Analysis
The Plaintiff (Meritus) was removed as the trustee of two trusts and replaced by the Defendant (Butterfield). Meritus applied by Originating Summons for an order that Butterfield transfer immediately all the assets of those trusts (the E Trust and the M Trust). Butterfield asserted, first, that it was entitled to retain sufficient trust assets against which to enforce its indemnity in relation to its contingent cost liability (estimated at $5 million) in relation to a threatened claim in respect of Butterfield’s management of the trust assets; second, that it was entitled to a contractual indemnity. Meritus contended, first, that as a matter of law the right of indemnity did not confer such retention rights and that, if any retention right did exist, $750,000 was a generous estimate of the appropriate quantum; second, that there was no entitlement to a contractual indemnity.
Held:
1) It was common ground that neither the Trustee Act 1975, nor the Trust Deeds, conferred retention rights on Butterfield as a former Trustee. Indeed, the statutory vesting scheme under the Trustee Act 1975 (Bermuda) envisaged that, when a new trustee is appointed, trust assets (including cash) will automatically vest in the new trustee, or the old trustee will otherwise be subject to a mandatory obligation to execute whatever instruments of transfer may be required to perfect the vesting process.
2) There is no general right of retention of trust assets as an incident of a former trustee’s indemnity in respect of actual and contingent liabilities which is exercisable against the new trustee under the general law of England or Bermuda. Subject to alteration by legislation or by the express terms of the Trust Deed, as regards those trust assets which automatically vest in the new trustee upon appointment, the right of retention is lost as against the new trustee by operation of law. The nature of the trustee’s interest is that of an equitable lien, in respect of which the only remedy against the trust assets is judicial sale or appointment of a receiver. Such a security does not confer any right to bring an action for possession of the property which is the subject of the equitable lien.
3) There was a fundamental distinction between the discretionary jurisdiction vested in a Court making a vesting order to authorise the former trustee to retain security, and the strict legal position that a former trustee does not have a positive legal entitlement to retain some of the trust fund by way of enforcement of its indemnity rights against a new trustee. As regards those trust assets which do not automatically vest in the new trustee, the former trustee can seek to postpone his statutory obligation to immediately vest them in the new trustee. This could happen either by agreement or with discretionary assistance from the Court, but it would be the only principled basis for obtaining legally valid retention rights against the new trustee.
4) There was also a clear practical and theoretical distinction between a trustee making a routine distribution to a beneficiary of an unencumbered legal and beneficial interest in the property distributed (which once made ordinarily strips the distribution proceeds of their character as ‘trust assets’) and the transmission of trust assets from one trustee to another. In the case of a distribution to a beneficiary, to give efficacy to the trustee’s indemnity, the law has recognised the existence of an ancillary retention right. No practical need for such retention will ordinarily arise when the trust assets are being vested in another trustee, because the trust assets retain their character as such and remain subject to the former trustee’s equitable lien by operation of law.
5) For the above reasons, Butterfield had no right to retain any trust assets (whether vested or unvested in Meritus) as security for its indemnity rights under the E and M Trusts. Butterfield was not in any way seeking to invoke the discretionary jurisdiction of the Court. That was a sensible concession, because there was no material before the Court which would support a finding that Butterfield was not adequately protected by its equitable lien in respect of the actual and contingent liabilities of which it was aware.
6) Butterfield was not entitled to a contractual indemnity. No authority was cited which supported the proposition that the Court had jurisdiction to compel Meritus to negotiate and consummate an express contractual indemnity in the absence of any express requirement in the Trust Deeds to this effect. Neither the Trust Deeds, nor the Trustee Act 1975, conferred any such entitlement.
<![CDATA[ Introduction [1] By an Originating Summons dated May 8, 2017, the Plaintiff (‘Meritus’) sought, inter alia, (1) copies of documents listed in the Schedule and (2) an Order requiring the Defendant (‘Butterfield’) to transfer immediately all assets of two trusts (the E Trust and the M Trust) and to vest title to such assets …Continue reading "Meritus Trust Company v Butterfield Trust Ltd [2018] WTLR 545"