In re Trust Under Will of Wallace B. Flint for the Benefit of Katherine F. Shadek , 2012 Del. Ch. LEXIS 306 ( 2015 )

EFiled: Jun 17 2015 08:00AM EDT
Transaction ID 57415922
Case No. 10593-VCL
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE TRUST UNDER WILL OF WALLACE )
B. FLINT FOR THE BENEFT OF ) C.A. No. 10593-VCL
KATHERINE F. SHADEK )
OPINION
Date Submitted: March 20, 2015
Date Decided: June 17, 2012
Todd A. Flubacher, Kimberly Gill McKinnon, MORRIS, NICHOLS, ARSHT &
TUNNELL, LLP, Wilmington, Delaware; Attorneys for Petitioner.
LASTER, Vice Chancellor.
The current income beneficiary of a testamentary trust petitioned for an order that
would modify the trust’s terms by rewriting its administrative provisions, thereby
converting the trust from the traditional, trustee-managed structure that the settlor
contemplated into a directed trust where the trustee would serve only an administrative
role. The petition also seeks an order providing that Delaware law will govern the
administration of the trust unless the application of Delaware law ―would or might‖ have
adverse tax consequences, in which case New York law—the law that originally
governed the trust under the settlor’s estate plan—would spring back into effect. The
petition is denied.
I. FACTUAL BACKGROUND
Wallace B. Flint established a detailed estate plan in his Last Will and Testament
dated December 12, 1934 (the ―Will‖). Among other things, the Will created a
testamentary trust that would receive as its corpus the residue of his estate (the ―Trust‖).
A. The Terms Of The Trust
The Will contains detailed provisions for the Trust, reflecting Wallace’s careful
attention to how he wanted the residue of his estate distributed after his death. The initial
purpose of the Trust was to provide income for his wife, Margaret McClenahan Flint, for
the duration of her life. Article SEVENTH of the Will stated:
All the rest, residue and remainder of my estate, whether real, personal or
mixed, and wheresoever situate, I give, devise and bequeath to my Trustees
herein-after named, their successor or successors, in trust nevertheless, to
invest and reinvest the same during the term of natural life of my said wife
MARGARET McCLENAHAN FLINT, and during such term to pay over
to her the net rents, income and profits thereof in monthly or quarterly
installments as my said Trustees may determine.
1
Under the plain language of this provision, Wallace expected his trustees to determine
how to invest the corpus of the Trust.
Wallace provided that after Margaret’s death, the Trust would continue for the
benefit of his daughter, Katherine Frances Flint (now Katherine F. Shadek), and provide
income to her for the duration of her life. Article EIGHTH stated:
Upon the death of my said wife MARGARET McCLENAHAN FLINT …,
I give, devise and bequeath my said estate to my said Trustees, their
successor or successors, in further trust nevertheless, to invest and reinvest
the same during the term of the natural life of my daughter KATHERINE
FRANCES FLINT and during such term to pay over to her the net rents,
income and profits thereof in monthly or quarterly installments as my
Trustees may determine, except that during the minority of my said
daughter such payments shall be made to her testamentary guardian
hereinbelow named.
Once again, under the plain language of this provision, Wallace expected his trustees to
determine how to invest the corpus of the Trust.
Under Article EIGHTH, Wallace gave Katherine two opportunities to invade the
principal of the Trust. Upon attaining age thirty-five, she could direct that the trustees
divide the corpus into fourths and pay one fourth over to her. Upon attaining age forty,
she again could direct that the trustees divide the corpus into fourths and pay another
fourth over to her. By providing these opportunities, Wallace recognized that Katherine
might desire some degree of control over property being used for her benefit, and so he
created two chances for her to obtain control over what works out to approximately 44%
of the corpus (¼ + (¼ * ¾)). Notably, Wallace did not permit Katherine to access the
entire corpus, nor did he otherwise authorize her to direct how the corpus of the Trust
would be invested.
2
In Article NINTH of the Will, Wallace granted Katherine a testamentary power of
appointment over the corpus of the Trust that remained at her death. Wallace took care to
address what would happen if Katherine failed to exercise her power. He specified two
alternatives. If Katherine had lawful descendants, then the trustees would divide the Trust
corpus and pay it over to them per stirpes. If she did not, then the trustees would divide
the Trust corpus and pay it over, per stirpes, to five different individuals whom Wallace
named. Three were the children of his cousin, Henry D. Scribner, and two were the
children of his brother-in-law, Henry Molwitz.
In Article THIRTEENTH, Wallace granted the trustees a limited power to invade
the Trust corpus for the benefit of his wife or daughter if the trustees deemed it
appropriate in their sole discretion. Notably, Wallace limited the amount to a maximum
of $10,000 in any calendar year. By imposing this limit, Wallace ensured that the bulk of
Trust corpus would remain intact and under the direction of his trustees so that his estate
plan could be carried out.
Evidencing his desire to have trustworthy persons exercise judgment over the
Trust corpus, Wallace provided in his Will that the initial trustees would be Henry
Scribner, Henry Molwitz, Margaret, and the Chemical Bank and Trust Company, a New
York corporate trustee. Wallace did not make Margaret, initially the only income
beneficiary, the sole trustee.
B. The Trust Migrates To Delaware.
After Wallace died, the Surrogate’s Court of the State of New York, Queen’s
County (the ―New York Court‖), issued letters of trusteeship dated February 16, 1938, to
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the initial trustees. By instrument dated June 10, 1949, Katherine restricted her
testamentary power of appointment to an exercise in favor of her spouse, descendants,
and donees.
After Henry Scribner and Margaret died, the New York Court appointed Katherine
as a successor co-trustee. After Henry Molwitz died, Katherine and Chemical Bank
continued as the sole remaining co-trustees.
As noted, Katherine had the power to obtain (i) a distribution of one-fourth of the
Trust corpus when she turned thirty-five and (ii) a distribution of one-fourth of the
remaining corpus when she turned forty. She did not exercise either power. Today,
Katherine has four adult children who are the presumptive remainder beneficiaries under
the Trust. She has grandchildren who are contingent remainder beneficiaries. She has
potential additional descendants, as yet unborn and perhaps not even contemplated. They
are also contingent remainder beneficiaries.
In 2001, Katherine and Chemical Bank took steps to move the Trust to Delaware.
They obtained an order from this court dated October 5, 2001, that provisionally
approved the change of the Trust’s situs. It stated:
(A) Chase Manhattan Bank USA, N.A. shall be appointed successor co-
trustee of the Trust and this Court shall accept jurisdiction over the Trust at
such time as the Surrogate’s Court of New York, Queens County, enters an
Order authorizing (i) The Chase Manhattan Bank to resign as trustee, and
(ii) the change of the situs of the Trust to Delaware; and
(B) following the revocation of her Letters of Trusteeship by the
Surrogate’s Court of New York, Queen’s County, this Court affirms the
continuation of Katherine F. Shadek as trustee of the Trust.
4
Obtaining the New York order took some time. Nearly one year later, on
September 25, 2002, the New York Court entered an order that provided as follows:
(1) Katherine F. Shadek and JPMorgan Chase Bank are hereby given
leave to transfer the situs of the Trust to the State of Delaware for
administration thereof under the jurisdiction of the Court of
Chancery of the State of Delaware, County of New Castle and the
assets comprising the corpus of the Trust shall be transferred to
Katherine F. Shadek and J.P. Morgan Trust Company of Delaware,
as Trustees.
(2) JPMorgan Chase Bank, successor in interest to The Chase
Manhattan Bank, is hereby authorized to resign as co-Trustee.
(3) J.P. Morgan Trust Company of Delaware shall be appointed
successor co-Trustee upon the transfer of the Trust pursuant to the
terms of the order of the Court of Chancery of the State of Delaware,
County of New Castle.
(4) The Letters of Trusteeship issued to Katherine F. Shadek and The
Chase Manhattan Bank (now known as JPMorgan Chase Bank),
shall be revoked upon the appointment as co-Trustees of Katherine
F. Shadek and J.P. Morgan Trust Company of Delaware by order of
the Court of Chancery of the State of Delaware, County of New
Castle.
Approximately one month later, Katherine and Chemical Bank obtained an
additional order from this court dated October 29, 2002 (the ―2002 Order‖). It declared
that effective as September 25, 2002, the date of the New York Court’s order, the
following items were true:
(A) J.P. Morgan Trust Company of Delaware and Katherine F. Shadek
are appointed as successor co-trustees of the Trust;
(B) this Court has accepted jurisdiction over the Trust; and
(C) Sections 3302, 3312, 3313 and 3402 of Title 12 of the Delaware
Code shall govern all matters concerning the administration of the
Trust that are addressed thereunder, and New York law shall
continue to govern all other matters concerning the administration of
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the Trust; provided, however, that the co-trustees shall not be
required to account in any court other than one of the courts of the
State of Delaware.
Although the entry of the 2002 Order reflected this court’s practice at the time when
evaluating trust consent petitions, Delaware decisions have held subsequently that a
petition seeking consensual declarations that do not require judicial implementation does
not give rise to an actual controversy supporting declaratory relief.1
C. The Trust’s Concentrated Corpus
Approximately 81% of the fair market value of the Trust corpus is invested in the
stock of International Business Machines Corporation (―IBM‖). Wallace’s brother,
Charles Flint, founded Computing Tabulating Recording Company in 1911, which was
renamed IBM in 1924. When Wallace died, shares of IBM stock formed a preponderance
of the corpus.
JP Morgan has recommended diversifying the Trust. Katherine and her children do
not want to diversify the Trust. Although the Trust is not a directed trust, JP Morgan has
acceded to their wishes. To hedge against a decline in the value of the stock, JP Morgan
has been entering annually into principal installment stock monetization transactions,
which the petition labels ―PrISM‖ transactions. The PrISM transactions have not been
described in detail.
1
See In re In re Peierls Family Inter Vivos Trusts, 77 A.3d 249, 266-67 (Del. 2013). See
generally 10 Del. C. § 6504; Rollins Int'l Inc. v. Int'l Hydronics Corp., 303 A.2d 660, 662–63
(Del. 1973).
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The plain language of the Trust appears to contemplate that the trustees can retain
the IBM stock. Article SIXTEENTH of Wallace’s Will provides that his trustees can
continue to hold investments that he held. It states:
[M]y Trustees as well and [their] successors . . . shall have full power and
authority in their absolute and uncontrolled discretion to hold and retain
any property coming into their hands hereunder in the same form of
investment as that in which it may exist at the time of my death although it
may not be of the character of investment permitted by law to Trustees . . . .
Article SIXTEENTH does not say that the trustees can retain an investment that Wallace
held even if they believe that it would be in the best interests of the Trust to sell it.
In recent years, JP Morgan has insisted that additional steps be taken in light of
Katherine and her children’s desire to maintain the Trust’s concentrated investment in
IBM stock. First, the trustees distanced themselves from the actual investment decisions.
In 2012, they delegated to Laurence A. Shadek and James M. Shadek, two of Katherine’s
adult children, ―all duties and powers in connection with the investment of the assets of
the Trust,‖ including but not limited to a list of specific types of investments (the
―Investment Managers‖). Katherine’s adult children, including Laurence and James,
signed the delegations to Laurence and James on behalf of themselves and their
descendants.
Second, in each of the last four years, Katherine and her adult children have
entered into consent, release, and indemnification agreements with JP Morgan and with
Laurence and James in their capacities as Investment Managers. Through these
agreements, Katherine and her adult children approved and consented to the
concentration of the Trust corpus, released JP Morgan and the Investment Managers from
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any liability, and agreed to indemnify JP Morgan and the Investment Managers against
any claims arising out of (i) the decision not to diversify the Trust’s investments other
than through the PrISM transactions, (ii) the PrISM transactions themselves, and (iii) the
delegation of investment authority to the Investment Managers. Katherine’s children
signed the delegations on behalf of themselves and their descendants.
D. The Petition To Modify The Trust
By petition dated October 24, 2014, Katherine sought to modify the terms of the
Trust. The brief in support of the petition stated that the changes are ―intended to
formalize the current investment management structure and replace the ad hoc
mechanism of delegations of investment responsibilities to the Investment Managers
which requires the annual burden of drafting and executing consent, release and
indemnification agreements between all interested parties.‖
To achieve this result, the petition asks the court to approve a document titled the
―Modified and Restated Last Will and Testament of Wallace B. Flint.‖ The petition
shortens this to the ―Restated Will.‖ Both are newspeak. The new document would no
longer be the Last Will and Testament of Wallace B. Flint. It would be a new will and
testament, written for him by Katherine’s current lawyers, eighty-one years after his
death.
The Restated Will would differ substantially from the original Will. Its length
more than doubles from the original Will’s nine pages to the Restated Will’s nineteen.
The additional bulk comes from four new articles that convert the Trust from a traditional
trustee-managed structure into a directed trust. The heart of the change is a new Article
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TWENTY-SEVENTH, which creates the position of Investment Advisor, appoints
Laurence as the initial Investment Advisor, and provides that Katherine and her adult
children shall have the power by majority vote to appoint a new investment advisor.
Section C of the new Article TWENTY-SEVENTH directs the trustees to exercise
their investment powers only as directed by the Investment Advisor:
(C) Investment Direction. My Trustees shall exercise all
investment powers granted to it under Sections (2) through
(5), and (7) through (14) of Section 3325 of Title 12 of the
Delaware Code2 or any successor provision thereto, all
2
These sections provide as follows:
Without limiting the authority conferred by § 3324 of this title, a
trustee may:
…
(2) Acquire or sell property, for cash or on credit, at public or
private sale;
(3) Exchange, partition or otherwise change the character of trust
property;
(4) Deposit trust funds in an account in a regulated financial
services institution, including an institution operated by or
affiliated with the trustee;
(5) Borrow money, with or without security, and mortgage or
pledge trust property for a period within or extending beyond the
duration of the trust;
…
(7) With respect to an interest in a proprietorship, partnership,
limited liability company, statutory trust, business trust,
corporation or other form of business or enterprise, continue the
business or other enterprise and take any action that may be taken
by shareholders, members or property owners, including merging,
dissolving or otherwise changing the form of business organization
or contributing additional capital;
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(8) With respect to stocks or other securities, to exercise the rights
of an absolute owner, including the right to:
a. Vote, or give proxies to vote, with or without power of
substitution, or enter into or continue a voting trust agreement;
b. Hold a security in the name of a nominee or in other
form without disclosure of the trust so that title may pass by
delivery;
c. Pay calls, assessments and other sums chargeable or
accruing against the securities, and sell or exercise stock
subscription or conversion rights; and
d. Deposit the securities with a securities depository or
other regulated financial services institution;
(9) With respect to an interest in real property, construct, make
ordinary or extraordinary repairs, alterations or improvements in
buildings or other structures, demolish improvements, raze existing
or erect new party walls or buildings, subdivide or develop land,
dedicate land to public use or grant public or private easements,
and make or vacate plats and adjust boundaries;
(10) Enter into a lease for any purpose as lessor or lessee,
including a lease or other arrangement for exploration and removal
of natural resources, with or without the option to purchase or
renew, for a period within the duration of the trust;
(11) Grant an option involving a sale, lease or other disposition of
trust property or take an option for the acquisition of property,
excluding an option exercisable beyond the duration of the trust,
and exercise an option so acquired;
(12) Insure the property of the trust against damage or loss and
insure the trustee, the trustee's agents and beneficiaries against
liability arising from the administration of the trust;
(13) Abandon or decline to administer property of no value or of
insufficient value to justify its collection or continued
administration;
(14) With respect to possible liability for environmental
conditions:
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powers granted in Articles SIXTEENTH and TWENTIETH
of this my will [sic], and all other powers relating to the
acquisition, disposition, retention, exchange, change in
character, lending, borrowing, pledging, mortgaging,
managing, voting, leasing, granting of options with respect to,
insuring, abandoning, or in any other way relating to the
investment or management of the trust estate, only upon the
written direction of the [I]nvestment [A]dvisor . . . .
(Footnote added). In his actual Will, Wallace placed the trustees in charge of investing
the Trust’s corpus. The original Will did not contemplate the position of Investment
Advisor or the concept of a directed trust, nor did it incorporate statutory language post-
dating Wallace’s death.
Section D of the new Article TWENTY-SEVENTH relieves the trustees of any
duty to monitor the Investment Advisor:
a. Inspect or investigate property the trustee holds or has
been asked to hold, or property owned or operated by an entity in
which the trustee holds or has been asked to hold an interest, for
the purpose of determining the application of environmental law
with respect to the property;
b. Take action to prevent, abate or otherwise remedy any
actual or potential violation of any environmental law affecting
property held directly or indirectly by the trustee, whether taken
before or after the initiation of a claim or governmental
enforcement action;
c. Decline to accept property into trust or to disclaim any
power with respect to property that has or may have environmental
liability attached;
d. Compromise claims against the trust which may be
asserted for an alleged violation of environmental law; and
e. Pay the expense of any inspection, review, abatement or
remedial action to comply with environmental law . . . .
12 Del. C. § 3325.
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(D) Trustee Has No Duty to Monitor. My Trustees shall
have no responsibility to undertake any review of, or to
provide advice regarding, any part of the trust estate subject
to the direction of the Investment adviser. My Trustees shall
have no duty or obligation to (a) communicate with or warn
any beneficiary or any third party concerning instances in
which my Trustees would or might have exercised their
discretion in a manner different than the manner exercised by
the Investment Advisor, (b) to inquire into or monitor the
directions of the Investment Adviser notwithstanding any
appearance of or actual conflict of interest of the Investment
Advisor, or (c) inquire into, monitor or question the prudence
of or inform any beneficiary with respect to the investment of
the trust estate subject to the direction of the Investment
Advisor, and any and all review of the investments by my
Trustees shall be presumed to be solely for statement, tax
reporting and/or other administrative purposes. My Trustees
shall have no duty to seek the direction of the Investment
Advisor in the absence of any direction. My Trustees shall be
entitled to the full protection of Section 3313(e) of Title 12 of
the Delaware Code3 without limitation. This Article has been
3
This section provides as follows:
Whenever a governing instrument provides that a fiduciary
is to follow the direction of an adviser with respect to investment
decisions, distribution decisions, or other decisions of the
fiduciary, then, except to the extent that the governing instrument
provides otherwise, the fiduciary shall have no duty to:
(1) Monitor the conduct of the adviser;
(2) Provide advice to the adviser or consult with the adviser; or
(3) Communicate with or warn or apprise any beneficiary or third
party concerning instances in which the fiduciary would or might
have exercised the fiduciary's own discretion in a manner different
from the manner directed by the adviser.
Absent clear and convincing evidence to the contrary, the actions
of the fiduciary pertaining to matters within the scope of the
adviser's authority (such as confirming that the adviser's directions
have been carried out and recording and reporting actions taken at
the adviser's direction), shall be presumed to be administrative
12
included in order to effectively bifurcate the investment
function from other functions of my Trustees in order for
investment decisions to be made by the Investment Adviser
without the interference of my Trustees.
(Footnote added). In his actual Will, Wallace placed the trustees in charge of the Trust.
The Restated Will not only alters this arrangement, but it justifies it by referring to the
trustees’ management and oversight of the Trust as ―interference.‖ That is a strange
choice of words.
Section E of the new Article TWENTY-SEVENTH directs the trustees to robo-
sign documents provided to them by the Investment Advisor:
(D) My Trustees shall execute all documents necessary or
appropriate in connection with any matter that is the subject
of directions from the Investment Advisor, including, without
limitation, making any representation, warranty or covenant
required in order to make or maintain any investment of the
trust, and any future action with respect to any such
representation, warranty or covenant, only as directed by the
Investment Adviser. My Trustees shall have no duty to
conduct any independent review of documents presented to it
[sic] by the Investment Adviser in furtherance of the
Investment Adviser’s written instruction to my Trustees and
shall sign the same as presented. Further, the Investment
Adviser shall have the authority to direct my Trustees with
regard to amending, securing, paying, and otherwise dealing
with any debts, promissory notes, and other obligations of the
trust. My Trustees shall act solely at the direction of the
actions taken by the fiduciary solely to allow the fiduciary to
perform those duties assigned to the fiduciary under the governing
instrument and such administrative actions shall not be deemed to
constitute an undertaking by the fiduciary to monitor the adviser or
otherwise participate in actions within the scope of the adviser's
authority.
12 Del. C. § 3313(e).
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Investment Adviser in executing and delivering any and all
documents in connection with any matter that is the subject to
direction from the Investment Adviser, such as purchase and
sale agreements, necessary or convenient to, or otherwise
prepared in connection with, the purchase, sale, exchange,
transfer, pledge or other disposition or encumbrance of trust
investments and in making any and all representations and
warranties appearing in any such documents.
In his original Will, Wallace contemplated that the trustees would exercise judgment and
discretion, not act as marionettes for the Investment Advisor.
A new Article TWENTY-EIGHTH exculpates the trustees from all liability when
acting at the direction of the Investment Advisor ―except in cases of such Trustee’s own
willful misconduct.‖ The same new article provides broad indemnification and
advancement rights to the trustees and former trustees for ―any threatened, pending or
completed action, claim, demand, suit or proceeding, whether civil, criminal,
administrative or investigative, falling within the exculpatory provisions of the preceding
paragraph or to which the Trustee is made a party, or threatened to be made a party, by
reason of serving as Trustee.‖ The original Will did not provide the trustees with such an
extensive degree of insulation from accountability to their beneficiaries.
Finally, a new Article TWENTY-FIFTH broadens the powers of the Investment
Advisor by providing that the Investment Advisor may direct the trustees
to acquire and retain investments not regarded as traditional for trusts,
including investments that would be forbidden or would be regarded as
imprudent, improper, or unlawful by the ―prudent person‖ rule, ―Prudent
investor‖ rule, Section 3302 of Title 12 of the Delaware Code,4 any rule or
4
This section provides as follows:
14
(a) When investing, reinvesting, purchasing, acquiring, exchanging, retaining,
selling and managing property for the benefit of another, a fiduciary shall act with
the care, skill, prudence and diligence under the circumstances then prevailing
that a prudent person acting in a like capacity and familiar with such matters
would use to attain the purposes of the account. In making investment decisions, a
fiduciary may consider the general economic conditions, the anticipated tax
consequences of the investment and the anticipated duration of the account and
the needs of its beneficiaries.
(b) Within the limitations of the foregoing standard and considering individual
investments as part of an overall investment strategy, a fiduciary is authorized to
acquire every kind of property, real, personal or mixed, and every kind of
investment, wherever located, whether within or without the United States,
including, but not by way of limitation, bonds, debentures and other corporate
obligations, stocks, preferred or common, shares or interests in common funds or
common trust funds, securities of any open-end or closed-end management type
investment company or investment trust registered under the Federal Investment
Company Act of 1940 (15 U.S.C. § 80a-1 et seq.), options, futures, warrants,
limited partnership interests and life insurance. No investment made by a
fiduciary shall be deemed imprudent solely because the investment is not
specifically mentioned in this subsection.
(c) The propriety of an investment decision is to be determined by what the
fiduciary knew or should have known at the time of the decision about:
(1) The inherent nature and expected performance of the investment
portfolio;
(2) The limitations of the standard set forth in subsection (a) of this
section; and
(3) The nature and extent of other investments and resources, whether
held in trust or otherwise, available to the beneficiaries as they existed at the time
of the decision; provided however, that the fiduciary shall have no duty to inquire
as to the nature and extent of any such other investments and resources not held
by the fiduciary or held by the fiduciary in a trust or trust account subject to the
direction of an adviser authorized to direct the fiduciary with respect to
investment decisions, within the meaning of § 3313(d) of this title, concerning the
assets held in the trust or trust account.
Any determination of liability for investment performance shall consider
the performance of the entire portfolio and such other factors as the fiduciary
considered when the investment decision was made.
15
(d) Notwithstanding the foregoing provisions of this section, a trustee who
discloses the application of this subsection and the limitation of the trustee's
duties thereunder either in the governing instrument or in a separate writing
delivered to each insured at the inception of a contract of life insurance or
thereafter if prior to an event giving rise to a claim thereunder, may acquire or
retain a contract of life insurance upon the life of the trustor or the trustor's
spouse, or both, without liability for a loss arising from the trustee's failure to:
(1) Determine whether the contract is or remains a proper investment;
(2) Investigate the financial strength or changes in the financial strength
of the life insurance company;
(3) Make a determination of whether to exercise any policy option
available under the contract;
(4) Make a determination of whether to diversify such contracts relative
to 1 another or to other assets, if any, administered by the trustee; or
(5) Inquire about changes in the health or financial condition of the
insured or insureds relative to any such contract.
(e) Any fiduciary acting under a governing instrument shall not be liable to
anyone whose interests arise from that instrument for breach of fiduciary duty for
the fiduciary's good faith reliance on the express provisions of such instrument.
The standards set forth in this section may be expanded, restricted or eliminated
by express provisions in a governing instrument.
(f) Where a bank or trust company acting in a fiduciary capacity invests trust
funds in, or otherwise acquires an interest in, a common trust fund which it or 1 of
its affiliates manages, as defined in § 23A of the Federal Reserve Act (12 U.S.C.
§ 371c), the plan for such common trust fund shall be filed and recorded in the
office of the Register in Chancery of the county in which is located the main
office in Delaware of the bank or trust company which is the fiduciary for such
trust funds.
(g) Fees may be charged for making an investment through a computerized or
automated process, such as sweeping otherwise uninvested cash into a cash
management vehicle, provided that the amount of such fees is disclosed on a
continuing basis as a separate item on the regular periodic statements furnished to
the beneficiaries of the account.
(h) A fiduciary is authorized, in the absence of an express provision to the
contrary, whenever a law, regulation, governing instrument or order directs,
requires, authorizes or permits investment in United States government
16
law concerning the duty of loyalty or any other rule or law which restricts a
fiduciary’s capacity to invest.
(Footnote added). The original Will did not contemplate this expansive degree of
investment authority. Moreover, given the broad range of investment authority
contemplated by Section 3302, it seems odd to expand it further, and particularly extreme
to encompass investments that otherwise would be ―unlawful.‖
Ironically, the Restated Will would continue to bear Wallace’s signature and the
signatures of his three original witnesses. It also would continue to recite that it was
―SIGNED, SEALED, PUBLISHED AND DECLARED by [Wallace] . . . in his presence
and in the presence of [the witnesses] this 12th day of December, 1934.‖ That would no
longer be true.
obligations, to invest in those obligations, either directly or in the form of
securities of, or other interests in, any open-end or closed-end management
investment company or investment trust registered under the Investment
Company Act of 1940 (54 Stat. 847, 15 U.S.C. § 80a-1 et seq.), if the portfolio of
that investment company or investment trust is limited to United States
government obligations and to repurchase agreements fully collateralized by
United States government obligations, which collateral shall be delivered to or
held by the investment company or investment trust, either directly or through an
authorized custodian.
(i) Except in the case of United States government obligations, which are treated
in subsection (h) of this section above, the authority to invest in specified types of
investments includes authorization to invest in any open-end or closed-end
management investment company or investment trust registered under the
Investment Company Act of 1940 (54 Stat. 847, 15 U.S.C. § 80a-1 et seq.), or in
any common or collective trust fund established and maintained by a corporate
fiduciary, if the portfolio of the investment company or investment trust, or of the
common or collective trust fund, consists substantially of the specified types of
investments and is otherwise in conformity with the laws of the State.
12 Del. C. § 3302.
17
E. The Modification Of The 2002 Order
In addition to modifying the trust through the creation of the Restated Will,
Katherine wishes to modify the 2002 Order’s declaration regarding the law governing the
Trust. Rather than choosing a single state’s law to govern the administration of the Trust,
the 2002 Order picked two. Delaware law governed the matters set forth in Sections
3302, 3312, 3313 and 3402 of Title 12 of the Delaware Code, and New York law
continued to govern all other administrative matters.
In the petition, Katherine asks for a more amorphous, complex, and unpredictable
division in the form of language that would provide as follows:
Delaware law shall govern all matters pertaining to the administration of
the Trust except those matters concerning administration which, if the law
governing administration were changed from New York to Delaware law,
would or might change the time of the vesting of interests in the property of
the Trust, extend the duration of the Trust, or shift a beneficial interest in
the Trust to any beneficiary who occupies a lower generation (as defined in
Section 261 of the Internal Revenue Code of 1986, as amended), than the
person or persons who held the beneficial interest prior to the change in the
law governing administration, and all matters concerning the validity and
construction of the Trust, and all matters concerning administration
excepted from the application of Delaware law pursuant to the foregoing
provisions, shall continue to be governed by new York law; provided,
however, that the co-trustees shall not be required to account to any court
other than one of the courts of the State of Delaware.
As a practical matter, this language would create a contingent choice of law provision, in
which Delaware law would govern all issues of administration unless it ―would or might‖
create adverse tax affects, in which case the law governing that particular issue would
revert back to New York.
18
II. LEGAL ANALYSIS
This case presents two issues: the modification of the Trust and the modification
of the 2002 Order. Both requests are denied.
A. The Modification Of The Trust
The petition seeks to modify the Trust by having the court adopt the Restated Will.
The supporting brief stresses that the petition seeks modification, not reformation, and
candidly defines a modification as any change to a trust that departs from its original
terms. Katherine thus admits that she wants to rewrite Wallace’s estate plan so that it says
what she wants it to say, and she claims she should be able to do so simply because she
and her adult children agree.
The problem with this approach is that it conflicts with Wallace’s intent. When he
drafted his Will, he did not create a directed trust in which the beneficiaries picked an
Investment Advisor—here, one of themselves—and the trustees simply did whatever the
Investment Advisor said. Wallace’s Trust contemplates that the trustees will use their
judgment when investing and re-investing the Trust corpus. The beneficiaries are not
supposed to exercise the degree of control over the Trust that the Restated Will would
give them. Wallace’s actual Will evidences his intent by placing limitations on
Katherine’s ability to access the corpus and limiting the trustees’ power to invade
principal on Katherine’s behalf. The most direct control Katherine could have was over
44% of the Trust corpus, and to get it she had to elect to receive one-fourth at age thirty-
five and one-fourth of the remainder at age forty. The most the trustees can do to invade
principal on Katherine’s behalf is a maximum of $10,000 per calendar year.
19
Wallace plainly intended for the Trust to benefit from the expertise and judgment
of individuals whom he trusted and who were not beneficiaries, like Henry Scribner and
Henry Molwitz. He also plainly intended for the Trust to benefit from the involvement of
a corporate trustee that actually would fulfill a trustee’s traditional role. The use of
independent trustees and the involvement of a corporate trustee have been thought to
provide meaningful protection against mismanagement and self-dealing.
Doubtless Katherine and her adult children have good reasons for wanting to
change Wallace’s estate plan. Under the quite different administrative structure that the
petition advocates, a corporate trustee likely would charge far lower fees, because its
responsibilities would be reduced from those of a real trustee to those of an
administrative agent. Although short-term savings can have long-term costs, the costs of
re-writing Wallace’s estate plan are currently distant and contingent. The savings are
immediate and tangible.
Whether the wishes of living beneficiaries should prevail over the wishes of a
dead settlor is a contestable issue where reasonable minds can disagree. Different
jurisdictions have reached different results. English law has long made the wishes of the
beneficiaries paramount. See Saunders v. Vautier, 49 Eng. Rep. 282 (Ch. 1841). By
contrast, under the Claflin doctrine, the majority rule in the United States has long
prioritized the settlor’s intent. See Claflin v. Claflin, 20 N.E. 454 (Mass. 1889). Recent
statutory initiatives, including the Uniform Trust Code, have eroded the Claflin doctrine
and moved towards prioritizing the wishes of beneficiaries. See generally Richard C.
20
Ausness, Sherlock Holmes and the Problem of the Dead Hand: The Modification and
Termination of “Irrevocable Trusts,” 28 Quinnipiac Prob. L.J. 327 (2015).
In Delaware, the settlor’s intent controls. Our Supreme Court has stated repeatedly
that ―[t]he cardinal rule of law in a trust case is that the intent of the settlor.‖ 5 Our Trust
Code makes it the policy of the State of Delaware ―to give maximum effect to the
principle of freedom of disposition and to the enforceability of governing instruments.‖
12 Del. C. § 3303(a). It would undercut this policy, and might well be described as
duplicitous, for our State to represent to a settlor that our law will respect his dispositions
and enforce his governing instrument, only to enable his beneficiaries to rewrite that
instrument after his death.
Delaware obviously permits a settlor to create a new trust containing all of the
features that the petition seeks to implement. Re-writing an existing trust to incorporate
those features, contrary to the settlor’s intent as manifested by the instrument that the
settlor executed, is a different matter.
1. Prior Consent Decrees
In an effort to persuade the court to grant the relief sought, the petition cites a
laundry list of orders and suggests that court previously granted the type of relief that the
petition requests. A rote listing of orders is not persuasive. Many date from a period when
this court routinely granted relief to which all parties consented, without independently
5
Chavin v. PNC Bank, 816 A.2d 781, 783 (Del. 2003) (internal quotation marks
omitted); accord Annan v. Wilm. Trust Co., 559 A.2d 1289, 1292 (Del. 1989); Dutra de
Amorim v. Norment, 460 A.2d 511, 514 (Del. 1983).
21
testing whether there was a live dispute or similar basis for jurisdiction and without
examining carefully whether there were adequate grounds for the relief requested. All
pre-dated the Pierels decisions6 and the adoption of a statutory mechanism for
nonjudicial settlement.7 They are not precedential.
2. Other Doctrines
Next, the petition cites a number of other doctrines and contends that they support
relief in this case. Recognizing that none apply, the petition does not actually rely on any
of them. Rather, the petition contends that when taken together, they imply the existence
of a judicial power to rewrite a trust when all current beneficiaries consent. Put
differently, the petitioner perceives within the penumbra of these doctrines the ability to
modify a trust by consent. To my mind, the doctrines’ limited reach supports the opposite
inference, namely that Delaware law does not countenance wholesale consensual
modification and only departs from the settlor’s intent in narrow circumstances.
a) Reformation
―Trust reformation is an equitable remedy and is an ordinary remedy for mistake
in the terms of a trust instrument.‖ 90 C.J.S. Trusts § 92 (footnotes omitted). ―A trust may
be rescinded or reformed upon the same grounds as those upon which a transfer of
6
See In re Peierls Family Inter Vivos Trusts, 59 A.3d 471 (Del. Ch. 2012), aff’d in
part & rev’d in part, 77 A.3d 249 (Del. 2013); In re Ethel F. Peierls Charitable Lead
Unitrust, 59 A.3d 464 (Del. Ch. 2012), aff’d sub nom. In re Peierls Charitable Lead
Unitrust, 77 A.3d 232 (Del. 2013); In re Peierls Family Testamentary Trusts, 58 A.3d
985 (Del. Ch. 2012), aff’d in part & rev’d in part, 77 A.3d 223 Del. 2013).
7
See 79 Del. Laws, c. 172, § 2 (2013).
22
property not in trust may be rescinded or reformed.‖ Restatement (Third) of Trusts § 62.
―Where no consideration is involved in the creation of a trust, it can be rescinded or
reformed upon the same grounds, such as fraud, duress, undue influence, or mistake, as
those upon which a gratuitous transfer of property not in trust can be rescinded or
reformed.‖ Id. cmt. a.
Delaware adheres to these principles and, with one exception, applies the
traditional law of reformation to an application to reform a trust. See Roos v. Roos, 203
A.2d 140, 142 (Del. Ch. 1964). ―It is a basic principle of equity that the Court of
Chancery has jurisdiction to reform a document to make it conform to the original intent
of the parties.‖ Waggoner v. Laster, 581 A.2d 1127, 1135 (Del. 1990). Outside of the
trust context, ―reformation is appropriate only when the contract does not represent the
parties' intent because of fraud, mutual mistake or, in exceptional cases, a unilateral
mistake coupled with the other parties' knowing silence.‖ Emmert v. Prade, 711 A.2d
1217, 1219 (Del.Ch.1997) (internal quotation marks omitted).
The doctrine of reformation for mistake with regard to trusts differs from
instruments such as contracts in one important respect; in contract law,
reformation will not be granted unless the parties' mistake is mutual, but
mutuality of mistake is not always required where trusts are concerned, in
that, because a settlor usually receives no consideration for the creation of a
trust, a unilateral mistake on the part of the settlor is ordinarily sufficient to
warrant reformation.
90 C.J.S. Trusts § 92 (footnote omitted); accord Roos, 203 A.2d at 142.
The Court of Chancery has the power to reform a voluntary trust instrument even
after the death of the settlor, as long as the record ―clearly and affirmatively establishes‖
the grounds for reformation. Roos, 203 A.2d at 143. Notwithstanding that all parties to a
23
case seek relief via consent petition, the petitioners still must introduce ―clear and
convincing evidence of the decedent's intent‖ in order to obtain reformation. In re Estate
of Tuthill, 754 A.2d 272, 273 (D.C.Ct.App.2000). ―Even though a unilateral mistake by
the settlor is a sufficient ground for reforming a trust that was created without any
consideration, the burden is nonetheless on the party seeking reformation to establish by
clear and convincing evidence the mistake.‖ 90 C.J.S. Trusts § 92 (footnote omitted).
The petition concedes that grounds for reformation do not exist here, because the
Will accurately reflects Wallace’s plan for his estate, including the terms he wished to
establish for the Trust. But the petition argues that because the court has the power to
reform a trust instrument under limited circumstances, it should assert and exercise the
more expansive power to modify a trust instrument whenever all current beneficiaries
consent. In my view, the limited circumstances under which a Delaware court will order
reformation indicate the opposite and suggest that that modification is not freely available
as a matter of convenience.
b) Common Law Cy Pres
Cy pres is a French phrase meaning ―as near.‖ The Delaware courts first applied
common law cy pres in 1948.8 Under that doctrine,
8
See Del. Trust Co. v. Graham, 61 A.2d 110, 113–14 (Del. Ch. 1948); see also
E.L. Fisch, Cy Pres Comes to Delaware, 9 Md. L. Rev. 359, 359 (1948). In 1979, the
Delaware General Assembly established a statutory version of cy pres under the rubric of
judicial modification. See 12 Del. C. § 3541. This decision discusses judicial
modification separately. When adopting Section 3541, the General Assembly did not
indicate to what degree the statute displaced common law cy pres, leading this Court to
observe that ―[i]t is unclear to what extent [the statute] is meant to abrogate the Delaware
24
where the general charitable purpose of a trust would fail due to a
circumstance, unanticipated by the settlor, that renders the literal fulfillment
of the trust impossible or impractical, the court may designate an alternative
beneficiary ―cy pres ‖ (as near as may be) to the named beneficiary, to
facilitate the settlor's general intent.
PNC Bank, Del. v. N.J. State Soc. for Prevention of Cruelty to Animals, 2008 WL
2891150, at *6 (Del. Ch. July 14, 2008). If, however, the settlor’s ―particular intent
remain[s] possible, the bequest will be so applied. The general intention is of the last
resort.‖ S.A. Anderson, The Cy Pres Doctrine as Affecting the Construction of Deeds and
Wills, 1 Colum. L.T. 8, 12 (1887) (citation omitted).
Because cy pres is a last resort, a court will not invoke the doctrine ―merely
because some imaginary benefit is anticipated from giving latitude to the language of the
written instrument, or on any bare suggestion of expediency.‖ Id. Only when it becomes
―absolutely impossible to accomplish the particular purpose‖ of the trust will cy pres
empower a court to craft an imperfect solution to make the trust functional. Id.As with reformation, the petition does not rely on common law cy pres. That
doctrine only can be invoked for charitable trust, which the Trust is not. Ronald Chester,
George Gleason Bogert & George Taylor Bogert, The Law of Trusts and Trustees, § 431,
at 118 (3rd ed. 2005) (―Cy pres has no application to private trusts....‖). Once again, the
common law doctrine.‖ See PNC Bank, Del. v. N.J. State Soc. for Prevention of Cruelty
to Animals, 2008 WL 2891150, at *7 n. 18 (Del. Ch. July 14, 2008) (citing In re Estate of
du Pont, 663 A.2d 470, 478 n. 14 (Del. Ch. 1994)). This decision need not address the
continuing vitality of common law cy pres because the petitioner has referenced it only
by way of illustration to indicate the type of reformative powers that the petitioner
believes this court should wield. No one contends that common law cy pres applies on the
facts of the case.
25
petition cites cy pres as indicative of a broad power to modify trusts that this court should
wield freely. In my view, the doctrine is informative because it only permits modification
in the limited circumstances where the literal fulfillment of the trust’s purpose becomes
impossible or impractical. Applied by analogy, this court should modify the Trust only if
it is no longer possible to achieve Wallace’s intent. No one claims that is the case.
c) Deviation
The common law doctrine of deviation permits a departure from the literal terms
of a trust ―where compliance is impossible or illegal, or where owing to circumstances
not known to the settlor and not anticipated by him compliance would defeat or
substantially impair the accomplishment of the purposes of the trust.‖ 9 As with
reformation and common law cy pres, the petition does not rely on deviation directly but
rather as suggesting unbridled equitable authority over trusts. To my mind, once again,
the limitations of the doctrine suggest the opposite. A court could deviate from Wallace’s
estate plan only if his scheme became impossible or illegal. Neither has occurred.
d) Statutory Modification
By statute, Delaware authorizes a court to modify a trust, including a
noncharitable trust. The Trust Code provides as follows:
(a) Subject to subsection (b) of this section, if a particular charitable
purpose or noncharitable purpose becomes unlawful under the Constitution
of this State or the United States or the trust would otherwise no longer
9
Bank of Del. v. Buckson, 255 A.2d 710, 716 (Del. Ch.1969) (quoting William F.
Fratcher, Scott on Trusts, § 383 (4th ed. 1989); see 12 Del. C. § 3306 (preserving
common law doctrine of deviation).
26
serve any religious, charitable, scientific, literary, educational, or
noncharitable purpose:
(1) The trust does not fail in whole or in part;
(2) The trust property does not revert to the trustor or the trustor's
successors in interest; and
(3) The Court of Chancery shall modify or terminate the trust and
direct that the trust property be applied or distributed, in whole or in part, in
a manner consistent with the trustor's charitable or noncharitable purposes,
whether or not such purposes be specific or general.
(b) The power of the Court of Chancery to modify or terminate a charitable
or noncharitable purpose trust, as provided in subsection (a) of this section,
is in all cases subject to a contrary provision in the terms of the trust
instrument, whether such contrary provision directs that the trust property
be distributed to a charitable or noncharitable beneficiary.
(c) For purposes of this section, a ―noncharitable purpose‖ is a purpose
within the meaning of § 355510 or § 355611 of this title.
10
Section 3555 authorizes trusts for the care of an animal. See 12 Del. C. § 3555.
11
Section 3556 authorizes trusts for ―Other Noncharitable Purposes.‖ It states:
(a) In addition to the provisions of § 3555 of this title, a trust for a declared
purpose that is not impossible of attainment is valid notwithstanding that
the trust might not be deemed to be for charitable purposes.
(b) A trust authorized by subsection (a) of this section shall not be invalid
because it lacks an identifiable person as beneficiary.
(c) A trust authorized by subsection (a) of this section may be enforced by a
person appointed in the terms of the trust or, if there is no such person or if
the last such person no longer is willing and able to serve, by a person
appointed by the Court of Chancery. A person who has an interest in the
declared purpose of the trust other than a general public interest may
petition the Court of Chancery for an order that appoints a person to
enforce the terms of the trust or to remove that person.
(d) Property of a trust authorized by this section may be applied only to its
intended use. Upon the termination of the trust, any property of the trust
27
12 Del. C. § 3541 (emphasis added; footnotes supplied).
Section 3541 identifies the limited circumstances in which the General Assembly
has granted the court the power to modify a trust. The statute prescribes a two step
inquiry before judicial modification can take place. Initially, the court must determine
that (i) the trust's purpose has become unlawful or (ii) the trust does not otherwise serve
―any ... noncharitable purpose.‖ 12 Del. C. § 3541(a). If so, then the court must evaluate
whether the settlor contemplated the particular contingency and provided for it. See 12
Del. C. § 3541(b). The court only may modify or terminate a trust if the first inquiry is
met and the trust instrument does not address the contingency. Id.; see PNC Bank, Del.,
2008 WL 2891150, at *7.
As with the other doctrines, the petition does not rely on judicial modification per
se, but rather cites it as illustrative. As with the other doctrines, I see a different picture.
By analogy to Section 3541, a court should not modify the Trust unless its purpose has
become unlawful or it no longer serves ―any ... noncharitable purpose.‖ Neither is the
case.
3. The Request For Modification Is Denied.
The petition seeks to modify the Will in a manner that conflicts with Wallace’s
intent. Under Delaware law, the settlor’s intent controls, and it is the public policy of this
remaining shall be distributed in accordance with the terms of the trust or,
in the absence of such terms, as provided in § 3592 of this title.
12 Del. C. § 3556.
28
state ―to give maximum effect to the principle of freedom of disposition and to the
enforceability of governing instruments.‖ 12 Del. C. § 3303(a). The petitioners are not
permitted to rewrite Wallace’s Will to suit their current convenience.12
B. The Modification Of The Order
The petition also seeks to modify the 2002 Order to impose a contingent choice-
of-law scheme. Under the proposed provision, the law governing administration would
flip back and forth between Delaware and New York depending on whether the
application of Delaware law ―will or might‖ have adverse consequences for the trust. In
my view, the proposed language is too vague and uncertain to be implemented.
III. CONCLUSION
The relief sought in the petition is denied. Wallace’s intent controls. The language
of the 2002 Order continues to establish the law governing the Trust.
12
The petition also confronts the obstacle that the terms of the Trust are set forth
in the Will. This court has held that it lacks the equitable power to reform or modify a
will. See In re Last Will and Testament of Daland, 2010 WL 716160 (Del. Ch. Feb. 15,
2010). Under Daland, the court cannot modify a testamentary trust, like the current Trust,
where the provisions appear in a will. See Bogert, supra, § 991 at 133-34 (―[T]he
traditional presumption against reforming mistakes in wills may present an additional
challenge for a petitioner who seeks the reformation of a testamentary trust.‖). The
petitioner argued that Daland should be limited to its facts and that the Court of Chancery
should be able to reform both wills and testamentary trusts. In light of the disposition of
the petition on the merits, this decision need not reach the issue.
29