Emma Holland and Luca del Panta write for Trusts and Estates Law & Tax Journal, looking at Perry v Neupert, an international family dispute which has lessons for trustees and personal representatives defending removal claims
The decision as to costs in the long-running saga of Perry v Neupert ([2019] EWHC 52 (Ch) (removal application) and [2019] EWHC 2275 (Ch) (costs judgment)), provides a number of salutary lessons for personal representatives and trustees contemplating defending their position in the face of a removal claim intimated by beneficiaries. In short, such fiduciaries cannot simply rely on their indemnity out of the estate/trust fund for either their costs of any steps taken or for those of their counterparties. This is particularly the case (as it was here) where they engage in a robust and partisan approach in opposition and are considered to have lost the case.
The background to this decision, which includes long-running multi-jurisdictional litigation, shows the level of acrimony between the various parties. It also offers an example of the sort of issues that can arise when wealth creators set up complex structures for succession planning or tax mitigation. Advisers would do well to bear the issues raised in the case in mind when choosing the appropriate vehicles and jurisdictions to achieve their desired aims.
The removal application
The costs judgment concerned an application brought by the deceased’s widow, Lea Lilly Perry (also known as Lilly Lea Perry) (the widow), who was the sole beneficiary to the English estate. She was supported by her daughter, Tamar Perry (the daughter).
The application (as amended) sought an order under s50 of the Administration of Justice Act 1985 removing and replacing the executor, a Swiss lawyer called Dieter Neupert, with the widow arid her daughter, or the widow, her daughter and a professional trustee. (Prior to amendment it had merely sought replacement with the widow.)
Dr Neupert resisted his removal, asserting that he was the appropriate person to conduct the role and that replacing him would incur unnecessary expenses. However, before long his position began to change. He was willing for a professional trustee to be appointed to act jointly with him; then, for that co-executor to have a casting vote; and then for the professional trustee to replace him. This latter concession was initially made in a without prejudice letter, but then openly. It formed the basis of Dr Neupert’s counterclaim in which he objected to the widow and daughter’s suitability because of a failure on their part to acknowledge debts of the estate. While Dr Neupert successfully applied for summary judgment on the counterclaim, this was overturned on appeal, with the costs being reserved.
Dr Neupert ceased to take active part in the proceedings in July 2018 before the section 50 application was heard. However, the trustees of two Liechtenstein trusts which had claims on the estate (the trustees), who were joined as second and third defendants, similarly resisted the appointment of the widow and her daughter as personal representatives.
The judge, Ms Lesley Anderson QC sitting as a deputy judge of the High Court, removed Dr Neupert as executor. She appointed the daughter jointly (subject to significant restrictions) with an independent professional. The restrictions on the daughter were due to criticism that she had demonstrated a lack of balance regarding estate issues. The widow was found not to be suitable on the basis that she would be incapable of acting independently of her daughter.
The deputy judge determined the widow and daughter were nonetheless the successful parties and accordingly applied the general rule (under CPR 44.4(2)), which led to a costs order against the unsuccessful parties, the trustees, since their joinder. The issue of costs up to July 2018 as between the widow and daughter on the one hand and Dr Neupert on the other was to be determined at a separate hearing.
The costs judgment
At the costs hearing, the widow and daughter argued that the same general rule should apply on the basis that they had been ‘successful’, particularly as Dr Neupert had effectively abandoned his counterclaim, which was akin to discontinuance.
Dr Neupert’s position was that this was not hostile litigation but rather a case involving an executor complying with his duty to act in the best interests of the estate. Accordingly, it was argued that he should be entitled to his costs on the basis that CPR 46.3 provides a rule that, where costs are not recovered from any other person, personal representatives (and trustees) are entitled to be reimbursed their litigation costs on an indemnity basis from the trust fund.
HHJ Eyre QC, sitting as a judge of the High Court, found that where proceedings are between beneficiaries and trustees, particularly where the trustee is unsuccessful, there is tension between the principles in CPR 44.2 (that the successful party recovers their costs) and CPR 46.3 (that a personal representative/trustee is entitled to be indemnified out of the estate/ fund). This could lead to beneficiaries effectively being paid their costs with their own money and an unsuccessful trustee litigating at the expense of the beneficiaries. The countervailing consideration is whether it is correct to deprive of indemnity a trustee who has acted properly for the benefit of the trust but was ultimately found by the court to be unsuccessful. The judge rejected the assertion that absent out-and-out resistance by a trustee to a removal, CPR 46.3 would apply as being too stark a dividing line.
In considering how to address this tension, the court considered, inter alia, McMillan J’s decision in the Supreme Court of Victoria in the case of Wales v Wales (No 2) [2014] VSC 33, where similar costs issues were addressed following the removal of trustees and executors on the grounds of conflict of interest. HHJ Eyre quoted from that judgment:
“In litigation the general rule is that trustees are entitled to their costs out of the estate unless they have been guilty of some misconduct. Mere obstinacy in pursuing a claim, even though the trustee may lack on the pleadings, may amount to misconduct upon the part of the trustee.”
(This passage in the original judgment reads ‘even though the trustee may lack bona fides’. It is clear from the context that this is itself a typo for ‘may not lack bona fides’.)
He also referred to the following passage where McMillan J identified the central question, namely:
“… whether the costs expended by the plaintiffs in defending the application for their removal were improperly incurred. Relevant to the determination of that question is whether it was reasonable to defend the application.”
However, HHJ Eyre QC found that the starting point was the general rule under CPR 44. It was clear from the substantive judgment that the widow and her daughter were successful, and that Dr Neupert had resisted the relief that was being sought, in particular the appointment of either claimant as a trustee or executor. That said, the judge found that he also needed to take account of CPR 46.3 in considering whether the costs incurred by Dr Neupert and his liability in costs to the widow and daughter arose through acting properly in his role as an executor acting in the interests of the estate.
The court acknowledged that a decision by a personal representative/trustee to defend a claim, even where relief is sought against them personally, is not necessarily tantamount to acting for a benefit other than that of the estate/fund (Practice Direction 46, para 1.2). Here, there were questions regarding the liability of the estate in respect of certain alleged debts and it had not been open to Dr Neupert to wash his hands of the matter. Plus, it was accepted that Dr Neupert genuinely believed the allegations against him were misconceived and the claims were unsuitable.
However, the court found that Dr Neupert had adopted a ‘proactive, not to say aggressive, resistance’ and his ‘stance was one which was partisan and was neither reasonable nor proper’. He had made an application to strike out the claim (although this was withdrawn), and for summary judgment on his counterclaim, both of which steps were found to be classic hostile litigation and not a sensible way to resolve matters. Summary judgment was obtained but then reversed on appeal, by which point Dr Neupert had incurred costs of around £550,000. While the court found that the fact that Dr Neupert’s approach had changed was not of itself an indication of impropriety or unreasonableness, Dr Neupert’s resistance to removal, taking into account the tone, language and the ‘sheer scale of the exercise’ undertaken by him, had been unreasonable. Even if Dr Neupert genuinely thought that he was acting in the best interests of the beneficiaries and that the widow and daughter were unsuitable to be personal representatives, he had indulged his defence of his position and his criticism of their suitability at length and at considerable expense.
The unreasonableness of Dr Neupert’s actions was particularly stark given that he had neither attempted to negotiate nor sought authorisation or guidance from the court in the form of a Beddoe application before defending proceedings. It was noted that in Wales, although the Supreme Court of Victoria accepted that the trustees’ view was not unreasonable, it found that it was unreasonable for them to oppose the application for their removal without seeking direction from the court, particularly as there was an issue which was vehemently opposed and certain beneficiaries had formed the view that the trustees were in a position of a conflict of interest (para 24).
In the circumstances, Dr Neupert was found to have carried his opposition too far and in unreasonable terms. Accordingly, the costs of the litigation were found to have been improperly incurred and Dr Neupert was not entitled to the protection of CPR 46.3, namely an indemnity out of the estate. It was ordered that he bear his own costs.
The court did, however, acknowledge that although improper costs had been incurred at an early stage, making a cut-off date difficult to ascertain, some expense would inevitably have been incurred by Dr Neupert on taking advice even if he had adopted a neutral stance. Accordingly, the judge considered it appropriate to order that he should pay 85% of the claimants’ costs incurred until the end of his involvement.
Background and ongoing litigation
The background to the executorship dispute in England is colourful and interesting in itself, and has engendered multiple sets of proceedings in various jurisdictions, many of which are live at the time of writing and likely to continue for some time. In this case, the combination of a complex structure and a falling out between those intended to run it and those intended to benefit from it led to what the daughter has described as (para 8 of the removal application judgment):
“… an international and multi-jurisdictional battle that my mother and I have been obliged to bring to preserve the legacy of my father for the benefit of his family.”
The list of jurisdictions involved will not surprise anyone familiar with the affairs of international families such as this: England and Wales, Cayman, BVI, Panama, the Isle of Man, Liechtenstein, Switzerland, France, Israel, New York, Delaware, Curacao. Millions of pounds have been spent in fees, and — perhaps more unusually — the reputation of a whole jurisdiction’s trust industry has been said to have been damaged.
Nor was the wealth creator himself immune from controversy and litigation. Israel Igo Perry (Mr Perry) was born in Poland on 23 April 1942 and escaped with his family during Nazi occupation to Israel, where he took citizenship and became a successful lawyer and businessman. He married his wife (the widow) and had two children, Tamar (the daughter) and Yael. In 2000, he and his wife moved to the UK, from where he continued to build up the wealth which was later to become the subject of the current disputes after his death.
Among one of his earlier ventures was a pension and insurance scheme he set up in Israel in 1983 which, pursuant to a post-war compensation agreement between Israel and the then West Germany, assisted Israeli citizens to deposit funds in a West German social security scheme in order to receive a German state pension. Allegations in relation to that scheme in the early 2000s led to Mr Perry’s conviction in Israel in 2007 on charges of aggravated fraud, embezzlement, obstruction of justice and violation of insurance laws, for which he received a 12-year sentence.
That conviction led the Serious Organised Crime Agency in the UK (SOCA) to apply for disclosure and freezing orders against his and his family’s assets. The litigation went all the way to the Supreme Court on the question of whether the English court’s powers under the Proceeds of Crime Act 2002 had extra-territorial reach (Perry v Serious Organised Crime Agency [2012] UKSC 35. The Supreme Court held that they did not, which prompted Parliament to make amendments to the Crime and Courts Act 2013, giving SOCA’s successor, the National Crime Agency (NCA), power to continue to pursue Mr Perry. That action, however, was eventually dropped, leading Mr Perry to sue the NCA in turn and forcing it to pay him more than £3m in legal fees.
In the meantime, having been diagnosed with cancer, Mr Perry was attempting to put his affairs in order. He had settled a Liechtenstein trust in 2000, the Heritage Trust, with a Swiss trust company co-founded by Dr Neupert, Lopag Trust Reg (Lopag), as trustee.
The Heritage Trust later had transferred into it the shares in a BVI company, which owned a large family property in Mayfair. In 2013, after his diagnosis, he settled the Lake Cauma Trust, which came to hold a Cayman company with substantial cash assets. In 2015, he settled a further eight Liechtenstein trusts intended to hold assets for each of his family members and formed the Swiss Protectors Association (SPA), one of whose directors was Dr Neupert, to be the protector of all the trusts.
Shortly before his death on 18 March 2015 he recorded ‘certain instructions in relation to his wishes as regards his estate and the trust funds’. The parties have since referred to this as his ‘Letter of Wishes’ and Dr Neupert has cited it in support of his actions and general stance in relation to the trusts as against the family’s objections.
Relations between Mr Perry’s family and Dr Neupert did not immediately deteriorate after Mr Perry’s death. The catalyst appears to have been a disagreement about the sale of some property in Israel, which the family alleged Dr Neupert had not properly accounted for. The daughter then raised concerns about Dr Neupert’s financial interests in Lopag (which was trustee of all the family trusts), arid attempts were made to exclude him from decision-making at meetings of the SPA.
Dr Neupert then brought proceedings in Switzerland in July 2016 in relation to the corporate governance of the SPA. Litigation in Liechtenstein followed, first over Lopag’s trusteeship and then over the proceeds of sale of the Israeli property, with further proceedings over the protectorship of the trusts and the family’s involvement in their administration.
As discussed above, the widow then brought the executor removal claim in England in November 2016. In May 2017, the BVI company owned by the Heritage Trust that held theMayfair property brought possession proceedings against the family.
In Cayman and the BVI the family issued claims in 2017 to set aside certain transfers into the trusts (which included shares in Cayman and BVI holding companies). The transfers were challenged on the grounds that the assets were subject to the Israeli community property regime and that the widow, who therefore had a joint interest in them, had not consented to their transfer. They were also challenged on alternative grounds of mistake on the basis that Mr Perry had not appreciated the limited extent of the rights his family would have under the Liechtenstein trust. A trial of the Cayman action took place in March 2019 and as far as we are aware judgment is still awaited.
As sole beneficiary of Mr Perry’s will, the widow also brought proceedings in Delaware in 2017 seeking to establish that the equity in a Delaware company which owned a villa in the south of France fell into his estate rather than being owned by a Liechtenstein foundation controlled, among others, by Dr Neupert.
Proceedings were also started in Curacao in 2018 in relation to the ownership of a Curacao company which was said to have held a substantial shareholding in the Dutch holding company of the Israeli technology firm Mobileye.
More recently, there may be criminal proceedings afoot. In January 2019, the family lodged a petition for judicial assistance in New York to obtain documents for use in Liechtenstein criminal proceedings.
Conclusion for practitioners
A whole article might be dedicated to each set of proceedings. What the above illustrates is simply the complications which can arise when individuals or families arrange their affairs across multiple jurisdictions.
One aspect of the litigation which has attracted comment, as noted above, has been the perceived reluctance of Liechtenstein courts to assist beneficiaries in asserting their interests under Liechtenstein trusts. Press reports both in Liechtenstein and abroad speak of a loss of trust in the jurisdiction and damage to its reputation as a result of the Perry v Neupert saga.
Trust practitioners familiar with Liechtenstein will be aware that its trust law contains a number of features, for example its stringent confidentiality provisions, which are designed to preserve a Liechtenstein trust’s integrity against attack. While that is generally in the interest of the beneficiaries themselves, there will undoubtedly be cases where they pose an obstacle to a beneficiary seeking to challenge trustees’ actions regardless of the merits of the challenge.
That is something which a settlor and their advisers must weigh up against other considerations when considering whether to settle a trust in Liechtenstein.
Reports of the death of the Liechtenstein trust industry, however, must surely be greatly exaggerated — not least because much of the litigation is ongoing and so it is difficult to judge to what extent the fact that the trusts were Liechtenstein trusts may have hindered a meritorious claim by beneficiaries against delinquent trustees. While perception is everything, and no doubt there will be potential settlors who may be put off Liechtenstein on the basis of the press coverage, there will equally be some who see the jurisdiction as all the more attractive for providing a robust defence against attacks on a trust.
This article appears behind a paywall in the Trusts and Estates Law & Tax Journal, November 2019.
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