Dear Clients, Colleagues, and Friends,
“Am I going to jail?”
Andrew’s creditor just asked a court to hold him in contempt for failure to pay a multi-million dollar judgment.
Andrew’s eyes were wide with disbelief. “I’ve done everything they asked, but I can’t pay the judgment if the trustee refuses to release funds.”
“Don’t worry,” explains Andrew’s lawyer, “this is how the trust is supposed to work.”
When Andrew sold his company to a private equity firm, his corporate lawyer advised him to park the cash in an offshore Cook Islands asset protection trust just in case the buyer experienced “buyer’s remorse” or worse, wrecked the company and then asks for their money back. Sure enough, two years following the sale, the business failed and the buyer claimed Andrew cooked the books. The buyer sued and convinced the jury Andrew was guilty and awarded a multi-million dollar judgment in favor of the buyer.
Andrew had been enjoying his new lifestyle and wasn’t interested in giving back any money. When the buyer learned Andrew’s assets were held in Andrew’s offshore trust and they couldn’t reach it, the buyer went back to the same judge and filed a motion for the court to order Andrew to bring back the cash.
The court agreed and ordered Andrew to “bring back the money.” Under the “duress clause” of the trust, Andrew’s repeated requests to his Cook Islands Trustee to release funds were rejected. The duress clause prohibits the trustee to make distributions to a trust beneficiary who is then under duress, i.e., court order.
When the trustee denied Andrew’s requests, the buyer’s lawyer filed an action with the court to find Andrew in civil contempt. Andrew never imagined he’d actually need the trust’s protection; nor did he imagine that his inability to revoke its protection could potentially result in a civil contempt order. Finding it impossible to comply with the judgment, Andrew is afraid he might go to jail.
“You didn’t cause the impossibility,” explains Andrew’s lawyer, “so you’re protected.”
Andrew’s lawyer clarifies that if a debtor refuses to comply with a judge’s order to return a trust’s assets, the judge may issue a civil contempt order, jailing the debtor in order to obtain compliance. You did comply with the court’s order but you were unsuccessful. However, with offshore asset protection trusts, the few cases that have resulted in jail time have occurred only because the debtor caused the impossibility for which the return demand was based.
“Didn’t I cause the impossibility to pay when I put the money in the trust?” worries Andrew.
Andrew’s lawyer points out that civil contempt incarceration can only be used to obtain compliance with a court order — it cannot be used to punish for failure to comply. Moreover, it can only be used when the party subject to the court order has the present ability to comply. In fact, the United States Supreme Court considered such a case and determined the decisive characteristic of civil contempt is that it leaves the contemnor to “carry the key of his prison in his own pocket.” Maggio v. Zeitz, 333 U.S. 56,68,68 S.Ct. 401, 92 L.Ed. 476 (1948).
Andrew’s lawyer continues, “When you set up the trust, you did so for valid, legitimate, and legal reasons. You didn’t make a fraudulent transfer, the trust is perfectly legal, the protection it gives your assets is legal, and it’s working exactly as it was designed to work. You cannot change the trust because it’s irrevocable, so even though you created the trust, you did not create the impossibility to pay a judgment that came years after its creation. You can’t go to jail for failing to do something that is completely out of your control.”
Following the court hearing, the judge found Andrew to be a credible witness and the trust was established for a legitimate purpose, and because Andrew tried to comply with the judgment but could not due to circumstances completely out of his control, the court was denied the creditor’s motion for civil contempt. Andrew will not go to jail.
Andrew breathes a loud sigh of relief. Not only will he not go to jail, his trust remains intact — protected and seemingly impenetrable.
A grin stretches over Andrew’s face as he shakes his lawyer’s hand in gratitude. He had no idea how tricky a creditor could get, testing for weakness in legal arguments and resolve. He is forever grateful that his corporate lawyer convinced him to set up the asset protection vehicle since no one can predict what potholes life’s road will bring. Indeed, it protected more than just his assets.
With competent preparation and proper implementation, the risk of going to jail for refusal to return assets of an offshore asset protection trust remains more lore than reality.
The case books are full of sellers like Andrew who were not so fortunate and had to return the cash. If you want to learn about protecting more than just your assets against an unforeseen lawsuit, call our office now to schedule a consultation.