Will trustees be protected for their costs in a claim against a third party?

 In Probate, Trusts

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…..Not if they and the third party are the only beneficiaries

Trusts and Beddoe’s application – Pettigrew v Edwards [2017] EWHC 8

Case Summary from LawSkills | Private Client specialist trainersThis case examines whether trustees, two of whom were also the remaindermen, were entitled to a Beddoe order to defend a claim by the life tenant concerning non-payment of income to him and to make a counter claim. In the main action the trustees were counterclaiming repayment of a loan for which the life tenant had given a promissory note to the testator shortly before her death. The issue before the court here was not the main action and the enforceability of the loan or the payment of the income, but the question of the trustees’ Beddoe application.

The facts

Veronica Edwards died on 2 April 2003. By her Will she appointed her sons by her first marriage, Patrick and Shaun Pettigrew, and her solicitor David Rule, as her executors and trustees. Veronica left the residue of her estate to her fourth husband, Neale Edwards, on trust for life. After his death and the payment of small specific gifts, the remainder was left to her sons Patrick and Shaun.

On completion of the administration of the estate the residue which became the trust fund comprised assets worth £521,897. Included within this was a promissory note from Neale to Veronica for £100,000 dated 21 March 2003. Veronica had originally intended to acquire an interest in Neale’s property which they lived in together and for the £100,000 to be spent on improving it. Once Veronica learnt she had pancreatic cancer however, this was altered to a loan by Veronica to Neale of £100,000, repayable on demand.

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There was evidence that it was the intention of Veronica and Neale that the loan would remain outstanding during Neale’s life and only be repaid on his death. Following the administration of the estate the trustees wrote to Neale concerning the repayment of the loan and asked for security for the loan. No security was given.

The trustees then learnt that Neale had remarried, put the house up for sale and was considering moving to France. Neale then transferred the house into the joint names of himself and his new wife.

By May 2014 when the trustees again asked for security, they also said that if Neale failed to repay the loan on demand they would be entitled to withhold the income from the trust fund. In May 2015 the trustees demanded repayment of the loan, but Neale’s solicitor did not accept that there was any loan liability outstanding and claimed the ‘alleged’ debt was statute-barred and unenforceable. In July 2015, the trustees instructed the fund manager to withhold all income payments to Neale.

In May 2016 Neale issued a claim for an order that the trustees pay all outstanding and future income to him. The trustees filed their defence to Neale’s claim. The trustees then applied to court for permission to continue to defend the claim brought against them by Neale, to make their counterclaim in that claim and to be indemnified out of the trust fund in respect of all costs properly incurred by them in connection with the claim and counterclaim i.e. for a Beddoe order.

The issues in the main claim concerning the enforceability or otherwise of the promissory note and the right of trustees to set off income due to the life tenant against the debt were to be decided once the present Beddoe application by the trustees had been decided.

The law

The purpose of a Beddoe order is to provide reassurance to trustees that they are correctly applying funds they hold for the benefit of others, in taking or defending legal proceedings (or not doing so).

Matthews M stated that he had considered the costs rules in detail in Blades v Isaac [2016] EWHC 601 and referred to the law he had set out in that case:

s51 Senior Courts Act 1981 provides in part that, subject to rules of court, the costs of and incidental to all proceedings in the High Court are in the discretion of the court, and that the court has full power to determine by whom and to what extent the costs are to be paid.

By Civil Procedure Rule (CPR) rule 44.2(1), the court has discretion as to whether costs are payable by one party to another, the amount of those costs, and when they are to be paid. Then under rule 44.2(2), if the court decides to make an order about costs, the general rule is that the unsuccessful party will be ordered to pay the costs of the successful party, but the court has discretion to make a different order.

In trust and estate litigation there are special provisions in CPR rule 46.3 for the costs of trustees and personal representatives (PRs):

(1) This rule applies where –
(a) a person is or has been a party to any proceedings in the capacity of trustee or personal representative; and
(b) ……
(2) The general rule is that that person is entitled to be paid the costs of those proceedings, insofar as they are not recovered from or paid by any other person, out of the relevant trust fund or estate.
(3) Where that person is entitled to be paid any of those costs out of the fund or estate, those costs will be assessed on the indemnity basis.
And in para 1 of the Practice Direction to Part 46:

1.1 A trustee or personal representative is entitled to an indemnity out of the relevant trust fund or estate for costs properly incurred. Whether costs were properly incurred depends on all the circumstances of the case including whether the trustee or personal representative (‘the trustee’) –
(a) obtained directions from the court before bringing or defending the proceedings;
(b) acted in the interests of the fund or estate or in substance for a benefit other than that of the estate, including the trustee’s own; and
(c) acted in some way unreasonably in bringing or defending, or in the conduct of, the proceedings.
1.2 The trustee is not to be taken to have acted for a benefit other than that of the fund by reason only that the trustee has defended a claim in which relief is sought against the trustee personally.
The costs of other parties, such as beneficiaries who issue proceedings against trustees or PRs, are governed by case law and in particular by Re Buckton [1907] 2 Ch 406. In that case the judge said that there were three classes of case:

(1)    Application by originating summons (now Part 8 claim) by trustees for directions/construction: all parties’ costs come out of the trust estate;

(2)    Application which could have been made by the trustees (as in (1)) but in fact is made by a beneficiary, joining the trustees as defendants: all parties’ costs come out of the trust estate;

(3)    Application by a beneficiary adverse to other beneficiaries, in hostile litigation which could have been begun by writ action (now Part 7 claim) but was in fact begun by originating summons: the general costs rule applies, and the unsuccessful party is generally ordered to pay the costs.

Matthews M stated that “for trustees to have the assurance that they will not personally have to pay costs of proceedings to which they are parties, but may use trust funds, they need to know that their participation is not unreasonable or for the benefit of anyone other than the fund” i.e. they should make a Beddoe application.

Where the litigation is ‘friendly’ and it is obvious that the proceedings are for the benefit of the trust fund, such as a question of construction, it would be a waste of trust funds to apply for a Beddoe order.

However, if there is a dispute with a third party the trustees cannot be sure at the outset whether the proceedings will be for the benefit of the trust fund so they should make a Beddoe application.

If there is a dispute between the trustees and a beneficiary, such as breach of trust by the trustees, the court will not (on an application for a Beddoe order) be able to judge the reasonableness of the trustees defending their position. Instead it is ‘ordinary hostile litigation’ so costs follow the event and a Beddoe application should not be made.

There are sometimes cases falling within one or more of the above three categories where the dispute is between persons claiming a beneficial interest in the trust fund and the trustees should remain neutral. Any small costs of theirs will be properly incurred so no Beddoe order is needed.

Where all the beneficiaries are ascertained, competent and capable of deciding whether or not to pursue a claim and are in agreement on the course of action they want the personal representatives (PRs) to follow, then the PRs are protected and there is no need or justification for asking the court for directions: Re Evans deceased [1986] 1WLR 101.

The decision

Master Matthews did start by saying that all Beddoe cases are fact-sensitive and “this one is unusually so”.

Matthews M first analysed the character of the claims to see if it was possible or useful for a Beddoe order to be made:

1)    The life tenant’s claim for payment of the income to him Matthews M found that this element was not a ‘friendly’ dispute as the trustees had argued, but was a breach of trust claim. It was therefore not possible or sensible to make a Beddoe order.
2)    The defence to claim 1 by the trustees and their set-off of the alleged debt by the life tenant as a third party to the trust
The defence by the trustees comprises two aspects:

i)    The question of the validity and enforceability of the promissory note was a third party claim and a Beddoe order would be a possibility.

ii)    The set-off element is a question of the trustees’ obligation under the trust and is not a third party claim. Just this element would mean no Beddoe order would be needed.

3)    The trustees’ counterclaim for the whole of the loan to be repaid and/or a declaration that they may retain the income due to the life tenant until the debt is repaid.

This split as 2) above had done:

i)    The counterclaim for the repayment of the debt is again a third party claim and a Beddoe order would be a possibility.

ii)    The claim for a declaration element is a question of the trustees’ obligation under the trust and is not a third party claim. Just this element would mean no Beddoe order would be needed.

Matthews M then acknowledged that the elements were all mixed up, but there were two separate issues:

1)    the validity and enforceability  of the loan under the promissory note, when a Beddoe order would be a possibility; and
2)    how the result of 1) above bears on the trustees’ obligation to pay income to the life tenant which he is entitled to, when a Beddoe order would not be possible.

In looking at the only issue which he needed to decide (the first issue), Matthew M agreed that the first two trustees were adults with capacity, parties to the litigation and as beneficiaries of the remainder interest they could decide in that capacity whether to risk litigation to enforce the loan against the third party (Neale). As the life tenant, Neale was already a party to the litigation too.

As all the beneficiaries were parties to the litigation there was no need for the trustees to take a substantive role. The trustees would be entitled to nominal costs for a nominal role. It would make a difference if there were minors or other beneficiaries with substantive interests.
Of particular importance here, and on the particular facts of this case, the Master decided that it would not be fair on Neale as the life tenant, if a Beddoe order was made and then the loan was found to be unenforceable. He would still have paid part of the costs (as a beneficiary of a reduced trust fund) when his action as a third party was successful.

A Beddoe order was therefore not appropriate.

Practice points

1)    Before applying for a Beddoe order trustees or PRs should first analyse the character of the dispute in order to put it in the correct category of litigation.

2)    Remember that, according to Matthews M, a Beddoe order can only be made where there is a dispute with a third party. ‘Friendly’ or breach of trust litigation will mean a Beddoe order will not be appropriate.

3)    Bear in mind that if the trustees are also beneficiaries and all beneficiaries are parties, a Beddoe order may not appropriate either. Look at the capacity the parties are acting under (beneficiary or trustee?) and whether there are other beneficiaries who are not involved in the litigation.

4)    Take note that if a beneficiary is the third party in question, it may be unjust to make a Beddoe order, even though one is possible in a third party claim.

5)    Remember too that all Beddoe cases are fact-sensitive so you may be able to distinguish your case!

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