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Cases, General, Trustee liability

How much discretion is unfettered discretion really?

Another day, another decision. Beneficiaries of new appear to be more litigious beasts than beneficiaries of old. I blame the internet. Or google. Whatever the reason, trustees need to take more care to ensure that their decisions cannot be impugned. This point is highlighted in McNulty v McNulty & Ors a case involving two beneficiaries and their Uncle Brian.  The beneficiaries are pretty unhappy that Uncle Brian, together with an independent trustee company, effectively transferred the trust’s sole asset, a valuable piece of property, to Brian  personally.

Court proceedings followed. The Trustees’ approach was to seek summary judgment arguing that the case against them (both as trustees and personally) had no merit. The beneficiaries ran four arguments, three of which (including the claim against the director of the trustee company) the court agreed had no merit  and could be struck out. However, one argument (the third cause of action) was found to have some legs. Now this does not mean that it is strong enough to survive a substantive hearing – but it was enough to keep the matter alive for another day, and no doubt the trustees awake for a number of nights. The winning argument concerned the exercise of the trustees’ discretion and whether there had been a breach of the trustees’ duty to exercise their discretion in a reasonable and proper way.

Trust law 101 provides that trustees have total autonomy in the exercise of the discretion provided pursuant to the deed of trust.  Trustees are not required to disclose the reasons for how their discretion, which is effectively unfettered, is exercised.  However, while this principle is unimpeachable – where trustees elect not to give reasons, the court can make inferences from the trustees’ failure to give reasons.  For example, if there are no reasons – is that because there weren’t any?  Was a decision made capriciously or without due consideration?  In the McNulty decision the Court noted that Uncle Brian gave evidence showing his familiarity with the beneficiaries’ circumstances.  However, no evidence was raised regarding his own circumstances.  This then begged the question – what did the independent trustee know of Brian’s circumstances?

In this vein the Court postulated that the need to compare the situations of all beneficiaries is heightened when one of the beneficiaries is also a trustee.

The question was also raised that, if only Brian had knowledge of his own circumstances, was the trustees’ decision unanimous as was required by the deed of trust or could that decision be impugned for want of process.  Unhelpful here, from the trustees’ perspective, was the absence of any meetings following the appointment of the independent trustee and prior to the decision to transfer all the trust’s assets to Brian.

It is important at this juncture to appreciate that this decision is only a summary judgment decision, and the threshold for success at summary judgment is extremely high.  As noted by the Court, the examination of appropriate inferences requires a full consideration of all the evidence, which is not possible in a summary judgment application.

In the meantime, trustees everywhere need to be taking note.  Quite literally.  While reasons, or the incidence of meetings, need not be recorded, sometimes it will be prudent to do so as inferences can be drawn in the dark.   Also, stepping back – how uncommon are the facts of McNulty?  Not very.  It is commonplace for trusts to be wound up and the trust’s assets distributed back to settlors or one or two beneficiaries without regard to other beneficiairies.  Trustees who continue to do so without attention to due process do so at their own risk.  Again, quite literally.

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