Power play

The Royal Court of Jersey’s ruling concerning BetOnSport.com founder Gary Kaplan’s actions has shed light on the status of protector powers.

Power play The Royal Court of Jersey has provided useful clarification on the status of protector ­powers and the doctrine of fraud on a power in its judgment in the matter of the Bird Charitable Trust and the Bird Purpose Trust.

The case arose against the backdrop of a US investigation into internet gambling and alleged racketeering by Gary Kaplan, the founder of BetOnSports.com. Basel Trust Corporation (Channel Islands), the Jersey trustee of two trusts settled by Kaplan, filed a suspicious activity report upon discovery of the US government’s investigation.

The trustee refused to have any direct communication with the settlor for fear of breaching local ‘tipping off’ provisions. The administration of the trust was therefore left in a state of paralysis.

Kaplan sought to return to a situation where the trust was in the hands of trustees who were unfettered by the requirement to obtain permission from a government authority. Following consultation with his advisers, Kaplan transferred the administration of the trust from Jersey to Liechtenstein by appointing trustees outside Jersey to take control of the assets – a matter undertaken without the approbation of the trustee. The purpose of the action was to clarify the ­validity of the transfer out of Jersey.

The court found that Kaplan had ­engineered the changes to the administration of the trusts for two reasons: first, to enable the protectorship to function more ­effectively should he be remanded in prison; and ­second, to procure the removal of the ­administration of the trusts from Jersey because of the difficulties caused to their administration by reason of the anti-money laundering provisions.

The court had to determine whether these motives amounted to a fraud on a power. As such, it noted that a power can only be ­exercised for the purpose for which it was conferred and in accordance with its terms and that this principle could be applied to both administrative and distributive ­powers. Also, that the doctrine of fraud on a power does not apply to general personal powers where the donee may benefit as well as ­anyone else, but it does apply to limited ­personal and fiduciary powers.

Is a power to appoint a new or additional trustee regarded as a fiduciary power? It was noted that, ultimately, such a question was one of construction of the trust deed. The court took the approach that it should consider the overall role of the protector, and if the protector’s role in a trust was a fiduciary one it was more likely that the power of appointing a successor protector was also fiduciary.

Under the terms of the trust deed in ­question, if a successor protector was not to be appointed by the protector then the duty to appoint fell to the trustee. Given that this power, in the hands of the trustee, was a fiduciary power, it was illogical for the power of appointment of the new ­protector to be personal where the appointment was made by the protector and ­fiduciary where it was made by the trustee.

The court therefore found that the power to appoint additional trustees and the power to appoint a successor protector were ­fiduciary powers. As such, they were reviewable by the court, which had a supervisory jurisdiction over their exercise.

The court found that Kaplan had not breached his fiduciary duties by exercising them in the manner and for the reasons stated above. The court made a strong ­distinction between its function to ­consider whether the appointments were valid and its function to consider the application of local regulatory/anti-money laundering ­legislation on those involved with the administration of the trusts.

The court was alive to the mobility of trusts, stating that: “In modern times the administration of trusts is frequently moved from one jurisdiction to another because the person with the relevant power ­considers that the former jurisdiction has become undesirable for one reason or another, so that the continued location of the trusts in that jurisdiction is no longer in the beneficiaries’ best interests.”

In this case the court took the view that Kaplan’s motives were not designed to flout Jersey law because the appointments were not in breach of Jersey law. They were designed to circumvent the trustee’s refusal to transfer/distribute trust assets because of the trustee’s concerns about the potential of money laundering.

The court made it clear in a postscript that different considerations might apply if the appointments had been made following a conviction of Kaplan and a finding that the trust assets were the proceeds of crime.

Dexter Flynn is a lawyer specialising in litigation at Voisin