Volume XVII, Number 1 – January 2008
© Donlevy-Rosen & Rosen, P.A.
CONTEMPT OF COURT:
Will I Go To Jail If I Establish An Offshore Trust?
INTRODUCTION. The short answer is “no”. However, because of two cases, Anderson and Lawrence, a “chicken little – sky is falling” mentality has emerged among misguided planners and those with an agenda to pursue. Civil contempt incarceration in the context of asset protection planning has been the subject of a tremendous amount of commentary. Some writers seem to have “an axe to grind” in this regard, as they present half-truths and innuendos as if they were the law. Most of the information is cursory and paints the contempt issue with a broad brush to the effect that if you establish an offshore asset protection trust, you will inevitably be incarcerated. Nothing could be further from the truth. This issue examines the actual law on the subject.
BACKGROUND. What is “contempt”? The law of contempt emanates from circumstances where a court orders a party to either do something or refrain from doing something, and the party disobeys. The party is then said to be “in contempt of court”. Contempt can be of a criminal or civil nature, and this issue will only address coercive (as opposed to remedial) civil contempt as it relates to asset protection planning. The typical coercive civil contempt sanctions are per diem fines and/or open-ended incarceration. The sole purpose of those sanctions is to force compliance with a court order. The theory being that the offending party can terminate the sanction by compliance with the order.
THE (ACTUAL) LAW. In order for a U.S. court to incarcerate a party for contempt for failing to repatriate the assets of an asset protection trust when ordered to do so, the following must be proven by clear and convincing evidence: the offending party must be shown to have present possession or controlof the asset sought. The burden of proof is on the party seeking to reach the asset. The seminal case in this area is Maggio v. Zeitz, decided by the U.S. Supreme Court in 1948 (from a long line of cases of similar holdings). Maggio addressed the impossibility of performance issue, even including a self-created impossibility, and held, regarding placing assets beyond the reach of the bankruptcy court, that: “…no such acts, however reprehensible, warrant issuance of an order which creates a duty impossible of performance, so that punishment can follow.” In other words, in order to incarcerate a party for civil contempt, it must be possible for the party to comply with the court order, and the party fails to do so. Another U.S. Supreme Court case (Rylander) followed this reasoning when the Court held in 1983 that a court cannot be blind to evidence that compliance with a court order is impossible. Many asset protection “advisors” are either unaware of these cases or fail to correctly understand their true meanings. However, in order to properly advise a client on offshore trust planning, Maggio and Rylander must be accurately understood, as they continue to be the law in the United States. The fact that it can be shown that the party had possession or control of the asset sought at some prior point in time is not relevant; it must be shown that the party had possession or control at the time of the court’s order or that the party created the impossibility of performance in direct anticipation or as a result of the court’s order. The “self-created” impossibility defense is often misunderstood. It is frequently said that impossibility of performance is a defense to a contempt citation unless the party claiming impossibility created the impossibility. This is not accurate. In order for a self-created impossibility (such as establishing an asset protection trust) to fail as an impossibility defense to a contempt order, the impossibility must have been created in direct anticipation or as a result of the court’s order. That is, there must be a very close connection in time between the creation of the impossibility and the court’s order.
Court decisions have consistently held that civil contempt incarceration can only be used to obtain compliance with a court order – it cannot be used to punish, and, it can only be used when the party subject to the court order has the present ability to comply. Incarcerating a party for failing to comply with an order which is impossible to comply with is punishment and, under the law set forth by the U.S. Supreme Court, cannot be done.
ANDERSON & LAWRENCE. In Anderson (See, APN Vol. VII, No. 2), the settlors were the trust protectors, with complete control over the trust. Their contempt incarceration was proper, and resulted from poor structuring of their trust – they retained too much power over the trust. In a properly structured asset protection trust, it is never a good idea to permit the settlor (the creator of the trust) to retain any power over or with respect to the trust, other than a testamentary power (one which can only be exercised in a will). In Lawrence, because of discovery violations which offended the bankruptcy court, a default judgment was entered against Mr. Lawrence. As a result of the entry of the default judgment, Lawrence was [legally] deemed to have admitted that he had control over his trust(which he actually did as a result of his retained power to remove and replace trustees). Since he had admitted he retained control over his trust, the bankruptcy trustee obtained a court order requiring Lawrence to “turn over” the assets of the trust to the bankruptcy trustee. When he failed to turn over the trust assets, he was incarcerated for contempt. Before the entry of the default judgment, the burden of proving by clear and convincing evidence that compliance with the turn over order was possible was on the bankruptcy trustee; once the default was entered, however, the significant burden of proving the impossibility defense (proving a negative) shifted to Mr. Lawrence. Once again, the contempt incarceration was (at least initially) proper, as the trust was incompetently drafted giving Lawrence great control over the trust, and Lawrence had [legally] admitted control over the trust.
CONCLUSION. Consider this: Since 1984, when the Cook Islands ushered in the modern asset protection trust era, thousands and thousands of asset protection trusts have been implemented. Contempt incarceration has only occurred in two reported cases – and it was proper in each case. Will you be incarcerated if you establish an offshore asset protection trust? The answer is decidedly no, if the trust is competently drafted and implemented at a time when there is no court order pending or anticipated. Use experienced, qualified counsel to avoid such problems.