More Analysis of the Anderson Case

The following is an article reprinted with permission which appeared in the newsletter Fiducia--VOLUME 7 ISSUE 1, published by Asiaciti Trust Group  

Cook Islands High Court Denies Repatriation of Trust Assets to the U.S.A.

The Anderson Case (Federal Trade Commission v. Affordable Media  LLC et al) has been the subject of much discussion by commentators during the past six months. It may therefore be helpful to practitioners to gain an insight into the proceedings, both in the United States and in the Cook Islands, from the Trustee's perspective. It is worthwhile restating the facts of the Anderson Case having regard to some inaccuracies that have thus far been published by other commentators.

In August 1995 Michael and Denyse Anderson ("the Andersons") settled a Cook Islands International Trust called the Anderson Family Irrevocable Trust ("the Trust"). The original beneficiaries of the Trust were their children, however, some six months later the Andersons themselves were added as beneficiaries of the Trust. The original trustees of the Trust were the Andersons and Asiatrust Limited, a subsidiary of the Asiaciti Trust Group. At the time of establishment of the Trust, Asiaciti Trust conducted its usual Due Diligence procedures to ensure that the property being settled on the Trust was neither the result of a fraudulent conveyance nor derived from any illegal activity.

The property settled on the Trust included a nominal settlement sum and a 98% interest in a United States corporation, the Anderson Family LLC ("Anderson LLC"). Anderson LLC carried on business in the United States as a telemarketer. During the period September 1995 to May 1997 Anderson LLC made regular distributions to the Trust in accordance with the Operating Agreement of the members. Further distributions were made by Anderson LLC in the period June 1997 to February 1998. It is these distributions which form the basis of the FTC's complaint against the Andersons.

In April 1998 the FTC obtained an ex parte temporary restraining order ("TRO") against (inter alia) the Andersons. The TRO had the effect of  freezing all assets owned by the Andersons. The TRO also required the Andersons to repatriate to the territory of the USA, all assets held by them outside the USA. The District Court incorporated the terms of the TRO into a preliminary injunction in May 1998.

It should be noted that the preliminary injunction was entered by the court prior to any pronouncement of judgment in relation to the alleged wrongdoing of the Andersons. At the time of writing (December 1999),and  notwithstanding some gratuitous observations by both the District Court and the Ninth Circuit, it is understood that there is no judgment entered against the Andersons in respect of the alleged wrongdoing.

On May 12, 1998 the Andersons sent a fax to Asiatrust Limited demanding  that all assets of the Trust be repatriated to the United States. The fax incorporated verbatim the terms of the District Court TRO/preliminary injunction. Upon receipt of this fax, Asiatrust Limited immediately sought legal advice from Cook Islands local counsel as to what it should do in response to the demand. The advice subsequently received was that:

• The issue of the TRO constituted an Event of Duress under the terms of the trust deed.
• As a consequence of the Event of Duress occurring, the Andersons were automatically removed from office as Trustees leaving Asiatrust Limited as the sole Trustee.
• Repatriation of the trust fund to the USA would confer a benefit on an Excluded Person and would be in breach of the Trustee's common law duty to act in the interests of all beneficiaries, having regard to the fact that the Andersons' children were also beneficiaries of the Trust.

On 14 May 1998, Asiatrust Limited informed the Andersons that, as a result of having obtained legal advice, it was precluded from complying with the demand.

In June 1998, Asiatrust Limited also sought legal advice from a US law firm in relation to whether the US District Court could assert jurisdiction over Asiatrust Limited as a consequence of the TRO/preliminary injunction. The advice received was that, on a proper consideration of the applicable law, the  District Court would have neither subject matter jurisdiction nor personal jurisdiction over Asiatrust Limited. Notwithstanding this advice, we considered it prudent for Asiaciti Trust executives to remain outside the USA pending resolution of the TRO.

Also in June 1998, Legal Counsel for Asiatrust Limited participated in a telephone discussion with Legal Counsel for FTC and Legal Counsel for the Andersons. During those discussions, it was suggested to FTC that perhaps the most appropriate way to proceed in the matter would be for FTC to commence proceedings in the Cook Islands against the Trustee (alleging a fraudulent conveyance) and at the same time seek a mareva injunction. This, it was submitted, would have the same effect as the TRO issued by the District Court.

As is well known, the District Court ordered the incarceration of the  Andersons in June 1998. The Andersons appealed this to the Ninth Circuit

In November 1998 FTC engaged Cook Islands legal counsel and obtained an opinion on the most appropriate way to enforce a repatriation of the funds to  the USA. It is understood that this opinion suggested two ways in which a repatriation of funds could occur. The first option was to commence proceedings against the Cook Islands Trustee alleging a fraudulent conveyance and, concurrently, seek a mareva injunction. The second option was to request the Andersons (in their capacity as Protectors of the Trust) to sack Asiatrust Limited as Trustee, appoint a Trustee friendly to the FTC, amend the trust deed to remove the language relating to the "Event of Duress" and then have the new Trustee repatriate the funds to the US.

FTC decided to take the second option and in December 1998 it requested the Andersons (whilst still incarcerated) to sign the following documents:

• A Deed of Removal and Appointment of New Trustee to remove Asiatrust Limited as Trustee and appoint a new Cook Islands International Company, known as FTC Incorporated, as the new Trustee. FTC Incorporated had been established at the instigation of FTC and was owned by FTC.
• A Deed of Amendment to exclude FTC from the definition of "Excluded Person" under the trust deed.
• A Declaration of Resignation by the Andersons as Protectors and the appointment of FTC as new Protector.

Consequently, upon execution of these documents ("the December documents"), the Andersons were released from incarceration.

Asiatrust Limited received copies of the December documents on 21 December 1998 and immediately sought legal advice from local counsel on the effect of those documents. On 23 December 1998 counsel advised that:

• The Deed of Removal and Appointment of New Trustee was invalid because inter alia it was an exercise of power by the Protector for the benefit of an Excluded Person and therefore contrary to the terms of the trust deed.
• There was no power to amend the trust deed.

On 29 December 1998, Asiatrust Limited wrote to FTC's Cook Islands legal counsel advising that it believed the Deed of Removal was invalid.

It was understood that FTC would thereafter commence proceedings in respect of the validity of the December documents. However, by May 1999 no such proceedings had been commenced. Therefore, in June 1999 Asiatrust Limited made an Application for Directions to the Cook Islands High Court in respect of the December documents. FTC sought, and was granted, leave to appear in those proceedings.

As is well known, on 15 June 1999 the Ninth Circuit rejected the Andersons' appeal against the finding of contempt by the US District Court.

Asiatrust Limited's Application for Directions was heard by the High Court on 29 July 1999 and judgment was handed down on 11 August 1999 by the Chief Justice, Quilliam CJ . He decided that:

• The December documents had been executed by the Protectors for the benefit of FTC.
• FTC was an Excluded Person for the purposes of the trust deed.
• The December documents were therefore wholly invalid apart from the Resignation of the Protectors, which Quilliam CJ accepted as a valid resignation.
• FTC should pay the costs of the Applicant.

In September 1999 the US District Court purged the Andersons of their contempt. However, at the time of writing it is understood that the District  Court is yet to hand down judgment.

• The present situation is therefore as follows:
• The Andersons have been purged of their contempt.
• The trust fund remains with the Cook Islands Trustee although the Registrar of the Cook Islands High Court is now a co-signatory.
• The US District Court is yet to hand down its judgment on the allegations made against the Andersons.
• The FTC's Cook Islands proceedings alleging fraudulent conveyance are currently pending the US District Court's judgment.

As will be appreciated, the conduct of this matter has been extremely difficult for the Cook Islands Trustee. The primary concern of Asiatrust Limited throughout has been to fulfil its primary duty as Trustee, which is to preserve the trust fund for the benefit of the beneficiaries in accordance with the proper law of the Trust (notwithstanding knowledge of the FTC's allegations). Thus far the Cook Islands High Court has agreed with the manner in which the Trustee has acted.  

Future developments in the matter will, it is submitted, depend upon the outcome of the proceedings against the Andersons in the US District Court. If the District Court finds that the Andersons have committed the offences alleged by FTC, the Cook Islands High Court will then need to consider whether any fraudulent dispositions were made to the Trust.