Among Other Rulings, Court of Chancery Opinion Speaks to Duties Owed to Presumptive Remainder Beneficiaries

Christopher J. Tigani, Sr., et al. v. Robert F. Tigani, Sr. and N.K.S. Distributors, Inc., C.A. No. 2017-0786-KSJM (March 30, 2021)

          This case raised several interesting Delaware trust law issues.  The Vice Chancellor outlined the facts and her rulings as follows:

Defendant Robert F. Tigani, or “Bob” as he is known to his family, is accused by his biological sons and grandchildren of breaching his fiduciary obligations as trustee of the “1986 Trust.” The 1986 Trust holds stock in the nominal defendant, N.K.S. Distributors, Inc. (“NKS” or the “Company”), an alcohol distribution business that has been operated and majority owned by the Tigani family since Bob’s parents formed the Company in 1950. The plaintiffs’ primary complaint concerns a 2012 transaction, where NKS issued Bob seventy-five shares of common stock in exchange for $2.5 million. The plaintiffs advance an unhappy and baseless theory, alleging that the stock issuance was a self-dealing transaction designed to facilitate the transfer of control of NKS from the 1986 Trust, which Bob’s biological heirs must inherit, to Bob’s “new” wife and her children. In reality, the Company was in dire financial straits, the $2.5 million capital infusion was a necessary condition to refinancing, and Bob stepped up to the plate to make it happen. The challenged stock issuance was made after the capital infusion, without input from Bob, to address accounting issues raised by the Company’s auditor. Ultimately, the Company repurchased the seventy-five shares at a bargain price for the Company. These facts do not support a finding that Bob breached his obligations as trustee.

The plaintiffs also claim that Bob breached his duties as trustee of another family trust, the “BST Trust,” by using trust principal to buy a residence in Florida and a private plane. As to those claims, this decision enters judgment in the plaintiffs’ favor [meaning that Bob is ordered to pay $231,000 back (the cost of the plane and Florida residence) to the BST Trust].

          Of particular note, regarding duties owed to presumptive remainder beneficiaries, the Court found as follows (citations omitted):

Under Delaware law, remainder beneficiaries hold only a vested interest in the remainder of an estate but do not enjoy the present right to possess or control trust assets. Although Delaware law does not speak directly to the rights of presumptive remainder beneficiaries, it stands to reason that such rights are no more extensive than those of remainder beneficiaries with vested interests. As with remainder beneficiaries, the rights of presumptive remainder beneficiaries must correspond to their interests in and can be modified by the trust instrument.

Relevant to this dispute, and subject to the strictures of the Trust instruments, Bob owes to Plaintiffs four categories of duties that a trustee generally owes to remainder beneficiaries.

First, Bob owes a duty to preserve the Trusts’ property. This duty flows from Plaintiffs’ presumptive interests in future rights to assets of the Trusts, and stems from Bob’s duty “act as [a] reasonable and prudent person in managing the trust.” The duty to preserve may be modified by a trust’s terms, and both Trusts modify this duty by granting Bob the discretion to invade the trust principal in limited circumstances—where Bob “deems that the funds available . . . (together with [his] funds from all other sources) are insufficient to provide properly for [his] health, education, maintenance and support.” Bob’s duty to preserve does not require him to grow or invest the Trusts’ principal; both Trusts allow the trustee to “retain all property in the original form received.” The 1986 Trust also modifies Bob’s duty to preserve by granting him the 5- and-5 Power as its current beneficiary.

Second, Bob owes a duty to act impartially in his treatment of the Trusts’ varying beneficiaries, including Plaintiffs. This duty “does not require an equal balancing of diverse interests but a balancing of those interests in a manner that shows due regard for— i.e., is consistent with—the beneficial interests and the terms and purposes of the trust.” Bob’s duty of impartiality requires only that Bob not act “on the part of one beneficiary at the expense of the others;” it does not mandate equal treatment of beneficiaries with materially different rights and interests. A trustee does not breach its fiduciary duties by pursuing a strategy to provide for the current beneficiary while preserving the corpus for a remainder beneficiary.  

Third, Bob owes a duty of disclosure, although the scope of that duty is limited given Plaintiffs’ remote beneficiary status. Generally, disclosure obligations in the trust context impose a duty to “furnish information to a beneficiary upon reasonable request.” Beneficiaries are entitled to information “including the existence of the trust, their status as beneficiaries . . . any significant change in their beneficiary status; and . . . material information needed to protect their interests.” The scope of a beneficiary’s rights under a trust dictates what constitutes information needed to protect their interests, such that “[t]he terms of a trust may alter the amount of information a trustee must give . . . and persons to whom[ ] it must be given.”

Fourth, Bob owes a duty of loyalty limiting his ability to self-deal, although that duty is also modified by the Trusts. . . . In this case, the Trusts create and therefore sanction conflicts of interests by appointing Bob as the trustee and current income beneficiary. Likewise, when the Settlors created the 1986 Trust and continued to fund it with NKS stock, Bob worked at NKS and personally owned NKS stock. Conflicts of interests inherent in this ownership scheme were therefore contemplated at the formation of the 1986 Trust.

          Specifically, the Court found that “Bob did not breach his obligations by failing to disclose the Stock Issuance. As discussed above, the Stock Issuance in no way affected Plaintiffs’ rights under the 1986 Trust. Thus, knowledge of the issuance was not necessary to protect Plaintiffs’ interests. Bob did not breach his obligations by failing to disclose changes in designations as to his successor trustee. As discussed above, Plaintiffs lack the right under the 1986 Trust to veto or replace Bob’s designated successor trustees, and disclosure of those designations was not necessary to protect Plaintiffs’ interests under the 1986 Trust.”

          Likewise, the Court found that “Bob did not breach his obligations by failing to disclose the Recapitalization, which never occurred, and which would have had no impact on Plaintiffs’ limited rights under the 1986 Trust in any event. As contemplated, the Recapitalization would have caused NKS to issue additional stock pro rata so as not to impact proportional ownership of the Company. It also would have involved Bob acting in his capacity as trustee solely to approve the transaction by voting the 1986 Trust’s NKS stock, a right Plaintiffs do not have.”

          And, the Court concluded that “Bob did not breach his obligations by failing to disclose his lifetime employment contract, his wife’s death benefits, or Ruggiero’s employment contract. The NKS employment contracts had no impact on Plaintiffs’ limited rights under the 1986 Trust . . . .”

As far as attorneys’ fees, the Court, facing Plaintiffs’ requests for fees, found that:  

As to the 1986 Trust, because this decision finds no breach of trust, Plaintiffs’ litigation produced no benefit and their request for statutory fee-shifting is denied.

As to the BST Trust, this decision does find breach warranting some recovery of attorney’s fees and expenses, although a fraction of what is requested commensurate to the level of victory achieved by Plaintiffs. As a rough estimate, Plaintiffs were successful on no more than 10% of their claims. In a generous gesture, this decision grants that 10% of Plaintiffs’ total attorneys’ fees and expenses shall be paid from the BST Trust.