Volume VIII, Number 3 – September 1999
© Donlevy-Rosen & Rosen, P.A.
Pitfalls To Be Avoided – Part 1
INTRODUCTION. A lot of fuss has been made about the Ninth Circuit appellate decision in the now famous Anderson case (For more, see: APN Vol. VII, No. 2).
BACKGROUND. Briefly, the Andersons established a Cook Islands Trust and funded it with (among other assets) commissions earned in connection with marketing late-night water-filled dumbbells and similar products. The Federal Trade Commission (“FTC”) sought to freeze the Anderson’s assets (along with the assets of others involved in the program) and found, to its dismay, that it could not freeze the Anderson’s assets because they were safely tucked away in a Cook Islands Trust.
Unfortunately for the Andersons (but, luckily, not for their assets), their Trust was poorly designed: they were designated both as co-trustees (with the Cook Islands Trustee) and as protectors.
Without again going into the details, the U.S. trial court ordered the Andersons to repatriate all assets held for their benefit offshore. This order caused their (automatic) removal as co-trustees, which, they then claimed, made it impossible for them to repatriate the Trust assets. The trial court held, and, on appeal, the Ninth Circuit agreed, that the Anderson’s still retained a great degree of control over the Trust (as protectors), and, without addressing the United States Supreme Court rule, which holds that impossibility is a defense to contempt, held them in contempt, and ordered their incarceration.
The Anderson’s incarceration ended with their agreement to remove the existing Cook Islands Trustee and to appoint “FTC, Inc.” (a corporation organized by the FTC) to replace the existing Cook Islands Trustee which had stood up to the United States government agency. In addition, the Anderson’s attempted to cause the amendment of the Trust to benefit an “excluded person”, and to cause the appointment of FTC, Inc. as successor Trust Protector.
TRUSTEES’ DUTY. The primary duty of a Trustee under the common-law (the law in nearly all English-speaking countries) is to conserve and protect Trust assets for the benefit of the beneficiaries of the trust. The Cook Islands Trustee, in the discharge of its duties as such, sought a ruling from the Cook Islands court as to the validity of these attempted changes, arguing that all were done under duress (the trust document, as is usual with such trusts, rendered acts, orders, etc., done under duress invalid). Such changes, if made under duress, would be contrary to the Trustee’s mandate of conserving and protecting Trust property for the benefit of the beneficiaries.
THE DECISION. In a decision rendered on August 10th, 1999, the Cook Islands court ruled: (1) the documents purporting to remove the existing Trustee and appoint FTC, Inc. as successor Trustee were an invalid exercise of the protectors’ power, (2) the document purporting to amend the trust was invalid because such an amendment would benefit an “excluded person”, and (3) the appointment of FTC, Inc., as Protector, was also invalid because it would have benefited an excluded person. Finally, the court awarded costs against FTC, Inc. and in favor of the existing Cook Islands Trustee.
CONCLUSION. We suppose the moral of this story (if it is indeed concluded) is that even a poorly designed Cook Islands trust can effectively protect the settlor’s assets.
POST SCRIPT. As a post script, in March, 1999, the Cook Islands Parliament enacted the International Trusts Amendment Act 1999, which again enhanced its International Trusts Act 1984 (See also, APN Vol. V, No. 4). Under the new law, in the event a claimant is successful in the Cook Islands in asserting a claim against a Cook Islands trust, the Cook Island Court must exclude from any amount awarded any element of damages which represents exemplary, vindictive, retributory or punitive damages (by whatever name such damages are called). The new law also places the burden of proving that such award does not contain the above elements on the creditor.