Repatriation to the United States of $18 million of debtor’s money in Swiss bank accounts in Schwarzbaum

In United States vs. Schwarzbauma U.S. magistrate in the Southern District of Florida considered and granted a U.S. motion to compel U.S. citizen and Florida resident Isac Schwarzbaum to repatriate to the United States from his Swiss bank accounts an amount greater than $18 million dollars.

According to the US complaint, Schwarzbaum was born in Germany but later emigrated to the United States and obtained his US citizenship in 2000. After Schwarzbaum became a US citizen, and from 2001 to 2009, Schwarzbaum received monetary donations substantial from his father who lived in Switzerland. . These gifts, and apparently money that Schwarzbaum made from investments and from a Costa Rican company called Bellagio, were deposited in Swiss bank accounts with various non-descriptive names, and whose accounts were for the ultimate benefit, were controlled by Schwarzbaum.

Alas, Schwarzbaum did not timely file its Foreign Bank and Financial Accounts Report (FBAR) for its Swiss accounts, and the U.S. government requested the substantial penalties that accompany such non-filing. After a five-day trial, the district court found that Schwarzbaum’s failure to file was unintentional, but reckless, and Schwarzbaum was ordered to pay the United States more than $12. $5 million, plus interest and late penalties (which inflated that judgment north of $18 million). Schwarzbaum then commenced his appeal as of right with the United States Court of Appeals for the Eleventh Circuit, but did not post any appeal bond.

In the meantime, the United States sought an order requiring Schwarzbaum to repatriate the $18 million to the United States so that it would be available for garnishment by the United States under the Federal Debt Collection Procedures Act ( “FDCPA”), which governs the procedure for recovering judgments to which the United States is a party. This culminated in the US Magistrate Judge’s Report and Recommendation which I will relate next.

The magistrate judge noted that although the FDCPA permits garnishment of the debtor’s assets to satisfy a judgment in favor of the United States, such garnishment cannot extend outside the United States to reach foreign assets, such as foreign bank accounts, because it has no jurisdiction over such foreign assets. There is, however, jurisdiction over the person of the debtor and, under the All Writs Act, a US court can order the debtor to repatriate the assets to the United States so that those assets are then under the jurisdiction of the United States and subject to garnishment. . Thus, the investigating judge:

“Mr. Schwarzbaum’s main argument against the government’s motion is that his money is held in various Swiss bank accounts that are outside the Court’s jurisdiction. However, this Court has the power to order Mr. Schwarzbaum to repatriate his foreign assets under a personal right It is therefore immaterial whether or not Mr. Schwarzbaum’s assets fall within the jurisdiction of the Court as long as Mr. Schwarzbaum himself falls within the jurisdiction of the Court. the Court. The Court has jurisdiction over Mr. Schwarzbaum. Thus, the Court may order him to repatriate his assets.”

Schwarzman argued that because the assets were never in the United States in the first place, there could be no Drepatriation of goods. This was a patently frivolous argument, for the reason that the term “repatriation” is not statutory to begin with and another term could be substituted to convey the concept that foreign assets held by a debtor may be ordered to be brought into the United States ⸺ whether they have ever been outside the United States or not ⸺, which is supported by a substantial body of case law in the FDCPA and other circumstances.

Another patently frivolous argument was that somehow Florida’s homestead exemption should apply to block the repatriation order, even if the United States did not seek to take an interest in the Florida house of Schwarzman.

But Schwarzman had an argument that piques interest, being that because the judgment here stems from the IRS’ assessment of Schwarzman’s failure to file its FBAR, for the United States to attempt to collect the judgment while it is on appeal is equivalent to a what is known in tax law as hazard assessment. The U.S. Magistrate Judge rejected that argument in a footnote stating that in order for Schwarzman to make that particular argument, the case would first have to be referred to the IRS, and the U.S. District Court had already ruled. against Schwarzman on this. demand.

Ultimately, the U.S. trial judge recommended to the U.S. District Court that the U.S. motion asking Schwarzman to repatriate the $18 million to the U.S. be granted, and the next step will be for the court U.S. District to consider this recommendation.

TO ANALYSE

The most important thing to remember from this opinion is the concept of the court’s continuing jurisdiction over the person of the judgment debtor and its ability to order the judgment debtor to make assets available to creditors, even if those assets are themselves -even outside the scope of the court’s jurisdiction. In other words, your assets can be the but you are here ⸺ and if you have control of the assets there, then you can receive the very appropriate order to bring those assets here.

This is exactly why simply having money in offshore accounts provides no asset protection to the owner of those accounts, unless of course you leave the country before the court is able to fulfill his order. Courts have very frequently sentenced debtors to prison despite disregarding repatriation orders. For example, the currently recognized holder of the longest prison sentence for refusing to bring foreign bank assets back to the United States is H. Beatty Chadwick, who spent fourteen years in the pokey to prevent his ex-wife from getting those funds.

Which raises another issue, if hypothetically Schwarzman were to refuse to bring these funds back to the United States, then in theory he would be held in contempt, which would have a costly consequence in addition to a possible prison sentence, namely that ‘he could be deprived of his appeal under what is called the doctrine of fugitive inadmissibility. This doctrine posits that a person who frustrates court orders (usually by fleeing, but also simply out of contempt or fraudulent conduct) may be deprived of their appeal rights.

In this case, if Schwarzman transferred his money ashore so the United States could seize it, but then a call, the United States would have to return the money to Schwarzman. The result is that Schwarzman could lose some interest earned on the money in the interim (but also immune to any losses), but would at least get his money back. This is very different from private creditors who might not return the money so easily, but instead try to put up their own walls to try to keep it.

Being nothing like a tax lawyer, let alone a tax controversy lawyer, which is his own specialty, the argument that what’s going on here is essentially a risk assessment seems to have some appeal and does not perhaps should not have been treated so lightly by the United States. Judge. As far as I know from the pleadings, Schwarzman appears to have paid the necessary US taxes on the funds in these offshore accounts, but simply violated FBAR reporting requirements, that is to say, this does not appear to be a case of taxpayers being cheated. In such a case, the idea that a taxpayer should benefit from his rights of appeal before the judgment is enforced against him is of some interest, in particular when the fine for non-compliance seems grossly disproportionate to harm to taxpayers.

Now, I realize that people who don’t disclose offshore accounts are a very big problem for the US Treasury, and I’ve often written with obvious glee when offshore tax evaders are caught and prosecuted. But there is a flip side, especially for immigrants who are relatively new citizens to the United States and come from countries where hiding money in Switzerland is a combination of legal, appropriate, and just how things are made. In such a case, failure to comply with FBAR requirements should result in a spanking with a smaller paddle than, say, a longtime U.S. resident who moved funds overseas for the very purpose of escaping the tax on the investment returns of these funds and for whom I have absolutely no sympathy. This seems to be one of those cases, and at the very least, it seems like situated people like Schwarzman should have their technical violations more closely scrutinized on appeal.

But, on the other hand, you probably don’t want people to take their call and then vamoose the US if they lose so that their fine becomes totally uncollectible. It seems there should be a balance somewhere in the middle, i.e. allowing people whose debt arises solely from a breach of technical statement to pay a portion of the total amount owed in the form of an appeal bond pending the resolution of their appeal. Whether that forces the appeals court to use its fair powers or requires statutory change by Congress, who knows, and in any case, I don’t expect that to happen anytime soon.

The final lesson of this opinion stems from failure to file the FBAR in the first place, which is such a failure can result in dramatic fines like here. People who believe in the sanctity of offshore secrecy are basically making a very bad bet, because time and time again we find that it doesn’t really exist in any practical form. Someone knows, and eventually all the facts seem to come out and finally land in the hands of the tax authorities. Hiding money overseas is just one of those horrible ideas that should have been left in the trash a long time ago, and yet it persists for various reasons, none of which are good.

CITE AS:

United States vs. Schwarzbaum, SD Fla. 18-CV-81147 (June 30, 2021). https://creditordebtor.com/a_cases/Schwarzbaum_Order_210630.pdf