Application to remove the protector of a trust – relevant test to remove protector – first such case in Bermuda (In the matters of FA Trust and FB Trust)

Private Client analysis Cont.

The court concluded that the overriding consideration is the welfare of the beneficiaries and the competent administration of the trust. The judge held that the breakdown in the relationship between the trustee and the protector and the trustee’s unwillingness to work with the protector going forwards was sufficient basis for his removal. The trustee’s view of the protector’s conduct was therefore of central importance. The case also highlighted the importance of the trustee’s regulatory obligations and that it is entitled to conclude it cannot work with a protector who might cause it to infringe those obligations. The protector’s service to the trust for some 20 years without issue could not justify his continuance in office.

In the matters of FA Trust and FB Trust [2021] SC (Bda) 2 Civ

What are the practical implications of the case?

The case confirms that the Bermuda Court has the jurisdiction to remove the protector of a trust and concluded that the test for the removal of a protector mirrors the test for the removal of trustees. Removal is appropriate where the protector’s continuation in office would be detrimental to the execution of the trust. The overriding consideration is the welfare of the beneficiaries and the competent administration of the trust.

The trustee’s view of the protector’s conduct will be of central importance in assessing whether the test is met. If the trustee considers it is unable to work with the protector, removal is likely to follow because of the resulting detrimental impact on the administration of the trust. The Court also underlined the importance of the trustees’ regulatory obligations and the fact that a trustee is entitled to conclude it cannot work with a protector who might cause it to infringe those obligations.

In the case at hand, removal was appropriate even though the matter giving rise to the application did not directly concern the Trusts and the Protector had served the Trusts for twenty years without issue. The decision therefore serves to underline that a protector’s historic association with a trust and its beneficiaries will count for little in the circumstances of an application by the trustee in a removal application where the future management of the trusts could be adversely impacted.

What was the background?

This was the final hearing in an application by the Trustee of two Bermuda trusts, the FA and FB Trusts (‘the Trusts’), seeking the removal of the Protector of the Trusts and his Successor Protector. There was an earlier hearing to determine the effect of the protector’s indemnity under the Trust deeds (In the matters of FA Trust and FB Trust [2019] SC (Bda) 77 Civ).

The Protector had significant historic involvement with the Trusts (and the trust which preceded them) going back over twenty years.

The application for removal was based on three matters. (i) The Protector had been “publicly censured” by the Attorney Grievance Committee of New York State because he had counselled a client to engage in conduct he knew or should have known was illegal or fraudulent (‘the Censure’). The client meeting which formed the basis for the Censure was, in fact, a journalistic sting operation and had been covertly recorded. The potential client represented himself as the conduit for an African government official who wished to buy property in the United States. The source of the funds was never properly explained. The Protector counselled the potential client on techniques to ‘scrub’ the money.

(ii) The Protector failed to inform the Trustee about the Censure. He had completed a personal declaration form at the Trustee’s request for regulatory compliance purposes, including confirmation that he had never been the subject of a judicial or other enquiry, or had fraud or dishonesty proved against him in any civil proceedings. The form required the Protector to promptly advise the Trustee of any changes which impacted the information in the form.

(iii) When the Trustee became aware by chance of the Censure it invited the Protector to resign. The Protector’s response was to suggest on two occasions that he would remove the Trustee and that he intended to do so with “all deliberate speed”. Following this, the Trustee obtained an order suspending the Protector’s powers to remove the Trustee pending the determination of the removal application.

The basis for the Trustee’s application for the removal of the Successor Protector was the unusually strong links between the Protector and the Successor Protector. They were married and co-partners in their law firm.

The beneficiaries of both Trusts supported the removal applications.

There were also some technical issues before the Court with regards to the Protector’s appointment. There were two resignation documents which, when properly construed, suggested he had resigned from the role and that the Successor Protector was now protector in his place. Notwithstanding this, everyone, including the Trustee and the beneficiaries, had operated as though he continued to hold the Protector role.

What did the Court decide?

The Court concluded that the test for the removal of a protector mirrored that for the removal of trustees. Hargun CJ cited the seminal statements of principle set in Letterstedt v Broers and Another (1884) 9 App Cas 371 (paras [16] and [17]), namely that removal is appropriate where the protector’s continuation in office would be detrimental to the execution of the trust. In particular, the Court concluded that the Guernsey case of In the Matter of the K Trust [2016] WTLR 1225 represents the position as a matter of Bermuda law (para [20]). K Trust had declined to follow an earlier Isle of Man case, Re Papadimitriou [2004] WRLR 1141, which had said that the removal of a Protector should be reserved for “exceptional circumstances”. By extension therefore, the Bermuda court also concluded that relying on Papadimitriou added an unnecessary additional element into protector removal applications.

The Protector was removed from office. The Court found that his actions had seriously damaged his relationship with the Trustee such that the Trustee had justifiably taken the position that it could no longer have any professional relationship with him (para [48]).

Of particular concern was the Censure itself. The facts and violations admitted as part of the Censure, “must raise serious issues as a person occupying the position of a protector… which necessarily involves the discharge of fiduciary responsibilities.” [para [41]) They were also serious in the context of Trusts administered in Bermuda, a properly regulated jurisdiction where the Trustee, as a regulated entity, is obliged to report misconduct, including money laundering. Against this background, Hargun CJ concluded, “it is not surprising the Trustee took the view that it could no longer have any professional dealings with the Protector.” [para [41])

The Protector’s reaction to the Trustee raising the Censure was also of significance. The Court concluded that the Protector’s fiduciary obligations were not uppermost in his mind when he threatened to remove the Trustee. (para [47])

Ultimately, the Court concluded “The continuation of the state of affairs is detrimental to the execution of the Trusts and does not advance the welfare of the beneficiaries.” [para 48]

On the decision to remove the Successor Protector, the Court decided that her appointment as Protector would not promote the welfare of the beneficiaries (para [51]). The Judge accepted that she is an attorney of some long-standing with no misconduct allegations against her. However, it did not approach the question in an “overly technical way” and it was enough that she had unusually close links with the Protector and that the beneficiaries hoped to have a clean break from both of them [para [52]).

Case details

1. Court: The Supreme Court of Bermuda (Civil Jurisdiction)
2. Judge: Hon. Chief Justice Hargun
3. Date of judgment: 6 January 2021