An anesthesiologist from Michigan by the name of James J. Kelly, Jr., was caught in possession of child pornography on November 3, 2007. This lead to a Criminal Complaint (May 15, 2008), followed by an Indictment (June 4, 2008), a Plea Agreement (Sept. 4, 2008), and ultimately a Judgment (Dec. 24, 2008), by which he was sentenced to three years in federal prison. But this article isn’t about that, but rather something else that the federal authorities found when they raided Kelly’s home and seized his computers: Evidence that Kelly held offshore bank accounts. This is where our story begins; a good summary of which is given by the U.S. Sixth Circuit Court of Appeal in its Opinion in U.S. v. Kelly, 6th Cir. No. 23-1481 (Feb. 8, 2024).
Facing federal charges, Kelly in 2008 closed his domestic bank accounts and transferred his funds to Finter Bank in Zurich, Switzerland. Finter set Kelly up with a numbered account, which is one that doesn’t include his name, and Kelly instructed Finter not to send him any account-related correspondence. Kelly asked Finter whether it would respond to IRS requests and Finter responded that the IRS would have to go through the Swiss authorities. Kelly kept about $1.5 million in the Finter account. It is worth noting that Kelly took these actions all by his lonesome, without consulting any U.S. tax professionals.
It was around this time that the U.S. and other industrialized nations were putting intense pressure on the Swiss to clean up their rather open aiding and abetting of tax evasion. By 2012, Finter had requested that Kelly provide the bank with documentation that Kelly was compliant with the U.S. tax laws for the account. When Kelly failed to provide that information, Finter closed the account. Later, Finter would re-open Kelly’s account — yet blocking any new deposits or withdrawals — and marked it as “Mandatory High Risk” and noted in the file that “US authorities most probably not aware of these assets … since the client is not properly documented for US tax purposes. Finally, in December of 2013, Finter sent Kelly a letter that requested proof of Kelly’s compliance with U.S. tax reporting requirements and warned Kelly that sooner or later the account would be reported to the IRS. Finter also strongly encouraged Kelly to take advantage of the IRS’s Offshore Voluntary Disclosure Program, known as OVDI.
Finally boxed in, Kelly finally made a request to participate in the OVDI program in April of 2014 to try to avoid civil and criminal penalties. In exchange for giving taxpayers better treatment, the OVDI program requires taxpayers to come clean about their actions and make truthful disclosures. Kelly belated filed his Foreign Bank Account Reporting (FBAR) forms for tax years 2008 to 2013. Around this same time, Kelly moved his money to Bank Alpinum in Liechtenstein.
Though now well aware of his FBAR reporting requirements, Kelly did not file any FBARs for 2014 or 2015.
We now move forward to 2018, when Kelly submitted to the IRS a Collection Information Statement (Form 433-A) signed under penalty of perjury. This form required Kelly to list all of his personal bank accounts, but he omitted his account with Bank Alpinum. An IRS investigation was triggered, which disclosed that Kelly had not timely filed his FBARs for 2013 to 2015 (recall that the one for 2013 was filed late as part of Kelly’s attempt to participate in the OVDI program), and the IRS assessed penalties of $769,126. Later, the U.S. sued Kelly to collect these penalties. The U.S. and Kelly both filed motions for summary judgment, and the U.S. District Court denied Kelly’s motion but granted the motion of the U.S. and Kelly then appealed to the U.S. Sixth Circuit Court of Appeals.
Kelly argued, apparently with a straight face, that he did not know that he was required to file FBARs for his Swiss account, at least until Finter told him that. The Sixth Circuit didn’t buy any of it, noting that Kelly went out of his way in 2008 to get Finter to give him a numbered account rather than one with his name on it and also told Finter to hold any correspondence to him and not mail it. But, most importantly, Kelly never contact any tax professional to determine whether he had any obligation to report. From the Sixth Circuit’s perspective, even if Kelly’s failure to timely file the FBARs was not intentional then it was at least reckless, which has the same effect. Thus, the Sixth Circuit denied Kelly’s appeal on February 8, 2024.
After all that, we have only now finally reached the real story of interest in this case. That story begins with the judgment in favor of the U.S. against Kelly for the $769,126. It is true that Kelly appealed to the Sixth Circuit, but the mere fact that an appeal is filed does not stop the enforcement of the judgment by the victorious party. To stop such enforcement until the appeal is decided, a judgment debtor must post an appellate bond, also known as a supersedeas bond, with the court. The bond operates to protect the judgment creditor during the appeal, since otherwise judgment debtors would use the time pending the appeal to secret or waste their assets. The amount of this bond varies from jurisdiction to jurisdiction, but it is usually at least the principal amount of the judgment (in California, for example, is twice the principal amount of the judgment).
Kelly did not post an appellate bond which meant that the U.S. could pursue enforcement against him while he appealed to the Sixth Circuit. Knowing that Kelly still held money abroad, the U.S. sought and obtained a Repatriation Order (as amended, Oct. 24, 2023) that ordered Kelly to liquidate enough of his overseas account to satisfy the judgment, which as of the October 24, 2023, date of the order had grown to a little over $1.1 million, and transfer that amount to a domestic account in Kelly’s name to be located at a financial institution in the Eastern District of Michigan, where the U.S. District Court hearing this matter sat. Kelly was also ordered to keep that money in that account and not touch it, as well as provide counsel for the U.S. the bank account information. The District Court gave Kelly 30 days to comply with this repatriation order.
And 30 days came and went, but Kelly did not transfer the $1.1 million or otherwise comply with the order. Instead, Kelly filed an objection to the District Court’s order which stated to the effect that the funds were “securely maintained and not at any risk overseas” and that he “objects to the repatriation of any exempt assets.” Curiously, prior to the hearing on the objection, Kelly withdrew it altogether. Yet, that left the October 24 repatriation order in full effect
Even though Kelly withdrew his objection it was tantamount to giving the federal judge the one-finger salute. The District Court noted that Kelly could have used the 30 days to obtain a supersedeas bond, which would have rendered the repatriation order a nullity, but Kelly did not do so. The District Court then observed the obvious, which was that Kelly had not complied with the repatriation order by transferring his overseas funds as it had mandated. The Court gave Kelly one last change, until December 1, 2023, to comply with the repatriation order. This is all found in the Order Denying Defendant’s Request For Stay (Nov. 28, 2023).
December 1, 2023, also came and went and Kelly had still not complied. On December 7, 2023, the District Court entered an order for Kelly to show cause why he should not be held in contempt of court for violating the repatriation order. The parties briefed the issue, on January 3, 2024, the District Court issued its Order Adjudging Defendant In Contempt Of Court (Jan. 3, 2024). This order found Kelly to be in contempt of the repatriation order, issued a warrant for his arrest and required Kelly to turn himself into the U.S. Marshals Service by Noon on January 5, 2024, and additionally imposed a daily $100 fine for every day that Kelly refused to bring the $1.1 million back to Michigan. The order lastly provided that:
“Upon arrest, Defendant Kelly shall be incarcerated until such time as he fully complies with the Court’s October 24, 2023 and November 28, 2023 Repatriation Orders.”
Kelly now had until January 5, 2024, to turn himself in to the U.S. Marshals Service. You dear reader may think that this brings us to the end of the story, where Kelly finally sees the writing on the wall and brings back his money from overseas. “Not!” would say movie character Borat as played by comedian Sasha Baron Cohen.
Instead, Kelly tried to hide from the U.S. Marshals, according to the Order Quashing Ex Parte Temporary Restraining Order (April 17, 2024). According to that order, Kelly was able to avoid the Marshals until February 20, 2024, when they finally found and apprehended him in White Lake, Michigan. But the story gets even stranger.
About six months before Kelly was ordered to turn himself in, Kelly’s ex-wife on June 28, 2023, filed a motion to retroactively correct the child support that she was due from Kelly according to a state action which was filed back in 2005, which was three years before Kelly was caught with the child pornography. This action meandered along until Kelly’s ex-wife won a summary judgment against Kelly on February 28, 2024, or just eight days after Kelly’s arrest. Apparently expecting Kelly to soon transfer his overseas money back to Michigan pursuant to the U.S. District Court’s order, Kelly’s ex-wife obtained an ex parte temporary restraining order (TRO) against Kelly’s bank which prohibited it from releasing the $415,082 in back child-support unless and until it was paid to Kelly’s ex-wife.
In essence, the Michigan state court was interfering with the orders of the U.S. District Court to enforce the IRS’s judgment. This did not sit well with the U.S. District Court, which then took the rare step of entering an injunction against the Michigan state court which basically ordered the Michigan state court to quit interfering with Kelly’s bank, quashed the TRO, and otherwise told the Michigan state court to go pound sand.
The U.S. District Court’s order and injunction against the Michigan state court was dated April 17, 2024. Shortly before, on Apr 6, 2024, Kelly advised the District Court that he had ordered his Liechtenstein bank to immediately send his funds to his Michigan Bank to satisfy the District Court’s order. Again, you would think that we would finally be at the end of this long saga. Again, you would be wrong.
Recall that Kelly’s funds were held in a Liechtenstein institution known as Bank Alpinum. Facing its own financial problems, Bank Alpinum was renamed to Sora Bank in December, 2022, but this was little more than putting lipstick on the pig and on March 7, 2023, Sora Bank voluntarily filed for bankruptcy. According to the Defendant’s Supplemental Status Report (May 8, 2024) filed by Kelly, his funds were only insured for 100,000 CHF (Swiss Francs) and the bankruptcy of Soro Bank inhibited his ability to even transfer that amount of money — equivalent to about US$107,380 back to his Michigan bank. Nonetheless, Kelly assured the court that even though he was incarcerated and couldn’t do much himself, he had given a power of attorney to his son to make a claim for the 100,000 in Swiss francs. Finally, Kelly pointed out that it was now impossible for him to comply with the U.S. District Court’s order, and, with impossibility being a defense to contempt, he should be released from jail.
A couple of weeks after the U.S. District Court took the Michigan state court to the woodshed, the District Court held a status conference to consider the Kelly situation. At this status conference, Kelly’s attorney apparently made an oral motion that Kelly should be released from the goal, as it resulted in the District Court’s Order Denying Oral Motion For Release (May 9, 2024). However, the District Court ordered further briefing on the subject, and set a hearing for May 29, 2024. Having already described Kelly’s side of the story, the U.S.’s Response In Opposition (May 22, 2024) may be of interest.
The May 29 hearing never occurred, however, because the District Court reviewed the parties’ written submissions and decided the day before that it would not find oral argument helpful and would simply rule on the basis of those submissions.
The question was whether Kelly could be kept incarcerated under the circumstances, which included his alleged inability to get Soro Bank while in bankruptcy to send moneys to Kelly’s Michigan bank. The District Court noted that Soro Bank has sent the 100,000 in Swiss francs to Kelly’s Michigan Bank, but was this enough?
The District Court thought not, as memorialized in its Order Denying Defendant’s Motion For Relief From Custody (May 28, 2024). Even if Kelly could not get Soro Bank to send more cash to Kelly’s Michigan Bank, the District Court observed, Kelly could still have liquidated his securities account and had those moneys sent instead. Although Kelly offered a variety of arguments as to why this was not so, ranging from the securities being controlled by the Soro Bank liquidators and his inability to open a domestic securities account because of his prior felony record, the District Court determined that Kelly’s evidentiary proof of these barriers had failed, concluding:
“Thus far, it appears that Defendant has inquired only about a transfer of the securities to the United States, not their sale and transfer of the proceeds to a bank in the United States.”
This finally brings us current with the Kelly case, but this story has of course not yet ended. As of this writing, Kelly remains in jail and only the 100,000 in Swiss francs has been received from abroad. We’ll have to wait to see what happens next.
ANALYSIS
As I have previously written numerous times, impossibility is a defense to contempt but it is also just about impossible to prove. The burden of proving impossibility is on the contemnor, and the contemnor must prove that there literally is no reasonable avenue open for the contemnor to comply with the court’s order. This is one of the rare places in Anglo-American law where a party must essentially “prove a negative” in that there was simply no way to comply with the order.
The contemnor’s credibility factors strongly into this analysis. Consider the view from the District Court. Kelly is a felon who has been convicted of child pornography charges. Kelly decided to cheat the IRS by opening a Swiss bank account, and took steps to make sure that it was a numbered account so the IRS could not easily find it. Kelly either willfully or recklessly failed to file his FBARs for the account. When Kelly finally did attempt to enter into the OVDI program, he lied about not having certain funds in Switzerland. The attempt by Kelly’s ex-wife to suddenly re-open a 2005 case to get $415,082 in Kelly’s funds, which Kelly apparently did not contest, smells funny insofar as that amount would have been protected from the IRS. Kelly did not turn himself in to the U.S. Marshals, but instead fled. Kelly apparently did not come up with the excuse of Soro Bank being in bankruptcy until after he had been incarcerated.
So when it came down to whether the District Court believed Kelly’s excuses, well, not happening. This is why credibility and full disclosure are so important in creditor-debtor cases, as once a judge decides that a debtor is lying, the debtor will probably never catch any breaks whether or not the debtor’s position is otherwise in the right. Yet, in case after case, we see debtors like Kelly who do about everything possible to thwart the collection of a judgment, but then finally beg for mercy from the court — mercy which by that time will not be forthcoming.
Again, the Kelly saga has not yet ended and it would not be any particular surprise if it gets even stranger. Stay tuned.
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