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This is the fifth entry in my series on foreign asset protection trust failures. It shares a number of facts with the other cases. This are:
Bilzerian claims he no longer has any assets. As noted above, the Court does not believe this claim. However, even if the claim were true, Bilzerian has not established an inability defense, as he admittedly created his alleged inability himself. With full knowledge of the existence of the Court's disgorgement judgment, he voluntarily chose to transfer his assets to the Family Trust and the Children's Trust. If he cannot convince the trustees or Trust protector to return his assets to him, it is a problem of his own making. See. e.g., Piambino v. Bestline Products, Inc., 645 F.Supp. 1210, 1215 (S.D.Fla.1986) (finding that attorneys who had dissipated disputed funds rather than set them aside pending resolution of the dispute had created their own inability to comply and therefore had not established an inability defense); United States v. Lay, 779 F.2d 319, 320 (6th Cir.1985) (upholding district court's contempt finding where defendant consciously induced his purported inability to comply by divesting himself of assets through property conveyances to family members). To allow Bilzerian to avoid the Court's disgorgement Orders through his contumacious conduct would render both the Court's Orders and the SEC's enforcement power meaningless. See SEC v. AMX Int'l, Inc., 872 F.Supp. 1541, 1545 (N.D.Tex.1994). The one potential saving grace for asset protection planners is that here, as is the case with most of the other FAPT trust failures, the taxpayer established the trust when a potential creditor existed. This is clearly in violation of the fraudulent transfer doctrine. That fact, combined with the unsavory character of this and other defendants in the FAPT failure cases, likely prejudiced the judge against the grantor. But there are now multiple cases standing for the proposition that a self-created structure preventing payment to creditors disallows the impossibility defense in response to a contempt charge. This greatly limits one of the primary drafting tools to create a foreign asset protection structure. Long ago, attorneys that drafted foreign asset protection trusts (FAPTs) recognized that a court could eventually force their client to disgorge assets. They used several strategies to prevent an actual payout. A “duress clause” – which I discussed in my last post – was one such tactic. Another was to place assets into a family member’s name -- a tactic was used in Solow. But like the taxpayer in Lawrence, Solow lost, invalidating this structure.
The following transactions are at the heart of this case.
The SEC sued Solow, alleging he engaged in a fraudulent trading scheme. After losing, Solow faced $5.2 million in damages. Solow asserted the impossibility defense, arguing he owned no assets. The court ruled against Solow, first noting, “where assets are held in an offshore trust, the ‘burden of proving impossibility as a defense to contempt will be especially high.’” By the time of the Solow decision, courts had come to view these trusts suspiciously, believing they allowed debtors to run up exorbitant debts only to claim poverty when the bill comes due. Not wanting to be seen as aiding unscrupulous behavior, courts had developed a jaundiced view of these structures. The court next concluded that Solow “failed to demonstrate that he had made in good faith all reasonable efforts to comply with the court’s disgorgement order.” Solow had paid the court a little under $3,000 over a six-month period -- a paltry amount in relation to the total judgment. He hoped that by placing marital assets into his wife’s name – and then placing the bulk of those assets into a Cook Island trust -- he could argue he couldn’t satisfy the judgement. While Solow was penniless on paper, he continued to benefit from the assets through his wife; together, the couple was still living the high life. The court easily saw through this charade. But the following reasoning – like the Lawrence case – is Solow’s most important holding: “… an inability defense is unavailable where the inability was created by the defendant.” This is a legal principle with solid grounding in common law precedent. The court is saying, “we won’t let clever trust drafting techniques to allow a debtor to “have his cake and eat it, too.” This reasoning, combined with the already high bar courts place on offshore trusts, neuters a vast majority of plans using an FAPT. Solow’s reasoning directly undercuts most planning using foreign asset protection trusts. Granters now face a two-pronged problem. They have to jump over an “especially high” bar when asserting the impossibility defense. But when they’re responsible for the barrier preventing their compliance, courts will rule against them. The combination of these two points is particularly damaging to FAPT grantors, coming close to invalidating these structures. Long ago, drafters of foreign assets protection trusts (FAPT) realized that courts might hold grantors in contempt because they wouldn’t repatriate assets from a foreign jurisdiction into the U.S. To prevent this outcome, drafters included a “duress clause” in a FAPT document. This clause states that should a court threaten a U.S. grantor with contempt, he will not only be stripped of any power to control the trust, but will also lose all trust benefits. This should allow the US grantor to argue that compliance with the repatriation order is impossible. The Anderson case, which I discussed in my last post, dealt a serious blow to this strategy. Lawrence[1] - the topic of this post - adds another nail in the “duress clause” coffin.
In January 1991, Lawrence funded a Mauritius trust with $7 million dollars. He had the sole power to appoint or remove a trustee. He added a spendthrift provision one month later. In March 1991, Lawrence lost a $20.4 million dollar arbitration award. He added a duress clause two years later in addition to a provision that terminated his beneficial interest if he declared bankruptcy -- which he did two years later. The bankruptcy court eventually ordered Lawrence to turn over the trust assets. Lawrence responded that this was impossible, citing the duress clause. The court disagreed, held him in contempt of court, and placed him in jail pending compliance with its order. The latter few sentences in the preceding paragraph contain the quintessential facts a duress clause is designed to thwart. After being ordered to turn over all trust assets, Lawrence sent a request to the trustee to do so, only to have him cite the duress clause as the reason for non-compliance. Lawrence dutifully went back to the court and said, “I tried.” The court saw through his charade. They first noted that a duress clause violated Florida public policy preventing a trust grantor from forming a self-settled spendthrift trust where the grantor was also a beneficiary. This policy is based on §505 of the Uniform Trust Code whose comments note “… A settler who is also a beneficiary may not use the trust as a shield against the settlor’s creditors.” The court then added, “the sole purpose of this provision appears to be an aide to the settlor to evade contempt while merely feigning compliance with the court’s order.” The court is saying the duress clause allows the grantor to look like he’s complying, when he ultimately has no intention of doing so. The court then delivered a potential knock-out blow to all duress clauses, ruling: “Lawrence’s claimed defense is invalid because the asserted impossibility was self-created.” This is the most damning statement from the decision. The court will overlook clever draftsmanship when it is designed to subvert public policy. No other interpretation of the court’s reasoning is possible. The impossibility defense should be left to truly impossible situations. For example, suppose a grantor funded a trust in a country where a military coup occurs, which is followed by a nationalization of all offshore assets. Here compliance with a repatriation order is truly impossible. However, no court should allow clever draftsmanship to either circumvent judicial power or thwart public policy, which duress clauses are clearly designed to do. For practical purposes, Lawrence had made duress clauses moot. [1] Lawrence v. Goldberg, 279 F. 3d. 1294, (11th Cir. 2002) |
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