The Cook County Slammer
The case of Marriage of Harnack, 2022 IL App (1st) 210143 (Ill.App.Distr. 1, June 1, 2022), involves the marriage of Pamela Harnack to Steve Fanady in 2003 and their subsequent divorce in 2008. At some point, Fanady quit bothering to appear in the divorce action, and a default judgment was entered against him which found that he had $7.3 million in assets, while Harnack suffered from health issues, had minimal income and was unable to support herself. Among Fanady's holdings were 280,000 shares of stock in the Chicago Board of Exchange, Inc. (the "CBOE"), and this was determined to be part of the marital estate. The court awarded 120,000 of the CBOE shares to Harnack, and ordered Fanady to turn them over. Fanady refused to comply, but more on this in a moment.
It turns out that not only was Fanady attempting to cheat Harnack out of her fair share of the marital assets, but Fanady was also allegedly attempting to cheat his business partners, the latter who had brought a breach of partnership action against him. For its part, the CBOE interplead (deposited with the court) whatever of Fanady's stock that it held to let the court sort out the ownership.
By this time, Fanady had determined that simply letting Harnack take a default judgment was a mistake, and so he attempted to set aside the judgment she held. The court didn't have much sympathy for this effort, holding that Fanady's
"complete refusal to participate in the dissolution proceedings for more than 15 months, his attempts to evade service of process and his refusal to comply with the court's orders regarding payment of maintenance and with its restraining orders and injunctions barring him from [the] transfer of any assets held by him or his enterprises. * * * We also noted that the record showed Fanady's 'attempts to evade the jurisdiction of the court and to defraud this court' as well as a Florida court, where he obtained a dissolution of marriage judgment under false pretenses. [] The record further showed that Fanady 'forge[d] * * * a dissolution judgment in order to obtain a religious divorce' and attempted to 'hide marital assets by selling one presumptively marital CBOE seat and hiding the money received in Switzerland and by transferring 120,000 presumptively marital shares' from partnership accounts. [] In light of the above, we explained that 'Fanady was the architect of his own predicament' and that "any alleged errors in the judgment or inequalities in the distribution of assets are solely due to Fanady's failure to participate in the dissolution proceedings. Any errors or injustices in the judgment for dissolution of marriage of which Fanady now complains would not have occurred absent his abandonment of the litigation. Fanady chose not to participate in the litigation. He must now live with the consequences of that decision. * * * Rather than participate in the action and present his own evidence to the court to rebut Harnack's evidence, Fanady chose instead to make underhanded efforts to prevent Harnack from getting her appropriate share of the marital assets and to avoid the trial court's jurisdiction. His behavior in this case has been so egregious, so contemptuous of the law and the court, that he cannot now complain that substantial justice requires that the judgment for dissolution of marriage be set aside."
The litigation between Harnack and Fanady then went on and on, including several appeals and a trial. Readers shall be spared the lengthy description of that, but should only know that the end result was that on December 11, 2020, the court ordered Fanady to transfer 120,000 of CBOE stock (or an equivalent) by December 18, 2020. Fanady of course appealed this order, and again lost.
December 18, 2020, of course came and went and there was no transfer by Fanady. Several days later, on December 30, 2020, Harnack filed a petition for Fanady to show cause for his failure to comply with the court's order. That now brings us to Fanady's offshore trust.
Fanady claimed that he had an offshore trust located in Belize, which contained "everything he has ever owned", but stated that he had no way to access the assets of the trust, although it did pay his living expenses and legal fees. Moreover, Fanady claimed that the Belize trust was a "blind trust" in the sense that he didn't even know what assets were in it. Fanady sent a copy of the court's order to the Belize trust, and the Belize trustee (as is exactly the plan with offshore trusts faced with ligation) stated that because Fanady was under "duress", the Trustee could no comply with any orders of Fanady, much less turn over any assets to the court or Harnack.
At a subsequent hearing on February 9, 2021, the court found Fanady in indirect civil contempt, that he had the means to comply with the order, and that his failure to comply with the order was willful and contumacious. The court ordered Fanady committed to the Cook County, Illinois, jail until he transferred either 120,000 shares of CBOE stock or $10 million (based on the CBOE's stock current estimated value) to Harnack. The next day, a body attachment order was issued to the Cook County Sheriff for Fanady, with the Sheriff told to hold Fanady in jail until he transferred the aforementioned stock or cash to Harnack. Fanady then appealed the body attachment order and this lead to the opinion of the Appellate Court of Illinois for the First District that I shall now relate.
As an initial matter, Fanady argued to the effect that he shouldn't be kept in jail while he appealed. Not so, said the Appellate Court, since a judgment is valid and enforceable unless it is stayed on appeal, and the judgment against Fanady was not.
Fanady's main argument was that he could be held guilty of contempt because it was impossible for him to comply with the court's order. Indeed, this is the main thrust of any offshore trust defense: Because of the way the offshore trust is worded, the settlor (here, Fanady) has no rights to the trust assets and of course the offshore trustee is refusing to give the assets up to help him. This argument sounds really good, until one learns that it almost never works. And here's why.
In a contempt situation, the creditor bears the burden of showing that the debtor (contemnor) has failed to comply with a court order. The burden of proof then shifts back to the debtor to prove up whatever defenses he might have, such as that he had no ability to comply and therefore his contempt was excused. The problem with this is that is requires the debtor to essentially prove a negative, i.e., that it was impossible for the debtor to comply. Where an offshore trust is involved, the debtor then attempts to prove that because of the terms of the trust, and because the trustee has refused to repatriate assets, it is impossible for the debtor to comply.
But there is a huge fly in that ointment: When a debtor places assets in an offshore trust, that is said to be a self-created impossibility, and a self-created impossibility is not a defense to contempt. Or, as the Appellate Court put it: "An alleged contemnor's inability to comply with an order is a defense to contempt, but that defense is unavailable where the contemnor has voluntarily created the inability to comply." So, it doesn't matter if the debtor can actually comply or not: Either way the debtor loses. The only inquiry by the court becomes whether the debtor created the offshore trust and placed assets in it, thus self-creating the very impossibility that the alleged has his defense. Here, Fanady made the exact same argument about impossibility due to his inability to access his Belize trust's asets, and the court found that his defense was not available to Fanady because he self-created the impossibility by setting up and funding the Belize trust in the first place.
The Appellate Court's next consideration was whether incarceration was the appropriate remedy under the facts of the case, and of course it was. Fanady had been dodging Harnack's judgment for over a decade, and it was clear that nothing short of sending him to jail would suffice to make him finally pay up. Thus, the Appellate Court:
"Based on the record of this case, as well as this court's longstanding familiarity with Fanady's behavior, we find no abuse of discretion in the court's determination that Fanady would ignore a more lenient sanction and that incarceration was appropriate and necessary to coerce Fanady's compliance. The contempt sanction ordered in this case was properly coercive; Fanady holds the 'keys to his cell' and may purge the contempt at any time, by simply complying with the order."
The Appellate Court then dispensed with a laundry list of other objections by Fanady, none of which had the slightest whisp of merit or are worth our examination here, and overruled them all. The Appellate Court concluded that "committing Fanady to the Cook County jail was an appropriate and available sanction in these circumstances. Once the circuit court entered its contempt order providing for Fanady's commitment as a sanction for his indirect civil contempt, it was similarly entitled to enforce that order and allow the sheriff to effectuate that order, through a body attachment order."
Fanady's appeal thus failed, and the Appellate Court entered its decision affirming the trial court's body attachment order on June 1, 2022. Apparently, Fanady was subsequently committed to incarceration in the Cook County jail on June 28, 2022, as Inmate No. 20220628143, where he still was resident at the time of this writing on July 13, 2022. According to one Mr. Jake Elwood of the Blues Brothers, the Cook County slammer is known for its bad oatmeal.
ANALYSIS
As far as I am aware, the "impossibility defense" has failed in about 30 or so cases — although truthfully I lost count some years ago — and has only worked once. Thus, the "impossibility defense" may quite correctly be said to be just about impossible for a debtor with an offshore trust to establish. This is why offshore trusts fell out of favor as asset protection devices after the so-called Anderson Case, named for the couple sent to jail for contempt in FTC v. Affordable Media, LLC, 179 F.3d 1228, 1243-44 (9th Cir. 1999). This doesn't mean that offshore trusts don't work at all, but rather that their utility is restricted to basically two situations:
(1) The debtor has left the jurisdiction (basically, the entire United States) so that the incarceration order cannot be carried out, and/or
(2) To facilitate a settlement with creditors who might not want to spend the time and effort to have the debtor held in contempt, although this of course might not particularly effective against those creditors with deeper pockets.
Offshore trusts are known as Foreign Asset Protection Trusts (FAPTs), and despite their shortcomings are still better than the fatally-flawed Domestic Asset Protection Trusts (DAPTs) which are still the flavor-of-the-day asset protection device by estate planners who either simply don't know any better, or just want something easy to sell to their clients whether it works or not. I've talked about the disadvantages of both varietals enough over the years that I don't really feel compelled to rehash that all over again.
However, since we've now had close to a quarter-century of law relating to FAPTs, I thought that I would take the example of this case to look back to see how some issues have developed over the years.
First, when the Anderson Case first came out, most asset protection planners (then, a much smaller but much more informed group) thought that the Anderson Case was an outlier and that the courts would generally not adopt the idea that a self-created impossibility is no defense to contempt. A few us thought otherwise, and suggested that this doctrine would expand. Over the years we have been proven correct as numerous state and federal courts have adopted this doctrine as the Illinois Appellate Court just did with Fanady. There is utterly no reason now to suspect that a court will allow a self-created impossibility as a defense to contempt, although there still is a chance (as happened in one case) that a wily debtor might actually prove up the impossibility to the satisfaction of the court.
Second, planners used to argue — and some still do today — that some offshore jurisdictions were better than other offshore jurisdictions, i.e., that the Cook Islands was better than Nevis, or Nevis was better than Belize, or whatever. The real truth is this: Choice of jurisdiction has not mattered at all in a single case. There has yet to be a single case where the laws of one jurisdiction made a difference for a debtor where the laws of another offshore jurisdiction would not. Thus, those who claim that they "only use the best offshore jurisdiction" are doing nothing but blowing meaningless smoke. Offshore trusts work because the assets are outside the jurisdiction in a place that does not automatically respect U.S. judgments, and for no other reason.
Third, and similarly, planners used to argue that their offshore trust documents were somehow much superior to others. Yet, there has yet to be a case where the particular drafting of the offshore trust made any appreciable difference. Some planners still like to claim that their trust documents are better than others for whatever reason, and maybe they are for reasons other than creditor-debtor reasons, but as to the latter pretty much all offshore trust documents having at least the basic terms are all alike. Again, offshore trusts work because the assets are outside the country, not because of fancy drafting.
So, where does all that leave us? Are offshore trusts good or bad? Do they work or not? The answer is this: Offshore trusts are simply one tool in an asset protection planner's toolbox to be used when that tool is needed. An offshore trust is not, however, a tool of general use to be employed for each and everybody who comes along. Offshore trusts can make a lot of sense for truly international families, or for persons who actually have a lot going on overseas. But they don't make any sense for somebody who doesn't have pre-existing international connections, i.e., the surgeon in Omaha who isn't going to abandon his family and move his practice abroad if things in the U.S. become dicey.
But this is true of every asset protection vehicle, and not just offshore trusts. There simply is no asset protection vehicle of general use, and anybody who claims there is just doesn't know what they are talking about. Specific asset protection vehicles are used for specific persons in specific situations in specific jurisdictions with specific needs: That's what true planning is all about. It is not about selling some off-the-rack one-size-fits-all "solution" to the masses, which probably describes better than 99% of all asset protection currently being implemented, usually by "scare 'em then sell 'em" promoters.
Finally, as I have written probably hundreds of times, and lectured about as many, asset protection isn't about defrauding creditors or hurting people. It is about legitimately (and really) taking assets off one's table so that those assets are no longer exposed to one's future possible liabilities. Here, Fanady is using his Belize trust not for any legitimate purpose, but to cheat his spouse. That was never the proper office of asset protection planning, and it is nothing like legitimate.
Fanady today sits in jail because he used his Belize trust to hurt Harnack. He deserves what he is getting, and nobody should have any sympathy for him. If you are curious, the record for a debtor with an offshore trust sitting in jail is 6.5 years held by former options trader Stephen J. Lawrence. Maybe Fanady can take a run as his record?
