December 2019
Michael D. Chase v. Martha L. Chase and Clare L. Chase, C.A. No. 2019-0402-PWG (December 13, 2019)
In this case, counter-defendants argued that trust property could not be distributed until trust obligations were paid and the administration of the trust is complete, and also that the Delaware Court of Chancery should not involve itself in claims regarding a “Tennessee trust.” Counter-plaintiffs responded that the Delaware Court of Chancery could resolve those claims and that the trust requires immediate distribution of trust property to the beneficiaries. Master Griffin recommended a finding that Delaware courts can hear the trust claims but she recommended granting the motion to dismiss because “it [was] not reasonably conceivable that the trust could be interpreted to require immediate distribution of the trust’s property under the circumstances.”
The Master noted that it is not uncommon for Delaware courts to apply other states’ law in deciding Delaware cases. After applying the forum non conveniens factors, the Master decided the claims could be properly litigated in Delaware. The Master also applied Tennessee law in her opinion when appropriate.
Regarding the contention that the trust instrument mandated immediate asset distribution, the Master applied Tennessee law and concluded that “it [was] not reasonably conceivable that the Trust could be interpreted to require immediate distribution of the Trust’s assets without first addressing Trust obligations.”
J.P. Morgan Trust Company of Delaware v. Hadley Fisher, et al., C.A. No 12894-VCL (December 5, 2019)
This case is about a dispute between a trustee and the trust’s beneficiaries whereby the trustee is seeking a broad declaration that it had acted properly in all respects. During discovery, the trustee invoked the attorney-client privilege for otherwise relevant and responsive documents. The beneficiaries moved to compel production, relying on Riggs National Bank of Washington, D.C. v. Zimmer, 355 A.2d 709 (Del. Ch. 1976). Vice Chancellor Laster issued an opinion stating that the beneficiaries had satisfied the factors in Riggs to obtain the production over which the trustee claimed privileged and that the 2015 amendment to 12 Del C. § 3333 did not overrule Riggs such that the fiduciary exception no longer applied.
Background
In 2006 Richard Fisher entered into an option agreement with a newly created LLC (the “Company”). Upon his death the option would give the Company the right to purchase Richard’s ownership interest in a real estate business valued in the hundreds of millions of dollars. The members of the Company were Richard’s three children: Winston, Hadley, and Alexandra. Richard gave Winston a full membership interest that carried both voting and economic rights and the LLC agreement designated Winston as the managing member of the Company with sole authority to conduct its business. Richard also created trusts for Hadley and Alexandra and each trust received a special member interest that essentially had no rights.
If Winston caused the Company to exercise the option, then the Company would begin making distributions to the special members (Hadley and Alexandra’s trusts). The exercise of the option would also give the Company the right to acquire the special member interests after ten years (the “Special Member Buyout”). Soon after Richard died, Winston exercised the option and disputes arose among his widow, his children, and the administration of his estate. As part of a settlement, J.P. Morgan Trust Company of Delaware (the “Trustee”) became trustee of Hadley’s trust. Notable to this ruling, the Court found that the Trustee hoped to recast Hadley’s trust as a directed trust in which Hadley would act as the investment advisor and the Trustee’s duties would be limited to following his directives and performing administrative functions. However, Hadley never agreed to the amendments and so, according to the Court, the Trustee remained a common law trustee.
In May of 2016 (ten years following the exercise of the option), Winston initiated the Special Member Buyout process. In response, the Trustee hired Duane Morris LLP to represent the trust and conduct the discussions between the trust and the Company. In October of 2016, Winston offered two alternatives to the buyout: either a cash purchase of the trust’s special member interest for $11.5 million or an exchange of the special member interest for a pool of securities that Winston would select. According to the Court, both options would generate a significant tax burden for the trust. As such, Hadley asked the Trustee to propose a third alternative that would avoid the tax consequences. Documents produced by the Trustee showed that this third option was not something was acceptable to the Trustee. On November 1, 2016, Hadley threatened to sue the Trustee if it accepted either of Winston’s proposals.
In the litigation, Hadley argued that the Trustee should have disputed Winston’s ability to trigger the Special Member Buyout because he was faced with a conflict of interest (he was a partner of the real estate company and manager of the Company). Hadley argued that Winston gave in to Winston and accepted the cash buyout proposal because of its own conflicts of interests. That is, the Trustee had financial incentives to cooperate with Winston and, secondly, the Trustee had long wanted to exit its role as a common law trustee responsible for a non-diversified interest in a closely held business and the cash alternative would have achieved that goal. The Court held that Hadley developed some evidence to support its theories through the discovery it received in the course of litigation.
The Trustee’s Claim of Privilege
The Trustee’s privilege log contained 570 documents identified as privileged under the attorney-client privilege. According to the log, the Trustee’s representatives began communicating with in-house counsel almost immediately after Winston said he was triggering the Special Member Buyout. Within the same month, J.P. Morgan began communicating with Duane Morris, who represented the trust in discussions with Winston. According to the Court, the Trustee’s log indicated that counsel was performing work on behalf of the trust and providing advice in connection with the Special Member Buyout.
The Court first analyzed D.R.E. 502(b), which rule codifies the attorney-client privilege and its nonexclusive exceptions. The Court then addressed the non-codified, long-recognized exception: the fiduciary exception, which authorizes beneficiaries of a trust to gain access to a trustee’s communications with counsel. Riggs is the leading case on this privilege exception. According to the Court, the Riggs court conducted a two-step analysis to determine whether a document should be produced. The first is whether the trustee had retained counsel to represent the trust and provide advice that would advance the interests of the trust and its beneficiaries, or whether the trustee had retained counsel to protect its own interests, in anticipation of litigation in which the trustees would be defendants. The second was whether the trustee paid the law firm out of the trust, in which case, the court would regard that as a strong indication that the real client was the trust and the beneficiaries.
Citing Mennen v. Wilm. Tr. Co., 2013 WL 4083852 (Del. Ch. July 25, 2013)—a case that we blogged and its summary can be found here—the Court held that Riggs is still good law and that a party seeking to invoke the fiduciary exception bears the burden of showing that it applies. Here, the Court found that record on the motion established that the Trustee consulted with in-house counsel and with Duane Morris to obtain advice about how to carry out its duties to the trust and its beneficiaries and that the descriptions in the privilege log supported this conclusion, as did a few emails that the Trustee produced. Perhaps most tellingly though was that Duane Morris represented the trust in the negotiations with Winston. The Court further held that any uncertainty as to whether the items on the log were withheld because the Trustee was seeking advice to protect its own interest were the result of the Trustee’s repetitive and cryptic descriptions. In other words, the Court held that if the Trustee wanted to preserve the privilege, it could have characterized the items on the log as relating to its own defenses. The Court also held there were other factors that weighed in favor of Hadley having access to the documents on the log, such as the fact Hadley did not appear to have any other means of accessing information related to the Trustee’s evaluation of why it sought to choose one of Winston’s proposals.
There were, however, thirteen items on the log that warranted an in camera review. According to the Court, thirteen descriptions on the log included a tagline that said “potential litigation with Respondent Hadley Fisher.” The Court stated that under Riggs, without more in the way of a description, the Trustee would have to produce them. That said, the Court decided that it would review them in camera.
The Scope of Section 3333
The trustee argued that the 2015 amendment to Section 3333 of title 12 of the Delaware Code superseded the holding in Riggs. The Court disagreed. In short, the Court, looking at the legislative history, held that it merely codified the common law regarding the fiduciary exception. That is, that there is no longer a presumption in favor of the fiduciary exception just because the trustee pays for the legal advice from the trust. It found support for this by quoting the legislative history, in which it stated that it was meant to “clarify” when the fiduciary exception applies and when it does not. It also stated that if the General Assembly wanted to expressly overturn such an important case such as Riggs, it would have expressly stated so. And lastly it said that a reading of Section 3333 to mean that it overturned Riggs would be unreasonable because it would mean that Section 3333 also overruled other exceptions such as the crime-fraud exception.
