The Anderson Case - What it means and the Way Forward

A decision dated 15 June 1999 of the United States Court of Appeals for the Ninth Circuit raised important questions for offshore trusts. The "Anderson case" centered on the structure of an asset protection trust based in the Cook Islands.

THE TRUST STRUCTURE

Denise and Michael Anderson became involved in a fraudulent telemarketing scheme. Profits derived from this scheme were placed in a Cook Islands trust. The Andersons were named protectors and co-trusteesof the trust together with a Cook Islands trustee. The trust provided that the Andersons be removed as co- trustees in the event of duress. Under the trust instrument, the term "duress" included the issuance of a court order which, in the opinion of the protector, directly orindirectly restricted the free disposal by the trustee of any of thetrust assets.

FINDING OF CONTEMPT

The Andersons were found to be in civil contempt in part for their failure to comply with the requirements of the district court imposed under the terms of the temporary restraining order and a preliminary injunction issued by the District Court. The Andersons were jailed as a result of the District Court’s order.

REPATRIATION OF ASSETS

The restraining order required the repatriation of all the Andersons’assets located outside the U.S., including the assets held in the trust.The Andersons had sent a request to the Cook Islands trustee to repatriate the assets and specified the request was because of the temporary restraining order. The Cook Islands trustee refused to comply with the request and the Andersons were removed as co-trustees. It was then disclosed to the court that the Andersons were also the protectors of the Trust and as protectors had the power to remove the trustee. The Andersons then attempted to resign as protectors.

DEFENCE OF IMPOSSIBILITY

The Andersons did not deny that the assets of the Cook Islands trust were held for their benefit, but rather claimed that it was impossible for them to comply with the District Court’s order because the trustee would not repatriate the assets of the trust. The availability of the defence of impossibility in the context of a civil contempt charge was not fully settled by the Court of Appeals. The court proposed a higher that usual burden of proof to the defense of impossibility in the context of an asset protection trust, but did not rule on the issue as it was not required to consider it any further.

APPELLATE COURT’S FINDING

The Court of Appeals found that the Andersons had not satisfied their burden of proving that compliance with the District Court’s repatriation order was impossible. The court found that the Anderson trust structure enabled the protector of the trust to conclusively determine that an event of duress had occurred and therefore was evidence that the Andersons were in control of the trust assets. The Court of Appeals affirmed the decision of the District Court for the District of Nevada.

COOK ISLANDS DECISION

The Andersons were eventually released from jail. They attempted to make changes to the trust structure, primarily by removing the Cook Islands trustee and appointing another trustee in its place. The Cook Islands trustee argued that these actions were taken under duress. The Cooks Islands Court agreed.

In the words of Howard Rosen of Donlevy - Rosen & Rosen, Coral Gables, Florida:

"Clearly, the Andersons’ action was undertaken solely to secure their releases from jail - what greater duress could they have been subjected to?"

The Anderson case illustrates the potentially extreme consequences of improper drafting of trust instruments and the improper administration of the trust.

COMMENTARY By Stephanie Monteith

A professional trustee is duty bound to carry out his role as trustee to the fullest and not act as a mere nominee for the settlor. The settlor must relinquish significant control to the trustee. The Anderson case raises important issues of control, administration and drafting in the context of asset protection trusts and more generally in offshore trusts. This case highlights the problems associated with allowing the settlor to retain control over the trust assets either directly, as a co-trustee, and indirectly, as the protector of the trust.

The administration of the trust and the activities of the trust establish as a matter of fact, who has control over the trust. The administration of the trust rests with the trustee and the settlor must be prepared to allow the trustee to carry out his function independently. The settlor will have to relinquish control of the assets.

The settlor should not be allowed to act as trustee of the trust. Other mechanisms may be used to allow the settlor to give general directions as to the allocation of the trust property. Professional trustees would usually take into consideration a non-binding letter of wishes expressing the wishes of the settlor for the future disposition of the trust property and generally would endeavour to give effect to the expressed wishes.

The establishment of a protector for the trust should also give the settlor some measure of comfort that the trust property would be properly administered. A protector may be a professional advisor or a family friend. Professional protector services are also available. Where the settlor is insistent on acting as protector, it may be prudent for the settlor to be a member of a board of protectors.