Opinion
C.A. No. 18139-NC
Date Submitted: September 13, 2002
Date Decided: December 31, 2002
Stephen E. Herrmann and Steven J. Fineman, Esquires of RICHARDS LAYTON FINGER, Wilmington, Delaware; Attorneys for Petitioner.
John A Herdeg, Esquire of HERDEG DU PONT AND DALLE PAZZE, LLP, Wilmington, Delaware; Attorney for Respondent, Christopher A. Sailer.
James S. Green and R. Karl Hill, Esquires of SEITZ VAN OGTROP GREEN, P.A., Wilmington, Delaware; Attorneys for Respondent, John Sailer, Jr.
MEMORANDUM OPINION
Pending is the petitioner's post-trial motion seeking payment of its legal fees and expenses. The petitioner was the corporate trustee of the trust that is the subject of the lawsuit. The petitioner seeks reimbursement for the legal fees it incurred in connection with the administration of the trust, the negotiations relating to its termination, and the litigation relating to the trust. For the reasons discussed below, the motion for fees and expenses will be granted.
I. FACTS
The petitioner, Delaware Trust Capital Management ("DTCM"), was the successor corporate trustee of the Trust of Marion McKinley (the "Trust"), that the settlor, Marion C. McKinley ("Ms. McKinley"), established in July 1952. Ms. McKinley's two sons, John J. Sailer, Jr. ("John") and Christopher Sailer ("Christopher") were the individual trustees and are the respondents in this action.
During her lifetime, Ms. McKinley received the net income from the Trust. The Trust Agreement provided that upon Ms. McKinley's death, the principal would be divided into equal parts for her children who survived her and the issue of any of her children that predeceased her. Because her children were over 41 years old when Ms. McKinley died, the Trust Agreement, by its terms, gave the trustees a one-year window during which they could distribute the Trust principal to the children. After that one year expired, the undistributed share would remain subject to the Trust for the children and their issue.
In an unrelated case decided in 1995, this Court determined that John had breached his fiduciary duty as a trustee of an unrelated trust. In 1996, John was criminally convicted for his conduct in that capacity. After John's conviction, DTCM, supported by Christopher and Ms. McKinley, sought John's resignation as a co-trustee of the Trust. DTCM took the position that it did not want to be associated with John, and would resign as the corporate trustee unless John agreed to resign.
In re Rick, 1995 Del. LEXIS 122 (Del.Ch. Sept. 11, 1995).
State v. Sailer, 1996 Del. Super. LEXIS 59 (Del.Super. Feb. 28, 1996) (upholding John's conviction).
Initially John agreed to resign, and in response DTMC, with the consent of both brothers, retained the law firm of Richards, Layton Finger (the "Richards firm") to deal with any legal issues relating to John's resignation. John then changed his mind and refused to resign. As a result, DTCM employed the services of the Richards firm to remove John as co-trustee. For its services, the Richards firm charged a $30,000 fee, which the Trust paid.
In 1999, after Ms. McKinley's death, John and Christopher decided that the Trust should be terminated. DTCM agreed to terminate the Trust if two conditions were satisfied. The first condition was that 55% of the total Trust assets would be held in reserve to pay any potential tax liability, with the Sailers agreeing to pay any taxes that remained unpaid. The second condition was that the Sailers would unconditionally release DTCM from all liability arising out of its administration of the Trust. The Sailers refused to release DTCM from liability for the $30,000 Richards legal fee, and they also refused to consent to DTCM's voluntary resignation. In response, DTCM filed this lawsuit.
When Ms. McKinley died in December 1999, John and Christopher had both reached the age of 41. Therefore, under the terms of the Trust, the distribution to them of the Trust principal had to occur by December 2000.
In its petition, DTCM sought an order (i) permitting DTCM to resign as co-trustee; (ii) declaring that DTCM acted properly in seeking to continue the Trust; (iii) removing John as trustee; and (iv) determining whether the Sailer brothers could, in their capacity as trustees, lawfully act in their own interest by voting to terminate the Trust and to distribute the principal to themselves. The respondents interposed counterclaims seeking to (i) terminate the Trust, (ii) require DTCM to reimburse the Trust for the $30,000 legal fee paid to the Richards firm, and (iii) require DTCM to pay the Sailers' legal expenses.
In its post-trial Opinion, this Court determined that the Trust should be terminated, but denied all of the parties' remaining claims and counterclaims. The Court also denied DTCM's motion for reargument.
In the Matter of Trust U/A Marion C. McKinley, 2002 Del. Ch. LEXIS 64 (Del.Ch. May 24, 2002) (Jacobs, V.C.) [hereinafter McKinley I].
In the Matter of Trust U/A Marion C. McKinley, No. 18139 (Del.Ch. June 12, 2002) (Jacobs, V.C.) [hereinafter McKinley II].
DTCM has now moved for an order directing the payment of the legal fees it incurred in connection with (i) the administration and termination of the Trust, and (ii) this litigation.
II. THE CONTENTIONS AND GOVERNING LAW
At issue are DTCM's fees and expenses for the period February 25, 2000 to November 29, 2001. By statute, this Court has broad discretion to allocate the expenses in a fair and equitable manner.
The petitioner seeks fees totaling $146,701.24. of that amount, $22,449.57 was incurred before June 9, 2000, when work began on the petition. Between June 9, 2000 and November 29, 2001, the fees incurred were $124,251.67. Inexplicably, the amount of the expenses sought has been left blank in the motion papers. Therefore, the only expense related issue that the Court will decide relates to legal entitlement, as opposed to specific amounts.
The Court's power to award costs and fees arises under 10 Del. C. § 5106 and Rule 54(d).
DTCM claims that it is entitled to have its legal fees and expenses reimbursed because they were necessarily incurred for the administration of, and were intended to benefit, the Trust. DTCM contends that it acted in good faith, that it had good cause to bring this lawsuit (as this Court found), and that it was entitled to defend against the Sailers' counterclaims. As further support, DTCM argues that none of the disputed litigation costs, including legal fees, would have been incurred had the Sailers consented to DTCM resigning as the corporate trustee.
The respondents contend, in opposition, that DTCM's legal fees and expenses were an improper trust expense, because DTCM's goal of securing a release from liability was self-interested and not intended to benefit the trust. The respondents further contend that DTCM violated its fiduciary duty by (i) needlessly causing the prosecution of this litigation due to their refusal to negotiate in good faith, (ii) unnecessarily forcing the litigation of collateral issues, (iii) unreasonably refusing to terminate the Trust, and then (iv) filing a frivolous motion for reargument. John argues separately that, under the American Rule, DTCM is obligated to pay its own legal fees and that the amount of legal fees and expenses that DTCM seeks is unreasonable.
The motion for reargument was filed after the Court issued its post-trial Opinion in May 2002. DTCM's fees and expenses in litigating that motion were incurred after November 29, 2001 and therefore fell outside the time period covered by this motion. DTCM has not sought to recover those costs, for which reason that claim will not be further addressed in this Opinion.
Similarly, in a letter dated September 13, 2002, Christopher's counsel challenges certain fees and expenses relating to the transfer of real property owned by the Trust. Because these fees were billed to the Trust by DTCM between June 2002 and November 2002, they also fall outside the time period covered by DTCM' s motion.
John's attack upon the reasonableness of the amount of the requested fee is conclusory and unsupported either factually or by reasoned argument. For that reason, this contention is rejected and will not be further addressed in this Opinion.
These colliding contentions raise three separate issues. The first is whether the legal fees and expenses incurred by DTCM before the preparation and filing of the petition in this action, are properly payable by the Trust. For the reasons discussed in Part III A, infra, of this Opinion, the Court concludes that DTCM is entitled to be reimbursed for those expenses.
The second issue is whether DTCM is barred from recovering any of the fees and expenses it incurred in prosecuting this lawsuit, on the ground that such prosecution constituted a breach of DTCM's fiduciary duty as a trustee. For the reasons discussed in Part III B, infra, the Court concludes that DTCM acted properly in prosecuting this lawsuit and cannot be denied reimbursement on that basis.
The third (and final) issue is whether reimbursement of certain categories of legal expense should nonetheless be denied because those expenses were incurred for DTCM's sole benefit and were not intended to — nor did they— benefit the Trust. Those discrete expense issues are separately addressed in Part III C, infra, of this Opinion.
III. ANALYSIS
A. Overview
Under Delaware law, the payment of attorney's fees out of trust corpus is generally proper in two circumstances. The first is where the attorney's services are necessary for the proper administration of the trust. The second is where the legal services create a benefit to the trust. Where a trustee brings, or defends against, a claim advanced for the benefit of the trust estate or its administration, the resulting litigation expenses are properly borne by the trust. Where, on the other hand, the trustee improperly involves the trust in litigation or retains an attorney at the trust's expense for the trustee's individual benefit and not for the benefit of the trust estate, the trustee is chargeable with the legal fees and cannot recover those fees from the trust.
Bankers Trust Company v. Duffy, 295 A.2d 725, 726 (Del. 1972).
Id.
Id.
3 William F. Fratcher, Scott on Trusts § 188.4, at 62 (4th ed. 1988).
Id. at 68.
Id. at 67-68.
As earlier noted, DTCM seeks to recover the fees and expenses it incurred during the period February 25, 2000 through November 29, 2001. DTCM was previously awarded the $30,000 Richards firm legal fee that DTCM incurred in its effort to remove John Sailer as a co-trustee. The broad question presented here is whether the fees and expenses DTCM seeks on this motion are (or are not) of the same character as the $30,000 fee to which DTCM was found entitled. Only to the extent the respondents can show that the fees were intended solely to benefit DTCM and did not benefit the Trust or relate to trust administration would DTCM become disentitled to reimbursement from the Trust.
Bankers Trust at 726.
A. Pre-Litigation Expenses
The first category of challenged expenses included the fees that DTCM incurred before the petition was filed. Because those expenses were incurred in connection with negotiating the termination of the Trust, they were necessarily administrative in character. Therefore, those expenses are properly payable by the Trust and are reimbursable to DTCM.
3 Fratcher, supra note 12 at §§ 233.2, 344.
Bankers Trust at 726.
B. Expenses Incurred In Connection With The Initiation And Prosecution of This Lawsuit
The respondents next contend, on two separate grounds, that none of DTCM's litigation expenses are properly payable by the Trust. The first ground is that bringing and prosecuting this lawsuit constituted a breach of DTCM's fiduciary duty owed to the Trust and its beneficiaries. The second basis for attack, which is less global, is that discrete categories of litigation expenses are not recoverable because they were incurred for the sole benefit of DTCM and not for the benefit of the Trust. These two challenges are separately addressed.
1. Whether Bringing And Prosecuting This Lawsuit Constituted A Breach of DTCM's Fiduciary Duties Owed To The Trust And To The Respondents
Although the respondents contend otherwise, I conclude that DTCM's prosecution of this lawsuit did not constitute a breach of any fiduciary duty owed by DTCM to the respondents or the Trust. In its earlier Opinion, this Court determined that DTCM had brought this action in good faith, even though certain issues raised became moot or were found to lack merit. Moreover, the Richards legal fee was incurred for a purpose that would benefit the Trust: removing a trustee who had been adjudicated a faithless fiduciary and who had been convicted of a felony.
McKinley I, at *1 *24-*25. Christopher contends that DTCM's efforts to (i) resign as co-trustee, (ii) argue the estate tax issue, and (iii) join Ms. McKinley's grandchildren as remaindermen, constitute evidence of DTCM's bad faith. The Court found the first two issues to be moot and the third to be late and without merit. In the post-trial Opinion, however, the Court found that the respondents failed to show that DTCM acted in bad faith. McKinley I, at *30-*31.
See generally ln re Rick, supra n. 1.
See generally State v. Sailer, supra, n. 2.
It is true that DTCM brought the litigation, in part, for a determination that it had acted properly in administering the Trust. DTCM sought that relief because the Sailers had refused to release DTCM from liability arising out of its administration of the Trust. Such a release, if granted, would have constituted an acknowledgment by the Sailers that the Richards fee was a proper Trust expense — a conclusion this Court reached in its earlier Opinion. Because it is reasonable to-and the Court does — conclude that this lawsuit was brought to benefit the Trust, the Court rejects the respondents' global attack on DTCM's claim for reimbursement of all its litigation-related expenses during the relevant period.
McKinley I at *30.
Id. at *25
2. Whether Reimbursement Must Be Denied For Specific Categories of Legal Expense On The Basis That Those Expenses Were Incurred Solely To Benefit DTCM, And Not The Trust
Alternatively, the respondents urge that, at the very least, certain discrete categories of DTCM' s litigation expenses were improper because they were incurred solely to benefit DTCM, and not the Trust. Because this argument challenges specific categories of litigation expense, each of these categories will be considered separately.
Certain of these challenges are easily disposed of. First, the respondents attack the expenses DTCM incurred in seeking instructions as to whether John and Christopher were entitled to vote to terminate the Trust. Manifestly, a trustee is entitled to seek judicial instructions on issues that concern the administration of the trust. The instructions DTCM sought here concerned the administration of the Trust. Expenses incurred for that purpose are administrative, and hence, are properly chargeable to the Trust.
I ordered that the Trust be terminated because after having resolved the issues of the estate tax and the Richards legal fee (both in DTCM's favor), DTCM no longer had any reason to continue the Trust. Id. at *30
3 Fratcher supra note 12 at 68.
Id.
Second, Christopher argued that, even though the $30,000 Richards fee was found to be a proper trust expense, DTCM' s costs of litigating that issue were not. I reject that position, because Christopher has made no credible argument, nor cited any supportive authority. Christopher portrays this action as a calculated effort by DTCM to secure a blanket release from liability for its dealings with the Trust. As previously found, however, DTCM's purpose for bringing the lawsuit was far more varied. One of its purposes was to obtain a ruling as to whether the Richards fee was properly borne by the Trust. DTCM accomplished that purpose, since the Court ruled in its favor on that issue.
Christopher's argument, if accepted, would bring about a perverse and unjust result. If an expense incurred by a trustee is challenged and then judicially upheld as a proper trust expense, then so too should the costs the trustee is forced to incur to resist that challenge successfully be upheld. The litigation expense incurred to defend a proper trust expense is properly regarded as an administrative expense. A contrary rule would discourage qualified persons from serving as trustees because they would be forced to pay out of their own pockets the costs of defending expenses incurred solely to benefit the trust.
This result is consistent with the policy recently adopted in the corporate indemnification area by our Supreme Court in Stifel Fin. Corp. v. Cochran, 809 A.2d 555 (Del. 2002). That case holds that an indemnification claimant may recover the costs of successfully litigating its entitlement to indemnification under 8 Del. C. § 145.
John also argues that DTCM is required to pay the costs of litigating the Richards fee issue under the so-called "American Rule, " which requires that each party to a litigation pay its own costs regardless of whether that party prevails in the action. There are exceptions to that Rule, however. Those exceptions include statutory provisions, equitable doctrines, and contractual agreements that permit fee shifting.
Kosachuk v. Harper, 2002 Del. Ch. LEXIS 96, at *29 (Del.Ch. July 25, 2002).
Del. Express Shuttle v. Older, 2002 Del. Ch. LEXIS 124, *94 (Del. Ch. Oct. 23, 2002).
Wilmington Trust v. Coulter, 208 A.2d 677, 68 1-82 (Del.Ch. 1965).
Slawik v. State, 480 A.2d 636, 639 (Del. 1984).
Under Delaware statutory law and common law, a trustee is entitled to be reimbursed for its litigation costs. 12 Del. C. § 3584 authorizes the Court "to award costs and expenses, including reasonable attorney's fees ... to be paid ... from a trust that is the subject of the controversy" when "justice and equity" require that result. Moreover, and apart from the statute, the Trust Agreement here provides that the trustees shall have the power "[t]o defend and maintain suits at law or in equity ... affecting the trust or its property; to begin suits and prosecute [them] to final judgment ... and to pay counsel for services rendered." Nothing in that provision forbids the trustee from having its legal fees reimbursed where the trustee initiates a proceeding for a determination of the proper allocation of expenses as between the trust and the trustee.
See generally Bankers Trust; see also Wilmington Trust at 68 1-82.
Trust agreement, Art. 2 § h.
The final challenged expense category concerns the costs incurred to litigate DTCM' s claim that it was entitled to resign as trustee, or, in the alternative, to have John removed as co-trustee. As earlier noted, DTCM sought to have John removed because he had been adjudicated a fiduciary who had violated duties under both civil and criminal law. DTCM contended that if John were allowed to remain a trustee, it (DTCM) was lawfully entitled to sever its association with the Trust. That result, to be sure, would have benefited DTCM, which desired release from this acrimonious relationship. It also would have benefited the Trust to end the acrimony, since the respondent-beneficiaries could have substituted, in DTCM's place, a corporate trustee agreeable to them. Because this litigation expense was not incurred solely to benefit DTCM, and because it stood to benefit the Trust as well, it is properly reimbursable by the Trust.
IV. CONCLUSION
For the foregoing reasons, the petitioner's motion for fees and expenses is granted. IT IS SO ORDERED.