Long ago, drafters of foreign assets protection trusts (FAPT) realized that courts might hold grantors in contempt because they wouldn’t repatriate assets from a foreign jurisdiction into the U.S. To prevent this outcome, drafters included a “duress clause” in a FAPT document. This clause states that should a court threaten a U.S. grantor with contempt, he will not only be stripped of any power to control the trust, but will also lose all trust benefits. This should allow the US grantor to argue that compliance with the repatriation order is impossible. The Anderson case, which I discussed in my last post, dealt a serious blow to this strategy. Lawrence v. Goldberg – the topic of this post – adds another nail in the “duress clause” coffin.
In January 1991, Lawrence funded a Mauritius trust with $7 million dollars. He had the sole power to appoint or remove a trustee. He added a spendthrift provision one month later. In March 1991, Lawrence lost a $20.4 million dollar arbitration award. He added a duress clause two years later in addition to a provision that terminated his beneficial interest if he declared bankruptcy — which he did two years later. The bankruptcy court eventually ordered Lawrence to turn over the trust assets. Lawrence responded that this was impossible, citing the duress clause. The court disagreed, held him in contempt of court, and placed him in jail pending compliance with its order.
The latter few sentences in the preceding paragraph contain the quintessential facts a duress clause is designed to thwart. After being ordered to turn over all trust assets, Lawrence sent a request to the trustee to do so, only to have him cite the duress clause as the reason for non-compliance. Lawrence dutifully went back to the court and said, “I tried.” The court saw through his charade. They first noted that a duress clause violated Florida public policy preventing a trust grantor from forming a self-settled spendthrift trust where the grantor was also a beneficiary. This policy is based on §505 of the Uniform Trust Code whose comments note “… A settler who is also a beneficiary may not use the trust as a shield against the settlor’s creditors.” The court then added, “the sole purpose of this provision appears to be an aide to the settlor to evade contempt while merely feigning compliance with the court’s order.” The court is saying the duress clause allows the grantor to look like he’s complying, when he ultimately has no intention of doing so.
The court then delivered a potential knock-out blow to all duress clauses, ruling: “Lawrence’s claimed defense is invalid because the asserted impossibility was self-created.” This is the most damning statement from the decision. The court will overlook clever draftsmanship when it is designed to subvert public policy. No other interpretation of the court’s reasoning is possible.
The impossibility defense should be left to truly impossible situations. For example, suppose a grantor funded a trust in a country where a military coup occurs, which is followed by a nationalization of all offshore assets. Here compliance with a repatriation order is truly impossible. However, no court should allow clever draftsmanship to either circumvent judicial power or thwart public policy, which duress clauses are clearly designed to do. For practical purposes, Lawrence had made duress clauses moot.