October 29, 2013
Authored by: Luke Lantta
They became known simply as the Peierls cases – the three opinions in which the Delaware Court of Chancery refused to accept jurisdiction over, and then “reform,” thirteen trusts created during the period 1953 through 2005. None of the trusts was created or settled under Delaware law, and none was ever administered in Delaware. Understandably, the Court of Chancery’s opinions caused much hand-wringing among Delaware trustees because there seemed to be an almost insurmountable hurdle to moving foreign trusts to Delaware. At a minimum, they threw a well-established practice for Delaware trustees and practitioners into disarray. In a series of three opinions addressing the Peierls inter vivos trusts, charitable lead unitrust, and testamentary trusts, the Delaware Supreme Court – while mostly affirming the Court of Chancery’s opinions – gave us a road map for how to bring an out-of-state trust under Delaware law and into Delaware administration.
The bottom line is when a settlor does not intend his choice of governing law to be permanent and the trust instrument includes a power to appoint a successor trustee without geographic limitation, the law governing the administration of the trust may be changed. A settlor’s mere designation of an initial choice of law is not evidence that the choice is absolute and unchangeable – something more is needed to reach that conclusion.
Inter Vivos Trusts
For five inter vivos trusts, the Petitioners asked the Court of Chancery to: (1) approve the resignation of the current trustees; (2) confirm appointment of a new Delaware corporate trustee as sole trustee; (3) determine that Delaware law governs the administration of each trust; (4) confirm Delaware as the situs for each trust; (5) reform the trusts’ administrative schemes; and (6) accept jurisdiction over the trusts. The court broke the five inter vivos trusts down into three categories.
Accompanying the petitions were the resignations of the trusts’ current trustees, all expressly conditioned upon the approval of the Court of Chancery. Likewise, the appointment of the new Delaware trustee was expressly conditioned upon approval by the Court of Chancery. Because the current trustees had not actually resigned and the successor trustee has not yet assumed its role, the trusts were not yet “in Delaware” for purposes of whether to permit a transfer of administration and a change in the law of administration.
1953 Inter Vivos Trusts
These trusts contained a provision that stated that “all questions pertaining to [their] validity, construction, and administration shall be determined in accordance with the laws of the State of New York.” The trusts also granted each trustee the exclusive right to appoint a successor without any geographic limitation. The trustees’ commissions were determined under the laws of New York. The trusts required that there always be three trustees (two individuals and one institution).
The Court found that, although the settlor intended that the New York trustee initially administer the 1953 trusts under New York law, the settlor implicitly permitted the law of administration to change with a change in the place of administration. The settlor manifested this intent by permitting the existing trustees to appoint successor trustees without any geographical limitation and by not otherwise indicating that New York law must remain the law of administration despite a validly executed change in the place of administration. The law of administration can be changed when accompanied by the appointment of an out-of-state trustee, even in the face of the trusts’ choice-of-law provision. Thus, when in 1999, the United States Trust Company of Texas, N.A. became the valid successor trustee of these trusts, the trusts’ place of administration changed to Texas and Texas law governed the trusts’ law of administration.
1957 Inter Vivos Trust
This trust contained a provision that its “validity and effect [are] determined by the laws of the State of New Jersey,” but the settlor appointed a New York trustee to administer the trust. Furthermore, a New Jersey court ordered that another New York trustee, the United States Trust Co. of New York, succeed the then-existing New York trustee, Bankers Trust Co.
The initial selection of New Jersey law did not permanently control the law applicable to administration. The trust instrument did not contain any language evincing the settlor’s intent that New Jersey law would always apply. Moreover, the settlor did not include a restriction on the appointment of out-of-state trustees. The compensation scheme – under New York law – was only a “yardstick for compensation.” Although the trust was currently administered under New Jersey law, there was no evidence that the settlor’s initial choice of New Jersey law was “eternal.”
1975 Inter Vivos Trusts
These trusts resembled the 1953 trusts. The trusts were “governed by, and [their] validity, effect and interpretation determined by the laws of the State of New York.” The trustees had the right to appoint successors without any geographic limitation. The laws of the State of New York determined the commissions payable to the trustees.
Although the trusts designated New York law as the law of administration, it does not follow that New York law would always be the law of administration. Consistent with its analysis of the 1953 Trusts, the Court noted that nothing indicates that the settlor intended to limit the law of administration of the 1975 trusts to New York. Therefore, the trusts’ law of administration would change with a change in the place of administration. These trusts were currently administered in New York by the United States Trust Company of New York and, thus, New York law governed these trusts. Here, the court emphasized that it was the place of administration and not the settlor’s initial choice of law that determined which state’s law was the law of administration.
The law of administration analysis comprised the bulk of the Court’s work. What was left were the remaining claims of the Petitioners.
The Court of Chancery could not reform the 1953 and 1957 Trusts because Delaware law did not yet apply to the administration of those trusts.
With respect to the request for judicial approval of the resignations of the trustees of the 1975 Trusts, there was no case or controversy that would permit a court to hear the claim. Because the trust instrument for the 1975 Trusts expressly authorized the non-judicial resignation and appointment process, the Petitioners should not have asked the Court of Chancery to bless what they were otherwise empowered to do.
Charitable Lead Unitrust
As was the case with the inter vivos trusts, the petition regarding the charitable lead unitrust requested that the Court of Chancery: (1) approve the resignation of the current trustees; (2) confirm appointment of a new Delaware corporate trustee as sole trustee; (3) determine that Delaware law governs the administration of the trust; (5) reform the trust’s administrative scheme; and (6) accept jurisdiction of the trust.
What Delaware trustees and practitioners had been doing – and what was attempted here – was creating a process wherein a current trustee would condition its resignation upon the express approval of the Court of Chancery thereby creating a faux controversy in order to get judicial approval. The Delaware Supreme Court essentially declared this process dead where the trust agreement does not expressly or implicitly require judicial approval for a resignation to become effective. This trust instrument provided a process for designation of a successor trustee, and no court approval was required.
With respect to a change in situs of the trust, the trust agreement provided a definition of the situs and place of administration. A change in situs could be fulfilled under the terms of the instrument. If the petitioners were uncomfortable with relying on the terms of the trust instrument, then they could instruct the Delaware trustee to file with the trust a written declaration that the trust’s situs is Delaware.
Lastly, with respect to Delaware law governing the administration of the trust, again, the trust instrument’s language was controlling. It was clear on the face of the trust agreement that the settlor contemplated that the law governing administration would change with the situs of the trust. This stood in contrast with the inter vivos trusts, where the Court had to “dissect each trust instrument’s language to discern the settlor’s intent that the law governing administration be able to change.”
1960 Testamentary Trusts
Two trusts were created under the will of Edgar S. Peierls (the “1960 Trusts”). Edgar died as a resident of New Jersey, and his will was probated in New Jersey. The will’s language contained no choice-of-law provision pertaining to the trusts. New Jersey had been the situs of these trusts, New Jersey law has governed the administration of these trusts since inception, and the trusts were currently subject to the jurisdiction of a New Jersey court. The New Jersey court issued a Succeeding Trustee Short Certificate identifying the trustees who accepted trusteeships of the trusts, including a Delaware trust corporation.
The two individual trustees’ resignations were ineffective because they were conditioned upon the approval of the Delaware Court of Chancery. The corporate trustee’s removal, however, was a valid exercise of power under the trust instrument and did not require judicial approval.
The Certificate issued by the New Jersey court did not provide for a change in the place of administration or a change in the law governing administration of the trusts. The Certificate did officially name a Delaware corporation as trustee. Thus, the 1960 Trusts were administered in New Jersey pursuant to New Jersey law by several trustees, one of which happened to be a Delaware corporation.
Thus, it is for New Jersey’s courts, and not Delaware’s, to exercise jurisdiction as to all questions that may arise in administration of the trust, including the Petitioner’s requests. Therefore, the Petitioners should first address some of these issues in New Jersey.
1969 Testamentary Trusts
Two more trusts were created under the will of Jennie N. Peierls (the “1969 Trusts”). Jennie died as a resident of New York, and her will was probated in New York. The will adopted no choice-of-law provision. New York was the original situs of the trusts, and New York law originally governed their administration. A Texas Probate Court, however, later accepted jurisdiction over the trusts and moved the situs of the trusts to Texas. An order was entered by a New York court officially transferring the trusts’ situs to Texas. A Texas court issued an order declaring that Texas law governed the administration of the trusts while New York law continued to govern the validity and construction of the trusts.
As was the case with the other individual trustees’ resignations, the resignations of the individual trustees of the 1969 Trusts were conditioned upon the Court of Chancery’s judicial approval and, thus, ineffective. Likewise, the corporate trustee’s resignation was conditioned upon the new corporate trustee’s written acceptance which was, in turn, conditioned upon the issuance of an order from the Court of Chancery confirming appointment of the new corporate trustee.
Unlike the New Jersey court, the Texas courts were not currently exercising active control over the trusts. Nevertheless, the Texas probate court’s order clearly states that the trust was sitused in Texas and that Texas law governed its administration. Therefore, any claim for reformation of these trusts is a question of Texas law.
The terms of these trusts required three trustees – two individuals and one institution. The Petitioners wanted one institution to be the sole trustee. Therefore, the trusts must first be reformed to provide for only one trustee before the resignations of the two individuals could become effective. The substitution of corporate fiduciaries, however, could be accomplished under the terms of the trust instrument and without judicial oversight.
2005 Testamentary Trusts
Three trusts were created under the will of Elizabeth Peierls (the “2005 Trusts”). The will contained a choice-of-law provision that stated “[u]nless the situs of any trust is changed, the laws of the State of Texas shall control the administration and validity of any trust.” The will also provided that Texas “shall be and is fixed” as the situs of the trusts. There was, however, an exception that allowed the situs to change if the trustee shall be or become a resident of or have principal place of business in a state other than Texas.
The Petitioners, however, did not provide sufficient information about the 2005 Trusts for the court to consider the Petitioners’ requests regarding these trusts.