The Impossibility Defense in Offshore Trust Cases

The impossibility defense is the legal argument that a person cannot be held in contempt for failing to comply with a court order when compliance is genuinely impossible. In offshore trust litigation, the defense arises when a U.S. court orders a settlor to repatriate trust assets and the settlor argues that the foreign trustee, not the settlor, controls the assets and has refused to release them.

Whether the defense succeeds depends almost entirely on how the trust was structured and how the settlor behaved before and during litigation. Courts have accepted the defense when the settlor genuinely lacked any mechanism to compel the trustee, and they have rejected it when the settlor retained practical control or created the impossibility deliberately as a litigation strategy.

What the Impossibility Defense Is

The impossibility defense originates in federal contempt law, not in trust law. Under United States v. Rylander, 460 U.S. 752 (1983), a person facing a civil contempt charge can avoid sanctions by demonstrating that compliance with the court’s order is impossible. The Supreme Court held that the burden then shifts to the contemnor to show “categorically and in detail” why compliance cannot occur.

In offshore trust cases, the defense operates as follows. A U.S. court orders the settlor to cause the foreign trustee to transfer assets back to the United States. The settlor contacts the trustee and requests compliance. The trustee refuses, citing the trust deed’s duress clause and the laws of the offshore jurisdiction, which prohibit compliance with foreign court orders. The settlor returns to the U.S. court and argues that repatriation is impossible because the trustee, an independent fiduciary governed by foreign law, will not comply and the settlor has no legal power to force compliance.

The court then evaluates whether the impossibility is genuine. The analysis centers on how much control the settlor retained, whether the trustee acted independently, and whether the settlor’s inability to comply reflects legitimate trust structure or deliberate obstruction.

When the Defense Has Succeeded

The Grant case (S.D. Fla. 2008) provides the clearest example of a court accepting the impossibility defense. Raymond Grant established two irrevocable offshore trusts in Bermuda and Jersey in the early 1980s, funded with approximately $2.1 million. The trusts were created years before the IRS assessed millions in back taxes against the Grants in the early 1990s. After Raymond died, the IRS pursued his wife Arline and obtained a repatriation order directing her to bring the trust assets back to the United States.

Arline Grant attempted to comply. She wrote to the trustees requesting distributions and attempted to exercise removal powers granted in the trust deed. The Jersey trustee refused each request, consistent with its obligations under the trust deed and Jersey law. The court examined whether Grant had the actual ability to cause repatriation and found that she did not. Although she held paper powers under the trust documents, those powers were ineffective because the trustees would not follow her instructions.

U.S. District Judge Jordan declined to hold Grant in contempt. He found that her inability to comply was genuine, supported by documented efforts to cause repatriation. The ruling rested on specific facts: the trusts predated the tax liabilities by nearly a decade, the trustee’s refusal was independent and consistent with the trust deed, and Grant had no mechanism to override the trustee’s decision.

The Bellinger case reinforced this principle. Bellinger transferred assets to a Cook Islands trust after a bank demanded repayment of a multimillion-dollar loan. The bank obtained a court order directing Bellinger to contact the trustee and request repatriation. He complied. The Cook Islands trustee refused. The court examined Bellinger’s intent and found that his primary motive for establishing the trust was to preserve assets for retirement, not to defraud the bank. The trustee’s refusal demonstrated that the trust operated as designed—with genuine trustee independence.

Both cases share common features: the settlor cooperated with the court, made documented good-faith efforts to comply, and demonstrated that the trustee’s refusal was the trustee’s independent decision rather than the settlor’s strategic maneuver.

When the Defense Has Failed

The cases where impossibility defenses have failed share a different pattern: the settlor retained practical control over the trust, used the trust as a personal account, or behaved in ways that convinced the court the impossibility was manufactured.

In FTC v. Affordable Media (9th Cir. 1999), the defendants operated a fraudulent telemarketing scheme and funded a Cook Islands trust with the proceeds. They named themselves co-trustees alongside the Cook Islands trustee company and retained the role of trust protector. When the FTC obtained a repatriation order, the duress clause removed the Andersons as co-trustees, but the court found they retained control through their protector powers.

The Ninth Circuit held that because the Andersons designed the trust to make compliance impossible while keeping the ability to influence the trustee, their claimed impossibility was not credible.

The Ninth Circuit warned that courts should be “especially chary” of accepting impossibility claims when the offshore trust context creates a risk that compliance efforts are a charade. The Anderson case did not hold that offshore trusts are ineffective. It held that a settlor cannot claim impossibility while retaining the power to cause compliance.

In Lawrence v. Goldberg (11th Cir. 2002), the debtor created an offshore trust in Mauritius two months before a $20 million arbitration award was entered against him and transferred $7 million into it. Under the trust documents, Lawrence retained the ability to remove and replace the trustee. The bankruptcy court found his impossibility claim not credible and held him in contempt. Lawrence spent nearly seven years in prison. The Eleventh Circuit affirmed, holding that the impossibility defense is unavailable where the impediment is self-imposed and the debtor retains mechanisms of control.

In In re Mastro (W.D. Wash. 2011), the debtor served as sole advisor and protector of his offshore trusts while claiming he could not direct the trustee. The bankruptcy court voided all transfers, finding that Mastro retained de facto control over the trust assets. The structural flaw was that Mastro’s governance role gave him the very authority he claimed not to have.

In Advanced Telecommunications v. Allen (11th Cir. 2011), the debtor funded a Cook Islands trust with a duress clause and standard protective provisions during pending litigation. When the bankruptcy court ordered repatriation and Allen claimed impossibility, the court held him in contempt twice, finding the impossibility was self-created. The Third Circuit affirmed, applying the self-created impossibility doctrine.

The Self-Created Impossibility Doctrine

The central legal question in offshore trust contempt litigation is whether self-created impossibility qualifies as a defense. The general rule under Rylander is that impossibility is a complete defense to civil contempt. But courts evaluating offshore trusts have developed a narrower principle: when the contemnor deliberately created the conditions that make compliance impossible, the defense is weakened or unavailable.

The Anderson case framed the issue most directly. The Ninth Circuit observed that the Andersons’ inability to comply was “the intended result of their own conduct,” and their trust was designed precisely to produce the impossibility they now claimed as a defense. The court stopped short of holding that self-created impossibility can never be a defense, leaving the broader question for another day.

But the Anderson court imposed a heightened burden: the defendant must prove impossibility “categorically and in detail,” and the burden is “especially high” when the impossibility results from the defendant’s own planning.

The Eleventh Circuit in Lawrence was more direct. The court held that the impossibility defense “is unavailable where the impediment is self-imposed.” Every court that has examined the question has treated self-creation as a factor that weakens the defense and increases the burden of proof.

This does not mean the defense fails whenever the settlor established the trust. Every offshore trust is, by definition, a structure designed by the settlor. The distinction is between a trust created as legitimate planning—where control genuinely transfers to an independent fiduciary—and a trust created to manufacture a litigation defense while the settlor continues to pull the strings. The Grant outcome demonstrates that courts can distinguish between these situations when the facts support it.

Structural Features That Strengthen the Defense

U.S. courts evaluating the impossibility defense have identified specific structural features that determine whether the defense will be credible.

Independent Trustee with No Ties to the Settlor

The trustee must be a licensed, regulated trust company in the offshore jurisdiction with no prior business relationship to the settlor and no financial dependence on the settlor’s continued patronage. Courts scrutinize whether the trustee has historically exercised independent judgment or has simply followed the settlor’s directions.

No Retained Governance Roles

The settlor should not serve as trustee, co-trustee, protector, or investment advisor. In Anderson, the settlors served as co-trustees and protectors. In Mastro, the debtor was sole advisor and protector. Both lost the impossibility defense because the governance roles gave them the power to influence the trustee that they claimed not to have.

Duress Clause with Automatic Operation

The trust deed should include a duress clause that suspends the settlor’s limited powers and triggers the trustee’s refusal to comply with foreign court orders. The clause must operate through the trustee’s independent judgment under foreign law, not through the settlor’s discretion.

Documented Good-Faith Compliance Efforts

In Grant, the court credited Arline Grant’s written requests to the trustees and her documented attempts to exercise her powers. The settlor who cooperates with the court, contacts the trustee, makes written requests, and reports the trustee’s refusal, is in a far stronger position than one who simply tells the court compliance is impossible without demonstrating any effort.

Arm’s-Length Administration Throughout the Trust’s Life

A pattern of trustee independence during ordinary times strengthens the defense during litigation. If the trustee routinely approved every request the settlor made without independent evaluation, a court may conclude that the trustee’s refusal during litigation is performative rather than genuine.

Post-Claim Trusts and the Impossibility Defense

The impossibility defense is available regardless of when the trust was established, but timing affects how courts evaluate credibility. A trust created years before any claim arises presents a stronger impossibility argument because the planning was not connected to a specific litigation strategy. The Grant trusts, established nearly a decade before the tax liabilities, demonstrated this advantage.

A trust established after litigation has begun faces greater scrutiny. Courts are more likely to view the impossibility as deliberately manufactured to obstruct a known creditor. The fraudulent transfer analysis runs in parallel, and a court that finds the transfer was fraudulent may also view the impossibility claim with skepticism.

This does not mean post-claim trusts cannot support an impossibility defense. The Grant analysis focused on actual trustee independence and the settlor’s demonstrated inability to compel compliance, not solely on timing. A post-claim trust with a genuinely independent trustee, proper structural separation, and a Jones clause can present credible impossibility when challenged.

The Jones clause authorizes the trustee to pay a specific existing creditor under defined conditions. It serves a dual function: it mitigates the fraudulent transfer analysis and demonstrates that the trust was not designed solely to obstruct the creditor.

The honest tradeoffs are that post-claim trusts carry higher contempt risk and weaker negotiating leverage compared to pre-claim planning. Courts are less sympathetic to impossibility claims when the trust was created in response to a known threat. But the defense remains structurally available when the trust separates control from the settlor, the trustee operates independently under foreign law, and the settlor cooperates with the court’s process.

The impossibility defense is not a guarantee. It is a factual defense that depends on the trust’s actual governance, the trustee’s actual independence, and the settlor’s actual conduct. The cases that produced incarceration involved settlors who retained control, lied to courts, or treated their trusts as personal accounts while claiming no access.

The cases that succeeded involved settlors who genuinely transferred control to independent fiduciaries and could demonstrate that transfer through documented, arm’s-length administration. The risks and legal challenges of offshore trusts are real, but they are manageable through proper structuring and honest engagement with the legal process.