Opinion
No. X 09 CV 08 4038824
July 28, 2009
MEMORANDUM OF DECISION ON MOTION TO STRIKE
William Hale Hubbell is a beneficiary of two family trusts (Hubbell family trusts). He seeks to remove the present trustees of both trusts — the defendants C.J. Ratcliffe, Richard W. Davies and Andrew McNally IV (collectively, trustees) — and to recover damages from them for breach of their fiduciary duties. He seeks also a modification of the trusts so as to preclude persons such as the defendants, who have been employed with a corporation, Harvey Hubbell, Inc. (Hubbell), as officers or otherwise, from serving as trustees.
The defendants have moved to strike count four of the complaint, the count seeking to modify the trust, and Mr. Hubbell's prayer for punitive damages for the defendants' alleged breach of their fiduciary duties.
The operative complaint is the revised complaint dated Dec. 3, 2008, which the court will refer to in this decision simply as "the complaint."
Count five of the complaint, which sought damages from a former trustee, John A. Urquhart, for breach of his fiduciary duties, was also targeted by the motion, and the court struck that count at oral argument after Mr. Hubbell had conceded that the count was barred by the three-year statute of limitations applicable to claims for breach of fiduciary duty. Conn. General Statutes § 52-577. According to count five, Mr. Urquhart's service as a trustee ended in 2002; Complaint, ¶ 50; this action was not commenced until April 2008.
I
The facts alleged in the complaint, which the court assumes to be true for the purpose of this motion, are as follows. The two Hubbell family trusts were created in 1957 by Harvey Hubbell, III (Hubbell trust) and his mother, Louie E. Roche (Roche trust). The beneficiaries of the Hubbell trust were the settler and his wife, children and grandchildren; of the Roche trust, the settlor, her son and her grandchildren and great grandchildren. The obvious purpose of both trusts was to provide for the financial well-being of the beneficiaries via distribution of the income and principal of the trusts.
See part II, infra.
Both Mr. Hubbell and the trustees range far afield from the four corners of the complaint in their memoranda of law in support of and in opposition to the motion to strike. The court has ignored all of these improper assertions in determining the narrow issues before it.
Each trust provided for three trustees, and, pursuant to the trust indentures, each of these trustees must be a "director or officer, or both" of Hubbell or any successor corporation, as long as the trust corpus contains any securities of Hubbell or such successor corporation. The three present trustees of the Hubbell family trusts satisfy that criterion: Mr. Ratcliffe has been a director of Hubbell since 1980, as has Mr. McNally; Mr. Davies has been vice-president, general counsel and secretary of Hubbell since 1999.
See articles fifteenth and sixteenth of the Hubbell trust and articles eleventh and twelfth of the Roche trust.
In 1998 the trustees supported and voted for a "poison pill" provision adopted by the Hubbell board of directors (board) in the form of a "shareholders rights agreement", which provision is intended to deter a takeover of Hubbell by potential acquirors of Hubbell common stock. When this provision was adopted, in Dec. 1998, most of the assets of the Hubbell family trusts consisted of Hubbell class A common stock. In fact, the trusts owned about 43% of outstanding class A common stock of Hubbell, giving them a controlling interest in the corporation.
Thereafter, upon advice of an independent investment advisor, the trustees began in 2001 selling off some of the Hubbell class A common stock in order to diversify the trusts' holdings. The goal was to sell 25% of the trusts' Hubbell stock, and by October 2007 the trustees had sold off approximately one million of the trusts' shares. In September 2007 Mr. Hubbell and another beneficiary demanded that the trustees halt any further sales of class A common stock, but the trustees did not accede to that demand.
While the sales of class A common stock might have diluted the trusts' ownership interest in Hubbell, the complaint does not allege whether and to what degree that has occurred.
Beginning in November 2007, Mason Capital Management, LLC (Mason) offered to purchase all of the Hubbell class A common stock from the trusts (approximately 3,150,000 shares) at a cash price of $65 per share, representing a substantial premium over the trading price of Hubbell shares at that time. Mason demanded that, as part of the purchase, the trustees urge the Hubbell board of directors to redeem the "poison pill" provision or take other action to prevent its being triggered by Mason's purchase of the trusts' stock holdings. The trustees responded that they would forward Mason's request to the board but demurred on taking a position supporting Mason's demand. Mason's offer to purchase all the trusts' Hubbell stock was repeated several times during December and January 2008. Ultimately, the trustees reported to Mason that the board had declined to modify the "poison pill" provision so as to allow the purchase to be made.
Throughout this period Mr. Hubbell wrote to the trustees, arguing that the Mason proposal would be in the best interest of the beneficiaries because it would liquidate the trusts' holdings of Hubbell shares at a price 30% over their market value. His letters also accused the trustees of subordinating the interests of the trusts' beneficiaries to their own interests and of being controlled by conflicts of interest in their failure to recommend the Mason proposal to the Hubbell board. Finally, Mr. Hubbell urged the board not only to recommend the Mason proposal to the board but also to appoint a temporary trustee to evaluate the Mason proposal and to nominate for membership on the Hubbell board persons committed to redeeming the shareholder's rights agreement in the face of a reasonable offer to purchase the trusts' common stock holdings at a substantial premium over its market price. The trustees took none of the actions urged upon them by Mr. Hubbell, and this lawsuit followed.
II
Well-known canons govern the court's treatment of a motion to strike. The court must:
take the facts to be those alleged in the complaint . . . and construe the complaint in the manner most favorable to sustaining its legal sufficiency . . . Thus, if facts provable in the complaint would support a cause of action, the motion to strike must be denied . . . Moreover, . . . what is necessarily implied [in an allegation] need not be expressly alleged . . . It is fundamental that in determining the sufficiency of a complaint challenged by a defendant's motion to strike, all well-pleaded facts and those facts necessarily implied from the allegations are taken as admitted . . . (Citations omitted; internal quotation marks omitted.)
Violano v. Fernandez, 280 Conn. 310, 317-18 (2006).
Moreover, the court must apply settled law regarding the interpretation of pleadings:
The modern trend, which is followed in Connecticut, is to construe pleadings broadly and realistically, rather than narrowly and technically . . . Although essential allegations may not be supplied by conjecture or remote implication . . ., the complaint must be read in its entirety in such a way as to give effect to the pleading with reference to the general theory upon which it proceeded, and do substantial justice between the parties . . . As long as the pleadings provide sufficient notice of the facts claimed and the issues to be tried and do not surprise or prejudice the opposing party, we will not conclude that the complaint is insufficient to allow recovery. (Citations omitted; internal quotation marks omitted.)
III
The Supreme Court's last word on the test for modification of a trust is Connecticut Bank Trust Co. v. Coffin, 212 Conn. 678 (1989) ( Coffin). Relying on the second Restatement of the law of trusts, the court held: "If, owing to circumstances not known to the settlor and not anticipated by him, the continuance of the trust would defeat or substantially impair the accomplishment of the purpose of the trust, the court will direct or permit the termination of the trust." Id., 705, citing 2 Restatement (Second), Trusts § 336. "The same considerations apply in large measure to the modification of a trust." Id.
In Coffin the trial court refused to approve an agreement entered into by various beneficiaries, putative beneficiaries and the trustees of an inter vivos trust in order to settle a federal court action "because the trust modifications [called for by the agreement] were deemed not to be in the best interests of minor and unascertained beneficiaries nor consistent with the intentions of the settlor." Id., 682. The agreement called for payments out of the trust corpus to some of the beneficiaries and putative beneficiaries in return for a dismissal of the federal court action. Id., 699-700. It also called for certain modifications of the trust, in particular of a spendthrift provision limiting distributions to one of the settlor's children. Id., 700.
There was also a question in Coffin as to the meaning of the term "issue" as used in the trust indenture, which is of no moment in this case.
"The trial court in rejecting the proposed trust modifications relied upon written statements in several cases of the conditions necessary for termination of a trust: `(1) that all the parties in interest unite in seeking the termination, (2) that every reasonable ultimate purpose of the trust's creation and existence has been accomplished, and (3) that no fair and lawful restriction imposed by the testator will be nullified or disturbed by such a result.' Adams v. Link, 145 Conn. 634, 638 (1958) . . ." Id., 708. In reversing the trial court, however, the Supreme Court held that "(t)hese conditions precedent to termination of a trust under ordinary circumstances, as applied to its modification, must give way when it appears that a substantial impairment of the purposes of the trust is likely to occur unless certain modifications are made in order to resolve problems that the settlor never envisioned," again citing 2 Restatement (Second), Trusts § 336. Id., 709.
Thus, the Court established two conditions for modification of a trust: (1) the existence of circumstances not known to and not anticipated by the settlor of the trust and (2) the substantial impairment of the purposes of the trust due to those circumstances. These are, in effect, the two elements which Mr. Hubbell must prove to obtain a verdict in his favor on count four.
It is important to note the difference in the procedural posture of this case as opposed to Coffin. There the Supreme Court was measuring the findings of fact made by the trial court and the conclusions the court drew from those findings against the criteria it established for modification of the trust. So, after reviewing the evidence considered by the trial court, the Supreme Court could conclude that there was "little basis for the trial court's conclusion that minor and unborn beneficiaries will be harmed by the settlement"; Id., 705; and that "the value of the spendthrift provisions in ensuring against the possibility of Dexter, Jr.'s improvidence is clearly outweighed by the overall benefits that the settlement agreement provides for all the beneficiaries"; Id., 707; and that "the court's doubt . . . that Mary [a putative beneficiary] would prevail if her claim were fully litigated was not an adequate reason to conclude that the settlor's intentions would be so greatly thwarted by the payment to her of a sum approximating the estimated cost of further litigation that the settlement should be rejected." Id., 708. This court is not reviewing the record to see whether a circumstance exists that was not anticipated by the settlors and that is substantially impairing the purposes of the trusts; indeed, there is no such record.
Thus, the trustees' observation, after reviewing the evidence in Coffin, that "(t)he situation here is a far cry from that in Coffin"; Memorandum of Law in Support of Defendants' Motion to Strike, 14 (Jan. 20, 2009) (defendants' memorandum); is inapposite.
This court's sole function is to decide whether Mr. Hubbell has alleged facts that, if proven, would allow a court or jury to find that there exists a circumstance not known to or anticipated by the settlors of the Hubbell family trusts which is substantially impairing the purposes of the trust. The court concludes that he has.
The complaint alleges that the trusts were created in 1957; Complaint, ¶¶ 6, 7; and that the settlors "could not, and did not, anticipate" the development of devices, such as the "poison pill" provision in this case, to frustrate corporate takeover attempts. Id., ¶ 50. It further alleges that the "poison pill" was employed by the trustees, acting as directors or officers of Hubbell, to protect Hubbell from a takeover by Mason; Id., ¶¶ 35, 37, 41, 44; thereby denying the trust and Mr. Hubbell, a beneficiary of the trust, the benefits of a purchase by Mason of Hubbell common stock at a price substantially in excess of its market value. ¶¶ 39, 43. Finally, the complaint alleges that the trustees' decision to employ the "poison pill" device to frustrate Mason's efforts to purchase the trusts' controlling interest in Hubbell; ¶ 20; was a product of a conflict of interest on their part between their duties as directors and officers of Hubbell and their duties as trustees of the Hubbell family trusts. ¶¶ 39, 43, 50, 51.
The trustees argue that the "(p)laintiff's demand for modification flies in the face of two, fundamental expressions of the settlors' intent"; viz., that the trustees be officers and/or directors of Hubbell, thus knowledgeable about its affairs, and that the trusts retain rather than sell their Hubbell shares. Defendants' memorandum, supra, 14. It is not unusual, however, for modifications to alter basic provisions of a trust that have outlived their utility or that interfere with the trust's fundamental purposes. See Coffin, supra. And, the trust indentures, themselves, stipulate that the trustees are not obligated to retain Hubbell securities, the settlors' "hopes" to the contrary notwithstanding. Hubbell trust, article twelfth (1); Roche trust, article eighth (1).
The heart of Mr. Hubbell's claim in count four is that trustees who, as directors and/or officers of Hubbell, are required to look out for its best interests cannot, at the same time, look out for the best interests of the Hubbell family trusts and their beneficiaries, and did not do so in this case. Those provisions of the trusts which require that their trustees be directors or officers of Hubbell must be modified, he claims, to remove the conflict of interest between their fiduciary duties to the corporation and their fiduciary duties to the beneficiaries. "Constru[ing] the complaint in the manner most favorable to sustaining its legal sufficiency"; Violano v. Fernandez, supra, 280 Conn. 317; this court concludes that a reasonable jury could find that proof of the facts alleged would satisfy the two criteria the Supreme Court established in Coffin for modification of a trust.
IV
In his prayer for relief on count six, alleging that the trustees have breached their fiduciary duties, Mr. Hubbell requests not only compensatory damages but also "common law punitive damages." In order to secure common law punitive damages a plaintiff must plead and prove facts that "reveal a reckless indifference to the rights of others or an intentional and wanton violation of those rights . . . Recklessness is . . . more than negligence, more than gross negligence . . . [T] here must be something more than a failure to exercise a reasonable degree of watchfulness to avoid danger to others or to take reasonable precautions to avoid injury to them . . . Wanton misconduct is reckless misconduct . . . It is such conduct as indicates a reckless disregard of the just rights or safety of others or of the consequences of the action . . ." (Internal quotation marks and citation omitted.) Franc v. Bethel Holding Co., 73 Conn.App. 114. 137-38, cert. granted on other grounds, 262 Conn. 923 (2002). "A wilful or malicious injury is one caused by design. Wilfulness and malice alike import intent . . . [Its] characteristic element is the design to injure either actually entertained or to be implied from the conduct and circumstances . . ." (Internal quotation marks and citation omitted.) Nolan v. Borkowski, 206 Conn. 495, 501 (1988).
Common-law punitive damages were also requested as relief in connection with count five's allegation that Mr. Urquhart breached his fiduciary duty, but, since that count has been stricken (see n. 2, supra), his entitlement to relief vel non can only be evaluated in light of the allegations of count six.
Count six alleges that "(t)he actions or inactions of [the trustees] . . . were intentional, reckless or grossly negligent, and was (sic) in good faith." Complaint, ¶¶ 52, 56. These are conclusions of law, however, not allegations of fact. Attempting to meet the law's requirement that facts be alleged that evidence recklessness, wilfulness or malice, Mr. Hubbell simply recites in his opposition to the motion to strike the allegations of his complaint. Plaintiff's Memorandum of Law in Opposition to Defendants' Motion to Strike Revised Complaint, 17-19 (Feb. 17, 2009). While these allegations, if proven, may demonstrate that the trustees breached their fiduciary duties, they do not amount to reckless, wilful or wanton behavior so as to justify an award of punitive damages.
Not every breach of fiduciary duty involves reckless, wanton or malicious conduct that calls for an award of punitive damages. See, e.g., Campbell v. Lichtenfels, Superior Court, judicial district of New Haven at New Haven, Docket No. CV 04 4005066 (Oct. 3, 2005).
At oral argument Mr. Hubbell maintained that the trustees' disregard of his repeated protestations that they were violating their fiduciary duties in, inter alia, not facilitating the Mason purchase was sufficient to show recklessness, wilfulness or malice. But, the court does not consider that a trustee's failure to heed the arguments of one beneficiary of a trust evidences anything more than a difference of opinion.
V
For the reasons stated in this memorandum the motion to strike is DENIED as to count four of the complaint and GRANTED as to the prayer for common law punitive damages.