BAD FACTS MAKE BAD LAW… A great deal of press coverage has been given to a recent Ninth Circuit appellate decision, known as the Anderson case. We have been waiting for the outcome of the court decision in the Cook Islands, attacking the validity of the asset protection trust (APT) before writing to you with our comments and position concerning this most bizarre case. Now that the Cook Islands court has issued its decision, we offer the following summary and commentary concerning the case.FACTS: The facts of the case are straightforward. Mr. and Mrs. Anderson established a Cook Islands trust and funded it, in part, with commissions paid by Affordable Media, who sold interests to unsuspecting investors who later discovered the investment appeared to be a Ponzi scheme. The Federal Trade Commission (FTC) filed suit against the Andersons and sought to freeze their assets. The FTC was unsuccessful in freezing their assets because the Andersons had previously placed their assets in their Cook Islands APT where the APT’s funds were residing in banks domiciled outside the U.S. without any means for the FTC to reach them.
The APT was originally structured with the Andersons, the Settlors of the Trust serving both as Co-trustees (with a Cook Islands Trustee), and as Protectors. This form of structure is not recommended because a court would be hard pressed (as happened here) to respect the distinctions of the judgment debtor wearing too many hats.
When the FTC won its case against the Andersons and the FTC sought to enforce the judgment and recover assets, the duress provisions of the Trust caused the Anderson to be removed as co-trustees by the overseas trustee. The U.S. court ordered the Andersons to repatriate all of the assets held in their overseas trust. The Andersons claimed that their automatic removal as co-trustees made it “legally impossible” to repatriate the assets of the Trust in compliance with the court’s order. Undeterred by the Andersons’ claim of impossibility, the Court found the Andersons in contempt of court and ordered the Andersons jailed until the court’s order was complied with.
The Andersons were released from jail only when they agreed to execute documents removing the existing overseas Trustee (the foreign trust company) and replace it with a corporation formed by the FTC specifically for this purpose, (the FTC, Inc.), replace the Protector with the FTC, Inc. and to amend the Trust to remove the FTC, Inc as an “Excluded Person.”
Part of the trustee’s fiduciary duty requires it preserve trust assets for the benefit of the Trust’s beneficiaries. The Cook Islands Trustee sought a ruling from the Cook Islands court as to the validity of the attempted changes to the Trust. The Trustee argued that these changes were being made “under duress”, and as such, would be contrary to the Trustees fiduciary duties of preserving and conserving Trust assets for the benefit of the beneficiaries.
RESULTS: On August 10, 1999, the Cook Islands court ruled:
- The documents purporting to remove the existing Trustee and appoint the FTC, Inc. as the successor Trustee were an invalid exercise of the Protector’s powers,
- The document purporting to amend the Trust was invalid because such an amendment would benefit an “exclude person”, and
- The appointment of the FTC, Inc. as Protector was invalid because it would have also benefited an excluded person.
Finally, and most interestingly, the court awarded costs against the FTC, Inc. and in favor of the existing Cook Islands Trustee. In short, the FTC, Inc. was not able to reach into the Trust and take the assets of the Trust, even one as poorly structured as the one prepared for the Andersons.
Conclusions and Observations: By issuing their ruling, the Cook Island’s court does not condone the allegedly bad acts of the Andersons, or anyone else who attempts to use the asset protection laws of other countries to hide their assets. The court was merely upholding the trust laws as enacted by their Parliament. Every U.S. lawyer owes a duty to be vigilant and should refuse to take engagements from those whom they suspect will use the asset protection trust laws to injure and subvert the system.
The final outcome in the Anderson case was predictable based on the statutory and case law precedent of the Cook Islands and gives further comfort that their legal system maintained its integrity, even if the plaintiff is the U.S. government.
Several articles have appeared in leading business publications in the wake of the Anderson decision, concluding that asset protection trusts are no longer a viable method to shield assets from future lawsuits. The authors cite cases where U.S. courts have refused to recognize the validity of the foreign asset protection trust and issued orders requiring the defendant to turn over assets to the plaintiff. The articles fail to report that in each of the cases cited, while the courts have refused to give credence to the trusts, we are aware of not one instance where the APT’s assets held outside the U.S. in these trusts have been reached by the complaining party.