Monday, August 3, 2020
Mitch Crusto, a long-term buddy from past Southeastern Association of Law Schools (SEALS) conferences, contacted me last year about participating in a discussion group at this year's SEALS conference on issues surrounding and emanating from Jeffrey Epstein's significant asset transfers to a trust (for the benefit of his brother) two days before his death, currently ruled to be a death by suicide. The discussion group, held yesterday afternoon/evening, was designed to explore interdisciplinary approaches to legal problem-solving, with the thought that the conversation might spur us to bridge doctrinal silos not merely for ourselves, but also for the benefit of our students (in and outside the classroom). Megan Chaney and Victoria Haneman spoke passionately on that issue to lead-off our discussion. Doctrinal areas covered in the session included trusts & estates, business associations, federal income taxation, criminal law, civil rights, and professional responsibility (and I am sure that I am missing some . . . ).
In our initial set of communications, I asked Mitch what possible angle I could have on the Epstein trust matter based on my work and areas of expertise. He noted in response that he would like the session to address, e.g., whether veil piercing doctrine from the business entity law sphere might have a role in helping Jeffrey Epstein's judgment creditors--especially victims of his sexual exploitation, trafficking, molestation, and rape (including the sexual exploitation of teenaged victims)--satisfy any damages awarded to them with assets transferred to and held in the trust. I took the bait, more out of allegiance and curiosity than out of a feeling that I had something valuable to contribute. The session was extremely rewarding professionally and personally. I am sharing some musings from it today, most of which I also shared in yesterday's discussion. They are in the nature of a fledgeling thought experiment and do not reflect deep research.
At its base, the Epstein asset recovery issue presents as a fraudulent conveyance question: can creditors claw back into Jeffrey Epstein's estate the assets he put into trust (presumably to avoid keeping those assets in his name and, after death, in his estate) and, if so, under what circumstances? In reporting on the trust and the ability of Jeffrey Epstein's creditors to access assets from it, a Forbes article from last year concluded, on balance, that the trust assets may well be reachable by those creditors to satisfy their judgments. Of course, certain factual and legal matters asserted or assumed in the article's assessment would need to be established in fact (and participants in yesterday's session both agreed and disagreed with the conclusion expressed in the article, based on their individual knowledge of and "take" on the facts).
Aways loving a challenge, I set out to think about the business entity law angle Mitch pitched--focusing in on veil piercing doctrine (as the same is legally recognized under the law of corporations and limited liability companies). Interestingly, the Forbes article described a trust by contrasting it with these forms of business entity.
It is important to understand what a trust is and isn't. First, what it isn't: A trust has no physical existence: You can't have it over to your house on Saturday afternoon for beer and bar-b-que. Nor does a trust have a separate legal existence either, since it is not considered a "person" under the law that can itself sue or be sued; contrast this with the legal fictions known as corporations and LLC, which are considered "persons" under the law that can sue and be sued in their own names.
Right. So, there is no legal entity to disregard (although it was noted in the discussion group that a trust may be a taxable entity--a recognized legal person--for federal income tax purposes). There is, instead, the need to disregard a unique, legally recognized fiduciary relationship built on a contract or contract-like arrangement that involves the transfer, holding, and administration of property. The lack of legal entity status gives me pause.
Also, of course, veil piercing relates to who is liable for a loss (not whether assets owned of record by a transferee may be recovered, of sorts, and used to satisfy liabilities of the transferor). Various theories (e.g., alter ego, insufficient separateness, unity of interest/ownership) underlie the equitable application of veil piercing doctrine. Given the nature of a trust, however, I am hard-pressed to come up with a theory that would explain or justify holding a properly constructed trust or its trustee liable for the grantor's wrongful conduct. The possibility of disregarding the trust is not, then, logically rooted in notions of direct or vicarious liability operative in business entity law.
All that having been said, there is an interesting, albeit imperfect, analogy to explore between reverse veil piercing and fraudulent transfer law as the same may relate to the Jeffrey Epstein trust scenario. In reverse veil piercing, as business lawyers know well, a business entity is held legally responsible for damages created by the wrongful conduct of a shareholder. As a result, the corporation's assets would be used to satisfy the judgment for that wrongful conduct. The argument in the Epstein trust situation would be that transfers to a trust should be voidable to cover damages created by the wrongful conduct of the grantor. Thus, assets of the trust would be used to satisfy the judgment for that wrongful conduct. The analogy is arguably grounded in common policy underpinnings--the desirability that a plaintiff's recovery of damages for bona fide cognizable claims not be avoided by the establishment of legal structures purposefully designed to defraud or promote fundamental injustice. Kenya Smith put a point on the analogy in our session yesterday by asking us to consider whether reverse veil piercing would be appropriate if Jeffrey Epstein had transferred his assets to a corporation instead of a trust . . . .
Indeed, it appears that the reverse veil piercing argument has been used in at least a few cases. A 2020 Sixth Circuit opinion--Church Joint Venture, L.P. v. Blasingame, 947 F.3d 925 (6th Cir. 2020)--addresses reverse veil piercing in relation to a trust governed by Tennessee law. The opinion of the court notes that, under Tennessee law, reverse veil piercing has only been applied in the parent-subsidiary context. Both the opinion of the court and the concurrence offer much to consider. (I have more to say about the concurrence in the next paragraph.) Moreover, a Utah law firm has published a helpful post that offers a brief treatment of three cases--a federal tex case in which the argument was successful and two non-tax cases in which the argument was unsuccessful. (The post also includes information about two possible alternative arguments applicable to asset protection trusts: that the funding of all or part of the trust was a fraudulent transfer and, in the case of a self-settled trust, that the trust should not be recognized under applicable law.)
A problem with the reverse veil piercing analogy, to the extent it may be considered for use in a legal action, is the possible application of the doctrine of independent legal significance (a/k/a the doctrine of equal dignity). Under that doctrine, as it might be applied in this context, if a person chooses to use a corporation to accomplish a goal, then the law applicable to corporations should govern; and if a person chooses to use a trust to accomplish a goal (even if it be the same goal that could be accomplished with a corporation), then the law applicable to trusts should govern. A court may use that doctrine to reject the application of corporate law to the trust. In fact, the concurring opinion in the Church Joint Venture case cited above is grounded in independent legal significance and notes some of the points regarding the legal entity status (or a lack thereof) of trusts raised above. The concurrence begins: "I join the court’s opinion in full. I write to add a word (or two) about my discomfort with incorporating 'veil piercing' and 'alter ego' theories into trust law. Both concepts originate in corporate law, and both concepts should stay there." Church Joint Venture, L.P. v. Blasingame, 947 F.3d 925, 935 (6th Cir. 2020). I found the concurrence a great read overall. Another quotable from that opinion: "How could one 'pierce the veil' of a trust? It doesn’t have a veil, much less any form to pierce into." Id.
Notwithstanding the foregoing, it may be possible to use veil piercing not as a primary argument but, rather, as support for another legal theory of recovery (likely, fraudulent conveyance). It seems that legal actions may often raise both fraudulent transfer and veil piercing arguments, in the alternative, in any case. Regardless, it has been both instructive and satisfying to identify, think through, and discuss these issues with colleagues from other disciplines and other law schools. I look forward to future conversations of this kind with these and other colleagues in legal education, and I also look forward to engaging students with and in these discussions.