(Chancery Court Courthouse–from Court’s website)
The Court’s own introduction to this 35-page opinion is best quoted:
“The financial advisor (or sales representative) of a major brokerage firm improvidently advised an elderly woman to place most of her life savings in a charitable remainder unit trust with a 10% annual payout, lifetime gifts to her children and successor-beneficiaries, and the remainder to go to five charities, an event expected to occur almost half a century later – – objectors that all now seem to agree and understand were unrealistic and likely unattainable. In the spirit of cross-selling, a trust company sister entity of the brokerage firm was designated trustee. Legal advice was provided by an attorney selected by the brokerage firm; the attorney never even spoke with her client, the trustor.
In order to achieve the desired annual distribution and to maintain any hope of preserving principal for the benefit not only of the intervening life beneficiaries but also of the charities, the trust company invested the assets almost exclusively in equities. When the financial markets experienced a downturn, this investment strategy, which arguably suffered from a lack of diversification, resulted in a drastic drop in the asset value of the trust.”
The original challenge by the trustor to the wisdom of the advice that lead her to establish a unit trust in the first instance was barred by the Court as untimely. In this post-trial memorandum opinion, the Court found that the trust company “generally acted within the broad discretion accorded it under the controlling trust document, as well as the laws of Delaware governing the actions of fiduciaries and trustees. Certain payments from the trust related to the arbitration between the trustor and the brokerage firm, however will be disallowed.” The arbitration proceeding in which the trustor first asserted claims against a brokerage firm based on the investment mix was not successful for the trustor. Moreover, the trust company refused to be replaced as the trustee.
This decision shows how exceedingly difficult it is to remove a trustee even based on what appears on the surface to be a compelling factual situation.
The decision is notable for its discussion of the applicable “prudent investor standard” that governs the investment strategy of a trustee. See footnotes 54 to 58. Also noteworthy is the Court’s reference to the obligation of a trustee to consider the interest of all beneficiaries (see footnote 66), and the Court’s observation that the discretion of a trustee is only subject to review by the Court on a “abusive discretion standard” (see footnote 70).
In footnote 76 the Court observed that there was “something unsettling about allowing MLTC [an affiliate of Merrill Lynch] to evade liability . . . It no doubt seems unfair to Campbell.” However, the Court also noted that the “fatal flaw of this unhappy tale is found in the Trust Agreement itself. Fiduciary duties, always contextual,” did not allow the Court to second guess the investment decisions, and in light of the formation date making certain claims time barred, no breach of the prudent investment standard could be found.
To add insult to injury, the Court recognized that it was constrained by the traditional Delaware law that the payment of fees for attorneys out of the trust corpus has been considered to be generally proper where the: (i) attorney’s services are necessary for the proper administration of the trust or (ii) the services otherwise result in a benefit of the trust. This is true regardless of whether litigation is successful or not.