In re Lawrence – Not Exactly Shawshank Redemption, But Another Great Tale of Patience and Hope
By: James M. Duggan, MBA, JD
Co-Founder, The Asset Protection Society
Stephan Jay Lawrence, the now infamous options trader whose infamy derived from both his bad trades as well as his asset protection structure, may now be a celebrated name in the legal community. After 6 plus years of incarceration for civil contempt, Mr. Lawrence is being released. While his homecoming may yet retain some taint from the hovering bankruptcy judge, his return will no doubt reinforce the effectiveness of offshore asset protection trusts.
For those unfamiliar with the Lawrence case, Mr. Lawrence lost over $20,000,000 on “Black Monday” in 1987 when the market fell and Bear Stearns made its inevitable margin call. About two months prior to receiving final judgment from the court, Mr. Lawrence transferred the bulk of his net worth (approx. $7M) into an offshore trust. The trust was first domiciled in the Jersey Channel Islands and subsequently moved to Mauritius. The annual trust documentation was inadequate in that it failed to contain the key “spendthrift” and “anti-duress” clauses which lie at the heart of an asset protection trust. The trusts were amended on separate occasions to add these features – both of which took placed after the judgment was rendered. In addition, Mr. Lawrence retained significant powers of removal and substitution over the trustee.
When Bear Stearns pressed to collect on its judgment, Mr. Lawrence continually argued that he had no control over the trustee and that it was impossible for him to repatriate his money to pay off the judgment. The court ultimately grew tired of this argument (or, “charade” as it was called), so it put Mr. Lawrence in jail for civil contempt of court. The court refused to respect Lawrence’s “impossibility” defense when the impossibility was created by Lawrence himself.
The Lawrence case has fueled much debate among professionals about the viability of offshore asset protection trusts. When Mr. Lawrence was put behind bars, many practitioners put offshore APTs behind bars as well. The threat of pinstriped pajamas into perpetuity was simply too much for these practitioners to want to recommend this strategy at any level to a client seeking asset protection structuring. Instead, their planning generally focused in maximizing domestic exempt assets and transferring the remaining assets to US limited liability companies and US asset protection trusts.
Other professionals have maintained that the Lawrence case is a classic case of bad facts making bad law – among other things, there was subjective intent to commit a fraudulent conveyance just before the arbitration award was delivered, the client retained too many powers in the subject documents with respect to the trustee, and the critical spendthrift and anti-duress provisions were added to the documents on separate occasions after the fact. In addition, these practitioners actually look to the Lawrence case as an absolute reinforcement of the powers of the offshore asset protection trust. After all, though it is true that Lawrence went to jail, it is also true that his assets remained fully protected all the while. Therefore, many argue, the Lawrence case clearly demonstrates the power of placing assets outside the reach of the US court system.
The issue of contempt arose with Mr. Lawrence because the court simply did not believe his claims that he was unable to repatriate the assets from the trust to pay off the claim. He claimed that the order to repatriate was “impossible to comply with” since the trustee, pursuant to the documents, was instructed not to distribute any assets under US court order. Because this condition was created by Mr. Lawrence himself, known as a self-created impossibility, the court overlooked “impossibility” as a viable defense to the contempt charge. Therefore, Mr. Lawrence was placed in a federal detention center in an effort to coerce him into complying with the order.
Mr. Lawrence was intent on making his messages clear from the outset: 1) he could not be coerced, and 2) he would maintain that it was impossible for him to get to the assets. The years passed. He never wavered.
Now, more than six years later, his patience and persistence has paid off. Realizing that no length of incarceration would break him, US District Judge Gold has released Mr. Lawrence. Judge Gold acknowledged that there indeed is no realistic possibility that Mr. Lawrence would ever comply with the contempt order, and that the incarceration was failing to serve its intended purpose of coercion. Once civil coercion is no longer being served, imprisonment ultimately becomes more punitive in nature and violates certain due process rights of the individual being imprisoned. In effect, as a result of his stubbornness, Mr. Lawrence is now free to go.
Notwithstanding the foregoing, there may very will be much more to come in the saga. Judge Gold has allowed the bankruptcy trustee to institute proceedings to seek to prevent Mr. Lawrence’s enjoyment of the assets in the trust, and is allowing for future contempt charges to be brought if he fails to comply. Stay tuned. The next chapter may involve Mr. Lawrence’s permanent departure from the US to live happily ever after with his money…
As for the future of the debate among practitioners relating to the use of offshore asset protection trusts, one should be able to glean from this case that imprisonment for contempt is not forever. It is definitely a victory for the proponents of offshore planning as the ruling has diminished the threat of the US courts to keep someone in jail until repatriation. However, those who assail the use of offshore asset protection trusts will no doubt suggest that any stretch in the pen, no matter how brief, is something one should avoid.
From this writer’s perspective, jail time is avoided by proper planning with a competent professional – whether planning in the US or otherwise. The deficiencies in Mr. Lawrence’s facts (as well as the other contempt cases that have arisen) are significant. Good people who plan in advance of lawsuits, and who employ competent advisors that use proper documentation and structuring, should never find themselves in this unenviable position.
Query: Although the case is silent on the matter, one does wonder if Mr. Lawrence was assisting the staff in the detention center (and perhaps Judge Gold) in establishing daytrading accounts for implementation of his various options strategies – could make for a great movie…