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Trust Law/Level VI · Protection/6.2 Offshore/Lesson 3

Duress clauses, flight clauses and contempt

What duress and flight clauses in offshore trusts are meant to do, and why US courts have jailed settlors for contempt when they said they could not comply.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. The cheapest lawful position is not to need a duress clause: rely on exemptions and third-party trusts that US courts honor. Catch: a duress clause may keep assets offshore, but it does not shield the settlor from contempt.
  2. If an offshore trust exists, hand protector and appointment powers to genuinely independent people; retained powers defeated the Andersons (1999) and Lawrence (2002). Catch: impossibility you created yourself is no defence to contempt.
  3. When ordered to repatriate, comply in good faith and document every request, as the widow in United States v. Grant (2008) did and escaped contempt. Catch: anything short of all reasonable efforts invites civil contempt and possible jail.
  4. Use a flight clause only for genuine events, such as political upheaval, arranged before any claim. Catch: moving a trust after a claim arises can itself be evidence of intent to hinder creditors under UVTA §4(b).

MaterialsThe Ninth Circuit’s opinion in FTC v. Affordable Media, LLC, 179 F.3d 1228 (1999)The Eleventh Circuit’s opinion in In re Lawrence, 279 F.3d 1294 (2002), free on law.justia.comLesson 6.2.2, on Cook Islands and Nevis trust lawLesson 6.3.3, on why planning must come before trouble

Wonder

  1. What does a trustee do when it receives an instruction it believes was given under a court’s compulsion?
  2. Can a settlor say ‘I cannot comply’ when a court orders assets brought back?
  3. Why might a court treat a protector differently from a settlor?

Explore

  1. A duress clause in an offshore trust tells the trustee to disregard an instruction from the settlor, protector or a beneficiary if the trustee believes it was given under compulsion, such as a court order backed by the threat of contempt. Many clauses also let the trustee remove or suspend that person’s powers while the ‘event of duress’ lasts. The aim is to stop a foreign court from controlling the trust indirectly by ordering people within its reach to give instructions.
  2. A flight clause, sometimes called a migration clause, lets the trustee or protector change the trust’s governing law or move its administration to another country if certain events occur, such as a lawsuit or political upheaval in the current one. It differs from a duress clause: one concerns where the trust is based, the other which instructions the trustee will follow. Moving a trust after a claim has arisen can itself be treated as evidence of intent to hinder creditors (lessons 6.3.1 and 6.3.2).
  3. In FTC v. Affordable Media (9th Cir. 1999), Michael and Denyse Anderson had placed commissions from a telemarketing scheme the FTC called a Ponzi scheme into a Cook Islands trust. When a US court ordered them to bring the money back, the Cook Islands trustee declared an event of duress, removed them as co-trustees and refused. The court held them in civil contempt and they were jailed. The Ninth Circuit affirmed, finding they had not proved compliance impossible: as protectors, they still held powers over the trust. It doubted whether impossibility could be a defence in this setting but left that question open.
  4. In In re Lawrence (11th Cir. 2002), a debtor had moved about $7 million into a trust governed by Mauritius law shortly before a large arbitration award against him. The bankruptcy court found he still controlled the trust through retained powers and held him in contempt when he did not turn the assets over. The Eleventh Circuit affirmed and also relied on the rule that impossibility is no defence when the person charged created it. Practitioner accounts report that he spent more than six years in jail. The court added that civil contempt must stay coercive; once it can no longer secure compliance, it becomes punishment.
  5. Results depend on the facts. In United States v. Grant, a federal tax case in the Southern District of Florida, a 2005 order directed a settlor’s widow, who held power to replace the trustees of trusts in Jersey and Bermuda, to have assets repatriated. In May 2008 the court declined to hold her in contempt, finding she had made repeated requests that the trustees refused. The difference from the Andersons and Lawrence lay in the court’s findings about control, good faith and timing.
  6. The practical risk falls on people, not assets. A duress clause may keep a foreign trustee from sending money back, but it does not protect a settlor or protector within a US court’s reach from contempt, and courts may treat retained powers as control. A person who claims inability must show all reasonable good-faith efforts to comply. Lawyers in each country involved can explain how these rules apply. This lesson explains the case law; it does not suggest using these clauses.

Key facts

  • A duress clause tells the trustee to disregard instructions it believes were given under compulsion, such as a court order backed by contempt.
  • A flight clause lets the trust’s governing law or administration move to another country when specified events occur.
  • In FTC v. Affordable Media (9th Cir. 1999), the settlors were jailed for civil contempt because they kept powers as protectors and had not proved compliance impossible.
  • In In re Lawrence (11th Cir. 2002), the court held that impossibility is no defence to contempt when the person charged created it.
  • In United States v. Grant (S.D. Fla. 2008), the court declined to hold a settlor’s widow in contempt after finding she had tried and the trustees refused.
  • Civil contempt must remain coercive; once it can no longer secure compliance, it becomes punishment.

Exercise nine, six, three, one

9CollectList up to 9 facts from one of the three cases in this lesson (some cases give fewer), such as who set up the trust, when it was funded, who held which powers, what the court ordered and what the trustee did.
6ClusterSort them into 6 categories: timing of the transfer, powers kept by the settlor or protector, trustee actions, court orders, efforts to comply, and the outcome.
3DistillReduce the 6 categories to 3 groups: facts that pointed towards contempt, facts that pointed against it, and facts whose effect is unclear.
1CrystallizeWrite 1 sentence explaining, in your own words, why a duress clause can keep assets offshore but cannot protect the settlor from a contempt order.

Fact check

Dates, figures and claims checked against the published sources listed below.

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