[Author's Note: Shortly after the writing of this article, Mr. Charles Barrett contacted the Author and pointed out certain discrepancies between the Court's recitation of the facts, and certain of the record evidence in the case, particularly as to how much money the Barretts had voluntarily paid the IRS -- which Mr. Barrett claimed was substantial and had nearly, if not completely, paid off their tax debt to the IRS. The Author has made no independent investigation of these facts, and has not attempted to contact the IRS for their side of the story, but does point out the possibility of discrepancies in the Barretts' favor. Mr. Barrett points out what he considers to be these discrepancies in his comment below.]
In 2008, Charles and Kathleen Barrett filed a fraudulent tax return for Tax Year 2007. Because of that return, the Barretts received a tax refund of $217,615 to which they were not entitled.
On September 1, 2010, the IRS sued the Barretts in Colorado federal court, and eventually obtained a default judgment against them for $351,197 (now including penalties and interest) when the Barretts failed to defend. Three times the Barretts tried to vacate the default judgment, and three times they failed.
So far, so what -- if the Barretts had simply paid their taxes, this would have been an obscure case for a relatively small amount and probably nobody except the parties concerned would have cared much.
But the Barretts decided that they weren't going to pay, and that's where it starts getting interesting.
The record is silent (so far as I could find) on when the Barretts decided to leave the United States, but it does mention that the Barretts decided to move to Ecuador. What is clear is that the Barretts deposited their refund check first into their domestic bank account, then moved it to another account, and then wire-transferred $64,720 to an account with a bank in Uruguay.
Probably not just a few of my dear readers are probably thinking by this time, "Yeah, and good luck with the IRS collecting any of that money, against a couple living outside the U.S. with bank accounts outside the U.S."
But, in the off-chance that the Barretts might show up again, the IRS went to the U.S. District Judge, and asked that an order by the cool name of Writ of Ne Exeat Republica be issued against the Barretts to keep them from leaving the U.S. (although they were already long gone), requiring them to post a bond for the $351,197, requiring they be detained by the U.S. Marshal Service pending a hearing, requiring that they produce all their books and records of financial assets and accounts, and restricting them from further transferring or alienating their property.
Of course, this Writ was without little immediate effect since the Barretts had vamoosed. The Writ was issued without the Barrett's knowledge, by the court on an ex parte basis, which meant that only the IRS showed up to talk with the Judge, and the Barretts were unrepresented -- a disadvantage inherent to fleeing the country.
The Writ of Ne Exeat Republica (again, what a cool name) was issued on December 2, 2010, and immediately started to gather dust, languishing in the "Case Probably Dead And Nobody Cares Anymore" files in the basement of the Denver courthouse.
Our story might have ended right there, and readers would have wondered why I wasted electrons writing about it. So, let's now hit the fast-forward button.
In the summer of 2013, the Barretts decided to attend their daughter's wedding -- in the U.S.
Demonstrating surprising efficiency, U.S. Marshals were there to greet the Barretts upon their arrival, and the Barretts were detained (no word on what happened with the wedding). The Barretts were ordered to turn over their passports and any other international travel documents, and remain in the U.S.
On October 11, 2013, the Barretts appeared for a hearing before a U.S. Magistrate Judge. At this time, the IRS identified the assets they believed the Barretts had control of that were available to pay their debt -- about $20,000 in cash in various accounts, some real estate in Ecuador, a bunch of minority stock interests in a nutritional food company apparently doing business in Central America, various small assets such as coins and jewelry, a truck and a horse.
Mrs. Barrett claimed that most of the assets were either worthless or not accessible, and at any rate their total value was not much more than $48,000. Of course, these are just the assets that the IRS was able to identify.
Because of the paucity of the Barrett's assets, the U.S. Magistrate Judge recommended that the Writ be discharged, largely because the failure of the IRS to identify any significant assets meant that the IRS would not suffer any substantial harm would the Barretts to be allowed to leave the U.S.
The IRS also moved to hold the Barretts in contempt for failing to repatriate $16,000 in assets to the U.S. and apply them towards their IRS debt. The U.S. Magistrate Judge agreed with the IRS on this point, and ordered the Barretts to be confined in a half-way house until they had purged the contempt.
Within a couple of months, on December 17, 2013, the IRS advised the Court that it had been successful in getting $16,000 through a levy of one of the Barretts' assets, and this should be enough to purge the contempt. The U.S. Magistrate Judge then took a series of actions to reflect this.
The IRS then appealed to the U.S. District Court the U.S. Magistrate Judge's recommendations to release the Barretts from the Writ of Ne Exeat Republica.
Although noting that there is a constitutional Right to Travel, the U.S. District Judge noted that there are exceptions to the Right to Travel, and forcing debtors to remain in the U.S. until they have repatriated their foreign assets to pay their debts is one of those exceptions.
The Court also noted that the Barretts were not held in a "debtor's prison", and were no longer in custody from the contempt. Further, and very importantly, if the Barretts truly were without any assets to pay their debt, they could not be subject to the Writ of Ne Exeat Republica.
Where the District Judge disagreed with the Magistrate Judge was with the ability of the Barretts to repatriate certain of their assets. Specifically, the District Judge noted that there was no reason the Barretts could not repatriate moneys from certain of their accounts, and simply didn't believe that the Barretts could not liquidate their real estate in Ecuador (the Barretts claimed a boundary dispute made the property unmarketable, but provided no proof of this beyond their own word).
However, as with nearly all the debtors in similar cases involving offshore assets, the Barretts' biggest failure was their own credibility. Specifically:
- The Barretts had obtained a large tax refund through fraud. While they tried to claim that a "maverick accountant" signed their names to the return, when shown their signatures on their returns they claimed that the government forged their signatures. Nonetheless, the Barretts kept the fraudulently-obtained refund.
- The Barretts had not voluntarily paid anything to their creditor, and had "loaned" $20,000 to their son just to keep it out of their creditor's hands.
- While basically claiming poverty, the Mr. Barrett had his credit cards paid from an undisclosed account in the U.S., and had wired to another of his sons from $1,500 to $3,000 per month over a 2 to 3 year period.
- There was evidence that the Barretts had wire-transferred money between various accounts, and eventually withdrew $48,720 by a cashier's check, when a wire-transfer failed.
- The Barretts had refused to provide bank account or wire-transfer information for their various accounts.
- Mrs. Barrett sold shares in a company that was not disclosed to the U.S. Magistrate Judge for $40,000 while at the same time claiming that her sole income was the $430 she received from Social Security. Some of this money was used to pay the Barrett's legal fees.
Thus, the Court:
In short, the Court cannot trust the testimony of the Barretts. That being the case, their assertions about the unavailability of their real property in Ecuador as a source of funds to reduce their tax debt is unpersuasive. There might be evidence supporting the Barretts' position, but we have not yet seen it. * * * History tells us that the Barretts are unlikely to pay anything towards their tax debt if they are not compelled to do so, and the record shows that the government has exhausted its sources outside of the writ.
Thus, the Court ordered that it would keep the Writ of Ne Exeat Republica in place for now, but the Barretts could discharge the Writ by (1) paying the $16,000 which they were known to have, and (2) providing satisfactory evidence that their Ecuadorian property truly was unmarketable.
As a final note, the IRS had actually collect apparently substantial sums from other sources, by levying upon assets and other means -- thus leaving others who had dealt with or assisted the Barretts in various stages of discomfort (just as we have seen in so many other of these cases).
ANALYSIS
What do we get out of this case? A lot of juicy issues, that's what. Let's start with the most obvious.
If you flee the country to dodge your debts, don't come back. While this was a tax case, many states still recognize the Writ of Ne Exeat Republica too, and debtors who return after absconding could very well find themselves in a similar situation with their passports gently kept in the possession of the U.S. Marshal or local friendly sheriff.
Probably many who hear of this case, jump to the conclusion that this is all to be learned, and move on. But there is much more we can and should discern.
Another good lesson is that if a debtor is going to claim to court that they are no longer in possession of assets, they had better be prepared to document those claims in some depth. As shown here, courts are highly skeptical of debtors who concoct a story for which proof is little more than their own word.
Experience has long demonstrated that courts often don't believe debtors. Even if they are telling the absolute truth, in the absence of substantial documentation, probably most judges will simply refuse to believe them. This is particularly true of judges in the "Writs and Remedies" departments of larger courts who daily have innumerable debtors appear before them and spin "big fish" stories of where their assets when -- eventually, judges simply become numb to it all and tend to disbelieve any debtor who can't prove up their story.
Very similarly, it is a big factor with judges that a debtor is not attempting to pay their debts. There is an old saying that "Pigs get fat, and hogs get slaughtered". The debtor who makes some payments on a debt and appears eager and willing to pay the judgment has a chance of catching some breaks from the court; the debtor who pays nothing and claims no ability to pay is the hog to be slaughtered. The hard truth is that courts expect people to pay their judgments, as they should.
Where this is often seen is the debtor who claims no assets, or no access to assets, just like the Barretts here, but are shown to the Court to have the ability to finance their lifestyles, pay off credit cards, send money to their kids, and hire attorneys to defend them. These same debtors then seem surprised when the Court doesn't believe their claim to poverty.
I can't tell you how many cases that I have had where the debtor made a claim to poverty, but then was shown to be living in an expensive house, driving expensive cars, and generally not changing their creature comforts -- it just doesn't work against an aggressive creditor in real life.
If you're going to claim to be broke, you'd better appear to be broke in each and every aspect of your life. You'd also better be prepared to make full disclosure of all your finances, including turning over bank account records and other critical financial records.
Nonetheless, hardly a day goes by that I don't hear of some asset protection planner telling clients that in the event of financial distress, they can maintain their lifestyle while stiffing their creditors. Maybe in some states with generous exemption laws this is possible, but in the vast majority of states this is simply an impossibility, and thus a patently false representation by the planner (who usually has never had to defend debtors in court and thus realize the very practical and almost insurmountable problems this usually creates for those of us who do).
Paying legal fees is a particularly sticky issue, since creditors are usually entitled to examine the debtor (and in some states the debtor's attorney) to determine the source of the defense funds. A court that finds that the debtor's moneys are being applied to defense of the debtor instead of being used to pay down the debt, is often a court that will turn harshly on the debtor. Thus, a good asset protection plan will anticipate this issue, and plan for a source of paying for the debtor's legal defense from some other source than the debtor or a related entity.
In fact, an increasingly common tactic of creditor's attorneys is to quietly get their judgment liens down on the debtor, then begin enforcement, let the debtor's attorney run up some fees, and then go the debtor's attorney with proof of the lien on the debtor's funds and force the debtor's attorney to cough up that money to the debtor. Issuing levies for an attorney's trust account for any retainer funds held for the benefit of the debtor is becoming practice de rigueur by creditors in California and some other states. Thus, many debtor's attorneys, including Yours Truly, once they find out that judgment liens have been placed on the debtor, will refuse to represent the debtor until the payment comes from an external source -- and if there is no external source to pay these fees, the debtor is kindly shown the door.
These issues should be considered in advance, for after a judgment is issued it is often too late to do anything about it. Yet, very few asset protection plans contemplate these issues or attempt to do anything about them. Asset protection plans are not estate plans, where a planner can shove out a bunch of forms little particularized for individual clients and call it a day. To the contrary, asset protection plans must take into account these issues which seem minor in planning, but become major when creditors show up.
This is why many debtors end up in bankruptcy, although bankruptcy is the single worst place for a debtor with an asset protection plan to land. The debtors in those cases either don't want to, or can't pay their defense fees, and thus seek protection from a bankruptcy court which has as a major purpose to pick the debtor's assets clean for the benefit of creditors. Disaster almost always follows.
Clients are also not being advised that simply having an asset protection plan will usually not be enough. For all the talk of deterrence, many creditors see the existence of an asset protection plan as evidence that the debtors have the assets to pay a nice settlement if only enough pressure can be put on them. Some of this pressure goes to legal fees; defending an asset protection case can be very expensive, and many times the cost of the actual plan. Yet, few clients are warned of this, but instead told something to the effect that creditors will run in fear of their asset protection plan, when such is rarely the case in real life.
It is only a matter of time before clients start suing their planners for professional negligence for not advising the clients of the costs to defend their asset protection plans, and few planners give their clients such disclaimers.
Finally, the proliferation of offshore planning has been met with a much greater willingness of the courts to employ turnover orders for foreign assets and, as here, to order debtors to be incarcerated until the foreign funds are repatriated for the benefit of creditors. The practical upshot is that asset protection plans need to be better designed than ever, for if they fail in some respect the debtor had better be prepared to either show up and pay, or else bring the toothbrush and MP3 player and be prepared for an enforced vacation.
Here, these hogs deserved to be slaughtered, not just because of their many missteps and indefensible stupidity in returning to the U.S., but also because at the end of the day they cheated the government through their fraudulent refund and deserved to pay.
And a painful slaughter it has been indeed.
CITE AS
U.S. v. Barrett, D.Colo. Case No. 10-CV-02130 (Jan. 29, 2014). Full Opinion at http://goo.gl/NDs7sA
This article at http://onforb.es/1d1sVeO and http://goo.gl/LdrFYu
