Summary
The Delaware Supreme Court affirmed the Court of Chancery’s finding that trustees breached their fiduciary duties by failing to inform a beneficiary of his current beneficiary status and by showing partiality, and upheld remedies including a make-up distribution and surcharges. The court held that exculpatory clauses for ordinary negligence do not relieve trustees of the separate duties to inform beneficiaries and act impartially. It reversed the court-ordered appointment of a replacement trustee, ruling that the trust instrument’s vacancy-filling procedure must be followed absent compelling circumstances, and addressed standards for trustee removal and attorneys’ fees in trust litigation.
Topics
Practice areas
Questions Presented
- Whether the Lois Trustees breached their fiduciary duties by failing to inform Hank of his current beneficiary status and by acting partially toward the other siblings.
- Whether the Court of Chancery abused its discretion in imposing surcharges on trustees' commissions and a make-up distribution.
- Whether the court properly removed PNC as trustee and appointed a replacement.
- Whether the division of the Lois Trust into four resulting trusts and approval of unitrust policy was proper.
- Whether attorneys' fees should have been awarded to Hank.
Holdings
- The trustees breached their duties to furnish information and to act impartially. The trust's exculpatory clause relieving liability for ordinary negligence did not extend to these separate duties.
- No abuse of discretion. The surcharge of one-fifth of commissions for 1987-1996 was proportionate and within the court's equitable authority.
- No abuse of discretion. The remedy, though speculative, resolved uncertainty against the trustees whose misconduct necessitated the litigation.
- The trustees had authority under the trust instrument to divide the trust, and the decision was rational and within their discretion. No abuse of discretion by the Court of Chancery in approving it.
- Adoption of the unitrust policy was within the trustees' discretion and properly approved. It was a reasonable exercise of powers to preserve principal and provide certainty.
- Removal was not an abuse of discretion. PNC violated its own policies and engaged in a studied course of misconduct toward Hank.
- The Court of Chancery abused its discretion by disregarding the trust instrument's provisions for replacing trustees. The settlor's designated method for filling vacancies should be followed absent compelling circumstances.
- No abuse of discretion. Mather acted in good faith and the Vice Chancellor's personal observation supported his suitability.
- No abuse of discretion in denying fees. Hank's suit did not benefit the trust, the trustees' breach was not in bad faith, and Hank was not entirely successful.
Key quotations
“The grant of absolute or uncontrolled discretion to the trustee in the administration of the trust, without an exculpatory clause, may not relieve the trustee of liability for imprudent exercises of his powers.” (*509)
“A trust in which there is no legally binding obligation on a trustee is a trust in name only and more in the nature of an absolute estate or fee simple grant of property.” (*509)
“The duties to furnish information and to act impartially are not subspecies of the duty of care, but separate duties.” (*510)
“Even when a court seeks to exercise its residual authority of appointment, it should do so only in rare circumstances, since the identity and number of the trustees is central to the structure of the trust and a key indicator of the intent of the settlor.” (*514)
Factual background
In 1959, Henry Slack McNeil, Sr. established five trusts, including the Lois Trust for his wife Lois and his lineal descendants. His son Henry, Jr. (Hank) was a current beneficiary, but the trustees failed to inform Hank of this status, while his siblings were aware through family holding company involvement. Hank became estranged from his family, repeatedly sought information and distributions, but was rebuffed. The institutional trustees (PNC and Wilmington Trust) also misled him. The trust corpus grew to over $300 million, but Hank received nothing from the Lois Trust. After Lois's death, the trustees proposed dividing the trust into four resulting trusts and adopting a unitrust distribution policy. Hank sued for breach of fiduciary duties.
Procedural history
Henry Slack McNeil, Jr. (Hank) filed a complaint in the Court of Chancery alleging trustees of the Lois Trust breached fiduciary duties. After a six-day trial, the Court of Chancery found breaches of duty to inform and act impartially, ordered a make-up distribution, surcharged trustees, removed PNC as trustee, approved division of the trust and unitrust policy, and denied attorneys' fees to Hank. All parties appealed various aspects.
Remand instructions
Reverse the portion of the decision designating Bishop as replacement for PNC and remand for further proceedings consistent with the opinion, taking into account the settlor's intention as expressed in the trust instrument.