Introduction

Enforcement jurisdiction principles can be of great significance to a foreign trust. As was set forth in a previous writing, (TaxConnections, Foreign Trusts and Legal Risks, December 24, 2013) some of the most sought benefits are dependent upon their ability to maintain their status in accordance with the laws of the sovereign. This writing will focus upon the foreign trustee that is essential to this demarcation.

Third party judgment creditors and revenue judgments of foreign governments utilize enforcement procedures that function from enforcement jurisdiction. Enforcement jurisdiction is a sovereign’s power to induce or compel or to punish noncompliance with its laws or regulations. (1) Enforcement jurisdiction is contrasted to judicial jurisdiction; it is a penal measure, whereas judicial empowers the sovereign to make its laws applicable to persons or activities.

A foreign trustee of an irrevocable trust established by a United States Settlor operates within the protective statutes of the laws of the foreign sovereign. The core of their legal position is often challenged through principles that have been established by plaintiffs that have sought to obtain discovery in the course of a proceeding. Defendants have utilized defenses of noncompliance with summons requesting production of records and documents. Issues regarding the position of a foreign trustee are the essence of awareness, awareness of jurisdictional principles when situated in a foreign sovereign and jurisdiction if actually in the United States for purposes unrelated to matters of a trust administered in the foreign sovereign.

Enforcement Jurisdiction

As a foundation, judicial jurisdiction requires that a specific statute authorizes jurisdiction and that the exercise of jurisdiction be in accordance within the perimeters of due process. Those two elements are the premise for the exertion of jurisdiction. With the assumption that an authorization by statute is valid, it is the due process requirement that is the basis upon which most defenses against jurisdiction, judicial, prescriptive, or enforcement are exerted.

Due process is only derived on a case-by-case basis of the particular circumstance of facts in meeting the constitutional requirement. Due process is described generally as a concept of fairness. A first awareness of a foreign trustee would be an understanding that exorbitant jurisdiction, even in judicial jurisdiction due process analysis, has been exerted in the United States. (2)

The basis of defense of sovereign defendants regarding foreign trusts and the records that are held by a fiduciary are grounded in blocking statutes and international law principles of comity of a sovereign. The blocking statutes would be similar in essence by way of example, to the asset protection trust legislation of Cook Islands and Nevis, W.I. pertaining to treatment of judgment creditors and penal judgments, as previously referenced. (3)

Important to a foreign trustee are the implications of the holding of a United States appeals court, In re Grand Jury Proceedings. (4) The appellant was an Austrian citizen residing in the United States. It was an investigation for violations of United States tax laws and an appeal of a contempt order wherein appellant refused an order by the United States District Court to sign a consent directive.

The directive sought to compel appellant to sign and authorize any bank at which appellant had a “…bank or loan account … for which …appellant was, is or maybe the relevant principal, signatory, or beneficiary to disclose all information and produce all documents in its possession to the grand jury…” It further stated and contained as part of the declaration that it was executed in accordance with United States law and intended to be a consent of disclosure under Austrian law for which appellant was a relevant principal. (5) Austrian law provided that generally banks, bank officers, employees and personnel could not disclose or use confidential information obtained on the basis of a banking relationship with a client. (6)

A jurisdictional requirement of United States law requires that there be an authorizing statute and that it meet the rigors of due process. The authorizing statute in this instance provides the Internal Revenue Service the authorization to enforce summons to produce books, papers, or other data and jurisdiction by appropriate process. (7) The other element to provide jurisdiction is satisfying due process that is a case-by-case factual determination; is it fair and reasonable.

The theory of this defense is whether a United States court can entertain jurisdiction over a matter within the boundaries of the notion of due process and the fourteenth and fifth amendments of the United States constitution. Jurisdiction asserted cannot deprive an objecting party of life, liberty, or property without due process of law. Blocking statutes have been enacted in many foreign sovereigns to specifically thwart unilateral, extraterritorial discovery deemed to infringe upon that of a sovereign territorial right. (8)

An additional concept is derived by exerting authority over the law of Austria, a violation of another sovereign’s law where it was asserted to be a violation of the principles of international comity. (9) Comity is a type of reciprocal recognition of domestic law between sovereigns. In the case of Application of Chase Manhattan Bank, (10) it strongly upheld the concept of comity among sovereigns stating that to compel production of records in violation of Panamanian law would be nothing more than circumventing Panamanian law and not accord the respect that it should with a friendly sovereign.

The court in the In re Grand Jury Proceedings (11) worded their interpretation of comity to say that the issue of compelling the execution of the directive and a violation of Austrian law was not the sole issue, but rather whether the order violated Austrian law. In doing so it stated that the party relying on the foreign law with respect to international comity bears the burden of demonstrating that the foreign law bars compliance with the order. If a party fails to meet the burden on the comity issue, the court need not consider it. (12) To obtain the intended refection of these concepts, the reader will find it helpful to focus not on banks and its secrecy statutes that are unraveling, but rather general principles of the privacy of documents and sovereign rights and the fiduciary that is entrusted to facilitate the safe guarding of the trust estate.

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Footnotes

1. Restatement (Third) of Foreign Relations Law, Section 401 (c) (1987).
2. See, Grace v. MacArthur, 170 F. Supp. 442 (E.D. Ark. 1959). In this case, a defendant was served with a complaint while he was a passenger in an aircraft in flight through the forum state, an extreme application of transitory jurisdiction. It has important implications for non-residents of the United States. Also see Amusement Equipment, Inc. v. Mordelt, 779 F.2d 264 (5th Cir. 1985), ‘… When the defendant is present within the forum state notice of the suit through proper service of process is all the process to which he is due… a traditional notion of fair play and substantial justice has been that presence alone is sufficient to support personal jurisdiction…”
3. William Richards, Tax Connections, Foreign Trusts and Legal Risks, December 24, 2013 Blogosphere.
4. In re Grand Jury Proceedings, 40 F.3d 959 (Court of Appeals 9th Cir. 1994)
5. Id. at note 4, P. 961.
6. Bundesgesetz uber das Kreditwesen vom 24 Janner 1979 (Kreditwesengesetz) Bundesgesetz blatt, No. 63/1979).
7. Section 7402(b) (1986). Note that subject matter jurisdiction is Section 7402(a) (1986).
8. See United States v. Toyota Motor Corp., 561 F. Supp. 354 (Cal. 1983).
9. Note 4 at P. 965.
10. 297 F. 2d 611 (2nd Cir. 1962).
11. Note 4, P. 965.
12. Id. 11.

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