In the case of United States v. Kelly, Jr., the U.S. District Court for the Eastern District of Michigan (Court) addressed issues surrounding the standards for civil contempt in enforcing court orders for the repatriation of foreign assets.

The Court was tasked with deciding whether the defendant, James J. Kelly, Jr. (Kelly), could be relieved from custody after he failed to comply with orders to repatriate substantial assets held in foreign accounts.

Facts

On October 23, 2023, Kelly was initially ordered to repatriate $1,102,506.48 held in foreign accounts. After Kelly failed to comply with this order by the extended deadline of December 1, 2023, Kelly was subsequently arrested by the U.S. Marshals on February 20, 2024. The complexities increased when Sora Bank, holding Kelly’s foreign assets, declared bankruptcy.

In March 2024, Sora Bank’s bankruptcy proceedings began with Kelly’s liquid assets insured up to CHF 100,000 under Lichtenstein law. The CHF 100,000 of insured assets subsequently were repatriated, but the remainder was entangled in Lichtenstein’s bankruptcy proceedings.

Kelly also had securities held at Sora Bank that were not subject to the bankruptcy proceeding. Kelly needed to contact the bank liquidator in the bankruptcy proceeding to transfer or liquidate these securities. Sora Bank emailed this information to Kelly, in addition to emailing Kelly suggested steps for initiating transferring or liquidating the securities held at Sora Bank.

Analysis

The Court’s analysis centered on the legal standard for civil contempt, specifically the necessity for a contemnor to take “all reasonable steps within his or her power” to comply with court orders, as established in United States v. Mitchell and subsequent cases.

Established Sixth Circuit precedent from Glover v. Johnson dictates that “other than a showing of impossibility of compliance, nothing short of substantial compliance will suffice to purge contempt.” Kelly contended that the Sora Bank’s bankruptcy rendered it impossible to comply with the repatriation order.

However, the Court dismissed this argument as speculative and inadequate under the strict scrutiny applied in civil contempt proceedings. It noted that more than mere speculation about impossibility was required to satisfy the defense of impossibility in civil contempt cases.

The Court considered whether Kelly had made every reasonable effort to liquidate or transfer the securities held at Sora Bank. Despite Kelly’s claims of restricted capabilities due to the bankruptcy, the Court highlighted that the securities remained his property and could be transferred upon his request, as noted in emails from Sora Bank to Kelly.

The Court discussed Kelly’s inadequate efforts to communicate with the bank liquidator for transferring or liquidating the securities held at Sora Bank, emphasizing his failure to follow through with any of the suggested steps provided by Sora Bank.

Kelly argued that his status as a felon, which he claimed impeded his ability to open a new domestic brokerage account, rendered him unable to comply with the repatriation orders. The Court refuted Kelly’s claim regarding his felon status as a barrier to opening a domestic brokerage account, citing a lack of effort on Kelly’s part to substantiate his claims or seek alternative means to comply.

The Court highlighted that despite his felon status, Kelly did not adequately explore or document efforts to open a domestic brokerage account, nor did he pursue the liquidation of securities before attempting their transfer.

Conclusion

The Court concluded that Kelly had not met his burden of proving that compliance with the repatriation orders was impossible. Therefore, his motion for relief from custody was denied. The decision in this case reaffirms the rigorous standards applied to defendants in civil contempt cases involving repatriation orders.

The Court’s rejection of Kelly’s defenses emphasizes that defendants must provide concrete evidence and undertake all possible measures to demonstrate compliance or impossibility.

This article first appeared in the Estate Planning Journal.

Frank Baldino is an estates and trusts attorney who helps people throughout the greater Washington, DC area protect assets for their families and future generations through careful estate tax planning. For more information, contact Frank at (301) 657-0175 or fsbaldino@lerchearly.com.