U.S. Appeals Court Orders Settlor of Foreign A.P.T. Imprisoned “Indefinitely” But Not “Forever”

Nathaniel K. (Nathan) MacPherson and Donald W. (Mac) MacPherson

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Cititrust EDGE Magazine 1Q 2012 (January 2012): 6-7.

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A good example of the U.S. federal courts’ Draconian doctrine applied to settlors of a foreign asset protection trust is the case of Stephan Lawrence, [1] who parked $7 million in, presumably, the Republic of Mauritius, just two months prior to a $20.4 million arbitration judgment against him. Six years later, Lawrence attempted to discharge the judgment in the Miami, Florida, bankruptcy court, but the bankruptcy trustee challenged the debtor’s claim that trust assets were not part of the bankruptcy estate. In applying Florida law rather than the law of Mauritius, as chosen by the trust instrument, the court found the assets as property of the estate, and later ordered Lawrence to turn over the assets to the bankruptcy trustee. Lawrence claimed impossibility – the foreign trustee, not Lawrence, was in control. The court found otherwise and ordered, under its civil contempt power, the debtor incarcerated pending compliance. The district court affirmed the turn over and contempt orders, and the 11th Circuit affirmed, holding that Lawrence self-created his impossibility, and his imprisonment “may continue indefinitely, [but] it cannot last forever.”[2]. The U.S. Supreme Court refused to hear an appeal.[3]

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You see, imprisonment for civil contempt is not, after all, punishment. No, far from it, it is a means of coercion. The purpose is not to punish; rather, it is to obtain the objective sought. At such time as the court finds that it “has lost its coercive effect” [4] the court is obligated to release the contemnor. Also, the court should make such review “at reasonable intervals” which can be “after many months, or perhaps even several years.” [5] Indeed, Lawrence had already served 2.5 years before his appeal was decided. Consider – the burden is on the contemnor to prove impossibility; and the standard of review on appeal is clearly erroneous, a tough row to hoe. Here the lower courts found the debtor’s “testimony was not credible and that the trust documents did not preclude his exercise of control over the trust.” [6] This case is a testimonial of the need for competent professional advice, and witness the salient facts, in chronological order:

   

• Trust was settled during the arbitration proceeding.

• Trust amended with a duress/coercion clause, and Lawrence’s life interest would terminate in event of bankruptcy.

• Trust amended, Lawrence as “excluded person,” proscribing forever his status as beneficiary.

• Trustees’ “Declaration of Intent,” declaring excluded status as irrevocable.

 

This last point was given no effect by the courts because it was post-bankruptcy, thus in violation of the stay order. The lower court “found that Lawrence had control over the Trust, through his retained powers to remove and appoint Trustees and to add and exclude beneficiaries.” [7] The 11th Circuit relied heavily on a similar case decided by the 9th Circuit in which husband and wife, the Andersons, alleged Ponzi scheme perpetrators, created a trust in the Cook Islands which contained a duress clause – the couple would be terminated as co-trustees and replaced by a foreign trustee who would have full, exclusive control. [8] After the court turn over order, the Andersons, as protectors, ordered the foreign trustee to keep the funds in the Cook Islands for reason of duress, which he did. The Andersons, as trustees, were removed by the foreign trustee, whereupon the couple claimed impossibility. Not impressed, the circuit court affirmed the contempt holding, finding that here the protector powers were significant because it enabled the Andersons to appoint a new trustee. And the court found that the APT “was designed to frustrate the power of the courts to enforce judgments.” Thus imprisonment for contempt, aka coercion, was the remedy applied.

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The Lawrence case evidences the adage, “Bad facts make bad law.” The fact that he settled his trust during the arbitration is evidence enough to hold him accountable under the “trust to defraud creditor doctrine,” a stand-alone doctrine and one encompassed within the Uniform Fraudulent Conveyance Act adopted by many states. No doubt the bad timing evidences Lawrence’s intent to defraud present or future creditors, whether or not the arbitration award was yet “choate.” Lawrence was released after seven years – coincidentally, a year for each million concealed. As for the Andersons, we learn that the plaintiff – the federal government – agreed to the couples release from prison after six months, and agreed to litigate in the trust situs, the Cook Islands. The issue: do the Andersons hold an interest in the trust assets? Stay tuned.

 

[1] 279 F. 3d 1294 (11th Cir. 2002).
[2] Id at 1300, quoting U.S. v. Jenkins, 760 F.2d 736, 740 (7th Cir. 1985).
[3] Lawrence raised, inter alia, a claim of Fifth Amendment right against self- incrimination – production of the assets would constitute an admission that he was hiding assets, a crime under the bankruptcy law.
[4] Id.
[5] Id., fn 18, quoting Jenkins, supra.
[6] Id. at 1299.
[7] Id.
[8] F.T.C. v. Affordable Media, LLC, 179 F.3d 1228 (9th Cir. 1999)(Andersons).

 

About the Authors:
Nathaniel K. (Nathan) MacPherson spent nearly four years as an international finance lawyer in Frankfurt and London representing global banks and finance ministries in cross-border securitization, factoring, and derivatives transactions before heading the California office of The MacPherson Group, P.C. Nathan represents, inter alia, German companies with U.S. subsidiaries, U.S. citizens and expatriates with civil and criminal tax problems, and foreign nationals with U.S. tax issues. Nathan is fluent in German and conversant in Brazilian Portuguese and has lived and worked in four countries on three continents.

Donald W. (Mac) MacPherson is a civil and criminal litigator with 33 years of experience, including 55 trials.