The Dangerous Intersection of Bankruptcy and Offshore Asset Prote...

The Caribbean has long been a favorite location for persons seeking to shelter assets in offshore trusts as glamorized in popular culture in, among other things, books and movies such as The Firm. There is circuit court case law in the bankruptcy context that should give offshore asset protection planners pause when drafting their next trust instruments. In bankruptcy, the critical issue is the control, or lack thereof, afforded a debtor by a particular trust instrument. The degree of control may lead to a finding that a debtor’s interest in an offshore asset protection trust (“OAPT”) constitutes property of his or her bankrupt estate. If such a finding is made, then it won’t be long before the debtor is on the receiving end of a turnover motion made pursuant to Bankruptcy Code section 521(4).[1] The failure to comply can result in a motion for order to show cause why he or she should not be held in civil contempt. If a civil contempt citation issues, incarceration is an available remedy. While a bankruptcy trustee might never get his hands on the OAPT trust assets, a debtor would have to balance indefinite incarceration against the value he or she places on the property ordered to be turned over.

This is what happened to Stephan Jay Lawrence (“Mr. Lawrence”) who, until December 2006, when he was ordered released based on a finding that his incarceration had lost its coercive effect, had been incarcerated in federal prison for approximately 6 ¼ years for failure to comply with an order directing him to turn over the res of his self-settled OAPT (“Trust”). With one exception, this is the longest period of time that anyone in the United States has been incarcerated for civil contempt of a turnover order with respect to an OAPT. It has been said that the Lawrence case is a prime example of how not to go about offshore asset protection. We agree, since the facts led ineluctably to the conclusion that Mr. Lawrence settled the Trust as a fraud on his creditors. Most importantly, the Trust Indenture gave Mr. Lawrence control over the Trust to such an extent that it was easy for several federal courts to conclude that his interest in the Trust constituted “property of the estate.” The reported decisions in Lawrence are instructive as to fundamental bankruptcy-related issues of which asset protection planners should be aware.

Prior to and since Lawrence, the focus of the laws of the countries that provide protection for OAPTs is on limiting the ability, primarily through short statutes of limitations, of creditors (or trustees in bankruptcy) to avoid transfers into OPATs as fraudulent transfers. This focus, however, is inapposite where, as was the case in Lawrence, there is a finding that an OAPT constitutes property of a debtor/transferor’s bankruptcy estate such that he or she is statutorily obligated to turn over the res of an OAPT to a bankruptcy trustee pursuant to section 521(4) of the Bankruptcy Code. The district court which affirmed the underlying turnover order in Lawrence explicitly rejected Mr. Lawrence’s argument that the trustee could not rely on § 521(4) and instead was required to file and prosecute an adversary proceeding seeking to avoid the transfer of property into the Trust as fraud on his creditors.

1.                  Facts/Procedural Background[2]         

 Mr. Lawrence was the principal of several companies that traded on the Chicago Board of Trade. These companies used Bear Stearns & Co. as their clearinghouse. On Black Monday, Mr. Lawrence’s companies experienced a margin deficit in the approximate amount of $20 million.  Bear Stearns called on all margin accounts of Mr. Lawrence’s companies. Following Black Monday, Mr. Lawrence is believed to have been the only trader that did not enter into a compromise with Bear Stearns. Instead, he sued. The agreements between Mr. Lawrence and Bear Stearns required the arbitration of disputes. The arbitration process lasted some 4 years. Approximately sixty-six (66) days prior to the arbitrator’s decision, which Mr. Lawrence certainly knew was going against him, he set up an OAPT in the Jersey Channel Islands. Approximately 30 days later Mr. Lawrence changed the governing law of his Trust to the Republic of Mauritius. The arbitrator in fact ruled in favor of Bear Stearns in the approximate amount of $20 million. The District Court for the Southern District of New York confirmed the arbitrator’s award.

            Mr. Lawrence relocated to South Florida. He subsequently filed a voluntary chapter 7 bankruptcy case. Schedules attached to the bankruptcy petition identified the Trust but claimed that it was exempt from being administered because Mr. Lawrence no longer had an interest it.

            The bankruptcy trustee (“Trustee”) sought to deny Mr. Lawrence’s bankruptcy discharge based on the assertion that Mr. Lawrence maintained a secret managerial and beneficial interest in the Trust. During the course of the proceedings, a controversy arose concerning the completeness of the answers that Mr. Lawrence provided relating to the Trust res and location of the assets of the Trust. The bankruptcy court was troubled by the “hide the ball” approach of Mr. Lawrence and his counsel and proceeded to supervise a three (3) day examination of Mr. Lawrence. At the conclusion of the court-supervised examination, the bankruptcy court entered an order denying Mr. Lawrence his discharge. In so doing, the court specifically ruled that the Trust and Mr. Lawrence’s interest therein was “property of the estate” under Code section 541(a)(1). This provision dictates that all such assets are subject to administration for the creditors’ benefit.

           Once the interest in and over the Trust was established, the Trustee asked the bankruptcy court to order Mr. Lawrence to turnover the Trust pursuant to Code section 521(4) which compels such an act. In the interim, Mr. Lawrence appealed the order denying his discharge to the district court; however, the bankruptcy court dismissed the appeal for failure to prosecute. The district court affirmed that ruling and, inexplicably, Mr. Lawrence voluntarily dismissed his appeal of that ruling to the Eleventh Circuit.

           After several “progress” hearings, the bankruptcy court held Mr. Lawrence in civil contempt and ordered him incarcerated (the “Initial Incarceration”). Two days later the district court ordered Mr. Lawrence released  from the Initial Incarceration based on its holding that an Article I bankruptcy court lacked jurisdiction to incarcerate a civil contemnor.[3] After briefing and oral argument, the district court affirmed the turnover, contempt and incarceration rulings of the bankruptcy court, and ordered Mr. Lawrence to surrender himself for incarceration if he did not obtain a stay from the Eleventh Circuit. The Eleventh Circuit denied an emergency motion for stay, and Mr. Lawrence surrendered himself for incarceration on September 15, 2000.  

            Since the Eleventh Circuit handed down its ruling upholding the orders entered by the district court, and a one-line order denying without discussion a petition for rehearing entered approximately six (6) months later, there has been an enormous amount of collateral litigation initiated by Mr. Lawrence, on a pro se basis and (successfully) defended by the Trustee before the bankruptcy court, the district court and the Eleventh Circuit. 

2.                  Denial of discharge

           During the course of the bankruptcy case the bankruptcy court found Mr. Lawrence to not be credible. The court determined that Mr. Lawrence perjured himself in his testimony about why he set up the Trust.[4] The court cited controlling case law for the proposition that debtors have “an affirmative obligation to participate in an honest, non-evasive and complete manner,” Dollar v. Long Mfg., 561 F.2d 613 (5th Cir. 1977), and that “the purpose of discovery is to make a trial ‘less a game of blind man’s bluff and more a fair contest with basic issues and facts disclosed to the fullest extent possible.’” Lawrence, 227 B.R. at 915 (quoting United States v. Proctor & Gamble, 356 U.S. 677, 683 (1958)). The court noted that it was the obligation of a debtor to make full disclosures regarding financial information. Such disclosure was a “condition precedent” for the “privilege” of a discharge of debts in bankruptcy. Id.

The bankruptcy court relied upon Rule 7037(a)(3), Fed. R. Bankr. P., to enter a default judgment in favor of the Trustee in the discharge litigation based upon the discovery disputes. The court noted that “the Debtor has been shockingly less than candid with the Trustee and the Court,” and that Mr. Lawrence’s “web of deception strikes at not only the requirement of honesty mandated by the discovery rules, but also at the foundation of the bankruptcy system.” Id. at 916. Quoting from the Supreme Court’s decision in National Hockey League v. Metropolitan Hockey League, Inc., 427 U.S. 639, 642-43 (1976), the bankruptcy court struck Mr. Lawrence’s pleadings and entered default judgment for the Trustee under the various provisions in the complaint seeking denial of discharge pursuant to Code section 727. This statute contains varied provisions that, if the underlying facts are present, form the basis to deny a debtor his or her discharge in bankruptcy. The bankruptcy court stated that Mr. Lawrence “would have this Court countenance a complete lack of financial disclosure of absurdly epic proportions,” and that “to grant the Debtor a discharge, the Court would not only be required to ignore his discovery abuses, but to rip § 727 from the United States Code as well.” Id

3.                  The “property of the estate” finding

           Section 541(a) of the Code provides that all legal and equitable interests in property held by a debtor as of the commencement of a bankruptcy case constitute “property of the estate.” The bankruptcy court noted that under the Trust, Mr. Lawrence, as settlor, maintained the power to remove and replace trustees in his absolute discretion. Under the Trust, the trustees had virtually limitless discretion in dealing with the Trust res including loaning the entire principal to Mr. Lawrence on an unsecured basis for the 100 year term of the Trust. The court found “it impossible to believe that the Debtor surrendered ninety percent (90%) of his assets to a stranger on the other side of the world without maintaining some control over the assets.” Lawrence, 227 B.R. at 912 n.12, 913. The court denied Mr. Lawrence’s discharge for various violations of Code section 727 in respect of Mr. Lawrence’s interest in the Trust. A critical part of the court’s opinion was its finding, premised upon previously reported decisions,[5] that Mr. Lawrence’s “rights and obligations under the Mauritian Trust are governed by Florida and federal bankruptcy law, which have an overriding interest in the [T]rust, and not the law of the Republic of Mauritius. Accordingly, the [T]rust corpus is property of the estate under 11 U.S.C.  § 541.” Id. 917-18. 

            After rejecting Mr. Lawrence’s argument that this finding was dicta because, according to Mr. Lawrence, it was unnecessary for denial of his discharge, the district court found independent grounds to uphold the bankruptcy court’s finding. Specifically, the district court found that a Trust amendment declaring Mr. Lawrence an “excluded person” went to his status as a beneficiary, it was not irrevocable, and the revocation did not effect his retained powers as settlor. Lawrence, 251 B.R. at 641, 642. The district court noted that “Florida and federal bankruptcy law both prohibit individuals from setting up self-settled spendthrift type trusts and maintaining the benefits of and ability to significantly control same, while keeping the assets away from creditors.” Id. at 642 (citations omitted). Accord In re Brown, 303 F.3d 1261, 1266-67 (11th Cir. 2002). The district court concluded that Mr. Lawrence’s “managerial control over the Trust on the Petition Date, arising from, among other things, his ability to remove and replace trustees and to add and exclude beneficiaries, constitutes a legal or equitable interest in property, sufficient to bring such property within the scope of property of the estate.” Lawrence, 251 B.R. at 642. In Brown, the Eleventh Circuit made clear that “[t]he issue of self-settlement is separate from the issue of control, and either can serve as an independent ground for invalidating a spendthrift provision.” Brown, 303 F.3d at 1267 n.9. As noted by the Brown Court, in Lawrence, both self-settlement and control were present. Id.

4.         Turnover

             Based upon the “property of the estate” finding, the Trustee moved for turnover pursuant to Code section 521(4). The bankruptcy court granted the motion. On appeal, the district court noted that for entry of a turnover order there must be evidence that the Trust corpus was in Mr. Lawrence’s possession or under his control and that he had the present ability to comply. Lawrence, 251 B.R. at 643 (citing Maggio v. Zeitz, 333 U.S. 56, 65 (1948)). The district court found that the primary support for the finding of present ability to comply were the relevant provisions of the Trust including, but not limited to, the right to remove and replace trustees, which power was not affected by the subsequent designation of Mr. Lawrence as an “excluded person,” the fact that there was no indication that the designation was revocable or irrevocable, and that the trustees had virtually unfettered discretion and authority to deal with the Trust res as they saw fit.

           The district court next considered provisions Mr. Lawrence pointed to in the Trust and related documents in an attempt to demonstrate lack of control, most prominently the “duress” or anti-coercion provisions. These provisions commonly purport to preclude the exercise of any powers if the decision to do so is the result of coercion or duress, i.e., an order requiring repatriation of trust assets. The court found these provisions to be an attempt to establish the Trust as a spendthrift trust, but that under Florida law as construed by the Eleventh Circuit, “‘if a settler creates a trust for his own benefit and inserts a spendthrift clause, the spendthrift clause is void as far as then existing or future creditors are concerned, as they can reach his interest under the trust.’” Lawrence, 251 B.R. at 644 (quoting Felhaber v. Felhaber, 850 F.2d 1453, 1455 (11th Cir. 1988)). Continuing, the court noted that where a settler “retains the power to acquire all of the trust estate upon request, the interest is not exempt from the claims of creditors.” Id. (citing Felhaber, 850 F.2d at 1455). The court found that because Mr. Lawrence retained the power to remove and replace trustees, who in turn had the power to grant the entire corpus of the Trust to Mr. Lawrence (on incredibly favorable terms not to be had in any market), Mr. Lawrence “effectively had dominion and control over the property of the Trust….” Id.

In support of its finding, the district court noted that the “duress” or anti-coercion divestiture was “episodic in nature,” and vested in Mr. Lawrence and his “hand-picked off-shore trustees the subjective ability to determine which instances of alleged duress or coercion will render the Settlor’s powers inoperative.” Id. The court refused to validate these provisions, for to do so would “permit the trustees to ignore each and every action requested or demanded by the Debtor that may aid or satisfy the claims of creditors or advance the processes of law issued by the courts of the United States against the Debtor in respect of the Trust.” Id. at 645. Like the bankruptcy court, the district court noted that Mr. Lawrence’s designation as an “excluded person” did not affect his reserved powers as settlor.

The Eleventh Circuit concurred: “We also find that the district court did not err when it determined that the…[d]uress amendment is void as to current and future creditors under Florida law where the settler creates a Trust for his own benefit and inserts a spendthrift clause.” Lawrence, 279 F.3d at 1299 (citing Felhaber, 850 F.2d at 1455). The Court then essentially adopted the district court’s analysis as to the episodic nature of the invocation of the duress provision. Id.

5.         Civil contempt standards in the Eleventh Circuit

The relevant legal standards applicable in this Circuit were succinctly stated by the district court in United States v. Kahn, 2004 WL 1089116 (M.D. Fla. Mar. 30, 2004):

The party seeking a contempt order has the initial burden of proving by clear and convincing evidence that the alleged contemnors have failed to comply with an unambiguous and lawful order of the court. Once the moving party presents a prima facie case by clear and convincing evidence, the burden shifts to the alleged contemnors to show that a present inability to comply that goes beyond a mere assertion of inability and establish that they have made in good faith all reasonable efforts to meet the terms of the court order. While the inability to comply is a defense to a contempt action, it is unavailable where the inability to comply was self-imposed.

Id., *2 (internal and external citations and quotation marks omitted). The district court noted that appropriate sanctions for civil contempt include (i) a coercive fine; (ii) a compensatory fine; (iii) attorneys’ fees and costs; and (iv) coercive incarceration. Id.

           The impossibility defense has been recognized by the Supreme Court: “Where compliance is impossible, neither the moving party nor the court has any reason to proceed with the civil contempt sanction.” United States v. Rylander, 460 U.S. 752, 757 (1983); see also Maggio v. Zeitz, 333 U.S. 56 (1948). Of note, it is a “long-standing rule that a contempt proceeding does not open to reconsideration the legal or factual basis of the order alleged to have been disobeyed and thus become a retrial of the original controversy.” Rylander, 460 U.S. at 756-57. Civil contempt orders are reviewed for abuse of discretion, and findings of fact made in connection with the civil contempt adjudication and impossibility defenses are reviewed for clear error. Lawrence, 279 F.3d at 1297; FTC v. Affordable Media, LLC, 179 F.3d 1228, 1239, 1241 (9th Cir. 1999) (hereafter, “Anderson”).

6.         The civil contempt finding

In its order holding Mr. Lawrence in civil contempt the bankruptcy court stated that it had “no doubt that the Debtor retains the requisite power to cause the return of the [T]rust res to the United States in compliance with the Turn Over Order. The foregoing is based, in part, on Paragraph 12 of the Trust Indenture which...specifically reserves to the Settlor, the Debtor, the right to change the Trustees….” Lawrence, 238 B.R. at 500. Continuing, the court, relying on a Ninth Circuit case also involving an OAPT,[6] found that Mr. Lawrence’s intent was to “feign” assistance in repatriating the Trust so as to avoid a contempt finding.  Id. at 501. Quoting from Anderson, the court stated that “the very purpose of these types of offshore asset protection trusts is to create a scenario whereby a ‘defendant can assert that compliance with a court’s order to repatriate trust assets is impossible,’” and that the burden of proof of asserting the impossibility defense in the OAPT context “‘will be particularly high because the likelihood that any attempted compliance…will be merely a charade rather than a good faith effort to comply.’” Id. (quoting Anderson, 179 F.3d at 1241).

            The bankruptcy court then proceeded to reject Mr. Lawrence’s assertion of the impossibility defense since the asserted impossibility, based on the terms of the Trust, was self-created: “While impossibility is a recognized defense to a civil contempt order, the law does not recognize the defense of impossibility when the impossibility is self-created.” Id. (citing Pesaplastic, C.A. v. Cincinnati Milacron Co., 799 F.2d 1510, 1521-22 (11th Cir. 1986)); Bilzerian, 112 F. Supp.2d at 17, 28. In some colorful language, the court stated that “[g]iving credence to the Debtor’s argument would be tantamount to succumbing to the pleas for sympathy from an orphan who has killed his own parents! The efforts by the Debtor to claim an impossibility defense are nothing more than a part of his continuing efforts to hinder, delay and defraud creditors of his bankruptcy estate.” Id.

            After stating the relevant legal principles for civil contempt, the district court specifically adopted the bankruptcy court’s conclusion that the impossibility defense was unavailable to Mr. Lawrence. Lawrence, 251 B.R. at 651, 652 n.18. The district court, like the bankruptcy court before it, rejected the proposition that the mere assertion of inability to comply was sufficient to avoid a contempt citation, id. at 652, making note of a three-part test set forth by the Eighth Circuit.[7] The person seeking to avoid a finding of contempt based on inability to comply must show (i) that he or she was unable to comply, explaining why “categorically and in detail”; (ii) that the inability to comply was not self-created; and (iii) that they made in “good faith all reasonable efforts to comply.” Id. Accord Bilzerian, 112 F. Supp.2d at 23-28 (applying analysis with respect to, inter alia, a Cook Islands OAPT). The district court found that Mr. Lawrence failed to meet any of these factors. Id.

            On further appeal, the Eleventh Circuit agreed with the lower courts’ legal analysis, noting that Mr. Lawrence claimed that he has done everything within his power to cause the Trust res to be repatriated, that is, executing a letter attempting to appoint the Trustee as the trustee of the Trust, and

the fact that this attempt was met with silence (presumably due to the duress provision) is beyond his control. This contention is not persuasive for several reasons. In order to prevail on an impossibility defense, Lawrence must demonstrate that he has made in good faith all reasonable efforts to meet the terms of the court order he is attempting to avoid. We agree with the district court that [Mr.] Lawrence’s last minute appointment of [the Bankruptcy Trustee as the new Trustee of the Trust on the eve of being held in contempt] does not meet the requirement of all  reasonable efforts, nor do any of Lawrence’s actions appear to have been taken in good faith. He had to be aware that his attempted appointment would be ignored by the Trustees [of the Trust] under the duress clause. Further, the district court found that [Mr. Lawrence’s] testimony that he retained no control over the Trust and that he had not maintained communication with the Trustees lacked credibility.


Even if we were to find that [Mr.] Lawrence had set forth specific evidence of impossibility, we must agree with the trial court that [Mr.] Lawrence’s claimed defense is invalid because the asserted impossibility was self-created.  …  We agree with the district court that [Mr.] Lawrence created this Trust in an obvious attempt to shelter his funds from an expected adverse arbitration award. In addition, at the time [Mr.] Lawrence became an excluded person under the Trust he retained the ability to appoint a new Trustee who would have the power to revoke the excluded person status at any time. We, perforce, must conclude that the district court did not err in holding that [Mr.] Lawrence failed to establish his defense of impossibility.

Lawrence, 279 F.3d at 1299-1300 (internal and external citations and quotation marks omitted).

7.         Directions on remand; post-affirmance litigation to determine the coercive effect of continued incarceration          

            In its opinion affirming the district court, the Eleventh Circuit stated:

As we affirm the challenged orders, we are constrained to remind the district and bankruptcy courts that civil contempt sanctions are intended to coerce compliance with a court order. In Wellington we acknowledged that, [W]hen civil contempt sanctions lose their coercive effect, they become punitive and violate the contemnor’s due process rights. The district court must make an individual determination in each case whether there is a realistic possibility that the contemnor will comply with the order. We are mindful that, although incarceration for civil contempt may continue indefinitely, it cannot last forever.

Lawrence, 279 F.3d at 1300 (internal and external citations and quotation marks omitted).

            Prior to December 2006, the bankruptcy court conducted hearings, including one evidentiary hearing, to consider the continued coercive effect of Mr. Lawrence’s incarceration. The bankruptcy court found that Mr. Lawrence failed to meet the applicable standards set forth in Wellington, to demonstrate that his incarceration had lost its coercive effect. Mr. Lawrence failed to introduce any evidence that he has made any effort, since he surrendered himself for incarceration, to comply with the underlying turnover order. Instead, Mr. Lawrence has raised numerous and varied constitutional-based arguments.[8] To date, those arguments have been rejected by the bankruptcy court, the district court and the Eleventh Circuit. One argument is that the contempt, if not when entered, had become “criminal.” The Supreme Court has opined on the difference between “civil” and “criminal” contempt in, among other decisions, International Union, United Mine Workers of America v. Bagwell, 512 U.S. 821, 826-29 (1994). “The paradigmatic coercive, civil contempt sanction…involves confining a contemnor indefinitely until he complies with an affirmative command such as an order ‘to pay alimony, or to surrender property, ordered to be turned over to a receiver, or to make a conveyance.’” Bagwell, 512 U.S. at 828 (quoting Gompers v. Bucks Stove & Range Co., 221 U.S. 418, 442 (1911)). In short, civil contempt is usually imposed to coerce compliance with an extant court order. Id.; Penfield Co. of California v. SEC, 330 U.S. 585, 590 (1947) (same).

            “[W]hen considering a motion to terminate a civil contempt order, ‘the [trial] court must make an individualized determination as to whether there exists a realistic possibility that the contemnor will [comply].’” Wellington, 950 F.2d at 1530 (quoting In re Grand Jury Proceedings (Howald), 877 F.2d 849, 850 (11th Cir. 1989)). According to the Eleventh Circuit, this determination is one made within the court’s sound discretion and is “virtually unreviewable.” Id. at 1531 (citing Simkin v. United States, 715 F.2d 34, 38 (2d Cir. 1983)). Of note, the Eleventh Circuit in Wellington stated that “[p]rison time, in and of itself, will not satisfy [the incarcerated contemor’s] burden of proving that there exists no realistic possibility that he can comply” with the underlying order, 950 F.2d at 1531; however, the Court also stated that as time passes, the contemnor’s protestations of inability to comply grow stronger. Id.  

(i)         Recent proceedings resulting in Mr. Lawrence’s release from
            incarceration; pending appeal before the Eleventh Circuit 

After conducting a hearing at which Mr. Lawrence refused to testify on September 22, 2006, slightly more than six (6) years after Mr. Lawrence first surrendered himself for incarceration, a Magistrate Judge concluded that Mr. Lawrence failed to meet the burden of proof imposed on him to establish that his incarceration had lost its coercive effect, that is, that there was no realistic possibility the continued incarceration would yield compliance with the underlying turnover order. Thus, the Magistrate Judge recommended to the district court that Mr. Lawrence’s motion for release from incarceration for civil contempt be denied.

On December 8, 2006, the district court conducted a hearing on Mr. Lawrence’s objections to the Magistrate’s recommendation. Notwithstanding its acknowledgement that Mr. Lawrence failed to meet his burden of proof, the district court rejected the Magistrate’s recommendation and found that, after six (6) years of incarceration, there was no realistic possibility that continued incarceration would yield compliance, and it issued a written Order dated December 12, 2006 so holding and ordering Mr. Lawrence’s immediate release. Specifically, the district court found that Mr. Lawrence “steadfastly refused” to comply with the turnover order and that continued incarceration would therefore not yield compliance; however, there was no evidentiary basis for that finding which is why the Trustee appealed the district court’s decision to the Eleventh Circuit where the matter has been fully briefed and awaits either the setting of oral argument or the issuance of an opinion.

On appeal, the Trustee argues that Mr. Lawrence failed to meet his burden of proof to establish that his incarceration lost its coercive effect and there was no evidentiary basis for the district court’s finding of Mr. Lawrence’s “steadfast refusal” to comply. The Trustee further argues that the standard applied in the Eleventh Circuit is inconsistent with case law from other circuits[9] which construe applicable Supreme Court case law[10] to hold that a civil contemnor can be incarcerated “indefinitely” unless and until he (i) complies with the trial court’s order, or (ii) demonstrates that he is objectively unable to comply. The Trustee is asking the Eleventh Circuit to order Mr. Lawrence re-incarcerated unless and until he meets either of the preceding requirements.

Mr. Lawrence has cross-appealed the district court’s ruling. In his cross-appeal, Mr. Lawrence seeks vacation of the underlying discharge, turnover and contempt orders entered by the bankruptcy court on various constitutional bases, all of which the Trustee challenges, and which to date have been rejected by the courts which have considered them.

Presently pending before the district court is a lawsuit filed by Mr. Lawrence against the Trustee and his professionals, including the authors of this paper, and others, asserting numerous causes of action under state and federal law seeking damages resulting from his civil contempt and incarceration. Generally, Mr. Lawrence claims that the actions of the Trustee and his professionals worked a violation of various of his constitutional rights. As of the submission of this paper, the district court has under advisement motions to dismiss this lawsuit on the following grounds: (1) lack of subject matter jurisdiction because Mr. Lawrence failed to obtain leave of the bankruptcy court prior to filing suit as required by the Eleventh Circuit’s decision in Carter v. Rogers, 220 F.3d 1249 (11th Cir. 2000), and (2) failure to state a claim for which relief can be granted because, inter alia, (i) the Trustee and is professionals acted pursuant to orders of the bankruptcy court such that they are absolutely immune from suit based on controlling Eleventh Circuit case law, Boullion v. McClanahan, 639 F.2d 213, 214 (5th Cir. 1981), (ii) of Florida’s “litigation privilege,” Echevarria, McMalla, Raymer, Barrett & Frapier v. Cole, 950 So. 2d 380, 383 (Fla. 2007), since all of the Trustee’s and his professionals’ alleged wrongful acts occurring during the course of a judicial proceeding, that is, Mr. Lawrence’s chapter 7 bankruptcy case, and indisputably related thereto, and (iii) Mr. Lawrence has not and cannot establish the essential elements of the claims being asserted.

(ii)        Further Contempt Proceedings

In its Order directing Mr. Lawrence’s release from incarceration, the district court invited the Trustee to seek relief he deemed “appropriate” from the bankruptcy court to help ensure that Mr. Lawrence did not have access to the Trust after his release from incarceration. The Trustee accepted the invitation and sought entry of an Order, subsequently entered by the bankruptcy court, directing Mr. Lawrence to produce, inter alia, financial-related documents, including tax returns, to the Trustee. Mr. Lawrence has failed to comply with this Order and, therefore, the Trustee sought and obtained an Order to show cause why he should not be held in civil contempt, again. After a subsequent status conference, the bankruptcy court agreed to submit proposed findings of fact and conclusions of law to the district court holding Mr. Lawrence in civil contempt and incarcerating him until he complied with the financial reporting order.

8.         To file or not to file?

If a settler of an OAPT files bankruptcy, or is placed into bankruptcy involuntarily,[11],there is a real risk that there will be a finding that his or her interest in that  OAPT constitutes “property of the estate” making it subject to turnover and, failing that, contempt and indefinite incarceration. Interestingly, in response to a lawsuit filed in Miami-Dade County Circuit Court to collect outstanding legal fees by the law firm that represented Mr. Lawrence in the initial filing of his chapter 7 case, Mr. Lawrence counter-claimed for, inter alia, legal malpractice. The theory behind the alleged malpractice goes something like this: Counsel should have known that the Trust might be found to constitute “property of the estate,” that Mr. Lawrence would then be subject to a motion for turnover and, if he failed to comply with an order granting such a motion, he might be subject to indefinite incarceration. Armed with the “luxury” of 20-20 hindsight, that’s exactly what happened. Indeed, following Lawrence, it would arguably be per se malpractice to place an individual with an OPAT in bankruptcy.

9.        Amendments to the Bankruptcy Code 

Code section 548, which provides the mechanism for the avoidance of transfers made in fraud of a debtor’s creditors, now includes provisions that authorize a trustee to avoid any transfer of an interest of a debtor in property that was made on or within ten (10) years before the filing of the bankruptcy petition if (A) the transfer was made to a self-settled trust or similar device; (B)  the transfer was made by the debtor; (C) the debtor is a beneficiary of such trust or similar device; and (D) the debtor made the transfer with the actual intent to hinder, delay or defraud any entity to which the debtor was or became, on or after the date of the transfer, indebted. Code section 548(e)(1). Two notes: first, prior to the adding of these provisions, the limitation period on actions brought pursuant to section 548 was one (1) year. Thus, it is safe to assume that Congress was aware of bankruptcy cases involving OAPT’s, possibly including Lawrence. Second, had section 548(e)(1) been in effect when Mr. Lawrence filed for bankruptcy in June, 1997, the transfer into the Trust in 1991 would have been avoidable as a fraud on his creditors.

10.       Conclusion 

The key in drafting an OAPT, as far as planning to avoid any of the contempt and incarceration-related issues discussed above, is to ensure that there are no provisions giving a settlor control, most prominently, the right to remove and replace trustees, to add and remove beneficiaries and classes of beneficiaries, borrowing the entire corpus of the trust on unreasonably favorable terms, i.e., no interest or a 99 year repayment, making the settlor a beneficiary (Lawrence), or that make a settlor the “protector” (Anderson). If such provisions are present, and an individual files for, or is successfully placed into, bankruptcy, his or her interest in an OAPT may well be found to constitute “property of the estate” subject to turnover and, failing that, contempt and indefinite incarceration. At that point, the individual will have to literally answer the million dollar question—which do I value more, my property or my liberty?

Stephan Lawrence Litigation Summary

A.        In re Lawrence, 227 B.R. 907 (Bankr. S.D. Fla. 1998) (order denying Debtor’s discharge in bankruptcy and finding that the OAPT constituted property of the estate)

B.         In re Lawrence, Case No. 97-14687-BKC-AJC (Bankr. S.D. Fla. Aug. 26, 1999) (unpublished) (order directing Debtor to turn over OAPT to Trustee)

C.        In re Lawrence, 238 B.R. 498 (Bankr. S.D. Fla. 1998) (order holding Debtor in civil contempt for failing to comply with turnover order)

D.        Lawrence v. Goldberg (In re Lawrence), 251 B.R. 630 (S.D. Fla. 2000) (order affirming bankruptcy court’s turnover and contempt orders)

E.         Lawrence v. Goldberg (In re Lawrence), 279 F.3d 1294 (11th Cir. 2002) (order affirming district court’s order affirming bankruptcy court’s turnover and contempt orders), reh’g denied, Case No. 00-14481 (11th Cir. June 21, 2002) (unpublished)

F.         Lawrence v. Wetzel, Case No. 01-16991 (11th Cir. Mar. 15, 2002) (unpublished) (order affirming district court’s order dismissing Debtor’s petition for writ of habeas corpus on jurisdictional grounds; Trustee  filed an answer brief as intervenor per order of the Court)

G.        In re Lawrence, Case No. 97-14687-BKC-AJC (Bankr. S.D. Fla. June 29, 2004) (unpublished) (order finding that Debtor failed to demonstrate that his incarceration had lost its coercive effect)

H.        Lawrence v. United States Bankruptcy Court, 153 Fed. Appx. 552, 2005 WL 2269802 (11th Cir. Sept. 19, 2005) (order affirming district court’s order dismissing Debtor’s petition for writ of mandamus or prohibition)

I.          Lawrence v. Alan L. Goldberg et al., Case No. 06-21952-CIV-UNGARO-BENAGES (S.D. Fla.): In August, 2006 Lawrence filed a lawsuit in the U.S. District Court, Southern District of Florida, against Alan L. Goldberg, individually and not as Trustee, Mr. Goldberg’s firm, Berger Singerman, P.A. (BSPA) and several attorneys serving as the Trustee’s General Counsel, several professionals employed by the Trustee and Bear Stearns, two employees and two attorneys representing Bear Stearns in pre-petition litigation against Lawrence. Mr. Goldberg, BSPA and its attorneys have filed motions to dismiss based on the district court’s lack of subject mater jurisdiction because Lawrence failed to obtain prior leave of the Bankruptcy Court as required by controlling Eleventh Circuit case law, because these defendants are absolutely immune from suit since the underlying acts alleged to have damaged Lawrence were undertaken by orders of the Bankruptcy Court and Florida’s “litigation privilege,” and because Mr. Lawrence cannot establish the essential elements of the claims he asserts. The other professionals employed by the Trustee moved for dismissal on the same grounds.

J.          In re Lawrence, Case No. 05-20485-CIV-GOLD/SIMONTON: In August, 2006 Lawrence filed another motion, this time with the U.S. District Court, Southern District of Florida, seeking release from incarceration based primarily on actions the Trustee has undertaken pursuant to leave of the Bankruptcy Court or, failing that, an evidentiary hearing on the issue of whether his continued incarceration has lost its coercive effect. 

K.        In re Lawrence, Case No. 05-20485-CIV-GOLD/SIMONTON: On October 6, 2006, Magistrate Judge Turnoff entered his Report and Recommendation urging the District Court to deny Mr. Lawrence’s motion for release from civil contempt incarceration.

L.         In re Lawrence, Case No. 05-20485-CIV-GOLD/SIMONTON: On December 12, 2006, the District Court entered its Order rejecting the Magistrate’s Report and Recommendation concluding that continued incarceration would not yield compliance, and directing Mr. Lawrence’s immediate release from prison.

M.        Goldberg v. Lawrence, Case No. 07-10295 (11th Cir. 2007): Pending before the Eleventh Circuit is the Trustee’s appeal, and Mr. Lawrence’s cross-appeal, of the District Court’s December 12, 2006 Order.

N.        In re Lawrence, Case No. 97-14687-BKC-AJC: After having conducted a status conference on November 20, 2007, the Bankruptcy Court agreed to submit proposed findings of fact and conclusions of law to the District Court finding Mr. Lawrence in civil contempt for not complying with the Bankruptcy Court’s January 31, 2007 Order directing Mr. Lawrence to provide financial-related information to the Trustee.

[1] All references to the “Code” herein are to Title 11 of the United States Code, prior to the recent amendments, which is commonly referred to as the “Bankruptcy Code.” 11 U.S.C. §§ 101 et seq.

[2] There are several reported decisions that have come out of the Lawrence chapter 7 proceedings which, together, contain a detailed statement of the facts and procedural history of the case. Goldberg v. Lawrence (In re Lawrence), 227 B.R. 907 (Bankr. S.D. Fla. 1998) (opinion denying Mr. Lawrence’s bankruptcy discharge and finding that his self-settled Trust constituted property of his bankrupt estate); In re Lawrence, 238 B.R. 498 (Bankr. S.D. Fla. 1999) (order holding Mr. Lawrence in civil contempt for failure to comply with turnover order); Lawrence v. Goldberg (In re Lawrence), 251 B.R. 630 (S.D. Fla. 2000) (district court opinion affirming turnover, contempt and incarceration rulings of bankruptcy court); Lawrence v. Goldberg (In re Lawrence), 279 F.3d 1294 (11th Cir. 2002) (circuit court opinion affirming district court opinion affirming turnover, contempt and incarceration rulings of bankruptcy court). The above-stated facts and procedural background, in abbreviated form, derive from these reported decisions.

[3] In contrast, in its seminal opinion in this case, the Eleventh Circuit unequivocally stated that “[a] Bankruptcy Court has the power to imprison a debtor for contempt of court when the debtor fails to comply with a Turn Over Order.” Lawrence, 279 F.3d at 1297 (citing In re Hardy, 97 F.3d 1384 (11th Cir. 1996)).

[4]For example, noting testimony that the pending arbitration proceeding had nothing whatsoever to do with that decision, the absence of any due diligence prior to setting up the Trust, etc.

[5] In re Portnoy, 201 B.R. 685 (Bankr. S.D.N.Y. 1996); In re Brooks, 217 B.R. 98 (Bankr. D. Conn. 1998); In re Cameron, 223 B.R. 20 (Bankr. S.D. Fla. 1998). Together, these cases stand for the proposition that it would offend strong state and federal bankruptcy law policies if the law of the situs of the OAPT were to apply. See Lawrence, 227 B.R. at 917; see also In re Witlin, 640 F.2d 661, 663 (5th Cir. 1981) (recognizing strong public policy against allowing individuals from placing his or her property in what amounts to a revocable trust for his or her own benefit while shielding those assets from his or her creditors).

[6] Anderson is not a bankruptcy case but it is instructive as to the application of civil contempt law as applied to OAPTs. In its opinion affirming the turnover and contempt rulings by the lower courts in Lawrence, the Eleventh Circuit, like the lower courts before it, relied on Anderson and its legal analysis in the OPAT context. Lawrence, 279 F.3d at 1297-98. The Andersons were “protectors” of their Cook Island trust; the Ninth Circuit found that the protectors’ powers to, inter alia, appoint a new trustee, the same powers Mr. Lawrence had as  settlor, was strong evidence of their ability to control and, therefore, comply with the order directing repatriation. For another non-bankruptcy case involving an OAPT and civil contempt issues see Securities & Exchange Comm’n v. Bilzerian, 112 F. Supp.2d 12 (D. D.C. 2000)

[7] Chicago Truck Drivers v. Brotherhood Labor Leasing, 207 F.3d 500, 506 (8th Cir. 2000). This three-part test derived from statements of law in Anderson; In re Power Systems, 950 F.2d 798, 803 (1st Cir. 1991); and Commodities Future Trading Comm’n v. Wellington Precious Metals, Inc., 950 F.2d 1525, 1529 (11th Cir. 1992) (hereafter “Wellington”).

[8] For example, Mr. Lawrence tried (without success), to obtain a writ of habeas corpus, and a writ of mandamus or prohibition.

[9] Armstrong v. Guccione, 470 F.3d 89 (2d Cir. 2006) and Chadwick v. Janecka, 312 F.3d 597 (3d Cir. 2002) 

[10]  International Union v. Bagwell, supra; Rylander  v. United States, supra; and Maggio  v. Zeitz, supra.

[11] Individuals can be thrown into bankruptcy involuntarily by their creditors. 11 U.S.C. § 303. Of course, such persons can defend an involuntary petition but if they lose, they will be debtors in bankruptcy subject to the terms and conditions imposed on debtors who, like Mr. Lawrence, voluntarily seek bankruptcy protection including being obligated to turn over “property of the estate,” including Code section 521(4).