Don’t get tricked by the name of Delaware Statutory Trust (DST).
Although the concept of Delaware Statutory Trust (DST) is created by the Delaware Statutory Trust Act (DSTA) 1988, DST has never been really statutory in practice. In other words, the principle of freedom of contract that DSTs enjoy has shaped DSTs out of its statutory sense. Most of the legal issues related to DST are predominantly based on the Trust Agreement that is signed between investors and trustees. In reality, judges almost always scrutinize the trust agreement first to seek the answers to the cases at hand. Here are some real-life examples:

In the case of IKB International S.A. v Wilmington Trust Company, there are several valuable gists that can be learned. In this case, the investors raised an action against their DST trustee for breaches of contract and implied covenant of good faith after investments became worthless. The focal issues rely on the interpretation of the Trust Agreement. In general, if the terms in the Trust Agreement are ambiguous, they will be interpreted by the jury for the objective reasonableness test. For unambiguous terms, the court will step in to interpret them directly. The investors, in this case, relied on the Trust Agreement language tasking the trustee with the general duty “to administer the Trust”. The investors believed this plain language shall create positive duties upon the Trustee as supervisory or expansive, however, the Court disagreed with this very broad interpretation. On another point, the Court held that broad discretion to act that the Trust Agreement vested the trustee cannot be converted into a contractual obligation. In particular, one part of the Trust Agreement clearly stated that:” The right of the Owner Trustee to perform any discretionary act enumerated in this Trust Agreement or in any Basic Document shall not be construed as a duty…” For the purpose of consistent interpretation of the Trust Agreement in its entirety, investors’ argument could not stand. In relation to the failure of management of loan files, the Trust Agreement in fact withheld from the Trustee any obligation to “deal with the [c]ollateral.” which discharged the Trustee’s liability for such failure. In the end, after a scrupulous analysis of the Trust Agreement, the investors lost all their claims against the Trustee.

Reading through the judgment of this case, the court made no mention of any actual statutes from the DSTA. The adjudication of the disputes was purely based upon the Trust Agreement as a contract concluded between the parties.

In some cases, although the Trust Agreement is recognized as the foundation of the DST, it does not necessarily serve as the sole legal source for any disputes. The Trust Agreement can empower other trust related documents as legal forces to resolve disputes. In re National Collegiate Student Loan Trusts Litigation, the Trust Agreement states,” it is the intention of the parties hereto that … this Agreement constitute the governing instrument of the Trust.” But the Trust Agreement does not purport to be the only contract that speaks the Trusts’ governance and operation. The term “Trust Related Agreements” was defined to include each Trust Agreement that refers to the Indenture as well as the Administration Agreement. Hence, Trust Agreement and “Trust Related Agreements” will be all admitted as enforceable legal documents to court proceedings.

Another landmark case in the realm of DST is also worth mentioning here. It is Grand Acquisition LLC v Passco Indian Springs DST, C.A. 12003- VCMR (Del. Ch. Aug. 26, 2016). In essence, this case is related to the DST investor’s right to access confidential information held by the trustee. There are several important legal points to be observed. Firstly, the Court resorted to LLCs and LLPs cases to interpret the rights stipulated in section 3819 of DSTA Title 12. However, the court would only apply section 3819 if the trust agreement specifies. Otherwise, the beneficiaries can access the Trust’s books and records based on the terms laid out in the trust agreement. Secondly, the terms in the trust agreement related to the beneficial owner’s right to inspect the Trust’s records and books trump the owner’s statutory rights derived from DSTA by default. Again, the DSTA provides a statutory default to resolve potential legal disputes. However, in order to benefit from such default, a clause must be clearly incorporated into the DST Trust Agreement to express the will of the contracting parties to apply DSTA default provisions. Thirdly, the Court also affirms that the trustee bears the burden of proof if he wields “improper purpose defense”. The trustee has to demonstrate proof of probable harm to the trust by releasing requested documents to the beneficial owner.

Following the Passco case, Murfey v WHC Ventures, LLC, the Supreme Court of Delaware ruled that limited partners were contractually entitled to schedules, without needing to prove that documents were “necessary and essential”. The legal base for the court’s decision is directly extracted from the Trust Agreement. In this case, though the Trust Agreement did not define “books and records”, it defined the term “Ownership Record” in Section 5.3(i) to include “the name, mailing address and Percentage Share of each Owner,” which was the information sought. Moreover, under section 5.3(i), the trust manager was obligated to provide a copy of the Ownership Records promptly after each revision. Hence, the legal rights and obligations here among the parties in a DST were not statutorily delineated but solely based and sought from the trust agreement.

On the other note related to DST taxation, there is no statutory stipulation in DSTA to definitely classify DSTs for the federal tax purpose. Instead, whether a DST will be taxed as a trust or a business entity is based upon the parties’ power laid out in the Trust Agreement. As one of the deciding factors, “if there is no power under the trust agreement to vary the investment of the certificate holders,” then such DST would be preliminarily categorized as a trust for the federal income tax purpose.

In sum, DSTs are operating far from its statutory footings. As more of a contract based trust, DST enjoys its flexibility that allows the investors to design their trust in whatever way they desire through the trust agreement.