August 2013
In the Matter of The Mary R. Latimer Trust U/A/D 12/3/1924 C.M. No. 17254-N-VCL (August 19, 2013)
The Court of Chancery, per Vice Chancellor Laster, denied a joint petition filed by the trustee bank and a cemetery to modify a trust established for the maintenance of two burial lots in the cemetery. The petitioners argued that the language of the Trust regarding the application of income and/or principal of the Trust could be read broadly to include surrounding areas of the Cemetery and asked the Court to modify the Trust so as to permit the Trustee to distribute a unitrust amount to the Cemetery annually. In support the petitioners argued that the doctrine of cy pres, as reflected in the common law and as reflected in the cy pres statute, warranted the use of the trust’s funds to support the needed maintenance of a broader area of the cemetery, which would in turn benefit the lots. The Vice Chancellor, however, concluded that the trust was not a charitable trust; that it provided only for the preservation and maintenance of two specific burial lots and their immediate surroundings; and that there was no impossibility of purpose, etc. As a result, the Court found that cy pres was unavailable. Important in the Court’s ruling was the acknowledgment that under Delaware’s codification of the cy pres doctrine, even though expanded to include noncharitable trusts, a court’s power to modify a trust requires a first inquiry into whether the trust is unlawful or no longer serves any charitable or noncharitable purpose, and not whether it is excessively funded or wasteful. The Court also held that the statutory cy pres doctrine is not available to trusts for the maintenance of cemetery plots, by its terms.
Mennen v. Wilmington Trust, C.A. No. 8432-ML (July 25, 2013)
The Plaintiffs in this case, who are the beneficiaries of a trust, are seeking the removal of the co-trustees and damages in excess of $100 million as a result of alleged breaches of the co-trustees’ fiduciary duties. This action was preceded by a petition for instructions that the Co-trustee bank filed on May 25, 2012 to remove the individual co-trustee of the Trust (the “Petition Action”). The Co-trustee bank alleged in the Petition Action that the trust was a directed trust and that it was obligated to follow the individual trustee’s instructions. Among other things, the Plaintiffs sought to compel the Co-trustee bank to produce documents relating to the Petition Action.
The Co-trustee bank refused to produce any of its internal or external communications with counsel related to the Petition Action. Additionally, the Co-trustee bank refused to create a privilege log for the documents it withheld relating to the Petition Action. And the Co-trustee bank raised the “advice of counsel defense” but it refused to produce documents related to that defense. The Plaintiffs sought to compel the Co-trustee bank to produce “all privileged documents related to the Trust through March 22, 2013,” the date they filed their Verified Complaint, as well as “all privileged documents related to the Trust” and created thereafter if “not created in connection with [the] defense” of this action. The Plaintiffs asserted that under Riggs National Bank of Washington D.C. v. Zimmer, 355 A.2d 709 (Del. Ch. 1976) the Co-trustee bank must turn over all documents related to the Petition Action because that action presumably was brought on behalf of the beneficiaries, who were, in effect, the ultimate clients of the attorneys ostensibly representing the Co-trustee bank. The Co-trustee bank further argued that because litigation reasonably was anticipated between itself and the beneficiaries when it retained counsel regarding the events giving rise to the Petition Action, and because it paid for the legal advice it sought rather than using trust assets to pay the fees, the factors identified in Riggs as appropriate in resolving the privilege question do not support the application of a fiduciary exception to attorney-client privilege.
As an initial matter, the Court found that the reasoning in Riggs was not superseded by subsequent changes to Delaware law. But while the Master found that Riggs continues to be the law in Delaware, she also found that the plaintiffs-beneficiaries bear the burden of showing that Riggs applies to each of the categories of documents that they sought to compel. As the Master explained, in Riggs, “the application of the fiduciary exception to the attorney-client privilege primarily turned on a determination of who the ‘real’ or ‘ultimate’ client was, meaning the person for whose benefit the legal advice was procured.” To determine that, Delaware courts apply Riggs and examine: (i) the purpose of the legal advice; (ii) whether litigation was pending or threatened between the trustee and the beneficiaries at the time the advice was obtained; and (iii) the source from which the legal fees associated with the advice were paid. Here, the court found that the Co-trustee bank decided to obtain the legal advice because it was reasonably worried about its exposure. And based on the fact that the trust’s largest holding went bankrupt and the significant decline in the trust’s value, the Court also found that there was a real threat of litigation between the Co-trustee bank and the beneficiaries. Regarding the last prong, the Court explained that Delaware law confirms that a trustee’s retention of counsel, and its payment of counsel’s fees out of trust funds, does not operate as a waiver of the attorney-client privilege. In this case though it was clearer as the source of payment wasn’t the trust, it was Wilmington Trust’s parent corporation. As a result of those findings, the Master upheld the privilege as to the documents at issue, but required the Co-trustee bank to create a privilege log.
