Delaware Court of Chancery Issues Ruling on Jurisdictional Provisions of Delaware’s Qualified Dispositions in Trust Act

IMO DANIEL KLOIBER DYNASTY TRUST U/A/D DECEMBER 20, 2002 C.A. No. 9685-VCL (August 1, 2014)

Dan and Beth Kloiber are in the lengthy process of getting a divorce in Kentucky. Dan Kloiber is the primary beneficiary of a Delaware trust (the “Dynasty Trust”). In Kentucky divorce proceedings, Beth is maintaining that the Dynasty Trust is marital property, but the Kentucky Family Court has not ruled on that issue yet. The Kentucky Family Court has a status quo order in place. Fairly recently, Dan Kloiber resigned as special trustee of the Dynasty Trust. The special trustee has the authority to instruct the trustee on making distributions and on investing trust assets. When Dan resigned as special trustee, he appointed his son, Nick, to be the special trustee. The Delaware Court of Chancery stated that, after his appointment, “Nick proceeded to take action contrary to the status quo orders” and that "[t]he Kentucky Family Court issued a rule to show cause why Nick should not be held in contempt." The Delaware trustee filed a petition in Delaware arguing that the Delaware Court of Chancery has primary supervision over the Dynasty Trust and must intervene to enjoin Beth Kloiber from asking the Kentucky court to assert jurisdiction over the Delaware trustee and the trust.  For his part, Nick sought a TRO in Delaware to prevent Beth Kloiber from seeking to enforce the status quo orders, including through the pending Kentucky rule to show cause.

In reaching its decision denying Nick’s TRO application, the Court addressed whether 12 Del. C. 3572(a) provides that the Delaware Court of Chancery has exclusive jurisdiction over the Dynasty Trust under Delaware’s Qualified Dispositions in Trust Act.  Section 3572(a) states, “The Court of Chancery shall have exclusive jurisdiction over any action brought with respect to a qualified disposition.” The Court found that that language is only intended to provide which Delaware trial court—if the case is to be heard in Delaware—is to have jurisdiction. The Vice Chancellor explained that, “[w]hen a Delaware state statute assigns exclusive jurisdiction to a particular Delaware court, the statute is allocating jurisdiction among the Delaware courts. The state is not making a claim against the world that no court outside of Delaware can exercise jurisdiction over that type of case.” The Vice Chancellor further noted that Delaware couldn’t do that even if it so wanted as the states are peers and as there are constraints on a state within the federal republic that is the United States.

The Vice Chancellor also explained that under the Peierls cases, the Delaware Court of Chancery does have primary jurisdiction over administrative issues relating to Delaware trusts. But the court also explained that that jurisdiction is permissive, not mandatory or exclusive. Specifically, the court noted that “[o]ther courts may still exercise jurisdiction over matters of trust administration so long as doing so would not constitute 'undue interference' with supervision in the primary jurisdiction. (citing to Peierls).” The Vice Chancellor added that other state courts may exercise jurisdiction when they have jurisdiction over the trustee or over trust assets.

Importantly, at the same time that the Vice Chancellor denied the TRO motion, he entered a status quo order. The parties had agreed a status quo order should be entered, but couldn’t agree on the exact form. Thus, the court’s involvement was needed. All the parties had agreed that the Delaware court could exercise jurisdiction over Nick, the Dynasty Trust and the trustee. The Delaware court saw that as an opportunity to assist the Kentucky court and a Delaware status quo order as the vehicle to do so. Among other things, the Delaware status quo order provides that the Dynasty Trust is limited to activities only in the ordinary course. The Delaware court was hopeful that the Delaware status quo order would reduce the need for the Kentucky Family Court to reach trust administration matters, including those pertaining to the special trustee position.

Further, the Delaware court notably wrote, “The long-term interests of the two courts are the same as their short-term interests. The Kentucky Family Court needs to resolve the Kentucky Divorce Proceeding. This court has an interest in having matters of trust administration that are governed by Delaware law decided here so that the Delaware Supreme Court can ensure they are decided correctly. Just as this court has no interest in interfering in the conduct of judicial proceedings before a court of a different state, this court also has no interest in having Delaware law deployed to defeat the marital property laws of another state.”

In sum, the Delaware court explained, "[t]he question of whether an eventual judgment issued by the Kentucky Family Court can be enforced against the trust estate is not a matter where this court needs to act now to carve out and defend a future jurisdictional role. The Kentucky Divorce Proceeding should be completed first. If that case results in a final, non-appealable judgment against the Dynasty Trust, and if the judgment holder seeks to enforce it, then (but only then) will there be important questions of Delaware law to be decided.”

Note: This law firm represents Dan Kloiber in this Delaware action. This blog entry is only intended to present the facts and law as found by the court, not to opine on the accuracy or correctness of those findings.