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Article 2055. Definition of a trust

A trust is a legal relationship in which a party (trustee) is obliged to acquire a patrimonial mass (the trust fund), to administer and dispose of it, in accordance with the terms governing the relationship (trust terms) to benefit a beneficiary or advance public benefit purposes.


Annotation:
Author: Octavian Cazac
Published: 24 March 2021
Origin of the rule: Art. X. – 1:201 DCFR
Note: Some parts of this text have first been published by the author in the Materials of the Kyiv University Conference Матвєєвські цивілістичні читання, 6 November 2020.

Introduction of trusts into the Civil Code of the Republic of Moldova: the Decisive Role of the DCFR

On 1 March 2019 the Moldovan Civil Code (adopted back in 2002) was considerably modernized by way of a Law to Modernize the Civil Code NO. 133 dated 15 November 2018.  Most of its 1,624 articles were amended and some extra 1,000 articles were introduced.

One of the new legal institutions so introduced was Book 3, Title IV on trusts.  The Moldovan drafters decided to adopt the model rules suggested in the DCFR [Principles, Definitions and Model Rules of European Private Law Draft Common Frame of Reference (DCFR). Full Edition (Eds. Christian von Bar & Eric Clive). Vol. I-VI. Oxford University Press, Oxford, 2010] to a degree of 95%.  For a legislative drafter, the DCFR comes off as a well-thought-off soft law instrument, with a detailed commentary and insightful comparative notes, all useful for explaining it to drafters and to the legal community.  This made it easy for the Moldovan drafters to take decisions.  Sometimes policy choices had to be adapted to be more in line with the terminology and civil law tradition prevailing in Moldova.

A Trend of Many Colours

The introduction of trusts is a European trend of the last two decades.  Some European jurisdictions recognize the English law trust under the Hague Convention of 1 July 1985 on the Law Applicable to Trusts and on their Recognition [see, e.g. for Italy, Maurizio Lupoi. Country Report: Italy. In: Columbia Journal of European Law Online. Vol. 18, 2/2012, p. 5; for Switzerland, David Wallace Wilson, Caroline López Nagai. Country Report: Switzerland. In: The Columbia Journal of European Law Online. Volume 18, 2/2012, p. 35; for Spain, Sonia Martin Santisteban. Country Report: Spain. In: The Columbia Journal of European Law Online. Volume 18, 2/2012, p. 50].

In 2007 France introduced la fiducie in Articles 2011-2030 of the French Civil Code [François Barrière, Fiducie. In: Répertoire civil Dalloz, Paris, 2017].

Following the French model, the new Romanian Civil Code (2009) introduced fiducia in its articles 779-791.  That code took a conservative stance at introducing trusts.  Thus, it lays down a more limited regulation and sets out more rigid requirements for the establishment of a trust (notarial deed; registration with the tax authority under penalty of nullity; only qualified entities that may act as trustees) [for a presentation and critique of the rigid approach, see, e.g. Daniel Moreanu. Fiducia și Trust-ul, ed. C. H. Beck, București, 2017. p. 247 et seq.] .

In both the French and Romanian regulation, trusts are also not allowed in succession law and cannot be established mortis causa.  An equivalent purpose is reached by fideicomiso [Delphine Louis-Caporal. La fiducie-libéralité. Réflexion sur une opération prohibée. In: Revue Trimestrielle de Droit civil, Dalloz, Paris, 2016, p.49].

For an analysis of trust-like arrangements in Estonian law, see Karin Sepp, Legal Arrangements Similar to Trusts in Estonia under the EU’s Anti-money-laundering Directive. In: Juridica International, 26/2017 [last visited 27 March 2021], Available online: https://www.juridicainternational.eu/article_full.php?uri=2017_26_56_legal-arrangements-similar-to-trusts-in-estonia-under-the-eus-anti-money-laundering-directive.

In contrast, by following the model rules of the DCFR, all such limitations have been avoided in the new rules of the Moldovan Civil Code, such that any person may act as a trustee; there are no particular requirements as to form for the establishment of a Moldovan trust (except that a trust established not under contract, but under a unilateral deed, needs to be authenticated by a notary); also testamentary trusts are allowed and they arise whenever a will designates a prior heir and a subsequent heir (Article 2252 of the Moldovan Civil Code, based on §2100 of the German Civil Code).

Article 2055 of the Moldovan Civil Code defines a trust as a legal relationship in which a party (trustee) is obliged to acquire a patrimonial mass (the trust fund), to administer and dispose of it, in accordance with the terms governing the relationship (trust terms) to benefit a beneficiary or advance public benefit purposes (comp. art. X. – 1:201 DCFR).

In this approach, the trust fund is held by the trustee.  The trust fund is treated as a separate patrimonial mass (in French – masse patrimoniale), part of the entire patrimony of the holder (sometimes called estate; in Romanian – patrimoniu).  This is in line with the French doctrine that a person can have only one patrimony and all its assets and liabilities, regardless of their nature, fall into its patrimony.  Under the Quebec Civil Code the trust fund is a fund without a holder.

Under Article 2062 of the Moldovan Civil Code, a trust fund is distinct from the personal patrimony of the trustee (the personal patrimonial mass of the trustee) and any other trust funds that a trustee may hold (comp. art. X. – 1:202 DCFR).  A trust fund may contain ownership and other real rights over property, rights of claim of any nature, security interest and other patrimonial right or a universality of the same, present or future (trust assets). Rights that are not transferable may not constitute trust assets.  A trust fund also contains the trust debts.

However, keeping up with the trends, the Moldovan Civil Code provides that a patrimony can be divided into separate masses, where so authorized by law.  One example of a patrimonial mass is the inheritance estate, the other – the trust fund (masa patrimoniala fiduciara).  These are sort of sub-patrimonies.  These removes the need for a legal treatment where a person would have several patrimonies.Thus, Article 888 (3) of the code provides that creditors whose claims have arisen in connection with a certain division of the patrimony, authorized by law, must firstly enforce upon the property forming part of that estate (patrimonial mass). If these are not sufficient to satisfy claims, the other property of the debtor may be enforced upon unless the debtor is liable, under law or contract, solely with that estate.

This is how Moldovan law, following French and Romanian law, has reconciled the classical theory of the patrimony with the new legal construct of trusts.

Legal nature

The legal nature of trusts, once implemented in a civil law jurisdiction, is the object of debate.  An observer could attempt to treat it as either a jus in rem relationship or a jus in personam relationship.

This also impacts the placement of the provisions on trusts in a Civil Code.  The DCFR has conveniently placed it in a book of its own (Book X).  The Moldovan drafters did not want to set up a new book of the Civil Code, and had either the choice of Book 2 (Real Rights) or Book 3 (Obligations).  Finally, the Title on Trusts was included in Book 3 since most of the internal relationships among the parties to the trust appear to be of a relative, obligational nature and not erga omnes.  Indeed, a trustee is treated as owner and has erga omnes powers, but that is not regulated in the provisions of trusts; it rather falls under the common provisions on property in Book 2.  In other words, as per the model of the DCFR, no special provisions on the position as owner of the trust assets and holder of the trust rights by the trustee are provided in the rules of the trust; rather, the normal rules on ownership and rights of claims apply.

We submit that trusts are a sui generis and complex relationship, but also have obligational and real right implications.  In any event, the dual ownership approach of English law – where the beneficiary is an equitable owner and the trustee is a legal owner [see, e.g. Philip H. Pettit, Equity and the Law of Trusts, Oxford University Press, 2012, p. 25.] – has not been adopted in Moldova, as it is incompatible with the exclusive nature of ownership in Moldovan law, as throughout most civil law jurisdictions [Daniel Moreanu, op. cit., p. 510].

Legal Effects of a Trust

After the trust contract was made in any form or a unilateral deed of trust adopted in notarial deed, a settlor must transfer property or money to the trustee.  The trust assets become part of the trustee’s patrimony, but in a special part of that – the trust fund.

The trustee becomes, from a property law perspective, owner of the assets, and from an obligational perspective – creditor of the right of claims entering the trust fund.

This then answers procedural questions and clarifies that the trustee is a claimant or respondent in legal disputes relating to a trust asset since the trustee is their legal holder.

Evidently, this is not traditional ownership, but qualified ownership, i.e. subject to the satisfaction of the terms of the trust.  In the traditional sense, an owner is free to deal with its property at its own discretion.  A trustee however is bound by its goal – satisfaction of the terms of the trust, which may imply investment obligations and preservation of value and then paying that value to beneficiaries, or may simply lie in transferring the initial asset to a beneficiary upon a certain event (e.g. an event of default under a loan, where the beneficiary is the lender; entry of purchaser’s right over an immovable property in the land book, where the seller is the beneficiary of the trust money).

A binding element of trust is the beneficiary.  It has no proprietary right over the trust fund. Rather it has a right of claim (an obligational relationship) as against the trustee in respect of the trust fund, to receive its benefit under the terms of the trust.

An optional party is the trust auxiliary, who may be granted powers such as veto powers or powers to approve a transaction or a performance, or it may have supervisory powers.

Achieving Isolation

A core function of setting up a trust is isolation of an asset from the creditors of a person, also known as segregation [see Ugo Mattei, Henry Hansmann. The Functions of Trust Law: a Comparative Legal and Economic Analysis. In: New York University Law Review: Selected Works, 1998, p. 20].  This effect is laid down in Articles 2068 and 2071 of the Moldovan Civil Code (comp. art. X. – 1:202 DCFR).  The creditors of the settlor and the beneficiary cannot enforce on the trust funds, since they fall into the patrimony of the settlor or the beneficiary.

The beneficiary’s creditors can, of course, enforce on the rights of the beneficiary as against the trustee in respect of the trust fund.

But also, the trust fund is isolated from the remainder of the patrimony of the trustee (the so-called – personal patrimony) and therefore the trustee’s personal creditors (including any spouse) cannot enforce on or otherwise claim any entitlement to, the trust assets.

This isolation goes both ways and the creditors of the trust do not have recourse against either the settlor, the trustee’s remaining patrimony and the beneficiary (Article 2072 of the Moldovan Civil Code).  This has important insolvency implications.

This approach is a derogation from the DCFR, which suggests that the settlor bears subsidiary liability for the debts of the trust fund.  The Moldovan drafters saw this as paying a disservice to the isolation principle so rather chose the policy suggestion of the draft EU Protected Fund Directive [see S.C.J.J. Kortmann. D.J. Hayton. N.E.D. Faber. K.C.G. Reid. J.W.A. Biemans, Towards an EU Directive on Protected Funds, Kluwer Legal Publishers, Deventer, 2009], and opted for complete isolation and protection of the settlor.

On the other side, the creditors of the trust fund (which includes the beneficiary) can file claims against the trust fund and enforce on its assets.

Of course, the trustee becomes owner of the trust assets solely when the usual acquisition formalities are satisfied (the so-called modus, i.e. entry of its right of ownership in respect of an immovable property into the land book; entry of its right of ownership in respect of shares in a trade or companies register or a securities or shareholders register; or plain transfer of possession in case of movable property not subject to constitutive registration).

The isolation function comes at a price – publicity of the trust.  No special publicity (such as entry an any register) is required for the validity of the trust under the Moldovan code.

The personal creditors of the trustee need to be advised that certain assets of the trustee are not his personal, but are isolated from his personal patrimony.  Article 2067 of the Moldovan code nevertheless provides for a system of publicity for mere opposability of a trust to third parties, whenever a trustee wants to invoke isolation of the trust fund from its personal patrimony.  The DCFR does, unfortunately, provide for model rules on opposability of trusts.

Conclusion

Trusts have been sought by transactional practice in Moldova especially in respect of escrow accounts, now called protected trust account (cont fiduciar de sechestru), as part of M&A deals and real estate deals.  To fulfil a similar function the Russian Civil Code has introduced only the regulation of nominal bank accounts, but without having a general regime of trusts.  This approach is one of limited introduction of trusts, and has the inconvenience of failing to address a myriad of legal issues that might arise during such a relationship.

By adopting the model rules of the DCFR, Moldova made a comprehensive introduction of trusts into its civilian legal system.  Such an adoption does not generate legislative or theoretical anomalies and is compatible with the classical treatment of ownership as an exclusive and perpetual proprietary right that may be limited by a complex obligational relationship.

Recommended citation: 
Octavian Cazac, Annotation to Article 2055 [online]. Codul civil Adnotat [accessed on 24 March 2021]. Available at animus.md/en/annotations/2055/
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Online seminar on Trusts (in Romanian)

 

 

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