Académique Documents
Professionnel Documents
Culture Documents
Patrick M. Wilson
Abstract: In December 2008, Bernard Madoff was arrested in connection
with his operation of one of historys costliest Ponzi schemes. Bernard
Madoffs scheme defrauded investors, including charities and Nobel Prize
winners, out of more than $50 billion dollars. Madoffs victims are unlikely
to recover all of their investments. Unfortunately, Ponzi schemes and other
forms of corporate irresponsibility abound in society and cause significant
financial losses for investors. Measures must be taken in order to restore
investors faith and protect their investments from being lost to corporate
irresponsibility.
Candidate for Juris Doctor, New England School of Law (2010). M.A., Criminology and
Criminal Justice, University of Maryland, College Park (2005). B.A., Criminology and
Criminal Justice, University of Maryland, College Park (2003). I would like to thank my
family: Garry, Sue, Chris, Julie and Michelle for their love and support during my law
school studies and the writing of this Note.
791
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This proposal is necessitated by the lack of access victims have to the assets
of a corporate officers DAPT. Involuntary bankruptcy, fraudulent-transfer
laws, and contempt-of-court orders are all insufficient remedies in attempting
to access DAPT assets. Also, public policy reasons, including both the
prevention of individuals from becoming dependent on the state and the
collection of tax revenues, support the proposal to hold DAPTs spendthrift
clauses unenforceable. Moreover, the interests of justiceprotecting
innocent investorscalls for these trust assets to be accessible to victims of
corporate irresponsibility. Finally, the ease of amending legislation supports
the proposal of this Note.
INTRODUCTION
The phone rings. You pick it up and hear your financial consultants
voice on the other end of the line. Your expectation is that he is calling to
check in and inform you about the quarterly performance of your
investments. However, this call is different. This time, your investment
professional is calling you to let you know that all of your assets have been
wiped out in connection with a Ponzi1 scheme.2 You and your family are
financially ruined. At first you do not panic because you keep telling
yourself that your losses will be returned; your loss will be vindicated. As
time goes by, you learn that you will never be fully compensated for your
loss because the company you are suing has no assets to satisfy your
claims. You have just learned an expensive lesson about the corporate
irresponsibility3 problem in America. Unfortunately, Americans like Robert
Chew, a Time.com columnist who lost $1.2 million to a Ponzi scheme,
1. Although named after Charles Ponzi, Ponzi schemes have been around long before
Charles Ponzis stamp arbitrage scam during the 1920s. Eduardo Porter, Editorial, Ponzi
Schemes: The Haul Gets Bigger, but the Fraud Never Changes, N.Y. TIMES, Dec. 27, 2008,
at A24, available at http://www.nytimes.com/2008/12/27/opinion/27sat4.html?ref=opinion.
2. A Ponzi scheme is [a] fraudulent investment scheme in which money contributed
by later investors generates artificially high dividends or returns for the original investors,
whose example attracts even larger investments. BLACKS LAW DICTIONARY 1278 (9th ed.
2009).
3. The phrases corporate fraud and corporate irresponsibility will be used
interchangeably throughout this Note. Although corporate fraud always equates to corporate
irresponsibility, the opposite is not inherently true. For the purposes of this Note, corporate
irresponsibility will refer to any corporate activity that could provide the basis for the
successful piercing of a corporate veil. See infra Part I.C. Essentially, corporate fraud and
corporate irresponsibility refer to corporate actions that will expose corporate officers or
directors to individual liability.
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4. See Robert Chew, How I Got Screwed by Bernie Madoff, TIME.COM, Dec. 15, 2008,
http://www.time.com/time/business/article/0,8599,1866398,00.html.
5. See LAWRENCE E. MITCHELL, CORPORATE IRRESPONSIBILITY: AMERICAS NEWEST
EXPORT 19-20, 60-61 (2001); see also infra Part II.
6. See John W. Schoen, Corporate Fraud Alive and Well in U.S., MSNBC, May 25,
2006, http://www.msnbc.msn.com/id/12762573/ (U.S. losses from [corporate] fraud rose to
an estimated $638 billion in 2005up from $600 billion in 2002 and $400 billion in 1996 . .
. .).
7. See Porter, supra note 1 (referencing Bernard Madoffs Ponzi scheme). The most
recent tally of fraud claims by Madoffs victims totaled over 15,400. Diana B. Henriques,
Claims Total Over 15,400 in Fraud by Madoff, N.Y. TIMES, July 10, 2009, at B3, available
at http://www.nytimes.com/2009/07/10/business/10madoff.html.
8. Diana B. Henriques & Zachery Kouwe, U.S. Arrests a Top Trader in Vast Fraud,
N.Y. TIMES, Dec. 12, 2008, at A1, available at 2008 WLNR 23844269.
9. Linda Sandler, Madoff Brokerage, Homes, Boats Valued at $1 Billion, BLOOMBERG,
Jan. 9, 2009, http://www.bloombergnews.com/apps/news?pid=20601110&sid=aEXnt7M6c
9C0. One source estimates that [d]epending on the solvency of the persons sued,
recoveries will probably be in the range of [ten] percent to [fifty] percent of the amounts for
which the persons are liable. Id.
10. Id. (Creditors of bankrupt Enron Corp., which hid billions of dollars in debt in off-
the-books entities, received [thirty-six] cents on the dollar as of January 2008.).
11. Diana B. Henriques, Madoff, Apologizing, Is Given 150 Years, N.Y. TIMES, June 30,
2009, at A1, available at 2009 WLNR 12446925. On June 29, 2009, Bernard Madoff was
sentenced to 150 years in prison, the maximum sentence he could receive for his financial
crimes. Id.
12. Throughout this Note, the term victim will refer to those individuals who have lost
money due to corporate irresponsibility.
13. See Chew, supra note 4.
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14. Cf. JESSE DUKEMINIER ET AL., WILLS, TRUSTS, AND ESTATES 627 (8th ed. 2009)
(explaining that doctors may drop malpractice insurance and shift their assets into self-
settled trusts to prevent those assets from being accessible to satisfy liability claims of their
patients; corporate officers could also protect their assets by using these trusts against
claimants who successfully pierce the corporate veil of the officers corporation).
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A. Trusts
1. Purpose
Trusts are property management arrangements that are commonly
utilized tools in estate planning.15 In trusts, title to trust property is
bifurcated between two parties, a fiduciarythe trusteewhich holds
legal title to the trust property for the benefit of one or more othersthe
beneficiarieswho hold the equitable or beneficial title to the trust
property.16 Trusts are generally used for several reasons including tax
advantage purposes and maximizing the enjoyment of trust property for
several generations.17
2. Trust Creation
Creating trusts requires several elements. First, trusts require the
following three parties: settlor, trustee, and beneficiary.18 The settlor is the
person who creates the trust.19 The trustee may be anyone who is able to
hold legal title, including the settlor.20 A beneficiary is able to serve as
trustee, as long as the beneficiary is not the sole beneficiary.21 The
beneficiaries are persons or entities for whose benefit property is held in
trust.22 Second, the settlor must have capacity and intent to create a trust.23
Third, the trust must contain trust property, which is often referred to as the
res.24 The definition of trust property is quite broad and encompasses items
ranging from interests in property to a single penny; any item referred to as
15. JEFFREY N. PENNELL & ALAN NEWMAN, ESTATE AND TRUST PLANNING 219 (2005).
16. Id.
17. Id. at 224-25.
18. DUKEMINIER ET AL., supra note 14, at 547. It is important to note that three different
persons are not necessary for a trust. One person can wear two hats, or sometimes even all
three. Id.
19. Id.
20. PENNELL & NEWMAN, supra note 15, at 233. The required capacity for someone to
serve as trustee is simply the capacity that is required to hold legal title. Id.
21. Id. If the sole beneficiary served as the trustee, the legal and beneficial title to the
trust property would merge and the trust would terminate. Id. at 233-34.
22. Id. at 240. Beneficiaries include anyone with the requisite capacity to hold title such
as incompetents, minors, and corporations; however, the trust must have at least one
ascertainable beneficiary. Id.
23. Id. at 230. Essentially, [n]o particular form of words is necessary to create a trust.
Not even the word trust or trustee is required. The sole question is whether the grantor
manifested an intention to create a trust relationship. DUKEMINIER ET AL., supra note 14, at
557.
24. DUKEMINIER ET AL., supra note 14, at 569.
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3. Trust Types
Generally speaking, trusts can be divided into two categories:
mandatory trusts and discretionary trusts.27 The trustee of a mandatory trust
has no discretion in her distributions of the trust income or principal;
trustees must distribute all of the trust income.28 Discretionary trusts permit
the trustee to exercise discretion in disbursing payment of the trust income
or principal or both to the beneficiaries.29 Several variations of
discretionary trusts exist, such as support trusts and discretionary support
trusts.30 Support trusts are usually created for the purpose of distributions
to the beneficiary for health, education, maintenance, and support.31
4. Creditors Rights
Most trusts contain a provision that eliminates the right of a
beneficiarys creditor to access the beneficiarys interest in the trust
principal or income in order to satisfy the creditors claims.32 That
provision is called a spendthrift provision or clause.33 A trust is not
spendthrift unless the settlor expressly inserts a spendthrift clause [in the
trust].34 The beneficiary of a spendthrift trust cannot voluntarily alienate
25. Id.
26. Compare Brainard v. Commr, 91 F.2d 880, 881-83 (7th Cir. 1937) (holding that the
settlors trust, consisting of anticipated profits from the settlors securities, failed for want of
trust property at the time of the declaration of trust because the trust cannot form unless
there is actual, not anticipated, trust property at the time of declaration of trust), with
Speelman v. Pascal, 178 N.E.2d 723, 724-26 (N.Y. 1961) (enforcing a trust that contained
res consisting of an assignment of contractual rights to royalties for the production of a
musical and film).
27. DUKEMINIER ET AL., supra note 14, at 597.
28. Id. at 598.
29. Id. The trustees discretion of whatever latitude must be exercised in good faith for
the trust purposes and courts generally will review a trustees exercise of discretion under a
reasonableness standard. PENNELL & NEWMAN, supra note 15, at 252.
30. DUKEMINIER ET AL., supra note 14, at 598. Support trusts limit the trustees
discretion by describing support standards for the beneficiaries; discretionary support trusts
combine express statements of discretion with a standard of support. Id.
31. PENNELL & NEWMAN, supra note 15, at 256 (internal quotations omitted) (These
standards are said to be ascertainable, meaning that the trustees duty to make distributions
to the beneficiary for these purposes can be objectively reviewed and enforced.).
32. Id. at 257.
33. See DUKEMINIER ET AL., supra note 14, at 614.
34. Id.
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her interest. Nor can her creditors reach her interest in the trust. This is true
even if the trust provides for mandatory payments to the beneficiary.35
Spendthrift trusts are recognized in jurisdictions throughout the United
States.36 The rationale for enforcing spendthrift trusts has been that the
trust property belongs not to the trust beneficiary, but to the trust settlor.37
Therefore, because the trust settlor is under no obligation to transfer assets
to the beneficiary, the settlor is able to subject the transfer to conditions,
including the condition that the trust assets be protected from creditors of
the beneficiary.38
Most jurisdictions that recognize spendthrift trusts allow creditors to
reach the assets in some circumstances.39 First, states do not allow
beneficiaries to rely on the spendthrift clause to preclude the government
from collecting on its claims.40 Also, some jurisdictions allow individuals
to access a beneficiarys spendthrift trust in order to satisfy claims for child
support from the beneficiary.41
35. Id.
36. Id. at 616.
37. Stewart E. Sterk, Asset Protection Trusts: Trust Laws Race to the Bottom?, 85
CORNELL L. REV. 1035, 1042 (2000).
38. Id.
39. See PENNELL & NEWMAN, supra note 15, at 262-63.
40. Id. at 262. A beneficiarys interest in a trust will be considered when a government
agency is determining whether an individual is eligible for public assistance. Id. Also, a
beneficiarys interest is not protected against claims of government taxing agencies that
have claims against the beneficiary. Id. at 263.
41. See id. (The majority rule probably is that claims for child support may be
successfully asserted while alimony claims often cannot.).
42. For the purposes of this Note, DAPTs are synonymous with self-settled trusts.
43. Kalimah Z. White, Domestic Asset Protection Trusts, in ASSET PROTECTION
STRATEGIES 83, 83 (2008).
44. See DUKEMINIER ET AL., supra note 14, at 624.
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trust for their own benefit.45 Although courts and legislatures have had
some sympathy for property owners seeking to protect their [own]
profligate children, the notion that property owners ought to be able to
protect themselves against their own profligacy, at the expense of their
creditors, has been much harder to swallow.46 While DAPTs seemingly
run contrary to trust law, a number of states have enacted statutes that
provide for the validation of DAPTs.47 States with DAPT laws include:
Alaska, Delaware, Nevada, Oklahoma, Rhode Island, South Dakota,
Tennessee, Utah, and Wyoming.48 One incentive for states to enact DAPT
legislation is to compete with foreign trusts for investment money.49
and limited liability corporations.61 For example, piercing the corporate veil
is permissible when there has been fraud or the corporation is being used as
an instrument or alter ego of the corporations owner or corporate officer.62
To use fraud to pierce a corporate veil, a plaintiff does not have to
demonstrate that a business organization was created with fraudulent intent;
it is sufficient for a plaintiff to show that the corporation was so used to
commit fraud.63 Additionally, a corporate veil may be pierced (1) when the
unity of interest and ownership that separates the corporation from
corporate individuals is no longer present and (2) when adhering to the
falsity of that separate existence between the corporation and individuals
would promote injustice.64 Generally speaking, a corporate veil may be
pierced and liability will be imposed on corporate officers and directors
when doing so would result in an equitable disposition.65
61. See Judson Atkinson Candies, Inc., 529 F.3d at 379; NetJets Aviation, Inc., 537 F.3d
at 176.
62. NetJets Aviation, Inc., 537 F.3d at 176 (To prevail under the alter-ego theory of
piercing the [corporate] veil, a plaintiff need not prove that there was actual fraud but must
show a mingling of the operations of the entity and its owner plus an overall element of
injustice or unfairness.) (quoting Harco National Insurance Co. v. Green Farms, Inc., 1989
WL 110537, at *5 (Del. Ch. 1989)); Williamson v. Recovery Ltd. Pship, 542 F.3d 43, 53
(2d Cir. 2008).
63. NetJets Aviation, Inc., 537 F.3d at 177.
64. Judson Atkinson Candies, Inc., 529 F.3d at 379. Factors to consider in determining
whether there is unity of interest sufficient to pierce a corporate veil include the following:
inadequate capitalization, insolvency of the debtor corporation, absence of corporate
records, commingling of funds, and failure to observe corporate formalities. Id.; Williamson,
542 F.3d at 53.
65. Williamson, 542 F.3d at 53.
66. CORPORATE FRAUD TASK FORCE, REPORT TO THE PRESIDENT iii (2008).
67. Id.
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68. Id.
69. See, e.g., INTERNAL REVENUE SERV., EXAMPLES OF CORPORATE FRAUD
INVESTIGATIONSFISCAL YEAR 2009, http://www.irs.gov/compliance/enforcement/article/
0,,id=187268,00.html (last visited Apr. 15, 2010). A hedge fund manager pleaded guilty and
was sentenced to sixty months in prison for his participation in a conspiracy to commit mail
and wire fraud in defrauding investors of approximately $49 million. Id. Bernard Madoff
was arrested and charged with securities fraud after losing approximately $50 billion worth
of investors money in a Ponzi scheme. See Sandler, supra note 9.
70. See generally CORPORATE FRAUD TASK FORCE, supra note 66; INTERNAL REVENUE
SERV., supra note 69.
71. INTERNAL REVENUE SERV., STATISTICAL DATACORPORATE FRAUD (2009),
http://www.irs.gov/compliance/enforcement/article/0,,id=121471,00.html (last visited Apr.
15, 2010).
72. Id.
73. Id.
74. See CORPORATE FRAUD TASK FORCE, supra note 66, at 1.19-1.21.
75. Id. at 1.19. There were 1215 fraud cases in 2003 and 1746 in 2007. Id.
76. Id. at 1.20.
77. Id. There were 143 corporate fraud convictions in 2003 and 173 in 2007. Id.
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The U.S. Postal Inspection Service (USPIS) has also published statistics
that indicate an increasing corporate fraud problem.78 USPIS statistics
indicate that the number of convictions for corporate fraud increased by
nearly forty percent between 2004 and 2007.79 Interestingly, there has also
been an increase in both court-ordered restitution and criminal fines during
that time period; this information may reflect an increased level of
importance placed upon deterring corporate fraud.80 In 2004, court-ordered
restitution for corporate fraud was approximately $75.02 million.81 For
fiscal year 2007, courts ordered restitution for approximately $496.77
million.82 Moreover, during that time period, criminal fines assessed for
corporate fraud increased from $275,000 in 2004 to $19,185,000 in 2007.83
Generally speaking, the data provided by government agencies
demonstrates that the corporate fraud problem has increased and that the
government has become less tolerant of corporate malfeasance; however,
the problem continues.
on January 15, 2009, the SEC charged Atlantas James Ossie and shut
down [his] high-flying currency trading outfit, CRE Capital Corp., [for]
allegedly bilking 120 investors out of $25 million.89 Finally, on June 18,
2009, a grand jury returned an indictment against Texas financier Robert
Stanford accusing him of operating a Ponzi scheme and defrauding
approximately 30,000 investors out of $7 billion.90 Stanford, named one of
the wealthiest Americans by Forbes magazine in September 2008, utilized
his bank, Stanford International Bank, to sell certificates of deposit to
investors, claiming that said deposits would provide double-digit returns on
their investments.91 Instead of providing investors with returns on their
investments, Stanford diverted most of his clients assets into personal
loans to himself.92 The total value of investors money lost to the Ponzi
schemes discussed in this Note is approximately $57 billion.
89. Id. Ossies operation, like most Ponzi schemes, sounded too good to be true: he
guaranteed investors a return between ten and twenty percent and employed an accounting
firm to demonstrate the legitimacy of his operation. See id.
90. Clifford Krauss, Texas Financier and Antiguan Official Charged with Fraud, N.Y.
TIMES, June 20, 2009, at B1, available at http://www.nytimes.com/2009/06/20/
business/20stanford.html?pagewanted=1&sq=robert%20stanford&st=cse&scp=13; Clifford
Krauss, Indicted, Texas Financier Surrenders, N.Y. TIMES, June 19, 2009, at B2, available
at http://www.nytimes.com/2009/06/19/business/19stanford.html?scp=17&sq=robert%20
stanford&st=cse.
91. Terry Frieden, Missing Billionaire Found in Virginia, CNNMONEY.COM, Feb. 19,
2009, http://money.cnn.com/2009/02/19/news/newsmakers/stanford/index.htm.
92. See Krauss, Texas Financier and Antiguan Official Charged with Fraud, supra note
90.
93. For the purposes of this Note, the term corporate wrongdoers refer to corporate
officers or directors that are responsible for corporate irresponsibility. These are the
individuals held personally liable because a victim has successfully pierced the corporate
veil.
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1. Involuntary Bankruptcy
The victims of corporate wrongdoing may be able to force the debtor
of a corporate veil judgment into involuntary bankruptcy if the victim has a
claim of at least $10,000 against the debtor.96 Section 541(a) of the
Bankruptcy Code states that bankruptcy estates include all legal or
equitable interests of the debtor.97 However, 541(c)(2) states that a
restriction on the transfer of a beneficial interest of the debtor in a trust
that is enforceable under applicable nonbankruptcy law is enforceable in a
case under this title.98 Thus, in bankruptcy proceedings, it is
nonbankruptcy law that will govern property rights and whether a debtors
interest in a DAPT is included in the bankruptcy estate.99
94. Carlyn Kolker et al., Madoff Left No Trace He Made Any Trades, Picard Says,
BLOOMBERG, Feb. 20, 2009, http://www.bloomberg.com/apps/news?pid=20601103&sid=
alYrIDoF2Css&refer=us (stating that Madoffs customer claims will be capped off at
$500,000, for some that is a fraction of their total losses); Sandler, supra note 9 (stating that
the victims of Madoffs $50 billion Ponzi scheme will have access to $1 billion).
95. See In re Lawrence, 279 F.3d 1294, 1297 (11th Cir. 2002); Sterk, supra note 37, at
1044-47; White, supra note 43, at 96-104.
96. 11 U.S.C. 303(b)(2) (2006).
97. 541(a)(1); White, supra note 43, at 100. Seemingly, this provision would include
assets within DAPTs. See 541(a)(1).
98. 541(c)(2); White, supra note 43, at 100.
99. White, supra note 43, at 100.
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100. Patterson v. Shumate, 504 U.S. 753, 758 (1992); In re Mack, 269 B.R. 392, 398
(Bankr. D. Minn. 2001) (holding that the income stream from a debtors self-settled trust,
containing a spendthrift provision, qualified as property of the bankruptcy estate).
101. See Patterson, 504 U.S. at 758.
102. See In re Mack, 269 B.R. at 399.
103. See In re Bogetti, 73 F. Appx. 266, 268 (9th Cir. 2003) (holding that California law
does not protect the assets of a debtors self-settled trust that contains a spendthrift provision
from the debtors creditors); In re Brown, 303 F.3d 1261, 1271 (11th Cir. 2002) (holding
that Florida law did not protect the assets of a self-settled trust, which contained a
spendthrift provision, from the creditors of the settlor); In re Shurley, 115 F.3d 333, 338
(5th Cir. 1997) (holding that Texas state law did not protect the assets, contributed by one of
the settlors who also benefited from the trust assets of a self-settled trust, from the creditors
of the contributing settlor; therefore, the assets became part of the bankruptcy estate).
104. White, supra note 43, at 101.
105. See id. The uncertainty stems from a lack of cases involving challenges to DAPTs in
jurisdictions that statutorily authorize such trusts. See id.
106. See, e.g., In re Hunter, 261 B.R. 789, 791 (Bankr. M.D. Fla. 2001). A Bankruptcy
proceeding in Florida referenced Missouri state law to determine if the trust qualified as a
spendthrift trust because the trust was established in Missouri. Id.
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2. Fraudulent Transfers
If involuntary bankruptcy proves to be a fruitless avenue, victims may
consider examining whether a corporate wrongdoers transfer of assets to a
DAPT is fraudulent under the Uniform Fraudulent Transfer Act (UFTA),
which most states have enacted, or a similar state statute.107 UFTA section
4 describes the types of transfers that are fraudulent with respect to a
debtors creditors.108 Generally, a transfer is fraudulent if the debtor
completed the transfer:
(1) with actual intent to hinder, delay, or defraud any creditor of
the debtor; or (2) without receiving a reasonably equivalent value
in exchange for the transfer . . . and the debtor: was engaged or
was about to engage in a business or a transaction for which the
remaining assets of the debtor were unreasonably small in
relation to the business or transaction.109
The UFTA also holds transfers to be fraudulent regardless of whether a
victims claim arose before or after the transfer was made.110
Accordingly, if victims can prove that a debtor-settlor transferred assets
into a DAPT with the actual intent to defraud victims, whether future or
present victims, then victims can set aside the debtors transfer into the
trust; therefore, victims could gain access to those assets to satisfy their
claim.111
Alleging a fraudulent transfer is the first hurdle a victim must
overcome.112 The difficult task for a victim is to prove that the debtor
transferred assets into a trust with the actual intent to defraud claimants.113
The UFTA lists several factors to be considered in determining actual
intent including, the transfer or obligation was to an insider; the debtor
retained possession or control of the property transferred after the transfer;
the transfer or obligation was disclosed or concealed . . . [and] the transfer
was of substantially all the debtors assets.114 If a victim is unable to
demonstrate actual intent, he may still set aside the transfer upon
107. See Sterk, supra note 37, at 1045. States like Alaska and Delaware have created
their own version of the UFTA. See id. at 1052, 1055.
108. UNIF. FRAUDULENT TRANSFER ACT 4 (1984).
109. 4(a)(1)-(2)(i).
110. 4(a).
111. Sterk, supra note 37, at 1046. By avoiding the transfer of those assets into the trust,
the assets would be lumped together with the settlors other assets not placed in trust and
would presumably be accessible to victims.
112. See id.
113. Id. at 1047.
114. 4(b).
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3. Contempt of Court
Another potential remedy is the possibility that courts impose prison
sentences on corporate wrongdoers found in contempt of court for failing to
relinquish their DAPT assets.129 The Eleventh Circuit has held a settlor in
contempt of court for not relinquishing the assets of a foreign asset
protection trust to a bankruptcy trustee.130 The Ninth Circuit affirmed a
decision to hold a settlor in contempt of court for failing to comply with a
judicial order requiring the settlor to provide an accounting of trust assets
and to repatriate the assets of a foreign asset protection trust to the Federal
Trade Commission.131 In FTC v. Affordable Media, L.L.C., the Ninth
Circuit recognized that foreign asset protection trusts are outside of the
jurisdiction of U.S. courts, but that the jurisdiction over the physical person
of the settlor remains; therefore, U.S. courts could utilize contempt-of-court
powers to force settlors to repatriate assets of foreign trusts to the United
States.132 Thus, in Affordable Media, the Ninth Circuit held that the district
court properly held the settlors in contempt for not complying with a
judicial order.133
Although circuit courts of appeals have approved imprisoning settlors
for contempt, the availability and effectiveness of this remedy poses
problems, especially in the context of DAPTs.134 In terms of availability,
case law indicates that contempt may be used when settlors of foreign asset
protection trusts retain broad powers over the trust.135 For example, the
settlors in Affordable Media had significant control over the trustthe trust
document originally listed the settlors as co-trustees, allowed the settlors to
appoint new trustees, and contained a duress provision.136 However, it is
131. Affordable Media, 179 F.3d at 1243-44. The settlor established a trust in the Cook
Islands and was investigated by the Federal Trade Commission for operating a Ponzi
scheme and placing fraudulently obtained assets into the foreign asset protection trust. Id. at
1231.
132. Id. at 1240.
133. Id. at 1243-44. The settlors claimed the defense of impossibility, stating that the
trustee of their trust would not repatriate their assets and that it was therefore impossible to
comply with the judicial order. Id. at 1239.
134. See, e.g., DUKEMINIER ET AL., supra note 14, at 634 (calling into question the
effectiveness of imprisoning settlors for contempt of court by referencing one case in which
the imposition of jail time failed to compel settlors to comply with a judicial order to
repatriate their assets tied up in a foreign asset protection trust); Sterk, supra note 37, at
1103-04 (questioning the availability of contempt orders since it remains to be seen how
often and in what circumstances courts would be willing to impose contempt sanctions).
135. See Affordable Media, 179 F.3d at 1243 (indicating that the lower court did not
abuse its discretion in holding the defendants in contempt of court for not repatriating their
assets because the defendants, as trust protectors, had the power to repatriate their trusts
assets); Sterk, supra note 37, at 1103 (indicating that contempt orders may not be
appropriate or available when settlors do not retain significant control over their trust
assets).
136. Affordable Media, 179 F.3d at 1239 n.9 (stating that the duress provision provides
that upon the occurrence of an event of duress (judgment, order, or decree, etc.) that affects
the disposal of money by the trustee, the settlors would be replaced as trustees by a foreign
trustee who is beyond the jurisdiction of the United States courts); Sterk, supra note 37, at
1102-03.
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145. See, e.g., Sandler, supra note 9; see generally discussion supra Part III.A.1-3.
146. See, e.g., Patterson v. Shumate, 504 U.S. 753, 758 (1992); Sterk, supra note 37, at
1052-53; see generally discussion supra Part III.A.1-3.
147. Sterk, supra note 37, at 1046; see generally supra Part III.A.2.
148. White, supra note 43, at 86.
149. See Shelley v. Shelley, 354 P.2d 282, 286-87 (Or. 1960) (holding spendthrift clauses
unenforceable against child support and alimony claims); UNIF. TRUST CODE 503 (2005)
(indicating that spendthrift clauses are unenforceable against child support and alimony);
LaSalle Natl Bank v. United States, 636 F. Supp. 874, 877 (N.D. Ill. 1986) (holding
spendthrift clauses unenforceable against federal tax liens); 2 RESTATEMENT (THIRD) OF
TRUSTS 59(a) (2003) (indicating that spendthrift clauses are unenforceable against child
support and alimony).
150. See Shelley, 354 P.2d at 286-88. Several states authorizing DAPTs allow ex-spouses
and children to access DAPT assets for alimony and child support claims. See supra Part
I.B.2.
151. Shelley, 354 P.2d at 288.
152. Id. at 286.
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to dispose of his property through the device of a trust . . . cannot force the
courts to sanction his scheme of disposition if it is inimical to the interests
of the state.153 Essentially, the court did not want to allow the beneficiary
to escape his responsibilities and require the community or state welfare to
care for his children and ex-wife.154 Also, in support of allowing children
and spouses to access spendthrift-trust assets, Uniform Trust Code section
503(b) provides, even if a trust contains a spendthrift provision, a
beneficiarys child, spouse, or former spouse who has a judgment or court
order against the beneficiary . . . may obtain from a court an order attaching
present or future distributions to or for the benefit of the beneficiary.155
Second, federal tax claims are also successful in reaching the assets in
spendthrift trusts.156 If a trust is created under state law, that state law will
not protect the trust assets from the attachment of a tax lien created by
federal law.157 The general rule is that [n]o policy of state may interfere
with [the] power of Congress to levy and collect income taxes.158 The
rationale behind allowing tax liens to attach to spendthrift trusts is
straightforward; spendthrift trusts allow the beneficiary to be protected
against his own voluntary improvident or financial misfortune . . . . [But]
[t]he imposition of the tax burden is not voluntary by the beneficiary [i]n a
sense[,] the property itself incurs the tax[,] [not the beneficiary].159 Thus,
allowing the federal government to attach tax liens does not violate the
purpose of spendthrift trusts.160 Also, the public policy rationale supporting
the ability of federal tax liens to access spendthrift-trust assets is that the
public is directly affected by the governments ability to collect taxes to
support the federal government; the public may suffer if there is a shortfall
of taxes due to the governments inability to attach liens to an individuals
153. Id.
154. Id.
155. UNIF. TRUST CODE 503(b) (2005).
156. LaSalle Natl Bank v. United States, 636 F. Supp. 874, 877 (N.D. Ill. 1986).
157. Id.
158. Id. (internal quotations omitted). Regarding spendthrift trusts:
[C]ourts have consistently held that a restraint on transferability,
whether arising from the trust instrument or from state law, does not
immunize the beneficiarys interest from a federal tax lien. Since such a
restraint is merely a state-created exemption from the reach of creditors,
and not an aspect of the substantive right, it cannot serve to defeat the
federal tax lien.
United States v. Rye, 550 F.2d 682, 685 (1st Cir. 1977) (internal citations omitted).
159. Mercantile Trust Co. v. Hofferbert, 58 F. Supp. 701, 705 (D. Md. 1944).
160. See id.
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C. Interest of Justice
The interest of justice for victims of corporate irresponsibility also
supports the position of adding statutory amendments that allow limited
access to DAPT assets. Sprinkled throughout the law are exceptions to
established legal rules that seek to promote the interests of justice.170 For
example, Federal Rule of Evidence 807 allows for the admission of
otherwise inadmissible hearsay if the interests of justice will best be
CONCLUSION
Corporate irresponsibility continues to plague America. Americans
are losing their investments with entities in which they have placed their
trust. Unfortunately, that trust has been exploited and resulted in people,
171. Id. The hearsay evidence must also relate to a material fact and be more probative
than any other evidence for the point for which it is offered. Id.
172. See supra note 59 and accompanying text; infra app.
173. See supra note 59 and accompanying text.
174. See supra note 59 and accompanying text.
175. See U.S. CONST. art. I, 1, 8.
176. See infra app. The amendment would not be burdensome to create as this Note
proposes a model amendment from which legislators can build upon.
177. See supra notes 167-169 and accompanying text.
178. See supra notes 167-169 and accompanying text.
179. See supra note 59 and accompanying text.
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such as Robert Chew, losing the bulk of their life savings or investments.
One possible measure to combat corporate irresponsibility is to take away
certain tools of corporate officers that shield their assets from victims of
said irresponsibility. By eliminating or holding spendthrift clauses in
DAPTs unenforceable in the circumstances described in this Note,
corporate individuals will not be able to avoid satisfying the claims of
victims who have successfully pierced the corporate veil.
The proposed statutory amendment, located in the Appendix, will be
easy for states to add to their DAPT legislation. The amendment has built-
in safeguards. First, the amendment proposes to hold DAPTs spendthrift
clauses unenforceable only in the event a plaintiff successfully pierces the
veil of the settlors corporation. As has been discussed, piercing the
corporate veil is not an easy task for plaintiffs. Thus, this amendment does
not promote arbitrary access to a settlors trust assets. The amendment
seeks to promote justice by protecting investors from corporate
irresponsibility and punishing corporate individuals for their role in
corporate irresponsibility.
APPENDIX: PROPOSED STATUTORY AMENDMENT
The following proposed amendment acts as a skeleton for states to
follow. It has not been through the rigors of a legislative process; it is
merely a starting point for legislators.
A. Definitions
1. Corporate individual shall mean a corporate officer, director,
member of a board of directorsany corporate position that may face
individual liability when the corporations veil has been pierced.
2. Corporate Irresponsibility consists of malfeasance such as
commingling funds, fraud, failing to keep appropriate corporate records or
formalitiesany acts or omissions that are commonly held to be sufficient
for a plaintiff to pierce a corporations veil.
3. Domestic Asset Protection Trust shall refer to any self-settled
trust in which a settlor creates a trust for his or her own benefit and which
contains a spendthrift clause in order to prevent the voluntary or
involuntary alienation of the trust assets to creditors. Domestic Asset
Protection Trusts refer to only such trusts established within and in
conformance with the laws of the states, which offer such trusts in the
United States.
B. Corporate Irresponsibility Liability
If the settlor of a Domestic Asset Protection Trust is a corporate
individual, who may be exposed to liability for corporate irresponsibility,
and a plaintiff has successfully pierced the veil of the corporation with
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which the settlor is associated, then the plaintiff shall have access to the
settlors trust assets including both the trust principal and interest to satisfy
the plaintiffs judgment, and the trusts spendthrift clause shall be invalid
and unenforceable in such situations.