22 March 2006

Beware Foreign Asset Protection Trusts

If you put your fortune in foreign accounts or trusts, beyond the reach of U.S. Court, and the court doesn't believe that you don't have access to those funds, you could end up spending ten years to life in jail for contempt of court, as a certain Mr. Chadwick did.

This excerpt from a decision of panel of the U.S. Court of Appeals for the Third Circuit which included now Justice Alito, in 2002, sets forth the pertinent facts that let to the original jailing of Mr. Chadwick on non-punitive contempt of court charges:

In November 1992, Mrs. Barbara Chadwick filed for divorce in the Delaware County (Pennsylvania) Court of Common Pleas. During an equitable distribution conference in February 1993, Mr. Chadwick informed the state court and Mrs. Chadwick that he had unilaterally transferred $2,502,000.00 of the marital estate to satisfy an alleged debt to Maison Blanche, Ltd., a Gibraltar partnership.

It was later discovered that (1) one of the principals of Maison Blanche had returned $869,106.00 from Gibraltar to an American bank account in Mr. Chadwick's name and that these funds had then been used to purchase three insurance annuity contracts; (2) $995,726.41 had been transferred to a Union Bank account in Switzerland in Mr. Chadwick's name; and (3) $550,000.00 in stock certificates that the petitioner claimed he had transferred to an unknown barrister in England to forward to Maison Blanche had never been received. The state court then entered a freeze order on the marital assets on April 29, 1994.

In May 1994, Mr. Chadwick redeemed the annuity contracts and deposited the funds in a Panamanian bank. After a hearing on July 22, 1994, the court determined that Mr. Chadwick's transfer of the money was an attempt to defraud Mrs. Chadwick and the court. At that time, the court ordered petitioner to return the $2,502,000.00 to an account under the jurisdiction of the court, to pay $75,000.00 for Mrs. Chadwick's attorney's fees and costs, to surrender his passport, and to remain within the jurisdiction. Mr. Chadwick refused to comply, and Mrs. Chadwick thereafter filed a petition to have him held in civil contempt. Mr. Chadwick failed to appear at any of the three contempt hearings, but his attorney was present. The court found Mr. Chadwick in contempt of the July 22, 1994, order and issued a bench warrant for his arrest.

After learning of the bench warrant, Mr. Chadwick fled the jurisdiction but was arrested and detained on April 5, 1995. The state court determined that Mr. Chadwick had the present ability to comply with the terms of the July 22, 1994, order and set bail at $3,000,000. Mr. Chadwick could have been released from custody either by posting bail or by complying with the July 22, 1994, order. To date, he has done neither.

After ten years in custody, he is right where he started.

He was jailed in 1995 for allegedly hiding $2.5 million in overseas banks during a bitter divorce. Since then, a series of judges have told him he could go free once he tells the court what happened to the money, but Chadwick hasn't budged, the judges said.

Chadwick, a former corporate lawyer, maintains he lost the money in an overseas investment. Experts say it would now be worth more than $8 million.

In the latest ruling in the meandering case, a three-judge Delaware County panel concluded that the most recent court-ordered financial probe did little to resolve questions about the money. Chadwick, while claiming cooperation, did not give investigators full power to follow the money trail overseas, the judges said.

"Defendant Chadwick's lack of cooperation undermined the entire investigation, invalidating any conclusions or recommendations," the judges wrote in their ruling last month.

I have seen the contempt power abused in divorce cases where the contempt defendant doesn't have the ability to pay the amount he is compelled to pay and is cooperating. If the amount at stake were smaller, I might be inclined to believe that he really didn't have any further ability to cooperate in finding the money he hid, or to recover it. But, people will go to great lengths to hold onto $2.5 million, and so I'm inclined to think that deferrence to the court findings here is in order.

Moreover, even if the court was wrong, and he has no ability to recover the $2.5 million, it is hard to say that Mr. Chadwick has been morally wronged yet, even though it would be a legal wrong. Ten years in jail is far from being a cruel or unusual punishment for intentionally defauding your ex-wife of $2.5 million, even if is more than would be authorized for a punitive contempt punishment in the case. There is someone who is serving a life sentence right now for stealing some golf clubs in California. This case hardly shocks the conscience by comparison.

Mr. Chadwick, who is 68 years old, faces a real likelihood of dying in jail, and the funds will probably never be recovered. He asked for it, and he got it.

Judges hate foreign asset protection techniques, and even if you are technically correct that you shouldn't be subject to contempt of court sanctions that keep you in jail for a very long time in an effort to force you to comply with a court order to deliver the funds, this doesn't mean that the judges will believe you. Foreign asset protection is a high risk venture that one pursues only at one's own peril.

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