Andrew C. Grossman personally guaranteed a commercial mortgage loan, failed to pay on the guarantee, and Fannie Mae (which took over the loans) had judgments entered against Grossman in Oklahoma and Minnesota in 2007 and 2008.
In January, 2010, Grossman's father died. Immediately thereafter, Fannie Mae moved to a Temporary Restraining Order (TRO) against Grossman, to prevent him from transferring or disposing any of his inheritance. The Court granted the TRO, and later converted it to a Injunction.
Grossman appealed the Injunction -- and won, with the Minnesota Supreme Court ruling that the Injunction could not be entered because Grossman did not yet have possession of the trust proceeds.
The following year, on May 22, 2012, Grossman received $11 million father's estate, which he immediately wire-transferred to his Swiss bank account at Coutts & Co.
Fannie Mae then went back to Court and again obtained an Injunction prohibiting Grossman from transferring or disposing of the money, and further requiring Grossman to disclose information about the moneys in the Swiss account.
A couple of months later, in August 2012, Fannie Mae moved to apply some of Grossman's property in satisfaction of Grossman's debt.
Thus, in September, 2012, the Court ordered Grossman to transfer the amount of the outstanding judgment from his Swiss bank account to his account at Fannie Mae. Grossman thereupon sent a letter to his Swiss bank requesting that over $7 million dollars plus interest be transferred from his Swiss account to Fannie Mae.
Then, "surprise, surprise, surprise," as Gomer Pyle might say: The Swiss bank wrote back that it couldn't transfer the money because the account balance was zero.
Fannie Mae went nuts, of course, and filed an emergency motion to order Grossman, under penalty of contempt, to deliver the money to Fannie Mae and provide information about what happened to the money. The Court also went nuts, and on November 8, issued an order requiring Grossman to deliver $10.5 million plus interest ($1,300 per day) to Fannie Mae within 48 hours.
Then, as debtors are wont to do, Gross decided to play stupid (a role for which he was apparently well-suited), and wrote a letter to the manager of a just-formed Cook Islands LLC ("LSPG Shoreline 2012, LLC") that the money had apparently gone to, requesting that the funds be transferred to Fannie Mae.
The manager replied:
Pursuant to the recommendation of your investment advisor, your Coutts account funds were used on 23 May 2012 to purchase membership units in your name in a limited liability company ... [t]he Company engages in long-term fixed income investments....
Grossman later testified that he was unaware that Coutts had invested all of the $11 million in the just-formed LLC; oh, and also that he had not been receiving any account statements for his $11 million.
Fannie Mae moved to hold Grossman in contempt, and for attorneys fees -- which of course the Court agreed with under the circumstances. Grossman appealed.
By what is commonly known as a "Turnover Order", a debtor such as Grossman can ordered by the Court to transfer property that is under his possession, custody or control to a creditor (if cash) or an officer of the Court (read: sheriff) for non-cash assets.
On appeal, Grossman argued that he wasn't subjected to the November 8 order requiring him to transmit the money to Fannie Mae, because by that time he no longer had possession of it.
But the Minnesota Court of Appeals rang up "No Sale" to Grossman's argument -- it simply did not believe that Grossman no longer had control of the money:
At the time of the November 8 proceedings, it was not clear where the money that was in the account had been transferred. But because Grossman was the only accountholder, it was highly probable that he continued to have possession or control over the money.
Having given Grossman the thumbs-down on that argument, the Court of Appeals next considered whether Grossman was in contempt.
Here Grossman complained that held in contempt for not paying his debtor amounted to a "debtor's prison". This argument similarly flopped:
We disagree. The district court did not find Grossman in contempt for failing to pay a debt; instead, the district court found Grossman in contempt for failing to comply in good faith with its November 8 order. The district court is explicitly authorized by statute to hold a defendant in constructive civil contempt of court for "disobedience of any lawful judgment, order, or process of the court." Minn.Stat. sec. 588.01, subd. 3(3); see In re Burt, 56 Minn. 397, 399–400, 57 N.W. 940, 941 (1894) (holding that the defendant was not imprisoned for debt but for refusing to comply with the court's order to pay money to his creditors). The district court did not impermissibly order Grossman to be imprisoned for failure to pay a debt.
Shifting gears, Grossman next asserted the "Impossibility Defense", which is that he could not lawfully be held in contempt of the Court's November 8 Order to transfer the funds to Fannie Mae, because he was not in possession or control of those funds, i.e., it was "impossible" for him to comply.
The problem with the Impossibility Defense is that it is almost impossible for a debtor to win on, since the burden of proof is on the debtor to show that he couldn't comply, i.e., prove a negative.
Here, it was impossible -- totally impossible -- for Grossman to satisfy the requirements of the Impossibility defense, since:
(1) Grossman was the only member of LSPG Shoreline;
(2) the company was formed to shield Grossman's distribution from his father's trust from collection by Fannie Mae;
(3) nothing legally prevented Grossman from accessing his investment in the company; and
(4) his conditional confinement was reasonably likely to produce compliance with the order.
Actually, Grossman had produced to the District Court one copy of the Operating Agreement showing that he was the only member, and then after he had lost had tried to present another Operating Agreement showing that there were three members (one gets the idea that the ink was still wet on this latter document when it was presented to the Court). But even that second Operating Agreement did not disclose the identities of the other members, since their names were blacked out and the signature line said only "Signature on file". This was also very amateurish, to say the least.
But even beyond that charade:
by Grossman's own admission, he has a history of transferring his assets to foreign outposts to prevent Fannie Mae from collecting on its judgment against him. Grossman also testified that he opened the Coutts account in anticipation of receiving a distribution from his father's trust and, in fact, the account received a distribution of approximately $11 million from his father's trust in May 2012.
One can definitely come away with the impression that Grossman is a clueless bumbler, which is reinforced by the fact that the Operating Agreement for the LLC did not in fact keep Grossman from accessing his funds as would be necessary to prove the Impossibility Defense:
The plain language of the agreement states that Grossman may be liable for damages if he withdraws his investment, but it does not state that it is impossible for Grossman to do so. For this reason, the record also supports the district court's finding that conditionally confining Grossman is reasonably likely to compel his compliance with the order.
Grossman also argued that Fannie Mae's remedy was not to hold him in contempt of court, but rather to get a charging order against his interests. However, here the Court of Appeals made the ruling (which I will discuss much more extensively below) that because Grossman's Cook Islands LLC was not a Minnesota LLC, the charging order protection did not apply to it.
So, not only did Grossman lose on all counts and the contempt order was affirmed, but he was additionally hit with attorney's fees due to his bad faith and vexatious conduct.
ANALYSIS
There are two issues here -- the Impossibility Defense, and the Foreign LLC business.
The Impossibility Defense is thrown about at asset protection seminars more than the beach ball at a bad outdoor rock concert. "You can't be held in contempt, because you have no control over your assets!", the story goes.
The problem is that in the creditor-debtor context, you can count the number of cases where the Impossibility Defense was successful on one hand. Or two fingers. Or maybe you don't even need a finger as successful Impossibility Defense cases are as rare as meteorite strikes on the Statue of Liberty. It is just not something that you can, or should, count on.
Since the burden of proof of the Impossibility Defense is on the debtor to prove that there is no reasonable way that he can comply with the Court's Order, i.e., prove a negative, and the debtor can pretty much never meet this burden, the Impossibility Defense almost always flops for some reason or another.
Asset protection plans that ultimately rely upon the Impossibility Defense are therefore ultimately flawed. If for whatever reason the creditor doesn't settle and the matter goes all the way to adjudication, the debtor will very likely be held in contempt and then will have to make the decision whether to bring the money back and make it available creditors, or flee the country and thus the contempt power of the Court.
Which is pretty much what Grossman's options are in this case: He can either flee the U.S. and join his money abroad, he can bring the money back to the U.S., or he can go sit in jail.
So, the next time you hear about the Impossibility Defense, you'd better dig out that softball-sized grain of salt to take with it.
Much more technically interesting, although it encompasses the whole of one small paragraph in the Court of Appeal's Opinion, is the concept that a foreign LLC is not protected by charging order protection.
Indeed, according to the wording of the LLC acts (the ULLCA and RULLCA), there appears to be an anomaly for foreign LLCs and whether the charging order is the "exclusive remedy", i.e., whether a creditor of a debtor/member must use the charging order procedure as opposed to other of the creditor remedies available under general collection statutes.
If the charging order provisions do not apply to a foreign LLC, that means that these other remedies, such as levy (judicial seizure and sale) of the debtor/member's interest is possible. Such a ruling would immediately turn upside down many asset protection plans.
Here, the Minnesota Court of Appeals addresses the issue in a very dismissive fashion, as if it were a throwaway issue that required no meaningful discussion, and no meaningful discussion is exactly what we get in the Opinion. Thus, we'll have to wait for some other Opinion that discusses this issue in detail to see whether this theory has legs -- just be aware that it is out there.
Finally, I would remiss if I didn't mention that Fannie Mae would have not had any recovery at all had Grossman's father simply created a trust -- even a simple, domestic "living trust" -- with spendthrift provisions and wholly-discretionary distributions, and made Grossman the beneficiary. In that case, Grossman would not have been able to access the funds, and Fannie Mae would not have been able to access the funds, and Grossman probably could have worked out a very favorable settlement with Fannie Mae . . . without having to flee the country.
Asset protection planning must take into account not just the assets that a person has now, but also the assets they may acquire or inherit in the future, and that often means that asset protection planning needs to be multi-generational to be truly effective and efficient. Large inheritances, in particular, should not be left to heirs outright, but those should always pass in trust for the reasons which are here all to obvious.
And you can take that to the bank, an ordinary domestic one.
CITE AS
Fannie Mae v. Heather Apartments LP, 2013 WL 6223564 (Minn.App., Dec. 2, 2013).http://goo.gl/mQacuO
This article at http://onforb.es/1faqTbo and http://goo.gl/m3BC04
