Federal Trade Commission v. Affordable Media, LLC
179 F.3d 1228, 99 Cal. Daily Op. Serv. 4689, 99 Daily Journal DAR 5991 (1999)
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Rule of Law:
A party's self-created inability to comply with a court order is not a valid defense to a charge of civil contempt, particularly when the asserted impossibility arises from an offshore asset protection trust designed to frustrate the court's jurisdiction.
Facts:
- In July 1995, Denyse and Michael Anderson created an irrevocable asset protection trust in the Cook Islands, naming themselves as co-trustees and protectors.
- The trust was designed to shield assets from U.S. courts, containing provisions to remove the Andersons as trustees and prevent asset repatriation upon an 'event of duress,' such as a court order.
- Beginning in 1997, the Andersons, through their company Financial Growth Consultants, LLC, served as the primary telemarketer for The Sterling Group, an investment scheme.
- The scheme, which marketed investments in products like 'talking pet tags' and 'water-filled barbells,' promised investors returns of 50% in 60-90 days.
- The Sterling Group was ultimately revealed to be a Ponzi scheme, using new investor funds to pay earlier investors.
- The Andersons' company generated approximately $6.3 million in commissions from the scheme, which they placed into their Cook Islands trust.
Procedural Posture:
- The Federal Trade Commission (FTC) filed a complaint against the Andersons and their company in the U.S. District Court for the District of Nevada.
- The district court issued an ex parte temporary restraining order (TRO) that required the Andersons to repatriate assets held in foreign countries.
- After hearings, the district court entered a preliminary injunction that incorporated the TRO's repatriation requirement.
- The Andersons' foreign trustee refused to repatriate the assets, citing the court order as an 'event of duress' under the trust's terms and removed the Andersons as co-trustees.
- The FTC moved the district court to find the Andersons in civil contempt for their failure to repatriate the assets.
- After a hearing, the district court found the Andersons in civil contempt, rejected their impossibility defense, and ordered them taken into custody.
- The Andersons, as appellants, appealed the district court's preliminary injunction and contempt order to the U.S. Court of Appeals for the Ninth Circuit, with the FTC as appellee.
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Issue:
Does a defendant's inability to comply with a court's repatriation order constitute a valid defense to civil contempt when that inability was self-created through an offshore asset protection trust designed to thwart the court's jurisdiction?
Opinions:
Majority - Wiggins, Circuit Judge
No, a defendant's self-created inability to comply with a repatriation order does not constitute a valid defense to civil contempt. The burden is on the contemnors to demonstrate 'categorically and in detail' why they were unable to comply, and this burden is 'particularly high' in the context of an asset protection trust. The court found that the Andersons failed to meet this burden because the evidence showed they remained in control of the trust. Their role as 'protectors' gave them the power to replace trustees and determine whether an 'event of duress' had actually occurred. Their attempt to resign as protectors only after the court became aware of this role, coupled with their prior ability to withdraw over $1 million for taxes, demonstrated that their claimed inability to comply was not credible and was part of a charade designed to thwart the district court's authority.
Analysis:
This case significantly undermines the effectiveness of offshore asset protection trusts as a tool to shield assets from U.S. court judgments. It establishes a precedent that courts will view claims of impossibility with extreme skepticism when the impossibility is self-induced. The ruling places a high evidentiary burden on individuals using such trusts, signaling that courts are willing to use their contempt powers aggressively to coerce compliance. This decision makes it much riskier for debtors to rely on these trust structures, as they may face imprisonment for contempt if they cannot definitively prove a total and good-faith lack of control over the assets.
