Areas of Trust Litigation

1. Was the trust valid in the first place?

Rahman v. Chase Bank & Trust Company (CI) Ltd. and Others (1991) JLR 103.

Trust held to be a sham because settlor remained in control of the assets and took all management, investment and distribution decisions.

Note: Excessive powers given to a protector could make a trust a sham or result in the protector becoming a quasi trustee, possibly in a high tax jurisdiction. Beware Cook Islands, Marshall Islands, Samoa and Nevis asset protection trusts which expressly permit settlor control.

In the marriage of Ashton (1986) 11 Fam LR 45.

Husband in full control of assets of trust which was his alter ego. Order in favour of wife for payment from trust assets.

                    In the marriage of Stein (1986) 11 Fam LR 353.

Court recognised reality of control by husband. Order in favour of wife.

                    In the marriage of Goodwin Appeal No 172 of 1989

Court recognised reality of control by husband. Order in favour of wife.

                    In re a Company [1985] BCLC 333

Court disregarded separate personality of company where individual used as his alter ego. (Compare Allsene Pty Ltd v FCT (1989) 20 ATR 1688 and Richard Walter Pty v FCT (1996) ATR 97 in which tax plannings schemes were disregarded as shams).

                    Browne v Browne [1989] 1 FLR 291

Court treated trust in which wife had major interest as though trust assets were in reality owned by wife. Order for husband.

Grupo Torras SA and Another v Sheikh Fahad and Others [1998] 1 Lloyd’s Rep 7, CA

Court disregarded trust and treated controlling beneficiary as owner of the trust assets.

Deryll Wayne Pack v. United States (U.S. District Court for Eastern District of California; 77 AFTR 2d Par. 96-476, No.CV-F-92-5327 REC)

Trust and trustee held to be alter egos of settlor.

2. Did the trust fail to meet essential equitable criteria? Was it void for uncertainty?

Steele v. Paz Ltd. and Others (1993-95) MLR 102

Pension Trust with Red Cross Society of Ireland as beneficiary and class of beneficiaries to be nominated by trustee and approved by protector named in the trust deed. No protector was named. Was the trust void for uncertainty?

Was there a resulting trust?

                    Rawcliffe v Steele (1993-95) MLR 426

Court cured the uncertainty by appointing a protector.

3. Blind trusts problems

The Scheme Manager Depositors Compensation Scheme v Ahuja and Ors (2DS 1996/35 Judgment 10M 8/4/97)

Eight "investors" of £20,000 each in blind trust with Red Cross as named beneficiary. No appointment of real beneficiaries. Claims limited to £15,000 per claimant. Only one claim allowed i.e. by trustees.

4. Is the trust invalid under the law of the settlor's domicile?

e.g. a trust designed to overcome the succession laws of another jurisdiction                   

4.1 What is the proper law of the trust?

4.2 Does the proper law of the trust allow the trust to override the proper law governing succession to the settlor's estate on death?

Lemos v. Coutts & Co. (Cayman) Ltd. (1992 - 93) CILR 5 and 26 Disinherited civil law beneficiaries succeeded in having trust assets in Cayman Islands frozen. They also obtained a judgment against the trustees' parent bank in Greece. This resulted in a compromise settlement in favour of the excluded beneficiaries.

5. Can the trust deed be set aside as an incorrectly executed testamentary instrument?

Re Primmer's Estate [1936] 2 DLR 460

Trust deed was held to be a mere nomineeship during the lifetime of the settlor and not a valid testamentary instrument which could have effect after death.

(see also Anderson v Patten [1948] 2 DLR 202)

Rahman v. Chase Bank & Trust Company (CI) Ltd.

There was evidence that the settlor referred to the trust as his will but the invalid will argument was not raised.

5.1 Trustee may become an executor de son tort or an intermeddler on death of settlor.

6. Can a disgruntled creditor have a trust set aside as a fraud on creditors? In general, this will depend on the insolvency laws of the jurisdiction in which the assets are situated or the debtor is present. But note

In Re Larry Portnoy 201 Bankr 685 1996

Presence of debtor in New York was sufficient to enable New York court to apply local bankruptcy law to assets held in Jersey trust governed by Jersey law.

In re Brooks (1998 WL 35018 (Bankr. D. Conn))

Debtor transferred assets to wife who transferred them to offshore trustee. Trusts unenforceable in Connecticut.

6.1 What is meant by an asset protection trust?

6.2 Was the settlor already insolvent when the trust was set up?

Midland Bank v. Wyatt [1994] EGCS 113

Declaration of trust by a husband in favour of his wife and children held to be invalid against husband's creditor bank because it was found that there had been no real intention to benefit the beneficiaries but only to defeat the creditor.

Re Stephen Moor No W6TO of 1987 Fed No 105 Bankrupt in effective control: sham trust disregarded in favour of creditors.

6.3 Were there already significant claims against the settlor such that the creation of the trust made him insolvent?

6.4 What is the effect of an asset protection trust set up in an offshore jurisdiction when the assets are in another jurisdiction such as that of the creditors?

Duttle v. Bandler Kass (1992) 82 Cir. 5084 (MKW)

U.S. court assumed jurisdiction over U.S. assets when foreign trustee refused to submit to U.S. jurisdiction.

Deryll Wayne Pack v. United States (U.S. District Court for Eastern California; 77 AFTR Par. 96-476, No.CV-F-92-5327REC).

Offshore trust treated as alter ego of settlor.

Anderson (1998, US unreported)

Mr and Mrs Anderson imprisoned for contempt.

Reicher (1998, US unreported)

Dr excluded his wife from Cook Islands trust. Most the assets in NY. She got half of them.

Allen (1998, US unreported)

Arrest order issued by US court against the offshore trustees for not repatriating the trust assets.

Browne v Browne [1989] 1 FLR 291

Committal proceedings against wife for not paying husband from trust assets.

United States v. Reinhard P. Mueller (U.S. Court of Appeals for Eleventh Circuit; 77 AFTR 2d Par. 96-457, No.94-3617). An offshore company in which taxpayer held stock was his alter ego.

6.5 What remedies are available in the jurisdiction of the trust if proceedings are commenced after expiry of the limitation period?

515 South Orange Grove Owners Association and Others v. Orange Grove Partners and Others (No. 1) (1995) No.208/94

The two year limitation period normally runs from the date of the accrual of a right of action but under the Cook Islands International Trust Act 1984 time runs from the date of judgment.

515 South Orange Grove Owners Association and Others v. Orange Grove Partners and Others (No. 2) (1996) No.31/96

Second action in respect of second asset protection trust. Cook Islands International Trust Act has again been construed in favour of creditors.

Grupo Torras SA and Another v Sheikh Fahad and Others

(1997/98) 1 OFLR 443

Where the primary beneficiary treats the trust as an alter ego the court can treat the trust assets as in equity owned by the beneficiary for the purpose of making a tracing order. A Mareva injunction and discovery Order are calculated to discover and immobilise assets in the trust. If the beneficiary has exercised substantial and effective control over the trust, the Court would lift the veil of the trustee and regard the beneficiary as the beneficial owner of the assets in the trust.

See also Grupo Torras SA & Another v Mees Pierson (Bahamas) Ltd & Others (1998/99) 2 OFLR 163

Court has power to grant Mareva injunction and disclosure orders against defendant even though no substantive cause of action.

6.6 Note the possibility of worldwide Mareva injunctions and international cooperation in the enforcement of insolvency remedies and fraud investigations following the BCCI, Maxwell, Asil Nadir and Sheikh Fahad cases.

6.7 Ownership claims, if successful, create very serious problems for trustees.

6.8 Could the professional advisers be charged with conspiracy?

7. Has there been inadequate control and supervision of assets?

Bartlett v. Barclays Bank Trust Co. Ltd. [1980] 1 All ER 139

Trustee failed to ensure that it was provided with adequate information from board of directors of a company in which the bank trustee was the majority shareholder. Held trustee was negligent. Similar position where trustee delegates to an investment adviser: trustee must remain in overall control of the investments which should be invested in the trustee's name and not that of a custodian company owned by an investment manager.

West v. Lazard Brothers Co. (Jersey) Ltd. [1993] JLR 165

"A professional corporate trustee is liable for breach of trust if loss is caused in the trust fund because it neglects to exercise the special care and skill which it professes to have". An exculpation clause which seeks to exclude a trustee from liability for equitable fraud is repugnant to the trust concept. Indemnity costs against the trustee.

re Mulligan, Hampton and Others v PGG Trust Limited and Others (1996) High Court of New Zealand CP772/92

Trustees failed to protect capital from effects of inflation by diversifying into equities. Held jointly liable for breach of trust and ordered to make good the loss.

Browning v Fidelity Trust Company 250 F 321 (3rd Cir 1918)

The law "determines a point beyond which the parties cannot agree to relieve a trustee for breach of duty. For instance, a trustee cannot contract for immunity from liability for acts of gross negligence or for acts done in bad faith. Such contracts are invalid because [they are] repugnant to law."

Midland Bank Trustee (Jersey) Ltd. v. Federated Pensions Services Ltd.

(1995) JLR 103 and 352

Serious procrastination and failure to seek legal advice was an inexcusable breach of trust because it was "gross negligence" under Article 26(9) of the Jersey Trust Law.

Armitage v. Nurse [1997] 3 WLR 1046

Trustee can be exempted from all liability save for dishonesty. Gross negligence not accepted as different from negligence.

Contrast Lutea Trustees Ltd v Orbis Trustees Guernsey Ltd & Others (1998/99) 2 OFLR 227

Defendants lent $914,000 which was irrecoverable. New trustee (plaintiffs) sued old trustee for breach. Held indemnity did not cover culpa lata - "gross neglect verging on deliberate or reckless harm".

                    Bogg v Raper (The Times April 22, 1998)

                    Wight v Olswang (The Times September 17, 1998)

Exculpation clauses to be fairly construed with any doubt resolved against the trustee claiming exculpation.

Swain v Law Society [1982] 1 WLR 17 at 26

Trustee owes a fiduciary duty to prospective settlor before creation of the trust not to take advantage of the settlor’s ignorance eg of a wide exemption clause. Prudent trustee will refer settlor to independent lawyers for advice as to the suitability of the trust deed.

Trustee who relies solely on its own expertise may be subject to some duty of care as a lawyer Esterhuizen & Another v Allied Dunbar Assurance plc (1998) The Times 10/6/98. Trustee held liable for will making service held out as equivalent to that of a lawyer.

8. Conflict of interest where bank trust company refers banking services or investment management to an associated company. The first duty is to the beneficiaries which overrides the commercial commitment to the banking group as a whole.

Note: Money on deposit should attract the best rate which may be with a deposit taking finance company rather than a bank unless there is any serious doubt about the solvency of the finance company.

9. Breach of directors' duties in relation to asset holding companies.

9.1 There is no such thing as nominee directorship.

Passive or "nominee directors" can be liable where there has been failure to make the enquiries which honest people would have made.

Agip (Africa) Ltd. v. Jackson [1992] 4 All ER 451

"It is no answer for a man charged with having knowingly assisted in a fraudulent and dishonest scheme to say that he thought it was only a breach of exchange control or only a case of tax evasion". Accountant held liable for losses caused by fraud in circumstances in which the accountant knew something was wrong and should have made inquiries. The case involved the use of companies of which the accountant was a director.

Springfield Acres Ltd. v. Abacus (Hong Kong) Ltd. [1994] 3 NZLR 503

Professional adviser in Hong Kong could be sued in New Zealand for constructive trust. Accountant used firm's service company and a BVI company in relation to a transfer of assets to defeat a judgment creditor.

Royal Brunei Airlines v. Tam [1995] 2 AC 378

The defendant was held personally accountable as a constructive trustee to make good a loss arising from his dishonest assistance in a breach of trust or fiduciary obligation.

Cusack & Cotter v. Scroop Ltd. (1997/98) 1 O.F.L.R. 68

Remedial constructive trust imposed for unconscionable behaviour. Commonwealth authorities preferred to English authorities. Overturned on appeal but principle of remedial constructive trust not contradicted. Remains as obiter dicta.

9.2 Non-executive directors must understand the company’s business and ensure that the board has control of the company’s affairs. They cannot rely on the executive directors.

Daniels v Anderson (1995) 16 ACSR 607

Every director bears a personal responsibility for the welfare of the company. This cannot be delegated. Non-executive director cannot rely on executive directors and must be familiar with company’s affairs.

9.3 What is the liability of a director of a trust company where the trust company is guilty of breach of trust?

                                       Cross v Benitrust International (1998/99) 2 ORLR 32

(1) No direct liability of director to beneficiaries but

(2) Guernsey and Jersey Trust Laws make director of trust company a guarantor of the liabilities of the trust company for breach of trust; and

(3) Director may be liable in tort.

HR & Others v Japt & Others (1998/99) 2 OFLR 252

Director of trust company may be liable on the grounds of accessory liability for knowing assistance in a breach of trust (see Royal Brunei Airlines case) and potentially liable for indirect fiduciary duty and indirect tort, on the grounds that the director owed a duty of care to the former corporate trustee, had breached that duty and the right of action against him was trust property - the so-called dog-leg claim.

9.4 Limitation period of 6 years does not apply to constructive trustee.

Barlow Clowes International v Eurotrust [1998/99] 2 OFLR 42

lst Defendant was an IOM company carrying on business as a company formation and administration agent. Directors as 2nd and 3rd defendants.

lst plaintiff a Gilbrater company in liquidation since June 8 1988, 2nd and 3rd plaintiffs were receivers and managers of various BCCI portfolios.

Claim against defendants for breach of constructive trust.

Defendants argued exclusion of normal limitation period of 6 years did not apply where there was where there is a constructive trust in respect of money or property received. Argued that exclusion only applied where claim based on fraud or fraudulent breach of trust in respect of an express trust.

Held: 6 year limitation rule did not apply for breach of constructive trust so that it was not too late to bring proceedings.

9.5 If uncertain whether client is involved in dishonesty apply to court.

                                         Finers v Miro [1991] l All ER 182

Solicitors firm applied to court and entitled to relief without breaching client’s privilege.

10. Disputes involving protectors.

10.1 Von Knieriem v. Bermuda Trust Company Ltd. (13.7.94) Bermuda Judgments

Protector appointed new trustee in place of Bank of Bermuda Trust Company. Case concerned nature of powers and obligations of a protector and whether the protector was subject to fiduciary obligations similar to a trustee. The main question raised was whether the test for the valid exercise of a power to remove and appoint trustees, was merely that the power was not exercised for the personal benefit of the protector.

10.2 If there is a breakdown in confidence between the trustee and the protector, does this entitle the protector to appoint a new trustee?

11. Can the beneficiaries require disclosure of names of trustees as potential dependants?

John Murphy Junior v John Murphy Senior (1998/99) 2 OFLR 125

Court ordered settlor to disclose identity of the trustee so that the beneficiary could obtain information about the trust.

12. Can the beneficiaries insist on receiving copies of trust documents in order to challenge the administration of the trust by the trustees and any protector?

12.1 Proprietary right to trust documents

O'Rourke v. Darbishire [1920] AC 581

Beneficiary is entitled to see all trust documents to which he has a proprietary right.

12.2 What is a trust document?

Re Londonderry's Settlement [1965] Ch 918

Trustees supplied copies of documents relating to the appointment of beneficiaries and annual accounts. Court held no duty to supply documents relating to meetings of trustees and correspondence relating to appointment of beneficiaries.

Followed in: Lemos v. Coutts and Company (Cayman) Ltd. (1992-93) CILR 5 and 26;

In re Ojjeh Trust (1992-93) CILR 348;

Hartigan Nominees Pty Ltd. v. Rydge (1992) 29 NSWR 405.

12.3 Where beneficiaries are entitled to a copy of the accounts this has been widely construed.

West v Lazard Brothers [1987-88] JLR 414 at 420

"... every bit of information concerning the administration of this trust for which they (the beneficiaries) may properly ask ... that includes all accounts, vouchers, coupons, documents, and correspondence relating to the administration of the trust property ... including a full inventory of the trust assets ..."

Followed in

Re The Den Haag Trust (1997/98) 1 OFLR 495

Bhander v Barclays Private Bank & Trust Co Ltd (1997/98) 1 OFLR 497

Three letters of wishes were also voluntarily released in this case? Was this because the trustees thought they related to the trust assets and therefore the accounts?

12.4 Is a letter of wishes a trust document?

Hartigan Nominees Pty Ltd. v. Rydge

Court held `No'. Minority judgment said `Yes' because trustees used it when deciding how to administer the trust.

Note: Trusts are ultimately about enforcement so that beneficiaries cannot be wholly excluded from trust documentation and information.

On the authority of West v Lazard Brothers and the Bhander case above can a letter wishes be demanded because it relates to the accounts?

13. Can the beneficiaries force the trustees to comply with a letter of wishes? Bank of Nova Scotia Trust Company (Bahamas) Ltd. v. Nelia Ricart de Barletta (1985) Unreported (11/3/85)

No: if settlor wishes to restrict the trustees, provision must be made in the trust.

Hartigan Nominees Ltd. v. Rydge

No.

14. Can the settlor or beneficiaries of a trust that fails sue the professional advisers?

White v. Jones [1995] 1 All ER 691

Yes. The intended beneficiaries can sue in negligence even though they were not clients when the trust deed was prepared.

                    Esterhuizen & Another v Allied Dunbar Assurance The Times 10 June 1998

An insurance company, a trust company or a firm of accountants which provides a will or trust drafting service will owe the same duty of care as a lawyer.

15. Rectification should be considered first.

Walter v Geo H. Medlicott & Son (1998, The Times 25/11/98 (A))

Action by beneficiary against lawyers who omitted a specific devise in a will set aside. Plaintiff should first try to mitigate damage by action for rectification.

B.S. Briggs v Integritas Trust Management (Cayman) Ltd (1988-89) CILR 456

Rectification of incorrectly drafted trust deed.