High net worth individuals are loathe to transfer assets to any entity over which they have no control. This fact creates an unresolvable problem when forming an offshore asset protection trust: so long as a U.S. person can exert even a modicum of control over a foreign entity, a U.S. court has sufficient grounds to rule that a U.S. based debtor can repatriate assets. More importantly, failure to comply with a repatriation order could lead to contempt citation against the U.S. debtor. The facts of Federal Trade Commission v. Affordable Media typify this problem.
In 1995, the Andersons formed a Cook Island asset protection trust that had the following three features:
In 1997, the Andersons formed and ran a late-night television Ponzi scheme, which the Federal Trade Commission began attacking one year later. One of the FTC’s first actions was to obtain a temporary injunction against the Andersons, which included a demand that the couple repatriate foreign funds. The Andersons attempted to comply, asking their co-trustee to disgorge assets. However, the co-trustee did not comply. Instead, it determined that the court order was a “duress event,” leading them to remove the Andersons as co-trustees. The couple then told the court they tried to comply with the court’s order, but couldn’t.
The preceding paragraph contains a picture perfect fact pattern explaining the purpose of anti-duress clauses. Asset protection planners add these clauses to foreign trust documents, hoping they will be sufficient to blunt a domestic court’s contempt powers;
Another common issue is whether the client may someday be in the awkward position of either having to repatriate assets or else be held in contempt of court. A well-drafted asset protection trust would, under such a circumstance, make it impossible for the client to repatriate assets held by the trust. Impossibility of performance is a complete defense to a civil contempt charge.
This excerpt perfectly describes what the Andersons did.
The court treated the Anderson’s actions more as Kabuki Theater than a serious attempt to follow the court’s instructions. They first noted, “Foreign trusts are often designed to assist the settlor in avoiding being held in contempt of a domestic court while only feigning compliance with the court's orders.” The court continued,
With foreign laws designed to frustrate the operation of domestic courts and foreign trustees acting in concert with domestic persons to thwart the United States courts, the domestic courts will have to be especially chary of accepting a defendant's assertions that repatriation or other compliance with a court's order concerning a foreign trust is impossible. Consequently, the burden on the defendant of proving impossibility as a defense to a contempt charge will be especially high.
This cite is especially damning to the asset protection planning community. In no uncertain terms, the court is clearly informing planners that judges view duress clauses as illusory concepts devoid of legal substance. They allow a U.S. debtor to feign compliance with a court order, all the while knowing that their actions are meaningless. Although courts have to give duress clauses some weight, they will also enact and use an “especially high” compliance requirement on U.S. debtors who attempt to use them.
The court also ruled that because the Andersons were trust protectors, they could remove the trustee and replace them with a more malleable alternative. This was sufficient justification for the court to rule the couple was in contempt, despite their “attempt” to failed effort to repatriate assets from the Cook Islands. The court clearly demonstrated that they would not allow a U.S. debtor to use a well-drafted trust document to thwart a U.S. creditor’s attempts to collect monies owed.
In addition to greatly limiting the efficacy of duress clauses, this case also stands for the proposition that so long as a U.S. debtor can exert any influence over an offshore trust -- even if remotely tangential – the court has grounds to rule against the debtor. This creates a large problem for planners, because no U.S. individual will place his assets into an offshore entity without retaining control. But that control will eventually prove fatal should a court rule the grantor is in contempt of court.
 Federal Trade Commission v. Affordable Media, 179 F.3d 1228 (9th Cir. 1999)
 Id at 1241
In Re: Portnoy — a 1996 Bankruptcy case – was the first in a series of decisions with a foreign asset protection trust. As with most foreign trust cases, the fact pattern alludes to several areas of law – asset protection, bankruptcy, conflict of laws and trusts. Here are the relevant events in chronological order.
Two points should be made before discussing the case’s legal reasoning.
First, Portnoy formed the trust after becoming aware that MD could not repay the loan. The court specifically noted this timing because it was clearly a fraudulent transfer. Although the court did not connect this fact to specific badges of fraud contained in the Uniform Fraudulent Transfer Act, several are possible. For example, Portnoy concealed the transfer, only revealing it during bankruptcy proceedings 5 years after the trust’s formation. In addition, as part of a unified series of transactions, Portnoy transferred most of his assets to the trust or family members, essentially bankrupting himself in the process.
Second, to attract asset protection business, some international offshore financial centers have amended their statutes to be more lenient towards debtors. Hoping to capitalize on the friendlier legal environment, planners add a clause to transactional documents stating offshore laws will govern the transaction. But these clauses aren’t the final choice of law arbiter; that rests with the court using the Restatement of the Conflict of Laws. In fact, several foreign asset protection trust cases – including Portnoy — ruled against the debtor due to the conflict of laws analysis.
The court ruled against Portnoy and his structure. The decision contains two important lines of reasoning; the first focused on the choice of law analysis, which required the court to determine whether Jersey or New York law would govern their interpretation. It began with the court noting that settlors are allowed to specify which laws govern their trusts and, that this should not be defeated “…unless this is required by the policy of a state which has such an interest in defeating his intention, as to the particular issue involved, that its local law should be applied.” Later in the case, the court observes, “`[i]t is against [New York] public policy to permit the settlor-beneficiary to tie up her own property in such a way that she can still enjoy it but can prevent her creditors form [sic] reaching it.”
The importance of the preceding line of reasoning cannot be overstated: it strongly implies that planners attempts to invoke the laws of a debtor favorable jurisdiction will be defeated if the jurisdiction hearing the case has a public policy preventing a debtor from enjoying his assets at the expense of his creditors. Courts use this rationale in later asset protection trust cases, almost always to the debtor’s detriment.
The second important line of reasoning involved the court’s Conflict of Law’s factor analysis used to determine “the state whose interests are more deeply affected” – a factor in a Conflict of Law analysis. Here, the court noted that Portnoy settled the trust in Jersey, and had a Jersey firm administer the trust. But they then observed that all parties were U.S. residents. Additionally, the creditors had no contact with Jersey while Portnoy had extensive U.S contact when he established the trust. Due to the large number of U.S. contacts, the U.S. had the “weightier concern” about the litigation, thereby allowing the court to base its decision on U.S. law.
This part of the ruling shows the importance of “home court advantage.” Despite the assets being subject to a foreign jurisdiction, the parties are physically located in the U.S. Just as importantly, the creditors have no contact with trust’s jurisdiction. Here, the court ruled that the large number of U.S. contacts shifted the factual weight, meaning the court ruled for the U.S creditors. Finally, Portnoy’s jurisdictional contact pattern — an individual or group of U.S. based creditors sue a U.S. resident who has assets offshore – is very common in foreign asset protection trust cases.
Portnoy’s general reasoning laid a very strong groundwork for future court’s deciding FAPT trust cases. Future courts would decide against FAPT holders on several other grounds, but at the core of future reasoning is a general disdain for debtors who try to structure their affairs in a way to defrauds creditors. It’s simply not a practice that courts want to condone through their decisions.
 In re Portnoy, 201 B.R. 685 (Bankr. S.D.N.Y., 1996)
 (“An inference can be drawn that the timing was purposeful, for in June, two months before the trust’s creation, Portnoy knew that Mary Drawers was in trouble and by December of that same year, Mary Drawers had defaulted on its obligations to Marine.”)
 UFTA §4(b)(7) the debtor removed or concealed assets
 UFTA §4(b)(5)
 UFTA §4(b)(9)
 Portnoy at 698
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