Delaware statutory trust vs common law trust

Delaware’s comprehensive statutory framework governing common law trusts, which is reviewed and updated on a regular basis, is designed to promote flexibility, certainty, and predictability in transaction planning. Moreover, Delaware’s sophisticated judiciary is well positioned to deal with common law trusts and their related transactions. The Delaware Court of Chancery, which is recognized as a preeminent court for resolving sophisticated corporate law disputes, brings the same level of expertise and sophistication to disputes involving common law trusts. These factors combine to make Delaware an ideal jurisdiction for the formation of common law trusts in commercial transactions.

BACKGROUND
Common law trusts are used to issue asset-backed securities in structured finance transactions when the use of a statutory trust is undesirable because of regulatory or tax concerns. The agreement used to form the trust in these transactions is typically referred to as a “pass-through trust agreement” or a “pooling and servicing agreement,” and the law of the jurisdiction that is chosen to govern the commercial aspects of the agreement will also be the law governing the creation of the common law trust. We recommend that careful consideration be given to the choice of law to govern the pooling and servicing agreement or pass-through trust agreement in light of two key factors: (i) the jurisdiction’s trust law and (ii) the jurisdiction’s state courts.

SPECIFIC ADVANTAGES OF DELAWARE TRUST LAW

• Certainty, Flexibility, and Permissiveness: In contrast to traditional trust law’s inflexibility and restrictiveness, Delaware’s laws governing common law trusts are permissive and flexible and thus ideal to provide the certainty required for sophisticated commercial transactions. For example, governing instruments of common law trusts may expand, eliminate, restrict, or otherwise vary the beneficiaries’ rights and interests and a trustee’s powers, duties, standard of care, rights of indemnification, and liability from those that would otherwise apply at common law.
• Emphasis on Freedom of Contract: The Delaware Legislature has adopted statutory provisions for common law trusts providing that courts are to give maximum effect to the principle of freedom of contract when enforcing governing instrument provisions and that judicial canons of construction that would narrowly construe the law are not applicable.
• Clarity as to Applicable Rules: In the absence of clear guidance from statutory provisions, courts and commentators in many jurisdictions are not certain to what extent traditional trust law is applicable to commercial transactions. Delaware’s business-friendly common law statutory provisions are clear in this area.
• Creditor Rights and Trustee Liability: Delaware law provides comprehensive statutory provisions as to rights of creditors in trust property, trustee liability to third parties, trustee liability for actions by agents, protections available for agents and advisors, including investment advisors, and standards for discretionary action.
• Broad and Permissive Default Rules: Delaware has broad and permissive statutory default or gap-filler rules covering a broad array of matters, including delegation and the use of agents and investment advisors, transactions with affiliates, resignation and removal of trustees, custody and deposit of securities, affiliated transactions, and the appointment and use of co-fiduciaries.
• Modern Trust Laws: Much like its statutory provisions relating to statutory trusts, Delaware’s laws applicable to common law trusts are modern and business friendly, and significantly modify or abolish arcane rules such as the statute of frauds or the rule against perpetuities. Moreover, members of the Delaware bar and the General Assembly constantly monitor trust law and court decisions, and move rapidly to amend the statutory framework if necessary.