that he was unable to comply with an order to return funds to have been ineffective. The defendant disposed of the funds subject to the order one month prior to the issuance of the order and had reason to know the order would be issued at or about the time he undertook to dispose of the funds. As such, the court determined the defense of impossibility of performance to be unavailable.

In contrast, in Federal Trade Commission v. Blaine,²⁹ Blaine claimed he was unable to comply with a court’s order to produce corporate documents relating to a corporation of which he was the president, asserting that he had transferred all of the documents to his attorney five months prior to being served with the subpoena. When the order to produce the documents was issued, Blaine’s attorney returned the documents to him, but several files were missing. After the attorney and Blaine testified they did not know the whereabouts of the missing files, the court denied the petitioner’s motion to hold Blaine in contempt. The court reasoned that the impossibility of performance defense was a complete defense to a contempt charge because although Blaine had earlier disposed of the documents, he was not responsible for the current unavailability of the documents. The court found that Blaine had disposed of the documents in good faith prior to the issuance of the order to produce and thus should not be held in contempt because he could not produce them.

Consider also Ex parte Fuller,³⁰ wherein the Supreme Court of Missouri overturned a contempt citation against the defendant who had failed to pay the plaintiff money which the defendant had received from merchandise sold on consignment. The court stated that:

[I]f the Court had found, on substantial evidence, that petitioner had the proceeds of the sale of the property in his possession or under his control at the time the order directing him to deliver same to the receiver was made, or that he so held the money prior to making of the order, but disposed of or converted it in anticipation of the order and to avoid compliance therewith, such a finding of facts would have authorized the Court’s conclusion that petitioner wrongfully, illegally, and contumaciously misapplied, misappropriated, and converted same to his own use, but the Court made no such finding.³¹

Another case in which the court applied a "contumacious" standard is Van Hoosear v. Railroad Comm’n of California.³²  Here, the court applied a standard of whether the contemnor could be charged with "contumaciously putting [the property] out of his power to obey the order of the commission."³³

Consider also the case of Johnson v. Yoemans & Strickland,³⁴ wherein the Court states "[a]t the time he disposed of the property there was no order requiring him not to do so, and it is not, therefore, proper to punish him for contempt in selling it, and it is just as improper to punish him for contempt, for not obeying the order now that it is impossible for him to do so."³⁵

Ex parte Chambers³⁶ involved an individual who was found not to be in contempt of court because assets were transferred by him before an order concerning those assets was issued by the court. The court stated that "Chambers had no duty to preserve…the assets for the payment of fines to be ordered in the future…[O]ne must have knowledge or notice of the order with which one is charged with violating before judgment of contempt will obtain."³⁷

Similarly, in Berry v. Midtown Service Corp.,³⁸ during a stay of execution on a judgment a defendant disposed of his assets, thereby rendering himself execution proof. Finding the defendant to not be in contempt of court, it was stated that "a party must have violated an express court order before [being] punished for contempt…."³⁹

The time-nexus factor is not one that is unfamiliar in the law of evidence. In Brune v. Fraidin,⁴⁰ the court states "[t]he presumption of continued possession is only as strong as the nature of the circumstances permits. The presumption loses its force and effect as time intervenes and as circumstances indicate that the bankrupt is no longer in possession of the missing goods or their proceeds."⁴¹  The Brune court then cites 31 C.J.S. Evidence, Section 124: "Always strongest in the beginning the inference steadily diminishes in force with lapse of time, at a rate proportionate to the quality of performance belonging to the fact in question, until it ceases or perhaps is supplanted by a directly opposite inference."⁴²

The Brune court also states:

A turnover order is not a money judgment saying that the bankrupt ought to have the merchandise or the proceeds. It is the court’s command that he surrender, and necessarily presupposes the ability to comply. Obviously the court should not order one to do something that was impossible and then punish him for failure to do it. It has been said that such procedure dangerously approaches near the line, if it does not over step it, of imprisonment for debt. If the bankrupt has concealed and then dissipated assets of the estate, punishment should be sought under the provisions of the bankruptcy law relating to making of false oaths or concealment of assets.⁴³

Among other things, the Maggio and Brune courts set forth the principal that courts should look to whether a remedy other than contempt of court ought to be applied. In other words, if a remedy exists under the bankruptcy crimes provisions of the United States Code,⁴⁴ or under applicable fraudulent transfer law, then resort should be had thereto as opposed to punishing someone for something they did but cannot undo.

Asset Protection Planning Principles
and Contempt Law

Under a properly drafted, properly implemented, and properly administered planning structure, creation and funding will take place well in advance of any dispute or claim that may give rise to proceedings in which a court order compelling action or the like will issue. The same applies with respect to any action by the trustees in diversifying assets out of the jurisdiction in which the threat against the settlor is developing. In addition, if and when ordered by the court to take or carry out any act, the person subject to the order and who is subject to the jurisdiction of the court would be well-advised to take any and all steps designed to comply with the order, and to adequately document all such efforts. In the event any person is ordered to pay trust funds over against the terms of the trust, the foreign trustee should consider making an application for direction to a court local to it. An order to the foreign trustee directing that it NOT pay over trust assets would be an important factor in determining impossibility of performance.

The concept and role of the trust protector is often incorporated into offshore trusts. Very importantly, the nature and extent of protector powers will vary from trust to trust, depending on design. Related to this point and also of extreme importance is that there are various gradations of power. Powers as designed in a trust need not be either absent or full and absolute. In other words, and by way of example, a power to veto distribution of trust funds does not mean that the power holder can compel the trustees to turn trust assets over to a judgment creditor of the settlor.

In many cases, the settlor of the trust is the protector, at least initially. Powers typical of this position are the power to veto certain actions of the trustees, and the power to remove and replace trustees. Thus, the role of the protector is often more of a passive one rather than an active one, due to the protector having "negative" rather than "affirmative" powers. These are important distinctions recognized by the court in Anderson,⁴⁵ as quoted below under the discussion of that case.

American law is replete with other examples of situations wherein it is recognized that negative powers are not the same as positive powers, and that negative powers are not tantamount to control.⁴⁶

Trusts with asset protection goals will almost always contain a "duress clause." This clause provides if someone has a power, whatever it may be, it may only be validly exercised as a voluntary act; a power exercised as a result of duress is not an effective exercise of the power. Thus, by way of example, if the protector is still in office during the course of litigation, and if the protector is ordered to remove and replace trustees, under the terms of the trust the power to do so under such circumstance never existed at all. In any event, in such a situation the protector would be well advised to be "diligent and energetic" in attempting to follow the court’s order, and to take all reasonable steps within his power in the interest of compliance with the court order.⁴⁷

In the event a litigation threat arises against the settlor or the trust, important issues requiring immediate consideration include whether the protector should remain in office, and whether there should then be a successor protector in office. This is particularly the case if the settlor is the protector. While the duress clause itself renders powerless any person having a power (whether those powers are negative or affirmative in nature), the more cautious approach as litigation looms is for any power holder (protector or otherwise) to be in another jurisdiction. In this fashion, issues concerning what controls existed when a court order was handed down or was expected, and by whom were they then held, should not arise.

The Anderson Case

The appellate decision in FTC v. Affordable Media,⁴⁸ (commonly referred to as the Anderson case) resulted in Mr. and Mrs. Anderson being incarcerated for a number of months for contempt of court. Briefly, the reason the Andersons were incarcerated is that under the design of the foreign trust they settled, they in fact had the power to cause the trust to pay funds over to the court as and when the court ordered them to do so. When they did not exercise their powers in a fashion designed to bring about compliance, they were found to be in contempt of court. This result is entirely consistent with principles of the law on contempt of court as discussed hereinabove.

As of the date of this writing, the Andersons are no longer incarcerated, and no funds have been paid out by the foreign trustee. In September of 1999, the Anderson court modified its contempt finding to provide an alternative to the repatriation of the funds. In its Modification Order⁴⁹ the court stated an alternative to repatriation would be for the Registrar of the High Court of the Cook Islands to "be made a joint signatory of the Trust Account." This alternative to the repatriation of funds provides a very useful precedent for matters of this nature that may arise in the future.

The facts of Anderson are as follows: Michael and Denyse Anderson were involved in litigation with the Federal Trade Commission over what the appellate court called "a classic Ponzi scheme." Through the course of the proceedings they were ordered to produce certain financial information, which they did not cooperate in producing. They were also ordered to repatriate funds held overseas in a Cook Islands trust they had settled. When the funds were not returned to the United States, the Andersons were incarcerated in a Las Vegas, Nevada jail on federal contempt charges.

The Andersons named themselves as co-trustees of the trust they settled, along with a trust company in the Cook Islands. Later, it was revealed to the court that they were also the protectors of the trust. Why this design was utilized is not understood by the authors, and is not a design the authors would advise.

After the Andersons were ordered by the court to repatriate all assets held outside the United States, the Andersons faxed the Cook Islands trustee and instructed it to provide an accounting and to repatriate the trust assets. The Cook Islands trustee then notified the Andersons that the court’s order was an event of duress, removed the Andersons as co-trustees, and then refused to provide an accounting or repatriation of the assets. In other words, the Andersons’ fax to the foreign trustee, sent after the court’s order issued, is what led to performance by the Andersons being impossible. The Andersons thus created the performance impossibility in close nexus to (indeed, after) the court issued its order; performance was not impossible at the time of the court’s order. Accordingly, the Andersons were not able to satisfy their burden of proof as to impossibility.

A fatal flaw in the design of the Anderson trust is described by the court in a footnote to the appellate decision. There, the court writes:

The provisions of the trust also make clear that the Andersons’ position as protectors gives them control over the trust. In provisions of the trust agreement that the Andersons conveniently fail to reference, the trust agreement makes clear that the Andersons, as protectors, have the power to determine whether or not an event of duress has occurred…. Moreover, the very definition of an event of duress that the Andersons assert has occurred makes clear that whether or not an event of duress has occurred depends upon the opinion of the protector…. Therefore, notwithstanding the provisions of the trust agreement that the Andersons point to, it is clear that the Andersons could have ordered the trust assets repatriated simply by certifying to the foreign trustee that in their opinion, as protectors, no event of duress had occurred.⁵⁰ (emphasis added)

As mentioned above, the Anderson court itself recognized the difference between the protector having negative powers, and the protector having affirmative powers such as the affirmative power to determine whether or not an event of duress had occurred. The court states "[a] protector can be compelled to exercise control over a trust to repatriate assets if the protector’s powers are not drafted solely as negative powers to veto trustee decisions or if the protector’s powers are not subject to the anti-duress duress provisions of the trust."⁵¹

Concerning the Andersons’ control over the trust they settled, which control continued even as the Andersons were ordered to repatriate trust assets, the court writes:

Perhaps the most telling evidence of the Andersons’ control over the trust was their conduct after the district court issued its temporary restraining order…. After the Andersons claimed that compliance with the repatriation provisions of the temporary restraining order was impossible, the [F.T.C.] revealed to the court that the Andersons were the protectors of the trust. The Andersons immediately attempted to resign as protectors of the trust. This attempted resignation indicates that the Andersons knew that, as the protectors of the trust, they remained in control of the trust and could force the foreign trustee to repatriate the assets.⁵² (emphasis added)

Under the facts and circumstances of the Anderson case, and in particular under the design of the Anderson trust, it is no surprise that the Andersons were jailed for contempt of court and that impossibility of performance was unavailable as a defense. As discussed above, the Andersons as their own trustees and protectors had the power to repatriate the subject funds as of the time of the court’s order.

The Anderson court raises an interesting question when, in dicta, it states:

[W]e are not certain that the Andersons’ inability to comply in this case would be a defense to a finding of contempt. It is readily apparent that the Andersons’ inability to comply with the district court’s repatriation order is the intended result of their own conduct—their inability to comply and the foreign trustee’s refusal to comply appears to be the precise goal of the Anderson’s trust.⁵³

Does this mean that a new, "natural consequences" standard now applies under 9^th Circuit contempt law? Or did the court possibly desire a chilling effect on the whole bunch due to one bad apple? The latter appears to be a distinct possibility. Later in the opinion, the court says: "We leave for another day the resolution of this difficult question because we find that the Andersons have not satisfied their burden of proving that compliance with the district court’s repatriation order was impossible."⁵⁴

It has been said that "bad facts make bad law," and that Anderson is just another example of this old adage. The authors disagree, and continue to be of the view that Anderson is a case wherein bad facts led to an unfortunate result that was nevertheless appropriate and consistent with American contempt law. Proper asset protection structures are designed to take contempt law into consideration. It does not appear that such was the case with the trust the Andersons settled.

Having stated this, it is interesting to note that to date, the trust settled by the Andersons remains intact. The Federal Trade Commission in fact brought proceedings in the Cook Islands in an attempt to "bust the trust." Not only was the F.T.C. unsuccessful in this effort, but the Cook Islands court assessed costs of the proceedings against the F.T.C. While the overall Anderson plan did not work well for the Andersons, the trust continues to protect the subject assets.

An "Opinion on an Order Adjudicating Debtor In Civil Contempt…" in the case of In re: Stephan Jay Lawrence, Debtor was issued on September 8, 1999.⁵⁵  As a result of this opinion, Mr. Lawrence was incarcerated for contempt of court.

Mr. Lawrence was released two days later due to procedural difficulties with the contempt finding. The reason Mr. Lawrence was incarcerated is that Mr. Lawrence lied to the courts throughout his proceedings, and the court was therefore unable to find him credible when he claimed he could not repatriate trust assets. This result is entirely consistent with principles of the law on contempt of court.

The facts of this case are particularly egregious. Following the stock market crash of October 19, 1987, the Debtor and his companies experienced a margin deficit with Bear Stearns. Within weeks of an arbitration award in excess of $20,000,000.00 being entered against Mr. Lawrence, he created and funded an offshore asset protection trust. As the Court puts it in an excerpt from proceedings held on July 23, 1998:

Now, I would like to put things in simple terms. Let’s talk about what happened here. We had a debtor, big time debts, big time litigation with Bear, Stearns, went on for 42 months, ultimately a $20 million, roughly, judgment in place, 42 months of that. Within a few days of that a…transfer to a trust in a place called Mauritius.

The debtor in these proceedings, Mr. Lawrence, looked me in the eye when I asked him to and lied through his teeth.

But the thing is, Mr. Lawrence - - look at me, Mr. Lawrence. The thing is you lied to me.

I will refer the matter to the attorney, U.S. Attorney and I’m sure from there it will go to the FBI. I think also there will be a proceeding for perjury under which Mr. Lawrence you will probably go to jail.

I have no doubt that this will hold up and I have no doubt that you will never get a discharge and also, your case will never be dismissed. You’re going to have this debt forever.

…you’re not going to get away with this and you’re never going to get a discharge. You’re probably going to go to jail and you’re probably going to be watched forever.

"[My] order will indicate that [you are]to turn over [your] passport tomorrow. Forfeiture for this will be all assets that [you] may have in the United States if [you leave].

The Court found Mr. Lawrence completely lacked any credibility whatsoever, and accordingly found it not credible that Mr. Lawrence was unable to obtain funds he claimed to have previously settled in trust. In this Opinion, the Court notes that:

[t]he terms of the Turn Over Order…required the Debtor…to, inter alia, turn over to the Chapter 7 Trustee the res of the putative Lawrence Family 1991 Inter Vivos Trust…(hereafter the "Alleged Trust"), and to provide a full accounting of all transactions in respect of the Alleged Trust.⁵⁶

The Court, having quite an extensive institutional memory of this case, has reviewed the record in both the main case and in the adversary proceeding previously commenced by the Trustee against the Debtor…and has considered the testimony of the witnesses at the Status Conference and the argument of counsel, and being otherwise fully advised in the premises, hereby incorporates herein by reference all of the findings and rulings entered in the record on August 26, 1999 by Judge Utschig and Judge Utschig’s findings and rulings in In re Lawrence, 227 B.R. 907 (Bankr. S.D. Fla. 1988)….⁵⁷

The Court then stated it concurred "with the previous findings by Judge Utschig that the Debtor is not credible…."⁵⁸  In a footnote, the Court explains that:

[t]his Court has previously had the opportunity to observe the demeanor and candor of the Debtor in evidentiary proceedings before this Court. In each of the two prior instances in which the Debtor has testified before this Court, the Court has specifically made findings that the Debtor’s testimony [is] not credible and not believable…. The Court notes that Judge Utschig has made similar findings concerning the Debtor’s testimony before Judge Utschig.⁵⁹

A number of examples of Mr. Lawrence’s lack of credibility are cited in a decision entered on the "Trustee’s Motion to Compel Answers to Interrogatories Pursuant To Federal Rule of Civil Procedure 37 and Federal Rule of Bankruptcy Procedure 7037…"⁶⁰  These include: 61 62 63 64

The Court in these previous proceedings stated the "hearing continued over a three (3) day period during which [the] Court had a unique opportunity to observe the Debtor, who was the sole witness.…[The] Court endured eleven hours of what can candidly only be described as disingenuous and untruthful testimony from the Debtor….[O]ver the course of the Debtor’s testimony he committed perjury on several occasions."⁶⁵  In view of Mr. Lawrence’s complete lack of credibility, the Court was not able to believe that Mr. Lawrence was not able to repatriate the assets and Mr. Lawrence was thus found in contempt of court.

In some rather interesting language the Court then states its findings are based as well on "…the Court’s own common sense: it defies reason—it tortures reason—to accept and believe that this Debtor transferred over $7,000,000.00 in 1991, an amount then constituting over ninety percent of his liquid net worth, to a trust in a far away place administered by a stranger…."⁶⁶

At the time of this writing it is uncertain whether language of this nature contributed to the procedural difficulties that resulted in Mr. Lawrence being released after two days. It does appear that language of this nature once again proves that the bankruptcy bench is comprised of more bankruptcy attorneys than estate planners! In any event, while under the exigencies of Mr. Lawrence’s situation he may have been willing to trust a stranger in a far away land, such trust is not an element common to usual plans. Such plans do not so much involve one trusting a stranger in a distant land as they involve one trusting his or her professional team, typically comprised of domestic professionals and their foreign counterparts.

In view of this fact, the foreign trustee would have been well advised to apply to a local court to it for direction, as discussed above under the first paragraph of Asset Protection Planning Principles and Contempt Law.

Another interesting aspect of this Lawrence decision is how the Court, in dicta, misstates the law on contempt of court. Having already determined Mr. Lawrence to be in contempt of court due to the Court’s determination that he wholly lacked any credibility, in rather simplistic terms the Court states that:

[w]hile impossibility is a recognized defense to a civil contempt order, the law does not recognize the defense of impossibility when the impossibility is self created…..Since the provisions [of the trust] which he now relies upon in order to substantiate his inability to comply…were of his own creation, he may not claim the benefit of the impossibility defense.⁶⁷

The Court indeed paints with too broad a brush when it comes to its succinct summary of contempt of court and the law on the self-created impossibility. This broad-brush précis is neither a complete nor an accurate description of the impossibility defense and the self-created impossibility. The reader is referred to the other portions of this article.

Mr. Lawrence may, or may not, find himself incarcerated once again. This will, of course, depend on a resolution of the procedural issues that resulted in his being released after two days, as well as on the current substantive challenge to his being found in contempt. Regardless of what may happen to Mr. Lawrence, each and every case must stand or fall on its own facts and circumstances. In the view of the authors, the facts and circumstances of Lawrence, and indeed Anderson, have little or nothing to do with the typical integrated estate plan. These decisions do not provide new developments in the law of contempt, and are precedent only for cases similar thereto.

In Contrast To Anderson and Lawrence …

The reader will likely be interested in some language from a transcript of 1995 Contempt Proceedings involving a client of the authors’ firm and the trust settled by the client. Under the facts and circumstances of that case, the judge stated:

I’ve reviewed the law regarding contempt and the standards that are required for me to hold Mr. [X] in contempt. That standard is clear and convincing proof, which means something more than preponderance of the evidence but something less than absolute certainty.

One thing I’ve learned a long time ago as a judge, you never order something you can’t enforce. And if we order him to pay a million dollars, I have to be assured that’s a reasonable order. As a matter of fact, contempt law says that one should not issue orders that cannot be complied with. It’s a violation of due process to issue orders that the respondent cannot comply with.

I’d look pretty silly if I entered orders that couldn’t be enforced.

There’s case law to the effect that if we issue a compliance order that the respondent does not have the ability to comply with, that’s punishment and violation of due process.

By putting him in prison, that doesn’t compel compliance, because he does not have the ability, apparently, to comply.

An interesting philosophical question arises out of all of this. Assume you have worked hard for many years building your law practice, and you have somehow managed to carve out a nice nest egg for retirement. Assume further that due to some reason or another, you are forced to make the awkward choice between being incarcerated for a period of time, or losing your retirement nest egg and having nothing. What would you do? Well, regardless of your decision, neither general principles of contempt law, nor Anderson, nor Lawrence means that clients interested in being pro-active in their wealth planning must answer this question. But, one thing all readers can certainly agree on – this is indeed an interesting question to ponder.

If contempt law really was a tool courts could be expected to utilize in the typical case, the authors suspect we would have seen it used before. After the passage of twelve or more years, we have now seen only two cases in which contempt powers were utilized. One of these cases involves noncompliance when compliance could have taken place. The other of these two cases involves a fraudster who was absolutely devoid of any believability.

There is little a planner can do to protect a client from a "judge gone mad." There is much a planner can do to protect a client against an improper plan design or to at least advise a client on the risks associated with incorporating unprotective plan design features (a la Anderson) that the client may for some reason wish to use in the overall plan. There is also much a planner can do to caution against improper funding or administration of a planning structure, and to caution a client against dishonest testimony that will likely taint other aspects of the case against the client.

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