Christopher J. Tigani, Sr. v. Robert F. Tigani, Sr. and N.K.S. Distributors, Inc.

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
CHRISTOPHER J. TIGANI, Sr., and JLT)
his minor child, CHRISTOPHER J. )
)
TIGANI, Jr., ROBERT F. TIGANI, Jr., and
GFT his minor child, )
)
Plaintiffs, )
)
v. ) C.A. No. 2017-0786-KSJM
)
ROBERT F. TIGANI, Sr., Trustee and )
Individually, )
)
Defendant, )
)
and )
)
N.K.S. DISTRIBUTORS, INC., a )
Delaware corporation, )
)
Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: December 17, 2020
Date Decided: March 30, 2021
Christopher J. Tigani, Sr., Wilmington, Delaware; Pro Se.
John G. Harris, BERGER HARRIS LLP, Wilmington, Delaware; Counsel for Plaintiffs
Robert F. Tigani, Jr., Christopher J. Tigani, Jr., and minor children JLT and GFT.
T. Brad Davey, Daniel M. Rusk, POTTER ANDERSON & CORROON LLP, Wilmington,
Delaware; Counsel for Defendant Robert F. Tigani, Sr.
Stephen B. Brauerman, Brett M. McCartney, Elizabeth A. Powers, BAYARD, P.A.,
Wilmington, Delaware; Counsel for Nominal Defendant N.K.S. Distributors, Inc.
McCORMICK, V.C.
Few activities imperil familial harmony more than the transfer of generational
wealth, as this intra-family dispute over trust instruments illustrates. Defendant Robert F.
Tigani, or “Bob” as he is known to his family, is accused by his biological sons and
grandchildren of breaching his fiduciary obligations as trustee of the “1986 Trust.” The
1986 Trust holds stock in the nominal defendant, N.K.S. Distributors, Inc. (“NKS” or the
“Company”), an alcohol distribution business that has been operated and majority owned
by the Tigani family since Bob’s parents formed the Company in 1950.
The plaintiffs’ primary complaint concerns a 2012 transaction, where NKS issued
Bob seventy-five shares of common stock in exchange for $2.5 million. The plaintiffs
advance an unhappy and baseless theory, alleging that the stock issuance was a self-dealing
transaction designed to facilitate the transfer of control of NKS from the 1986 Trust, which
Bob’s biological heirs must inherit, to Bob’s “new” wife and her children. In reality, the
Company was in dire financial straits, the $2.5 million capital infusion was a necessary
condition to refinancing, and Bob stepped up to the plate to make it happen. The challenged
stock issuance was made after the capital infusion, without input from Bob, to address
accounting issues raised by the Company’s auditor. Ultimately, the Company repurchased
the seventy-five shares at a bargain price for the Company. These facts do not support a
finding that Bob breached his obligations as trustee.
The plaintiffs also claim that Bob breached his duties as trustee of another family
trust, the “BST Trust,” by using trust principal to buy a residence in Florida and a private
plane. As to those claims, this decision enters judgment in the plaintiffs’ favor.
I. FACTUAL BACKGROUND
Trial took place over three days in February 2020. As reflected in the Schedule of
Evidence, the record comprises 1,127 trial exhibits, live testimony from nine fact and two
expert witnesses, deposition testimony from eleven fact and one expert witness, and 109
stipulations of fact. 1 These are the facts as the court finds them after trial.
A. The Family
This case involves the descendants of James V. Tigani, Sr. and his wife, Betty S.
Tigani, whom their family affectionately called “Pal” 2 and “Mimi” 3 (together, the
“Settlors”). Pal and Mimi’s two children are Robert F. Tigani, Sr. (“Bob,” and together
with NKS, “Defendants”) and his older brother, James V. Tigani, II (“Jimmy”). 4 The
plaintiffs are Bob’s two sons, Christopher J. Tigani, Sr. (“Chris”) and Robert F. Tigani, Jr.
(“Bobby”), and their children (collectively, “Plaintiffs”). Chris and Bobby are Pal and
Mimi’s only biological grandchildren. 5
1
See C.A. No. 2017-0786-KSJM, Docket (“Dkt.”) 460, Schedule of Evid. This decision
cites to: trial exhibits (by “JX” number); the trial transcript (Dkts. 441–43) (“Trial Tr.”);
stipulated facts set forth in the Parties’ Joint Pre-trial Stipulation and Order (Dkts. 437)
(“PTO”); and deposition transcripts (by the deponent’s name and “Dep. Tr.” page and line).
Of the eleven trial witnesses, one, Linda Collins, was introduced exclusively through video
recording of her deposition. Trial Tr. at 5:6–8 (Collins).
2
Because this matter involves a familial dispute, this decision refers to many of the parties
by their first names or nicknames. The court intends no disrespect.
3
PTO ¶ 14; see Trial Tr. at 7:1–11 (Collins).
4
PTO ¶¶ 15–17.
5
Id. ¶¶ 10–12.
2
B. The Family Business
Pal and Mimi founded nominal defendant NKS in 1950. 6 NKS, a Delaware
corporation, is a wholesaler of alcoholic beverages with exclusive rights to distribute
several beer brands throughout Delaware. 7
Members of the Tigani family have always controlled all voting shares of NKS
stock. 8 Pal and Mimi initially granted Bob and Jimmy equal ownership interests in NKS,
but the brothers split the Company in 1999, with Jimmy spinning off the wine and spirits
distribution division. 9 Bob, who began working for NKS after graduating from college in
1968, is currently NKS’s CEO and Chairman of the NKS Board of Directors (the
“Board”). 10
For generations, NKS’s most critical business relationship has been with nonparty
supplier Anheuser-Busch, Inc. (“Anheuser-Busch”). 11 NKS is the exclusive wholesale
distributor of Anheuser-Busch products in Delaware. 12 Anheuser-Busch requires its
wholesalers to execute equity agreements. 13
6
Id. ¶ 14.
7
Id.
8
JX-985; JX-740.
9
PTO ¶ 32.
10
Trial Tr. at 506:6–10, 508:3–5 (Bob).
11
See id. at 88:4–9, 133:1–3 (Chris); id. at 266:8–9 (Ruggiero); id. at 507:22–23 (Bob).
12
JX-25 § 1(a) (“Anheuser-Bush hereby appoints [NKS] as the wholesale distributor of . .
. the Products in the territory . . . and agrees that it will not appoint another wholesaler for
the Products sold by [NKS] in the Territory.”); see also JX-28 at 1.
13
See Trial Tr. at 136:9–15 (Chris).
3
NKS’s equity agreement with Anheuser-Busch (the “Anheuser-Busch Equity
Agreement”) requires that NKS designate an employee to manage its relationship with
Anheuser-Busch, and requires that the designated employee hold a minimum amount of
Company stock. 14 The agreement also requires that NKS seek Anheuser-Busch’s approval
on change of control transactions. 15 The agreement further grants Anheuser-Busch the
right to terminate the agreement with NKS in the event of “the insolvency of [NKS] or
[NKS’s] failure to pay for Anheuser-Busch Products in accordance with approved terms.” 16
C. The Family Trusts
Pal and Mimi formed two trusts at issue in this litigation: the Irrevocable Trust for
the Benefit of Robert F. Tigani (the 1986 Trust) and the Revocable Trust of Betty S. Tigani,
which was restated on August 16, 1988 (the BST Trust). 17
1. The 1986 Trust
Pal and Mimi executed the 1986 Trust on December 16, 1986, to hold shares of
NKS stock in trust for Bob. 18 Pal and Mimi’s intent when forming the 1986 Trust features
prominently in Plaintiffs’ litigation themes. The trial and deposition testimony reflect that
Pal wanted NKS to remain a family-run business after his passing. More specifically, he
14
JX-25 §§ 2–3; Bob Dep. Tr. at 579:16–580:5; see also Trial Tr. at 433:9–434:15
(Director).
15
JX-25 § 4.
16
Id. § 6(a).
17
JX-17 (the 1986 Trust); JX-22 (the BST Trust); Trial Tr. at 12:12–13:15 (Collins).
18
1986 Trust.
4
hoped that that his natural-born sons and grandsons would maintain control of NKS. 19 In
Bob’s words, Pal ran NKS with an “old-school Italian” philosophy—he did not allow
female relatives, sons-in-law, or step-children to work in the business. 20 In fact, “the only
ones he would allow to work in the business were . . . natural born sons,” and only those
natural born sons could inherit the Company under Pal’s worldview. 21
Pal initially sought to accomplish his goal by gifting Bob and Jimmy NKS stock
directly, but he later changed course and placed NKS stock in family trusts. The change
in course was prompted by Bob’s divorce and second marriage. Pal formed the 1986 Trust
as a means of ensuring that his wealth would flow to his biological heirs only and not to
Bob’s so-called “new” wife or her children. 22 As Bob explained: “[Pal] did not want
[Bob’s] two stepsons to work in the business, . . . [and] he did not want his daughter-in-
law of a second marriage to have anything to do with it. He was very protective of the
business and . . . who would inherit [it].” 23
Initially, the 1986 Trust’s sole asset was 13 of the 250 outstanding shares of NKS
stock. 24 At the time the trust was formed, Pal, Jimmy, and Bob held the other NKS
shares. 25 Pal continued gifting NKS stock to the 1986 Trust in the years after the trust’s
19
Trial Tr. at 599:13–600:22 (Bob).
20
Bob Dep. Tr. at 361:14–19.
21
Id. at 361:19–20, 534:5–21.
22
See infra note 133; Trial Tr. at 602:17–603:3 (Bob).
23
Bob Dep. Tr. at 361:21–362:2.
24
1986 Trust Schedule A.
25
PTO ¶ 23.
5
formation. 26 With each issuance to the 1986 Trust, Pal gave matching gifts of NKS stock
directly to Jimmy. 27 Bob also personally owned 53 shares of NKS stock, which he
transferred to a separate trust on May 1, 1989. 28
As of May 1989, NKS had 250 outstanding shares split among three stockholders:
(i) Jimmy owned 125 shares, or 50% of NKS’s stock, (ii) Bob’s personal trust owned 53
shares, or 21.2% of NKS’s stock, and (iii) the 1986 Trust owned 72 shares, or 28.8% of
NKS’s stock. 29 Bob was trustee and beneficiary of both his own trust and the 1986 Trust,
which collectively held 50% of NKS’s outstanding stock. Voting power over NKS was
thus evenly split between Jimmy and Bob.
As a result of Bob and Jimmy’s business divorce in 1999, 30 Bob and the 1986 Trust
became the sole stockholders of NKS. The 1986 Trust held 72 shares or 57.6% of NKS’s
voting common stock, 31 and Bob’s trust held 53 shares or 42.4% of NKS’s voting common
stock. 32
The few provisions of the 1986 Trust relevant to this litigation are summarized
below.
26
Id. ¶¶ 24, 27, 28, 30.
27
Id. ¶¶ 24, 27–28.
28
Id. ¶ 29.
29
Id. ¶ 30.
30
See id. ¶ 32.
31
Id. ¶ 33.
32
Id.
6
The 1986 Trust appoints Jimmy as Bob’s successor trustee, 33 but Article Two of the
1986 Trust gives Bob the power to designate successor trustees should Jimmy “fail[] to
qualify or cease[] to act.” 34
The 1986 Trust designates Bob as the current income beneficiary. Article Four of
the 1986 Trust provides that, during his life, 35 Bob is entitled to all trust income and may
draw up to $5,000 and five percent of trust principal annually (the “5-and-5 Power”). 36
The 1986 Trust gives Bob the right to invade trust principal, but only where
necessary to provide for his “health, education, maintenance and support” as an income
beneficiary. 37
The 1986 Trust allows Bob to dictate the disposition of trust principal upon his death
through his will or other written instrument, but only to the extent it devises the remaining
trust principal to Chris or Bobby or their issue. 38 Article Four of the 1986 Trust provides
that, upon Bob’s passing, “the then-remaining amount of principal shall be distributed in
such proportions and in such manner as [Bob] shall have appointed . . . provided, that this
power may only be exercised in favor of [Bobby], or [Chris], and/or [their] issue.” 39
33
1986 Trust Art. 2 ¶ A.
34
Id.
35
Id. Art. 4.
36
Id. Art. 4 ¶¶ A–B.
37
Id. Art. 6.
38
Id. Art. 4 ¶ E (allowing Bob to distribute trust principal “by specific reference to this
power of appointment, in a writing delivered to the trustee, or, in default of such writing,
by his duly probated will”).
39
Id.
7
Should Bob pass without having exercised his Article Four power, Article Five of the 1986
Trust provides that the “trustee shall divide the then-remaining amount of principal into
equal shares” for Chris and Bobby, establishing separate trusts from which they are entitled
both income and principal distributions. 40 In the alternative, “[i]n default of all [other]
takers,” the 1986 Trust is dissolved by its own terms, with Jimmy receiving all remaining
principal. 41
The 1986 Trust gives Bob the discretion to establish trust shares for Chris and
Bobby. 42 If Bob grants Chris and Bobby trust shares, they would then have the right to
serve as trustee and to designate the successor trustee of their respective trust shares upon
reaching the age of twenty-five. 43
2. The BST Trust
Mimi formed the BST Trust on October 3, 1986, as a means to transfer her assets to
Bob and Jimmy. 44 Upon Mimi’s death in 1990, Article Six of the BST Trust established
two residuary trusts, one for each of Bob and Jimmy. 45 Jimmy’s residuary trust received
title to a house in Rehoboth, Delaware, 46 and Bob’s residuary trust took title to Mimi’s
40
Id. Art. 5 ¶ A.
41
Id. Art. 5 ¶ B.
42
Id. Art. 2 ¶ B.
43
Id.
44
See BST Trust. The BST trust was amended and restated several times. The version
executed on August 16, 1988 remains in effect.
45
Id. Art. 6.
46
Jimmy Dep. Tr. at 49:20–51:17.
8
residence in Wilmington, Delaware. 47 The Wilmington residence later sold for $545,000,
with the proceeds from the sale forming the principal of Bob’s residuary trust. 48
The BST Trust granted Jimmy both the trust income from his residuary trust and the
right to withdraw on the trust principal. 49 By contrast, the BST Trust granted Bob the trust
income only and named Chris and Bobby or their issue as beneficiaries entitled to the
residuary trust’s principal upon Bob’s death. 50 At some point after Mimi’s death, Bob
gifted a total of $75,000 of the BST Trust principal to Chris and Bobby. 51
Plaintiffs allege that assets of the BST Trust were used in connection with three
different transactions that Plaintiffs view as suspicious.
The first challenged transaction concerns a loan from the BST Trust to NKS in
1993. 52 According to Bob, the loan was originally in the amount of $400,000 and accrued
interest at 6.5%. 53 By 2008, NKS’s records reflected that the Company owed $176,955
47
Trial Tr. at 572:5–11 (Bob); id. at 230:10–13 (Chris).
JX-888 at 1. For simplicity, at times this decision refers to Bob’s residuary trust and the
48
BST Trust as one in the same.
49
BST Trust Art. 6 ¶ A(1)–(2).
50
See id. Art. 6 ¶ B (1)–(2); Trial Tr. at 571:17–20 (Bob).
51
Trial Tr. at 574:4–8 (Bob); PTO ¶ 65.
52
PTO ¶ 64.
53
JX-1070 at 2. NKS’s financial statements reflect that the loan was accruing interest at
8% and not 6.5%, see JX-150 at 14, but this factual discrepancy is immaterial to the
outcome of this decision.
9
plus interest on the loan. 54 When the Company paid interest, those payments were made
directly to Bob. 55
The second challenged transaction occurred in January 1997, when Bob used BST
Trust funds to purchase a home in Florida (the “Florida Condo”). 56 In April 2000, Bob
sold the Florida Condo and used the proceeds from that sale to purchase a different condo
in his name. 57
The third challenged transaction involves the acquisition of a private airplane. In
April 2000, the BST Trust loaned $119,000 to Ty Air, LLC (“Ty Air”). 58 Bob is the sole
owner, controller, and member of Ty Air, which he formed for the purpose of holding title
to an airplane. 59 Using the $119,000 it received from the BST Trust, Ty Air purchased a
twin-engine Beechcraft Baron airplane. 60 The loan was interest free with no maturity or
repayment date, but the BST Trust does have a lien filed with the Federal Aviation
Authority on the plane for the $119,000 it loaned to Ty Air. 61 Bob did not inform Chris or
54
Trial Tr. at 584:22–585:10 (Bob).
55
Id. at 589:6–15 (Bob). It is unclear whether Chris and Bobby were fully apprised of the
loan. Bob testified that he did not inform Chris or Bobby of the loan, id. at 587:19–
588:12 (Bob), but Chris testified that NKS “had a note payable to the BST Trust in 1995”
and that he learned of the loan in 1996, id. at 230:14–20 (Chris).
56
JX-912; Trial Tr. at 574:9–13 (Bob).
57
JX-912; Trial Tr. at 575:9–576:4 (Bob).
58
Trial Tr. at 577:16–19 (Bob); see also JX-37.
59
Id. 578:15–20 (Bob); PTO ¶ 67.
60
Trial Tr. at 578:21–579:3 (Bob).
61
Id. at 580:3–16 (Bob); PTO ¶ 68.
10
Bobby of this transaction and, to date, Ty Air has not paid back any part of the loan it
received from the BST Trust. 62
D. Prior Family Turmoil
Chris began working for NKS in 1992 as an on-premise coordinator for its
customers. 63 By 1999, Chris had worked his way up to executive vice president and was
promoted to Company president in 2005. 64 While managing NKS, Chris made many bad
decisions that even he acknowledges were serious mistakes, and which the court need not
rehash for the present purposes. 65 It suffices to say that Chris’ conduct threatened NKS’s
financial health and affected NKS’s relationships with its lenders.
The Company’s two lenders at the time, Wilmington Trust and Wilmington Savings
Fund Society (“WSFS,” and with Wilmington Trust, the “Lenders”), approached Bob in
December 2008 to voice “concerns regarding the finances of the company and Chris’
behavior.” 66 Specifically, the Lenders were worried about NKS’s cash flow and leverage,
that “cash flow was coming out of the company for noncompany items,” that NKS’s
checking account was overdrawn by about $1.5 million, and that NKS’s line of credit was
62
Trial Tr. at 580:17–24 (Bob).
63
Chris Dep. Tr. at 10:2–13.
64
Id. at 11:19–12:17.
65
Trial Tr. at 179:14–180:13, 183:21–184:3 (Chris); see also id. at 518:23–519:18 (Bob)
(describing the Company’s financial state under Chris’ leadership); see also JX-413 ¶¶ 2–
3 (listing Chris’ transgressions while running the Company).
66
Trial Tr. at 518:11–20 (Bob). Though Chris had assumed primary control over the
operations of the Company, the Lenders approached Bob to see if he “was in a position to
help them,” due to Chris’ mismanagement. Id. at 517:12–14, 518:15–20 (Bob).
11
overdrawn by about $3 million. 67 NKS’s status with the Lenders threatened its relationship
with Anheuser-Busch. 68
To protect NKS, in December 2008, Bob issued a written consent on behalf of the
1986 Trust in his capacity as its trustee, removing Chris as a director of NKS. 69 For the
same reason, in January 2009, Bob issued another written consent on behalf of the 1986
Trust removing Chris as an officer of NKS and placing him on a leave of absence from the
Company. 70 Then, in May 2009, Bob amended the portion of his will designating Chris as
the sole future beneficiary of the NKS stock held by the 1986 Trust, naming instead
Bobby’s and Chris’ issue while leaving out Chris. 71
In February 2009, NKS received a letter from Wilmington Trust declaring NKS in
default and demanding repayment of its outstanding debt. 72 Negotiations between NKS
and the Lenders resulted in a March 19, 2009 Forbearance Agreement that granted NKS a
longer runway to service its debt. 73
67
Id. at 518:23–519:18 (Bob).
68
Id. at 520:7–15 (Bob) (“It was my understanding that [the Lenders] were going to close
our accounts. . . . We would have been in default of our agreements and probably
immediately terminated by Anheuser-Busch.”).
69
JX-115 at 1.
70
Id. at 2–3.
71
JX-260 at 1–2; Trial Tr. at 544:5–12 (Bob).
72
JX-230 ¶ N, Trial Tr. at 675:22–676:17 (Forbes).
73
JX-230; see also id. at Recitals ¶¶ A–D, F–I, K; id. ¶ 1; Trial Tr. at 676:24–677:6
(Forbes).
12
Between December 2008 and March 2009, Bob contributed significant amounts of
his personal wealth to keep the Company afloat. 74 While the Lenders were threatening to
declare a default and close NKS’s accounts, Bob contributed almost $1.2 million to the
Company. 75 His contributions included the entirety of his 401(k), his liquidated
investments, including securities and cash in his personal bank accounts, and the cash value
of his life insurance policy. 76 In exchange for these funds, Bob received a promissory note
from the Company. 77 Separate from this note, Bob further contributed funds to NKS
through a lien on the Florida Condo and by selling his boat, accepting an $80,000 pay cut,
and contributing additional cash to help NKS meet payroll obligations. 78
In June 2009, NKS filed a complaint against Chris alleging breaches of fiduciary
duty pertaining to his actions as an NKS director and president. 79 Chris responded by filing
a complaint against Bob in his capacity as trustee of the 1986 Trust alleging breaches of
fiduciary duties and seeking specific performance of Bob’s alleged promise to transfer
control of the family business to Chris. 80
74
JX-316.
75
Id. Schedule A; Trial Tr. at 521:17–20 (Bob).
76
JX-316 Schedule A; Trial Tr. at 522:3–13 (Bob).
77
JX-316.
78
Trial Tr. at 523:13–524:5 (Bob).
79
C.A. No. 4640-VCP, Dkt. 1, Verified Compl.
80
C.A. No. 4677-VCP, Dkt. 1, Verified Compl.
13
In June 2011, Chris pled guilty to four felonies pertaining to illegal campaign
contributions funneled through NKS and related tax violations. 81 Later that month, Chris,
Bob, NKS, and several family trusts executed a Settlement Agreement and Mutual General
Release (the “Settlement Agreement”). 82 Under the Settlement Agreement, the parties
agreed to dismiss all litigation pending among them. 83
Under the Settlement Agreement, Chris agreed to “release[], acquit[], and forever
discharge[] [Bob], NKS,” and other related parties “of and from any and all . . . obligations
of any nature whatsoever, whether present or future, whether known or unknown,” which
Chris “now has, or can, shall or may have at any time against any of them . . . on or by
reason of any matter, cause or thing whatsoever arising or occurring from the beginning of
the world through the date of this Agreement.” 84
None of the other Plaintiffs were parties to the Settlement Agreement or the
release. 85
Throughout and following the roughly two years of litigation between Chris, Bob,
and NKS, the Lenders extended forbearance of NKS’s debt eight times, culminating finally
81
JX-413.
82
JX-417.
83
Id. ¶ 1(c)(ii).
84
Id. ¶ 3(a).
85
See id. at Recitals (defining “CJT Parties” as Chris and two of his personal trusts; lacking
reference to Bobby or any of Chris’ or Bobby’s children).
14
in a Seventh Amendment to the Second Amended Forbearance Agreement, dated April 25,
2012. 86
E. The Refinancing
Neither the Forbearance Agreement nor Bob’s substantial personal contributions
served to restore NKS’s financial health. By February 2011, NKS’s relationship with its
Lenders was strained. 87 Shortly after Bob and NKS settled the litigation with Chris, the
Lenders informed Bob that he “had 120 days to sell the company or refinance it.” 88
Unwilling to sell the Company, Bob opted to refinance NKS’s debt (the
“Refinancing”). 89 To accomplish this goal, NKS began refinancing discussions with Bank
of America, N.A. (“Bank of America”). Negotiations resulted in a Credit Agreement dated
86
See JX-504; see also JX-251, JX-352, JX-395, JX-397, JX-442, JX-464, JX-499
(amending and restating the Forbearance Agreement).
87
Trial Tr. at 527:15–18 (Bob); see also id. at 527:18–23 (Bob); id. at 692:14–18 (Forbes);
JX-487 at 2–3 (Feb. 16, 2012 email from Lenders’ counsel noting the “herculean efforts”
needed to avoid foreclosure); JX-514 (June 4, 2012 email from Lenders’ counsel
threatening “dire consequences” if NKS fails to obtain funding when the Forbearance
Agreement matures on June 29, 2012).
88
Trial Tr. at 528:6–12 (Bob) (“[W]hen I finally settled the litigation with Chris[,] . . . that
was the trigger for them . . . . And they had a meeting, a luncheon meeting at Wilmington
Trust, and it was at that meeting that they told me I had 120 days to sell the company or
refinance it.”).
89
Id. at 528:13–529:15 (Bob) (describing Bob’s unsuccessful attempt to find additional
equity investors without selling the company “at a fire sale,” which Bob “couldn’t let . . .
happen,” prompting Bob to instead focus his efforts on refinancing); see also id. at 683:13–
21 (Forbes) (explaining NKS’s efforts at finding equity investors that “came to naught.”).
15
July 13, 2012. 90 Bank of America conditioned the transaction memorialized in the Credit
Agreement on NKS obtaining a capital infusion of $5 million. 91
To infuse NKS with $5 million in capital, Bob, Jimmy, and a longtime Tigani family
friend Leo Renzette, 92 negotiated a series of transactions (the “399 Transactions”). 93 Bob,
Jimmy, and Renzette first formed a holding company called 399 Associates, LLC (the “399
LLC”). 94 Jimmy and Renzette each contributed $2.5 million. 95 The 399 LLC then used
those funds to purchase a warehouse space in Milford, Delaware, from NKS for $2.5
million. 96 This added $2.5 million in cash to the NKS balance sheet and allowed the 399
LLC to take title to the Milford property. 97
Around this time, Bob had obtained a property at 399 New Churchman’s Road in
New Castle, Delaware (the “399 Property”) from a Chapter 7 bankruptcy proceeding. 98
90
JX-565.
91
Trial Tr. at 684:6–13, 685:23–686:20 (Forbes); see JX-454 (December 14, 2011 email
from Bank of America inquiring about NKS’s capital structure to ascertain debt-to-equity
ratios of the Company); JX-565 § 4.01(a)(xxiii) (requiring “executed copies” of the notes
issued by Bob to NKS as a condition to closing).
92
Renzette also previously served as controller and CFO of NKS. JX-778 ¶¶ 5–6.
93
Trial Tr. at 418:16–17 (Director); JX-488.
94
JX-515; see JX-488 ¶ 1.
95
Trial Tr. at 418:8–10 (Director); see JX-488 ¶ 1.
96
JX-488 ¶ 1.
97
Trial Tr. at 418:12–13 (Director).
98
Chris had purchased the 399 Property for NKS in 2007 through a separate entity, My
Pal, LLC. Id. at 249:5–8 (Chris). It was through the My Pal, LLC bankruptcy that Bob
purchased the 399 Property. Id. at 418:2–7 (Director); see JX-488 ¶¶ 1, 3.
16
Bob contributed the 399 Property to the 399 LLC. 99 He then borrowed $2.5 million from
the 399 LLC and contributed it directly to NKS, adding another $2.5 million in cash to the
Company’s balance sheet. 100
The 399 Transaction closed on July 12, 2012, when Bob wired the final $2.5 million
to NKS. 101 The Refinancing closed the next day. 102 Had NKS not received the $5 million
capital infusion, the Lenders could have foreclosed and forced a sale of the Company. 103
F. The Stock Issuance
At a May 2012 meeting, the NKS board discussed the 399 Transactions and
contemplated that Bob’s resulting $2.5 million investment in NKS would be in the form of
equity, for which Bob would be issued NKS stock. 104 Those details were not finalized, and
Bob was not issued stock at the time he made the $2.5 million investment. 105
During the year-end audit conducted in the first quarter of 2013, NKS’s accountants
discovered that there was no accounting for Bob’s $2.5 million capital contribution. “[I]t
was sitting on the company’s books” but “wasn’t really classified as debt because there
[were] no loan documents,” and “wasn’t classified as stock because there[] [was] no stock
99
JX-488 ¶¶ 1, 3.
100
See Trial Tr. at 418:13–15 (Director); JX-488 ¶ 4.
101
See JX-562 at 1.
102
JX-565; see also JX-563 (July 13, 2012 closing statement).
103
Trial Tr. at 774:6–775:8 (Massey).
104
See JX-507 (noting “additional stock issued for $2.5” in Bob’s handwritten notes from
the May 18, 2012 NKS board meeting).
105
See Trial Tr. at 628:8–631:15 (Bob).
17
issuance.” 106 Under the Credit Agreement, Bank of America would not allow NKS to take
on additional debt. 107 NKS thus needed to classify Bob’s contribution as equity by issuing
him a commensurate amount of NKS stock. 108
Using inputs from the Company, the accountants calculated that Bob’s $2.5 million
contribution was worth approximately 75 to 78 shares of NKS common stock. 109 An
issuance of this amount would bring Bob’s total equity stake to over 50% and result in a
change in control under the Anheuser-Busch Equity Agreement. 110 The issuance therefore
required Anheuser-Busch’s approval, which the Company received by a letter dated
March 7, 2013. 111 The Board then voted to approve the issuance of 75 shares. 112 Bob did
not participate in the vote. 113 On March 7, 2013, NKS issued Bob 75 shares of NKS
common stock dated as of July 13, 2012 (the “Stock Issuance”). 114
106
Id. at 288:1–18 (Bramley). “The money that they put into the business could be treated
either as debt or it could be treated as a capital, you know, sale of stock.” Id. at 289:8–10
(Bramley).
107
Id. at 290:16–20 (Bramley).
108
Id. at 290:12–291:5 (Bramley).
109
Id. at 292:3–14, 308:2–23 (Bramley).
110
See JX-580.
111
See JX-598.
112
Id. at 5.
113
Id.
114
Though NKS did not issue the stock until March 2013, the issuance is reflected in both
its 2011 and 2012 financial statements. See JX-967 at 1; JX-466 at 18. This could be due
to the delayed preparation of those statements or in anticipation of the stock issuances or
both; the record is unclear. See Trial Tr. at 472:12–17 (Director); id. at 296:20–297:8
(Bramley). Plaintiffs allege that reference to the Stock Issuance in these earlier documents
18
At trial, Bob credibly testified that his primary concern when entering into the 399
Transactions was to avoid, in his words, NKS going “out of business.” 115 He did not
anticipate receiving, or ask to receive, NKS stock as a consequence of the transaction. 116
Rather, the Stock Issuance was necessary to account for the capital infusion, which was a
condition to the Bank of America refinancing.
G. Renewed Family Turmoil
The Tigani family experienced a brief period of relative peace and prosperity
following the Refinancing. 117 In September 2013, Chris resumed working for a company
he had previously founded, World Class Wholesalers (“World Class”). 118 By the fall of
2016, his relationship with his father was better than it had been (as Chris described, it was
“[a]s good as . . . can be expected”). 119 Bob took several steps to assist Chris and World
Class financially. 120 Bob even amended his will in March 2017 to reincorporate Chris into
reflect some nefarious motive on Bob’s part. The factual issue is of no consequence to this
decision.
115
Trial Tr. at 532:9–10 (Bob).
116
Id. at 532:14–21 (Bob) (“There had been conversations about it. And there were
handwritten notes that were shown today that was my handwriting, that I put that down
there. But it really wasn’t my focus that I would get stock for that money. . . . [I]t was
more my focus that I was able to get the money into the company and not whether I was
going to get any stock for it.”).
117
See, e.g., id. at 534:23–535:7 (Bob) (testifying that his relationship with Chris “was still
somewhat strained” but that he “wanted to rebuild a relationship,” so he and Chris “started
to interact and see each other” and “started to really rebuild [their] relationship”).
118
Id. at 201:12–21 (Chris).
119
Id. at 201:22–24 (Chris).
120
Id. at 539:4–23 (Bob).
19
his estate planning. 121 Bobby, who had been employed by the Company full time since
2009, was promoted to brand manager in 2014. 122
1. Chris and Bobby Learn of the Stock Issuance.
By May 2017, World Class was “really on its last legs.” 123 Chris’ resulting financial
position prompted him to begin asking more questions about Bob’s estate planning and the
family wealth, which was concentrated in NKS stock. 124
In mid-2017, Chris and Bobby became hopeful that their father would reinstate them
as successor trustees of the 1986 Trust. 125 Chris and Bobby set up a meeting with Bob and
Steve Director, Bob’s estate planning attorney, which took place on June 8, 2017. 126 At
the time of the meeting, the successor co-trustees were Director and George Forbes, a
director on the NKS board. 127 During this meeting, Bob added Bobby as a third designated
successor trustee to the 1986 Trust. 128 After several other meetings with Chris and Bobby
that summer, Bob ultimately removed Director and Forbes as successor co-trustees and
added family friend Renzette to serve as a successor co-trustee with Bobby. 129 Bob
121
Id. at 544:20–545:1 (Bob).
122
Bobby Dep. Tr. at 24:23–27:10.
123
Trial Tr. at 545:2–6 (Bob).
124
Id. at 545:4–10 (Bob).
125
Id. at 551:4–8 (Bob); id. 209:5–210:7 (Chris).
126
See JX-690; Trial Tr. at 545:17–546:6 (Bob).
127
Trial Tr. at 495:7–11 (Director); see also Forbes Dep. Tr. at 10:15–11:20.
128
JX-693.
129
JX-710.
20
believed that the Renzette/Bobby pair would ensure that “the Tigani family not only own
but control NKS.” 130
Whatever hope Chris and Bobby felt at the beginning of the summer of 2017 was
tempered by events that unfolded in the months that followed. It was at the June 2017
estate planning meeting that Chris and Bobby first learned that the 1986 Trust was no
longer the majority stockholder of NKS as a consequence of the Refinancing and Stock
Issuance. 131 In Chris’ words, he and Bobby felt “left in the dark.” 132
Chris believed that the Stock Issuance was designed to free Bob from the restrictions
imposed by Pal and Mimi through the 1986 Trust and enable Bob to pass NKS stock to
what Chris referred to as Bob’s “new” family. 133 Chris thought that he, Bobby, and their
kids were being “cut . . . out” of the family business and their inheritance. 134 Chris believed
that Bob intentionally failed to tell Chris and Bobby about the Stock Issuance—that Bob
130
Id.; Trial Tr. at 496:8–13 (Director).
131
Trial Tr. at 546:7–11 (Bob); id. at 205:9–11 (Chris).
132
Id. at 210:5–7 (Chris).
133
Id. at 115:8–18 (Chris) (“And what was intended to happen with that stock . . . is that it
was intended to go to new trusts that Mr. Director and Mr. Forbes and his wife would
control, with new beneficiaries, and my brother and I and our children were discarded and
disregarded and thrown away like we’re his old family. He’s got a new family. His new
step-grandkids work at NKS. I don’t begrudge those guys anything. But they certainly
shouldn’t be taking the share of my children and my niece and my grandparents.”); id. at
99:19–101:6 (Chris) (testifying as to his view that the very purpose of the 1986 Trust was
to prevent Bob from transferring a controlling interest in NKS to his stepfamily).
Id. at 116:1–5 (Chris) (testifying as to his belief that Bob’s wife was “going to decide
134
who the successor trustees are of the company and [Bob is] going to cut us out, that’s why
we had to file a lawsuit and that’s why we’re here before the Court”).
21
did not want his sons to know about the Stock Issuance. 135 Bob admitted that they “never
talked about it” 136 but denied that he intentionally concealed the information. 137
The revelation of the Stock Issuance further stirred Chris to seek more information
about the 1986 Trust, Bob’s stake in NKS, and Bob’s operation of NKS. Chris set up
several additional meetings with his father over the summer of 2017. 138 According to Bob,
Chris became “very aggressive” during these meetings, “hounding and pounding on [Bob]
to make changes” to his estate. 139 Bobby “hardly ever said anything,” allowing Chris to
run these meetings and to demand that Bob amend his successor trustee designations for
the 1986 Trust. 140
135
Plaintiffs point to a number of Bob’s statements at trial to support this theory. See Dkt.
451, Pl.’s Christopher Tigani Corrected Opening Post-Tr. Brief (“Pls.’ Post-Tr. Opening
Br.”) at 34–36. Specifically, they note that Bob relied on two methods of informing
Plaintiffs: first, that they would be notified upon Bob’s death; and second, that Bob would
have told them had they asked. Bob Dep. Tr. at 179:11–181:7, 657:3–21; Trial Tr. at
534:16–22, 546:16–547:7 (Bob).
136
Trial Tr. at 546:16–547:3 (Bob) (“It’s not something that I needed or wanted to hide
from them. It’s just something that never got discussed.”); see also id. at 534:16–22 (Bob)
(“I had no real plans to keep it a secret forever. I guess the fact that nobody asked me. But
I’ve always been very open and honest with everyone. If Bobby had said ‘Hey, did this
happen or did that happen,’ I certainly would have told him. It was not something -- there
was no reason to hold it a secret.”).
137
Id. at 547:1–3 (Bob).
138
The meetings “were sometimes individually with Chris and [Bob] at lunch, and maybe
with [Bob] and [Chris] and [Bobby] at lunch together.” Bob Dep. Tr. at 100:3–15.
139
Trial Tr. at 551:8–10 (Bob).
140
Id. at 554:1–14 (Bob).
22
2. Chris and Bobby Learn of Bob’s Employment Contract and a
Contemplated Recapitalization.
When Chris and Bobby pressed Bob for more information during the summer of
2017, they discovered that Bob had a lifetime employment contract with NKS. 141 On
December 29, 2016, the contract was approved by written stockholder consents executed
by Bob and by the NKS Board comprising Bob, Forbes, and Director. 142
The employment contract provides that, as of January 1, 2017, NKS would employ
Bob as Chairman of the Board “for so long as he is able and willing to render services,”
with a guaranteed salary and annual cost-of-living increases. 143 It further provides that
upon Bob’s death, NKS would pay Bob’s wife “the balance of [Bob’s] salary not paid to
him for the year of his death.” 144 After that year, NKS would pay Bob’s wife “an annual
payment equal to one-half of the annual salary paid to [Bob] during the year of his death,”
allowing for annual cost-of-living increases. 145
Chris contends that, at the time this employment contract was executed, the
Company was “so profitable that it was going to start issuing dividends.” 146 From Chris’
perspective, “every dollar that the company spends” on Bob’s employment contract and
death benefits represents a decision to spend Company money rather than to issue those
141
Id. at 118:6–18 (Chris).
142
JX-665.
143
Id.
144
Id. at 1.
145
Id.
146
Trial Tr. at 118:19–21 (Chris).
23
funds as dividends to the 1986 Trust. 147 Bob explained that his lifetime salary and the
death benefits for his wife were necessary “because all of [his] money . . . that [he] had,
[he] put into the company and [he] no longer had it for [his wife].” 148
Chris and Bobby also learned that summer that Bob was considering converting
NKS into an S-Corporation, which necessitated a recapitalization of voting and nonvoting
stock (the “Recapitalization”). 149 The Recapitalization would have facilitated Bob’s estate
planning goals by reducing the taxable portion of his estate. The Recapitalization would
have resulted in the issuance of 144 shares of nonvoting stock to the 1986 Trust and 256
shares of nonvoting stock to Bob personally and would have had no dilutive impact on
either the voting power or the economic value of the shares held by the 1986 Trust. 150 NKS
amended its Certificate of Incorporation to allow for the Recapitalization, though it never
actually occurred; 151 none of the proposed changes to NKS’s capital structure were
implemented. 152
3. Chris and Bobby Send Bob Demand Letters.
In September 2017, Chris and Bobby sent a series of letters to Bob in his capacity
as trustee of the 1986 Trust, demanding information and action as beneficiaries of the 1986
147
Id. at 118:19–119:11 (Chris).
148
Id. at 650:10–17 (Bob).
149
Id. at 61:2–7, 65:17–24 (Sparks).
150
JX-671 at 13–14; Trial Tr. at 69:3–74:2 (Sparks).
151
JX-671; Trial Tr. at 79:1–11 (Sparks).
152
See PTO ¶ 109.
24
Trust. 153 The first letter, sent on September 18, 2017, nominally sought to investigate the
2012 Stock Issuance but requested broad categories of documents reaching beyond its
stated purpose. 154 The second letter, sent on September 25, 2017, demanded that NKS
refrain from issuing any additional stock while the information requests remained
pending. 155 The second letter also threatened to seek injunctive relief preventing the
Company from issuing stock to its President, Paul Ruggiero. 156 Bob confirmed receipt of
the September 17 and 25 letters, but neither Bob nor NKS provided information to Chris
or Bobby in response to the demands. 157
Bobby then sent a second set of communications to Bob and NKS seeking
information as director of NKS. On September 28, 2017, Bobby emailed Bob seeking
information as an NKS director concerning an equity issuance to Ruggiero. 158 Bobby had
learned that NKS wanted to designate Ruggiero as manager of the Anheuser-Busch Equity
Agreement, which would require Ruggiero to hold a minimum 10% equity interest in
153
Trial Tr. at 212:3–12 (Chris).
154
JX-719 at 2, 4–5.
155
JX-721 at 1–2.
156
Id. at 2.
157
See JX-720; JX-722; JX-744; Trial Tr. at 641:2–8, 642:9–14 (Bob).
158
JX-729.
25
NKS. 159 On October 3, 2017, Bobby forwarded his email to the Board, requesting
additional documents pertaining to Ruggiero’s employment as NKS’s president. 160
Although the second set of communications were nominally from Bobby, Chris
admitted at trial that he assisted Bobby in drafting them in an attempt to “up the pressure
because we need[ed] information.” 161
4. NKS Terminates Bobby’s Employment.
The September and early October communications from Chris and Bobby raised
concerns at NKS. The Company’s management team grew worried that Chris was
manipulating Bobby to obtain confidential information to secure himself employment, to
take over the Company, or for some other purpose. 162
Management’s concerns escalated in early October due to events involving Total
Wine & More (“Total Wine”), a significant distributor for NKS. 163 On October 3 and 4,
2017, Chris put Bobby in contact with David Trone, CEO and Chairman of Total Wine.164
According to Chris, the goal was to help Bobby promote his assigned brand to improve
159
JX-659 at 1–2. To ensure that its product managers’ and wholesalers’ incentives were
aligned, Anheuser-Bush required that brand managers hold a minimum 10% equity interest
in NKS. See Anheuser-Busch Equity Agreement §§ 2(b); Trial Tr. at 433:9–434:15
(Director) (describing the approval process under the Anheuser-Busch Equity Agreement
for transferring NKS stock); Bob Dep. Tr. at 579:16–580:5.
160
JX-742; see JX-977.
161
Trial Tr. at 211:22–212:12 (Chris).
162
Id. at 310:20–311:4 (Ruggiero); JX-754 (“[W]e both know it’s not Bobby. Further he
needs to go through proper channels, not work behind our [manager’s] back.”).
163
Trial Tr. 214:3–4 (Chris).
164
See JX-1101; Trial Tr. 213:18–214:20 (Chris).
26
Bobby’s standing in the eyes of NKS’s management. 165 In an October 3, 2017 email, Chris
asked Trone to display an NKS product in his stores on Bobby’s behalf and Trone
agreed. 166 The next day, Chris alerted Trone that Bobby would later send an email to NKS
management copying Trone. 167 Chris told Trone that he had written the email from Bobby
and asked Trone to “reply all and just say something like . . . Bobby, happy to help. You
can count on Total Wine.” 168 Later that day, Trone replied to the email from Bobby
(written by Chris) as Chris had requested: “happy to help.” 169
The communications between Bobby and Trone were a performance and NKS’s
leadership team was the audience, though the performance was neither convincing nor well
received. The agreement with Trone was not consistent with the then-current business
strategy for NKS’s brands. 170 And the NKS management team suspected that Chris was
directing the show. In a private exchange with Bob concerning Bobby’s email, Ruggiero
wrote: “Normally you would say way to go. Under the circumstances do we really want
[Chris] pulling the puppet strings on Bobby. Hard to justify this type of display space for
these brands in our largest customer.” 171 Bob responded: “I’m still reluctant to start
165
Trial Tr. 214:10–215:12 (Chris); JX-1101 at 2.
166
JX-1101 at 2.
167
JX-1085 (“You are going to get a cc: email from my brother . . . . I wrote it and it
references you.”).
168
Id. (ellipses in original).
169
JX-776 at 1.
170
See JX-754, at 1.
171
JX-754 at 1.
27
shooting down everything he’s doing.” 172 To that, Ruggiero said: “[W]e both know it’s
not Bobby. Further he needs to go through proper channels, not work behind our [key
account manager’s] back.” 173
Ruggiero concluded that Bobby’s circumvention of the proper channels represented
a serious disruption at NKS, 174 and human resources concluded that Chris’ involvement
constituted a breach of confidentiality. 175
On October 4, 2017, Ruggiero recommended that Bobby be placed on
administrative leave. 176 In response to Ruggiero’s recommendation, Bob asked that the
Company “hold off” to allow tensions to de-escalate. 177
Tensions did not de-escalate. As October progressed, Bobby continued to behave
in a way that NKS management viewed as disruptive. Rumors circulated through NKS
that Chris and Bobby were orchestrating a corporate takeover, causing employees to fear
that their jobs were at risk. 178 Bob emailed Bobby a warning not to involve Chris in NKS-
172
Id.
173
Id.; see Trial Tr. at 315:20–22 (Ruggiero).
174
See JX-754.
175
JX-759 (October 4, 2017 email from NKS’s V.P. of Human Resources to Bob
explaining: “I reviewed the handbook this morning and the violation would fall under
breach of trust and confidential company information. A conflict of interest would also
exist when a member of an employee’s immediate family is involved in situations. If
Bobby, Jr. is disclosing confidential company information to his brother Chris who is not
an employee and could cause potential damage to N.K.S. that is clearly a conflict of
interest.”).
176
JX-760; JX-761; Trial Tr. at 325:3–15 (Ruggiero).
177
JX-762.
178
JX-781 at 1.
28
related business or communications on October 9, 2017, but that did not allay concerns.179
By October 23, 2017, Ruggiero’s worries regarding Bobby’s behavior prompted him to
request that Bobby not attend corporate events. 180
On November 2, 2017, Chris requested that Bobby download a software application
called “TeamViewer” that would allow Chris to remotely link to Bobby’s NKS
computer, 181 which contained the Company’s confidential information. 182 The next day,
on November 3, 2017, Chris and Bobby filed this lawsuit. 183
Immediately after receiving notice of the lawsuit, Bob issued a unanimous written
consent as stockholder of NKS removing Bobby from the Board. 184 At a meeting the
following day (that Bobby did not attend), the NKS board voted to put Bobby on
administrative leave and to gradually scale back his salary. 185 At the meeting, Bob
expressed concerns about leaving Bobby and his family without any income or health
insurance but abstained from the vote. 186
179
See JX-797.
180
JX-810; see Trial Tr. at 310:7–23 (Ruggiero).
181
JX-818; JX-819; Trial Tr. at 322:5–8 (Ruggiero).
182
Trial Tr. at 324:8–10 (Ruggiero).
See Dkt. 1, Verified Compl. For Breach of Fiduciary Duty, Breach of Trust, and
183
Removal of Trustee and Appointment of Successor Trustee (Compl.).
184
See PTO ¶ 114; JX-828; Trial Tr. at 565:10–13 (Bob).
185
PTO ¶¶ 115–18; Trial Tr. at 706:13–708:2 (Forbes); id. at 327:3–8 (Ruggiero).
186
Trial Tr. at 325:20–327:11 (Ruggiero).
29
H. This Litigation
Plaintiffs filed this action on November 2017, asserting claims against Bob for
breach of his duties as trustee of the 1986 Trust. Plaintiffs amended the complaint in June
2019, adding claims under the BST Trust. 187 Plaintiffs also added NKS as a nominal
defendant. The Amended Complaint asserts the following causes of action:
• Count I against Bob for breach of trust, seeking removal of Bob
as trustee of the 1986 Trust;
• Count II against Bob for breach of trust, seeking removal of
Bob as trustee of the BST Trust;
• Count III against Bob for breach of his fiduciary duties as
trustee of the 1986 Trust and the BST Trust, including by
accepting and concealing the Stock Issuance, firing Bobby,
failing to preserve the BST Trust’s assets, failing to establish
trust shares for Chris and Bobby under the 1986 Trust, and
failing to disclose trust information to Chris and Bobby;
• Count IV for declaratory judgment that Bob breached his
duties with respect to both trusts, that Chris and Bobby are
entitled to trust shares of the 1986 Trust, that Bob’s successor
trustee designations for the 1986 Trust are void and
unenforceable, and that Bob is a conflicted fiduciary and his
actions as trustee are thus null and void;
• Count V seeking to void the 2013 and 2016 NKS Certificate of
Incorporation amendments authorizing the Stock Issuance and
the Recapitalization; and
• Count VI for Plaintiffs’ attorneys’ fees and costs incurred in
connection with this action. 188
Dkt. 258, Verified First Am. Compl. for Breach of Fiduciary Duty, Breach of Trust,
187
Removal of Trustee and Appointment of Successor Trustee (“Am. Compl.”).
188
Id. ¶¶ 71–95.
30
I. The Stock Repurchase
On November 12, 2019, NKS repurchased the 75 shares of the Company’s stock
that were issued to Bob in 2012 (the “Stock Repurchase”). 189 Bob received just under $2.7
million for the 75 shares, 190 which allowed him to repay the $2.5 million loan from the 399
LLC. 191 Bob did not participate in the Board’s vote on the Stock Repurchase. 192
The Company’s value increased substantially between 2012 and 2019. The
$2.7 million purchase price, however, was calculated based on NKS’s valuation at the time
of the 2012 Stock Issuance (roughly $37,000 per share), not the 2019 value of the stock
(roughly $97,000 per share). 193 The price thus represented a bargain for the Company. 194
The Stock Repurchase brought NKS’s stock distribution back down to pre-2012
levels. The 1986 Trust currently holds 72 shares of NKS stock and Bob’s personal trust
holds 53 shares. 195
II. LEGAL ANALYSIS
Plaintiffs’ many claims against Bob can be grouped into two categories. First,
Plaintiffs claim that Bob, as trustee of the 1986 Trust and the BST Trust (together, the
“Trusts”), breached his fiduciary obligations to them as beneficiaries of those trusts.
189
PTO ¶ 45.
190
Id. ¶¶ 107–08.
191
See Trial Tr. at 330:8–12 (Ruggiero).
192
Id. at 329:17–19 (Ruggiero).
193
See id. at 330:13–20 (Ruggiero); id. at 440:16–20 (Director).
194
Id. at 709:12–16 (Forbes).
195
PTO ¶ 109.
31
Second, Plaintiffs claim that Bob, as a director of NKS, breached his fiduciary obligations
to them as stockholders of NKS. This decision addresses Plaintiffs’ claims in that order.
A. Breach of Fiduciary Duties as Trustee
To prevail on a claim for breach of fiduciary duty in the trust context, a plaintiff
must demonstrate that she is owed fiduciary duties and that the defendant breached those
duties. 196 This decision begins with an overview of the duties Bob owed to Plaintiffs and
then analyzes whether Bob breached those duties.
1. Nature of the Duties Owed
Under default principles of Delaware law, a trustee owes fiduciary duties to a
beneficiary. 197 Those duties are defined in part by the beneficiary’s status under a trust
instrument. The Trusts designate only one current beneficiary: Bob. 198 Chris and Bobby
are presumptive remainder beneficiaries. 199 Their interests are “presumptive” because
their right to trust principal is subject to Bob’s power of appointment. 200 Bob may leave
196
Hardy v. Hardy, 2014 WL 3736331, at *11 (Del. Ch. July 29, 2014); see also 12 Del. C.
§ 3581(a) (“A violation by a trustee of a duty the trustee owes to a beneficiary is a breach
of trust.”).
197
See 12 Del. C. § 3301(d); id. § 3301(h)(2)(a).
198
See 1986 Trust Art. 4; BST Trust Art. 6 ¶ B; see also JX-731 at 0:30:55–0:34:34
(transcription of a September 29, 2017 phone call between Chris, Bobby, Bob, and Bennett,
in which Bennett explained that Bob is the sole income beneficiary during his lifetime).
199
See Trial Tr. at 50:20–52:9 (Bennett). Their children are contingent successor
remainder beneficiaries. See 1986 Trust Art. 4 ¶ E (giving Bob the power of appointment
to distribute the trust assets, upon his death, “only . . . in favor of [Bobby], or [Chris], and/or
the issue of [Bobby], or [Chris]”); BST Trust Art. 6 ¶ B(2) (giving Bob the power of
appointment to distribute the trust assets, upon his death, “in favor of [Bob’s] children . . .
or in favor of the issue of [Bobby] and/or [Chris]”).
200
See 12 Del. C. § 3547(b)(1) (defining “presumptive remainder beneficiary” as “a
beneficiary who, as of any date and but for the exercise of any power of appointment,
32
the Trusts’ principal to all of the Plaintiffs equally or to any one of them to the exclusion
of the others. 201
Under Delaware law, remainder beneficiaries hold only a vested interest in the
remainder of an estate but do not enjoy the present right to possess or control trust assets. 202
Although Delaware law does not speak directly to the rights of presumptive remainder
beneficiaries, it stands to reason that such rights are no more extensive than those of
remainder beneficiaries with vested interests. As with remainder beneficiaries, the rights
of presumptive remainder beneficiaries must correspond to their interests in and can be
modified by the trust instrument. 203
would receive income or principal of the trust if the trust were to terminate as of that date
(without regard to the exercise of any power of appointment) or, if the trust does not
provide for its termination, a beneficiary who would receive or be eligible to receive
distributions of income or principal of the trust if all of the beneficiaries currently receiving
or eligible to receive distributions of income or principal were deceased”).
201
See 1986 Trust Art. 4 ¶ E; BST Trust Art. 6 ¶ B(2); see also In re Tr. FBO duPont Under
Tr. Agreement Dated August 4, 1936, 2018 WL 4610766, at *15 (Del. Ch. Sept. 25, 2018)
(describing presumptive remainder beneficiaries as “potential beneficiaries” because their
“rights, ultimately, were dependent upon [the settlor’s] exercise of the [limited power of
appointment]” (emphasis added)).
202
Blackstone v. Chandler, 130 A. 34, 35 (Del. Ch. 1925) (applying rule that a remainder
beneficiary’s right to benefit from a trust is “vested in interest, but not in possession” and
noting that the death of the life beneficiary “mark[s] the point in time when possession
should end for the first beneficiary and begin for the [remainder beneficiary]”).
203
Restatement (Second) of Trusts § 128 (Am. L. Inst. 1959) [hereinafter Restatement
Second] (“The extent of the interest of the beneficiary of a trust depends upon the
manifestation of intention of the settlor . . . .”); Restatement (Third) of Trusts § 49 cmt. a
(Am. L. Inst. 2007) [hereinafter Restatement Third] (“The interests of beneficiaries are
usually prescribed with reasonable clarity by the express provisions of a trust. . . . The
terms of the trust in these matters will be respected and given effect unless contrary to
public policy.”); see, e.g., Wilm. Tr. Co. v. Carpenter, 75 A.2d 815, 821 (Del. Ch. 1950)
(refusing to allow trustee to hold trust assets for remainder beneficiaries upon life
33
Relevant to this dispute, and subject to the strictures of the Trust instruments, Bob
owes to Plaintiffs four categories of duties that a trustee generally owes to remainder
beneficiaries.
First, Bob owes a duty to preserve the Trusts’ property. 204 This duty flows from
Plaintiffs’ presumptive interests in future rights to assets of the Trusts, and stems from
Bob’s duty “act as [a] reasonable and prudent person in managing the trust.” 205 The duty
to preserve may be modified by a trust’s terms, 206 and both Trusts modify this duty by
granting Bob the discretion to invade the trust principal in limited circumstances—where
beneficiary’s “renunciation of her right to the income” because the language of the trust
entitled “subsequent beneficiaries” to accelerate their right to the income “on the premature
termination of [the current] interest”); see also N.K.S. Distribs., Inc. v. Tigani, 2010
WL 2011603, at *2 (Del. Ch. May 7, 2010) (noting that Chris’ interest in the 1986 Trust
was “more attenuated” than that of a current beneficiary, and his status does not give him
“the same rights under a trust as its primary beneficiaries” (emphasis added)); Stegemeier
v. Magness, 1996 WL 549832, at *3 (Del. Ch. Sept. 20, 1996) (distinguishing rights of
current versus remainder beneficiaries and holding that remainder beneficiaries “have no
standing to assert the breach of fiduciary duty claim to restore the allegedly diverted profits
from the sale of” trust property).
204
See Restatement Second § 232 cmt. b.
205
McNeil v. McNeil, 798 A.2d 503, 509 (Del. 2002); see also 12 Del. C. § 3302(a) (“When
investing . . . 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 . . . .”);
Law v. Law, 753 A.2d 443, 447 (Del. 2000) (“[T]rustees are held to a prudent investor
standard in the management and investment of a trust’s assets or property.” (citing Wil. Tr.
Co. v. Coulter, 200 A.2d 441 (1964)).
206
Restatement Second § 176 cmt. d; see In re Living Tr. of Wilson, 2012 WL 5359293,
at *1 (Del. Ch. Oct. 11, 2012) (noting that “under the terms of the Trust, it was unlikely
that any contingent beneficiaries would take, because the Trust gives an unfettered right to
[current beneficiaries and trustees] to demand the distribution of their respective shares of
the Trust corpus at any time and for any reason”).
34
Bob “deems that the funds available . . . (together with [his] funds from all other sources)
are insufficient to provide properly for [his] health, education, maintenance and
support.” 207 Bob’s duty to preserve does not require him to grow or invest the Trusts’
principal; both Trusts allow the trustee to “retain all property in the original form
received.” 208 The 1986 Trust also modifies Bob’s duty to preserve by granting him the 5-
and-5 Power as its current beneficiary. 209
Second, Bob owes a duty to act impartially in his treatment of the Trusts’ varying
beneficiaries, including Plaintiffs. 210 This duty “does not require an equal balancing of
diverse interests but a balancing of those interests in a manner that shows due regard for—
i.e., is consistent with—the beneficial interests and the terms and purposes of the trust.” 211
Bob’s duty of impartiality requires only that Bob not act “on the part of one beneficiary at
the expense of the others;” it does not mandate equal treatment of beneficiaries with
materially different rights and interests. 212 A trustee does not breach its fiduciary duties by
207
See 1986 Trust Art. 6; id. Art. 8 ¶ A(14); BST Trust Art. 7; id. Art. 9 ¶ A(14).
208
1986 Trust Art. 8 ¶ A(1); BST Trust Art. 9 ¶ A(1).
209
See 1986 Trust Art. 4 ¶ B.
210
Restatement Third § 79.
211
Id. cmt. c (Am. L. Inst. 2007); see also id. cmt. b (“It would be overly simplistic . . . to
assume that the interests of all beneficiaries have the same priority and are entitled to the
same weight in the trustee’s balancing of those interests.”).
212
NHB Advisors, Inc. v. Monroe Cap. LLC, 2013 WL 6906234, at *3 (Del. Ch. Dec. 27,
2013) (holding that impartiality does not require perfectly equal treatment so long as a
trustee’s actions are motivated by the belief that an “outcome was required by his fiduciary
duties to all beneficiaries” and excluded beneficiaries are unharmed by those actions); see
also Law, 753 A.2d at 447–49 (holding that trustees do not have a duty to grow a trust’s
principal and instead may ensure that it is “preserved while producing” income for a current
beneficiary).
35
pursuing a strategy to provide for the current beneficiary while preserving the corpus for a
remainder beneficiary. 213
Third, Bob owes a duty of disclosure, although the scope of that duty is limited
given Plaintiffs’ remote beneficiary status. 214 Generally, disclosure obligations in the trust
context impose a duty to “furnish information to a beneficiary upon reasonable request.” 215
Beneficiaries are entitled to information “including the existence of the trust, their status
as beneficiaries . . . any significant change in their beneficiary status; and . . . material
information needed to protect their interests.” 216 The scope of a beneficiary’s rights under
a trust dictates what constitutes information needed to protect their interests, such that
“[t]he terms of a trust may alter the amount of information a trustee must give . . . and
persons to whom[ ] it must be given.” 217
Fourth, Bob owes a duty of loyalty limiting his ability to self-deal, although that
duty is also modified by the Trusts. 218 As commentators have recognized, “[i]t is well
established that a trustee may occupy conflicting positions in handling the trust where the
213
See Law, 753 A.2d at 447–48; Monroe Cap., 2013 WL 6906234, at *3.
214
See Restatement Third § 82.
215
McNeil, 798 A.2d at 510.
216
Deputy v. Deputy, 2020 WL 1018554, at *40 (Del. Ch. Mar. 2, 2020).
217
Restatement Third § 82 cmt. a(2).
218
See Lynch v. Barba, 2018 WL 1613834, at *4 (Del. Ch. Apr. 3, 2018) (noting that “the
fiduciary duties a trustee traditionally owes at common law include the duty of loyalty and
the rule against self-dealing”).
36
trust instrument contemplates, creates, or sanctions the conflict of interest.” 219 In this case,
the Trusts create and therefore sanction conflicts of interests by appointing Bob as the
trustee and current income beneficiary. Likewise, when the Settlors created the 1986 Trust
and continued to fund it with NKS stock, Bob worked at NKS and personally owned NKS
stock. 220 Conflicts of interests inherent in this ownership scheme were therefore
contemplated at the formation of the 1986 Trust.
2. The 1986 Trust
Plaintiffs claim that Bob breached his duties as trustee of the 1986 Trust through a
variety of transactions and attendant non-disclosures. Seeking a broad array of remedies, 221
Plaintiffs claim that Bob breached his duties: (a) in connection with the Stock Issuance;
(b) by failing to cause NKS to employ Chris and Bobby; (c) by failing to issue trust shares
to Chris and Bobby; (d) when selecting successor trustees; and (e) by failing to disclose
certain information.
219
John H. Langbein, Questioning the Trust Law Duty of Loyalty: Sole Interest or Best
Interest?, 114 Yale L.J. 929, 963 (2005) (quoting Dick v. Peoples Mid-Ill. Corp., 609
N.E.2d 997, 1002 (Ill. App. Ct. 1993)); see also Restatement Third § 79 cmt. b(1) (noting
that trustees are also life beneficiaries in “many modern trust situations”).
Trial Tr. at 508:2–509:12 (Bob); Schedule of Evid. Ex. A, Defs.’ Demonstrative Exs.
220
06–09.
221
In post-trial briefing, Plaintiffs request the following relief: (1) Bob’s removal as trustee
of both the 1986 Trust and the BST Trust, (2) appointment of Bobby and Renzette as
trustees of those trusts, (3) judicial dissolution of those trusts and creation of constructive
trusts over their assets, (4) a comprehensive accounting of those assets, Bob’s transactions
as trustee, and the 53 shares of NKS stock that Chris sold to Bob, (5) $21.3 million in
damages, (6) attorneys’ fees under statutory trust law and the bad faith exception to the
American rule, and (7) any other relief the court finds appropriate. Pls.’ Post-Tr. Opening
Br. at 94. At times, Chris also request relief in connection with 53 shares he sold to his
father, but that issue falls entirely outside the scope of this litigation.
37
a. The Stock Issuance
Plaintiffs claim that Bob breached his duty of loyalty and to refrain from self-dealing
by using his power as trustee of the 1986 Trust to cause the Stock Issuance, which Plaintiffs
say benefited Bob personally and at the 1986 Trust’s expense. 222 Plaintiffs then attempt to
invoke the “no further inquiry” rule, which allows a beneficiary to unilaterally void any
self-dealing transaction. 223
Defendants first argue that the Repurchase mooted Plaintiffs’ claims challenging
the Stock Issuance, and it is tempting to adopt this argument as an easy way to jump the
analysis. But the fact that the Stock Issuance was effectively undone does not mean it
cannot support a claim for breach under Delaware law. 224 This decision thus cannot avoid
Plaintiffs’ challenge to the Stock Issuance on grounds of mootness.
Defendants next argue that the Stock Issuance was not a self-dealing transaction as
that concept is commonly understood in the context of trust law. Delaware cases
addressing self-dealing by a trustee typically involve the transfer or mishandling of trust
property or trustee powers. 225 In this case, the 1986 Trust took no action in connection
222
Pls.’ Post-Tr. Opening Br. at 57–59.
See, e.g., Restatement Third § 78 cmts. b–c (describing the no further inquiry rule as
223
imposing an irrebuttable presumption of voidability to self-dealing transactions).
224
See, e.g., Gatz v. Ponsoldt, 925 A.2d 1265, 1273 (Del. 2007) (“Although the
[transaction] was unwound . . . the harm alleged to have resulted from that transaction was
not entirely undone . . . .”).
225
See Hardy, 2014 WL 3736331, at *8, 10; Stegemeier, 728 A.2d at 563; Mennen v. Wilm.
Tr. Co., 2015 WL 1914599, at *26 (Del. Ch. Apr. 24, 2015); see also George Gleason
Bogert, George Taylor Bogert & Amy Morris Hess, Bogert’s The Law of Trusts and
Trustees § 543 (3d ed. 2020) [hereinafter Bogert] (“A trustee engages in a divided loyalty
38
with the Stock Issuance. The transaction, which was between NKS and Bob, did not
depend on the exercise of any trustee powers and did not involve any trust property.
In response to this point, Plaintiffs argue that Bob should have wielded the voting
power of the 1986 Trust to prevent the transaction. 226 At times, Plaintiffs suggest that the
capital infusion and resulting stock issuance should have been made through the 1986
Trust, asserting what is in essence a version of a usurpation theory but not developing it as
such. Although Plaintiffs’ theory is underdeveloped, this analysis credits it for the purpose
of argument, accepting that Bob’s actions or inactions in connection with the Stock
Issuance were a form of self-dealing implicating his duties as trustee of the 1986 Trust. 227
transaction if the trustee acts in connection with trust property both on behalf of the trust
and for the trustee’s personal interests.”).
226
Pls.’ Post-Tr. Opening Br. at 60–61 (citing Harvey v. Leonard, 268 N.W.2d 504 (Iowa
1978)). Harvey is distinguishable. The trust in Harvey held a controlling interest in a
company, which granted bonuses to certain employees on the condition that those bonuses
be used to purchase equity in the company. Harvey, 268 N.W.2d at 509. Some of those
employees were not family members and thus were not beneficiaries to the trust; others
were current beneficiaries and trustees. Id. The issuances diluted the trust’s controlling
interest in the company, was not approved by all trustees, and benefited some trustees and
current beneficiaries but not others. Id. The court found approval and receipt of the
issuance to be a violation of defendant trustees’ duties of loyalty because it benefited them
over other equal beneficiaries and the trust itself, though it ultimately denied relief based
on laches. Id. at 512, 515. In this case, Bob is the sole current beneficiary and the sole
trustee of the 1986 Trust; Plaintiffs’ interests are not on par with Bob’s. Also, the finding
of bad faith was central to the Harvey court’s conclusion, a distinguishing fact for reasons
discussed below.
227
See, e.g., Kelly v. Fuqi Int’l, Inc., 2013 WL 135666, at *6 (Del. Ch. Jan. 2, 2013)
(“Delaware courts have the discretion to ‘look to the underlying substance of a pro se
litigant’s filings rather than rejecting filings for formal defects . . . .’” (ellipses in original)
(quoting Sloan v. Segal, 2008 WL 81513, at *7 (Del. Ch. Jan. 3, 2008))).
39
Although this decision assumes that the Stock Issuance was an act of self-dealing,
it does not follow that Plaintiffs may void the transaction under the no-further-inquiry rule.
Under common law, the no-further-inquiry rule permits a beneficiary to unilaterally
void a self-dealing transaction regardless of whether the trustee can show that the action
was taken in good faith, the terms of the transaction were fair, and it did not benefit the
trustee at the beneficiaries’ expense. 228 The no-further-inquiry rule is a “conclusive
presumption of invalidity” 229 that flows from a trustee’s duty of loyalty. 230
It is unclear whether Delaware has adopted the no-further-inquiry rule and, if so, to
what degree. Only one Delaware case mentions the concept, and only then to observe that
a trust instrument eliminated the presumption. 231
To the extent that Delaware law recognizes the no-further-inquiry rule, it is a
byproduct of the duty of loyalty and, like that duty, “may be modified by the terms of the
trust.” 232 As one commentator has observed, “[i]t is well established that a trustee may
occupy conflicting positions in handling the trust where the trust instrument contemplates,
creates, or sanctions the conflict of interest.” 233 Generally, “[w]hen the settlor selects a
conflicted person to serve as trustee, such as a family member who is also a beneficiary,
228
Restatement Third § 78 cmts. A–b.
229
See Langbein, supra note 219, at 931.
230
Restatement Third § 78 cmt. b.
231
See Mennen, 2015 WL 1914599, at *24 & n.254 (citing Restatement Third § 78 cmt. b).
232
See Restatement Third § 78 cmt c(2); see also Lynch, 2018 WL 1613834, at *4 (“Under
Delaware law, a trustee’s powers are subject to fiduciary duties unless modified by the
terms of the trust” (emphasis added)).
233
Langbein, supra note 219, at 963; see Restatement Third § 79 cmt. b(1).
40
the court infers that the settlor intended a commensurate waiver of the [no-further-inquiry]
rule, even if the trust instrument does not spell out that term.” 234
In this case, the terms of the 1986 Trust and the context in which it was formed
reveal that the Settlors intended to waive the no-further-inquiry rule. The 1986 Trust
creates and sanctions obvious conflicts of interest by making Bob both the current
beneficiary and the trustee. Moreover, the 1986 Trust was formed to hold shares of NKS
Stock, and when the Settlors formed and funded the 1986 Trust with NKS stock, Bob
worked at NKS and personally held 53 shares. 235 This combination of facts is rife with
conflicts resulting from Bob’s positions as (a) trustee, (b) beneficiary of a trust holding
NKS stock, and (c) an employee, manager, and personal stockholder of NKS. In this
scenario, it would be unreasonable to conclude that the Settlors intended to vest Plaintiffs,
as presumptive remainder beneficiaries, with the right to unilaterally invalidate any self-
dealing actions undertaken by Bob under the no-further-inquiry rule.
This decision thus declines to apply the no-further-inquiry rule and turns to the
merits of Plaintiffs’ claim that Bob breached his duty of loyalty as trustee in connection
with the Stock Issuance.
The duty of loyalty “requires a trustee to administer the trust solely for the interest
of the beneficiary and exclude all selfish interests and all consideration of the interests of
234
Langbein, supra note 219, at 963.
235
Trial Tr. at 508:2–509:12 (Bob); PTO ¶¶ 20–23.
41
third persons.” 236 A beneficiary may show that a trustee breached that obligation by acting
in his own self-interest “[i]nstead of evaluating what was in the best interests of [a]
[t]rust.” 237 Thus, Bob can be held liable for breaching his duty of loyalty if the record
supports a finding that Bob failed to act in the best interests of the 1986 Trust. 238
The record does not support a finding that Bob breached his duty of loyalty in
connection with the Stock Issuance. Plaintiffs claim that Bob issued NKS stock to himself
to “seize” a controlling interest in NKS, to deprive Plaintiffs of control of NKS, and to
circumvent the restrictions of the 1986 Trust and provide for his “new” family through
estate planning. 239 None of this is true. In reality, the Stock Issuance was an after-the-fact
accounting of a much-needed capital infusion. The capital infusion helped NKS
consummate the Refinancing and avoid financial ruin. The Refinancing set the Company
236
Hardy, 2014 WL 3736331; see also Bogert § 543 (“Perhaps the most fundamental duty
of a trustee is the trustee’s duty of loyalty to the beneficiaries, . . . . The trustee must
administer the trust with complete loyalty to the interests of the beneficiary, without
consideration of the personal interests of the trustee or the interests of third persons.”);
Restatement Second § 170(i) (noting that a trustee “is under a duty to the beneficiary to
administer the trust solely in the interests of the beneficiary”).
237
Paradee v. Paradee, 2010 WL 3959604, at *10 (Del. Ch. Oct. 5, 2010).
238
Where, as here, “a trust’s beneficiaries are selected or authorized by the settlor to serve
as trustee,” claims for breach of the duty of loyalty are often analyzed as claims for breach
of the duty to act impartially. Restatement Third § 78 cmt. c(2); see also id. § 79 cmt. b.
Because the Plaintiffs’ beneficial interests were in no way affected by the Stock Issuance,
as discussed infra, viewing the alleged breach through the lens of the duty of impartiality
confuses rather than clarifies the analysis.
239
Pls.’ Post-Tr. Opening Br. at 57.
42
on a course back to financial health and was thus in the best interests of NKS. 240 By
extension, the Stock Issuance was in the best interests of the 1986 Trust. 241
The Stock Issuance did not harm Plaintiffs’ interests in the 1986 Trust; indeed, the
Stock Issuance did not affect Plaintiffs’ interests in the 1986 Trust at all. While the Stock
Issuance had the effect of diluting the 1986 Trust’s ownership percentage of the Company
until the Repurchase, this at most diluted the 1986 Trust’s voting power exercised by Bob
as trustee. 242 It had no impact on Plaintiffs, who have no present rights to the trust’s voting
power. 243
Accordingly, Bob did not breach his fiduciary duties as trustee of the 1986 Trust in
connection with the Stock Issuance. 244
b. No Right to Employment
Plaintiffs claim that they each have a right to work at NKS and that Bob’s failure to
maintain or secure employment for them at NKS constitutes a breach of his duty as trustee
of the 1986 Trust. 245
240
See Trial Tr. at 528:6–12, 532:9–10 (Bob), id. at 774:6–775:8 (Massey).
241
Plaintiffs do not argue that the terms of the Stock Issuance were unfair (and they would
likely lack standing to assert such a claim for the reasons discussed infra Section II.B).
242
See 1986 Trust Art. 4 ¶ A; id. Art. 8 ¶ A(4).
243
See id. Art. 5.
244
To the extent that Plaintiffs challenge the Recapitalization as a breach of fiduciary duty,
such a claim fails because the transaction was never consummated, and it would have had
no dilutive effect whatsoever on the 1986 Trust’s voting stake in the Company in any event.
See PTO ¶ 109.
245
Pls.’ Post-Tr. Opening Br. at 61–63. Based on the premise that Plaintiffs have a right
to employment, Plaintiffs also claim that Bob breached his duties to them by “hiring his
wife’s family and her grandchildren” and not them, by allowing the NKS Board to reduce
43
As support for this argument, Plaintiffs rely solely on general statements about the
Settlors’ hope that Chris and Bobby work at the Company. 246 But the fact that a settlor
held a hope concerning a beneficiary does not convert such hope to an enforceable right.
For that hope to give rise to a right, it must be memorialized in the trust instrument. 247
There is no language in the 1986 Trust that requires the trustee to cause NKS to
employ Chris and Bobby. 248 In fact, at its inception, the Settlors did not vest the 1986 Trust
with enough NKS shares to empower its trustee to cause NKS to do anything. 249 The
Bobby’s pay and terminate his employment, by securing benefits for Bob’s wife through
Bob’s employment contract, and through Ruggiero’s employment contract. See Pls.’ Post-
Tr. Opening Br. at 57. These theories all seem to be based on Plaintiffs’ erroneous
contention that the 1986 Trust entitles Plaintiffs to employment at NKS and thus fail for
the same reasons.
246
See Pls.’ Post-Tr. Opening Br. at 62–63.
247
See, e.g., Wilson, 2012 WL 5359293, at *1–2 (finding that where a trust allowed either
of its two current beneficiaries and co-trustees to demand distribution of their entire trust
share “at any time and for any reason,” one trustee could not prevent the other from
demanding distributions because the settlors’ intent to maintain trust property for future
generations was not written in the trust instrument; holding that their duties as trustee “was
to the Trust as written: not to carry out the cryptic intent of [their] parents, unexpressed in
the Trust instrument”); Grant v. Bessemer Tr. Co. of Fla., Inc. ex rel. Grant, 117 So. 3d
830, 833–36 (Fla. Dist. Ct. App. 2013) (finding after extensive evidentiary findings that a
settlor desired for his son to continue working for the settlor’s company but not to advance
to an executive or management position, that language to this effect in a codicil to settlor’s
will was largely precatory and conferred a right to an employment opportunity but not a
guarantee of lifetime employment, and that the beneficiary-son did not have the right to
compel employment based on the trust language, despite his father’s expressed wishes).
248
See Trial Tr. 670:24–671:4 (Bobby) (testifying that “there’s nothing that says that” the
trustee of the 1986 Trust “has an obligation to hire” Chris and Bobby at NKS).
249
See 1986 Trust Schedule A. Even where a trust instrument expressly directs the
employment of a named individual, such provisions are “ordinarily intended merely to
promote the efficient administration of the trust rather than to confer a benefit on the
[individual]” and are thus often interpreted as discretionary. See Restatement Third § 48
cmt. b.
44
Settlors thus could not have intended for the 1986 Trust to ensure the employment of the
trust’s beneficiaries.
Plaintiffs rely on In re Estate of Winston, 250 but that decision offers no support for
their position. Winston concerned the marital trust of Harry Winston, which held roughly
$69 million in assets including a controlling stake in the settlor’s eponymous jewelry
business. 251 Harry’s two sons, Ronald and Bruce, were entitled to co-equal shares of the
remaining trust principal upon the death of Winston’s wife. 252 The sons disputed the
appropriate means of distributing the trust principal. Ronald, who was CEO of the
company, wanted to maintain control over the company and thus desired to distribute the
shares in kind. 253 Bruce had been fired from his position at the company. 254 Because his
brother had ceased distributions, share ownership would not result in any cash flow to
Bruce. 255 Bruce thus desired to sell the shares and believed that the estate would obtain
greater value if the shares were sold together. 256
Although it was clear that “Harry envisioned that the business would be continued
after his death” and that “Harry intended his son Ronald to continue as an officer and
director of the companies,” the “dominant intent” of the settlor evidenced by the trust
250
631 N.Y.S.2d. 999 (Surr. Ct. 1995).
251
Winston, 631 N.Y.S.2d at 1000.
252
Id.
253
Id. at 1001, 1003.
254
Id. at 1007.
255
Id. at 1002–03.
256
Id. at 1007.
45
instrument was “maintenance of a fair income” and “equal division of the value of his
estate between his two sons.” 257 The court therefore held that the testamentary documents
did not require an in-kind distribution. 258 The court concluded that it was more
advantageous to both beneficiaries to sell the whole controlling interest and thus ordered
the trustees to sell the business and distribute the proceeds. 259
Winston does not stand for the proposition that a trustee must ensure that
beneficiaries remain employed by a family business, as Plaintiffs argue. It stands for the
opposite proposition. Although the court found that the settlor intended for Ronald to
continue as a director and officer of the company, the court did not order an outcome that
allowed Ronald to retain his employment. Likewise, although the court found that the
settlor desired to benefit his children equally, the court did not order Ronald to hire Bruce.
The court ordered an outcome that was likely to deprive Ronald of his continued
employment in order to maximize the value of the trust assets. 260 Winston in no way
supports a conclusion that the court must order Bob to wield the voting power of the 1986
Trust to cause NKS to hire Chris and Bobby.
257
Id. at 1005–06.
258
Id. at 1005–07.
259
Id. at 1007.
260
Winston is further distinguishable in that Ronald and Bruce held a current right to
income from their trust. By contrast, Plaintiffs are presumptive remainder beneficiaries
with no current right to income or other financial benefits.
46
Because Plaintiffs have no right to be employed by NKS under the 1986 Trust, Bob
did not breach his duty as trustee by allowing Bobby’s termination and by refusing to
guarantee his sons’ employment with the Company.
c. No Right to Trust Shares
Plaintiffs claim that Chris and Bobby have a present right to receive trust shares, a
right they contend accrued when Chris and Bobby each turned 25.
Plaintiffs rely on Article Two of the 1986 Trust, which grants Chris and Bobby the
right to serve as trustees of their own trust shares and to designate their own successor
trustees only “after trust shares are established for” their benefit and “upon reaching age
25.” 261 They claim that this language obligated Bob to “divide[] the 1986 Trust into two
trust shares for Bobby and Chris at age 25.” 262
Plaintiffs misread Article Two and Article Five of the 1986 Trust. Article Five
requires the trustee to establish trust shares for Chris and Bobby if and only if Bob has not
exercised his personal power of appointment, 263 a power exercised upon his death. 264
Article Two, in turn, applies only “after trust shares are established” for Chris and
261
1986 Trust Art. 2 ¶ B.
262
Pls.’ Post-Tr. Opening Br. at 20.
263
1986 Trust Art. 5 (“After the death of [Bob], to the extent that the power of
appointment . . . is not effectively exercised . . . .”). Bennett confirmed this reading of the
1986 Trust at trial. See Trial Tr. at 51:4-23 (Bennett).
264
See du Pont Weymouth v. Wilm. Tr. Co., 1991 WL 148808, at *4 (Del. Ch. Aug. 2,
1991) (noting that a beneficiary’s power of appointment “could take effect only upon her
death” where the trust “provides that for her power of appointment to become exercisable,
[her] life estate must terminate, i.e., she must first die”).
47
Bobby. 265 Plaintiffs emphasize the phrase “[d]espite the foregoing” as evidence of a
mandate in Article Two—a mandate that is unsupported by Delaware law and the plain
language of the trust. 266 The phrase “[d]espite the foregoing” merely preserves Chris’ and
Bobby’s right to appoint or serve as trustee after their trust shares are established and if
they are over 25 years old—it does not compel Bob to establish those trust shares. 267 The
mandatory language (“shall”) of the provision refers only to rights triggered upon the
issuance of trust shares and does not impose upon its trustee any obligation to actually issue
those shares before a triggering event. 268 Bob is thus under no obligation to issue trust
265
1986 Trust Art. 2 ¶ B. Plaintiffs cite to Paradee for the proposition that the Court has
already interpreted Article Two consistent with Plaintiffs’ interpretation, Pls.’ Post-Tr.
Opening Br. at 20, but that case is distinguishable. The trust article in Paradee did not
involve trust shares and was triggered upon the death of the settlor, who had passed.
Paradee, 2010 WL 3959604, at *5 (“[A]fter my . . . death, and upon reaching age 30, my
grandson . . . shall be entitled to serve as trustee hereunder . . . .”).
266
See Pls.’ Post-Tr. Opening Br. at 20–21.
267
See 1986 Trust Art. 2 ¶ B. At trial, Bennett testified that she does not interpret the 1986
Trust as obligating Bob to grant trust shares and that she views such action as unlikely to
occur because the shares would constitute a taxable gift. Trial Tr. at 60:3–7 (Bennett) (“If
Bob were to create separate trust shares for Chris and Bobby during his lifetime, when they
turned age 25, would that be a taxable gift? A. Yes.”); id. at 60:15–20 (Bennett)
(“[C]reating the trust for them would be a taxable gift if they were funded. Bob has a
vested interest in the trust, we’re way past the disclaimer period, so anything would be a
taxable gift at this point.”). In fact, maintaining the status quo of the trust until Bob’s death
was the only way to ensure the avoidance of taxes levied on the 1986 Trust’s property. Id.at 61:2–7 (Bennett) (“[T]he primary purpose of the generation-skipping trust . . . is to avoid
taxes. And . . . the way it was done, won’t be included in Bob’s estate when he passes
away. So it won’t be subject to estate tax.”); see also JX-731 at 24 (“I also think the way
it’s written there’s just no chance that your father could ever set up those trusts for you and
your brother or your kids, during his lifetime.”).
268
See 1986 Trust Art. 2 ¶ B.
48
shares, and Chris and Bobby did not obtain rights under Article Two solely by their
reaching the age of twenty-five.
Therefore, Bob did not breach his duty as trustee by failing to establish trust shares
for Chris and Bobby when they turned twenty-five.
d. No Right to Remove the Trustee or Select the Successor
Trustee
Plaintiffs ask the court to exercise the discretionary power afforded under 12 Del. C.
§ 3327 to remove Bob as trustee. 269 They also ask the court to set aside Bob’s designations
as to his successor trustees due to alleged conflicts of interest. 270
Section 3327 authorizes this court to remove a trustee in five scenarios, only one of
which—Section 3327(c)—is relevant given the holdings of this decision. 271
Section 3327(3)(c) authorizes the removal of a trustee in the absence of a breach of trust if
there exists “[h]ostility between the trustee and beneficiaries that threatens the efficient
269
Pls.’ Post-Tr. Opening Br. at 78–79.
270
Id. at 79–83.
271
See 12 Del. C. § 3327 (permitting this court to remove a trustee if: “(1) The trustee has
committed a breach of trust; or (2) A lack of cooperation among co-trustees substantially
impairs the administration of the trust; or (3) The court, having due regard for the expressed
intention of the trustor and the best interests of the beneficiaries, determines that
notwithstanding the absence of a breach of trust, there exists: a. A substantial change in
circumstances; b. Unfitness, unwillingness or inability of the trustee to administer the trust
properly; or c. Hostility between the trustee and beneficiaries that threatens the efficient
administration of the trust”). Sections 3327(1), (2), (3)(a), and (3)(b) do not apply because
Bob has not breached any of his duties as trustee of the 1986 Trust; Bob is the only trustee
so a lack of co-operation could not impair the trusts’ administration; Plaintiffs do not allege
any substantial change in circumstances; and Plaintiffs do not allege any facts to suggest
Bob is either unfit, unwilling, or unable to administer trust property.
49
administration of the trust.” 272 Plaintiffs argue that Bob’s hostility towards them justifies
his removal under this provision. 273
Generally speaking, removal of a trustee is an extreme form of equitable relief that
“should ‘be exercised sparingly.’” 274 The court is reticent “to remove a trustee who has
been chosen by the settlor” 275 or to intervene “[w]here the terms of the trust provide a
method” for trustee appointment and vacancy-filling. 276 For removal to be warranted
under Section 3327(3)(a), “the friction or hostility must be of such a nature as to make it
impossible for the trustee to properly perform his duties.” 277 Mere disagreement or a “lack
of confidence” by the beneficiaries “is not a sufficient ground for removal.” 278
To demonstrate that Bob is hostile in the way required by Section 3327(3)(c),
Plaintiffs recast their arguments concerning Chris’ and Bobby’s entitlement to
employment. They contend that Bob is hostile because of his “financial retaliation against
Bobby and Chris.” 279 As discussed above, however, Bob has no obligation as trustee to
272
12 Del. C. § 3327(3)(c).
273
Dkt. 458, Pl.’s Post-Trial Reply Br. (“Pls.’ Post-Tr. Reply Br.”) at 40.
274
McNeil, 798 A.2d at 513 (quoting In re Catell’s Estate, 38 A.2d 466, 469 (Del. Ch.
1944)); see also Smith v. Biggs Boiler Works Co., 91 A.2d 193, 199 (Del. Ch. 1952) (“The
mere fact that there is discord between the parties to a trust will not ordinarily warrant a
court in removing a trustee.”); In re Heizer Corp., 1988 WL 58272, at *21 (Del. Ch. June 6,
1988) (noting that “removal of a trustee is a severe form of relief . . . and the power of
removal should be exercised sparingly”).
275
Bogert § 527.
276
McNeil, 798 A.2d at 513.
277
du Pont v. Wilm. Tr. Co., 2017 WL 4461132, at *8 (Del. Ch. Oct. 6, 2017).
278
Vredenburgh v. Jones, 1980 WL 6786, at *2 (Del. Ch. June 13, 1980).
279
Pls.’ Post-Tr. Opening Br. at 78–79.
50
ensure Chris’ and Bobby’s employment by NKS. Moreover, during the Board meeting
during which NKS terminated Bobby’s employment, Bob demonstrated his affection for
his son by seeking to ensure Bobby continued to receive some financial support post-
termination. 280 In the end, despite the years of insidious litigation, Bob credibly testified
that he wants his family to heal. 281 These facts cut against any finding of hostility.
Plaintiffs also ask the court to invalidate Bob’s designations for successor trustee.
But the 1986 Trust gives Bob absolute “power to designate fiduciaries.” 282 The trust
instrument gives Plaintiffs no power to select trustees unless and until they are issued trust
shares, which has not occurred. 283 Because Plaintiffs lack the right under the plain
language of the 1986 Trust to veto or replace Bob’s designated successor trustees,
Plaintiffs’ challenge to Bob’s appointments fail.
e. No Breach of Disclosure Obligations
Plaintiffs allege that Bob had an obligation to disclose but failed to disclose
information concerning: (i) the Stock Issuance, (ii) NKS’s employment contracts,
(iii) changes to the designation of successor trustees, and (iv) the Recapitalization.
280
See Trial Tr. at 325:20–327:11 (Ruggiero).
281
Id. 567:17–568:5 (Bob).
282
1986 Trust Art. 2 ¶ C.
283
See id. Art. 2 ¶ B.
51
As discussed above, beneficiaries are entitled to material information that is
necessary to protect their interests, and thus the scope of a trustee’s disclosure duty tracks
the scope of a beneficiary’s interests under a trust. 284
Bob did not breach his obligations by failing to disclose the Stock Issuance. As
discussed above, the Stock Issuance in no way affected Plaintiffs’ rights under the 1986
Trust. Thus, knowledge of the issuance was not necessary to protect Plaintiffs’ interests.
Bob did not breach his obligations by failing to disclose changes in designations as
to his successor trustee. As discussed above, Plaintiffs lack the right under the 1986 Trust
to veto or replace Bob’s designated successor trustees, and disclosure of those designations
was not necessary to protect Plaintiffs’ interests under the 1986 Trust. Moreover, a
successor trustee cannot take action that impacts Plaintiffs’ rights under the 1986 Trust.
Bob has the right to remain trustee until his death or incompetence. 285 If Bob is
incapacitated but still alive, he remains the sole current beneficiary of the trust. 286 If Bob
passes, the 1986 Trust requires the successor trustee to distribute its assets pursuant to his
will to Chris, Bobby, or their issue. 287 In the absence of a valid will, the trustee is directed
to establish trust shares for Chris and Bobby in residuary trusts to which they will then
284
See supra notes 214–17 and accompanying text. Chris acknowledged this in a
September 29, 2017 phone call with Bob, Bobby, and Bennett. See JX-731 at 0:52:51
(responding to a comment that remainder beneficiaries typically must affirmatively request
information, asking “[d]on’t [Delaware courts] require the trustee to give beneficiaries
information, enough information that they can protect their rights?”).
285
1986 Trust Art. 2 ¶ A.
286
Id. Art. 4 ¶ A.
287
Id. Art. 4 ¶ E.
52
have the right to appoint or serve as trustee. 288 Therefore, the moment at which a successor
trustee becomes trustee due to Bob’s death is also the moment at which Chris’ and Bobby’s
right to trust shares under Article Five vest, giving them the authority to remove a trustee
of which they do not approve. 289
Bob did not breach his obligations by failing to disclose the Recapitalization, which
never occurred, and which would have had no impact on Plaintiffs’ limited rights under
the 1986 Trust in any event. As contemplated, the Recapitalization would have caused
NKS to issue additional stock pro rata so as not to impact proportional ownership of the
Company. It also would have involved Bob acting in his capacity as trustee solely to
approve the transaction by voting the 1986 Trust’s NKS stock, a right Plaintiffs do not
have. 290
Bob did not breach his obligations by failing to disclose his lifetime employment
contract, his wife’s death benefits, or Ruggiero’s employment contract. The NKS
employment contracts had no impact on Plaintiffs’ limited rights under the 1986 Trust, and
288
Id. Art. 5.
289
Plaintiffs support this argument with the Restatement’s contention that “a trustee’s duty
to provide information to beneficiaries may apply when there are . . . significant changes
in trustee circumstances, including changes in the identities, number, or roles of trustees.”
Pls.’ Post-Tr. Reply Br. at 13 (emphasis added and omitted) (quoting Restatement Third
§ 82 cmt. d). The Restatement offers no support for the assertion that a change in the
successor trustee sufficiently warrants notification where the trustee himself remains
unchanged, particularly where the successor trustee has no discretionary authority affecting
Plaintiffs.
290
See JX-667 at 5.
53
the 1986 Trust was not a party to any of these agreements. 291 To the extent these
agreements implicated any self-dealing by and among the directors and officers of NKS, it
had nothing to do with the 1986 Trust itself and is insufficient to trigger any information
rights Plaintiffs may have as presumptive remainder beneficiaries.
3. The BST Trust
Plaintiffs contend that Bob violated his duties as trustee of the BST Trust by
stripping the trust of its principal in self-dealing transactions and by failing to disclose
information about the trust’s transactions. Plaintiffs specifically allege that Bob breached
his fiduciary duties by loaning BST Trust funds to NKS, using BST Trust funds to purchase
the Florida Condo, and loaning BST Trust funds to Ty Air for the purchase of an
airplane. 292
Bob did not breach his fiduciary duties when loaning BST Trust funds to NKS. The
loan was an investment on behalf of the BST Trust that earned interest. 293 The BST Trust
authorized Bob to invest its principal, including “[t]o make loans” from those funds. 294
Although the interest payments on the loan were made by NKS directly to Bob, Bob is
entitled to trust income as the current income beneficiary. 295 Bob therefore did not breach
291
See JX-666; JX-977.
292
See Pls.’ Post-Tr. Opening Br. at 72–73.
293
Trial Tr. at 584:22–24, 586:4–7 (Bob).
294
BST Trust Art. 9 ¶¶ A(3), (11).
295
See 12 Del. C. § 61-406(a) (“An amount received as interest . . . must be allocated to
income . . . .”); Trial Tr. at 588:19–589:15 (Bob).
54
his fiduciary obligations under the BST Trust in issuing the loan to NKS or accepting the
interest payments.
By contrast, the Florida Condo and Ty Air transactions are problematic. Bob
admitted that he used funds from the BST Trust to purchase the Florida Condo in the trust’s
name for his personal benefit and not as an investment of trust principal, 296 that proceeds
from the sale of the Florida Condo “were rolled into the purchase of another property”
titled in Bob’s name, and that those proceeds are still absent from the BST Trust. 297 He
also admits that he did not inform Plaintiffs of these actions. 298
Bob likewise admitted that he caused the BST Trust to loan money to Ty Air, an
entity he owns and controls entirely, 299 and that he caused Ty Air to use the BST Trust’s
funds to purchase an airplane. 300 Although he filed a lien with the FAA in the name of the
BST Trust, he admits that he did not consider this transaction to be an investment on behalf
of the BST Trust. 301 Bob further admits that Ty Air has not repaid the loan and that he did
not inform Plaintiffs of the loan. 302
Bob breached his duties as trustee of the BST Trust in connection with both the
Florida Condo and the Ty Air transactions. As discussed above, Bob owed Plaintiffs a
296
Trial Tr. at 574:14–21 (Bob).
297
Id. at 575:14–576:4 (Bob).
298
Id. at 576:5–18 (Bob).
299
Id. at 577:16–19, 579:18–580:2 (Bob).
300
Id. at 578:15–24 (Bob).
301
Id. at 577:20–23, 579:10–14 (Bob).
302
Id. 580:17–23 (Bob).
55
duty to preserve the principal of the BST Trust for their future benefit and restricted Bob’s
ability to invade the trust principal. 303 While the BST Trust allows Bob to invade the trust
principal for his health, education, maintenance, and support, Bob does not contend that he
invaded the trust principal for these purposes in connection with the Florida Condo or Ty
Air transactions. While the BST Trust also allows Bob to invest trust principal, Bob does
not contend that the Florida Condo purchase or the Ty Air loan were investments; rather,
Bob used BST Trust principal to fund personal purchases. 304 Bob has thus failed to
preserve the BST Trust’s principal in breach of his duty as trustee. 305
Bob does not meaningfully dispute this conclusion. He instead argues that Plaintiffs
have not and will not suffer harm because Bob plans to restore all trust principal to the BST
Trust at the time of his death with proceeds from his life insurance policy. 306 Effectively,
Bob argues that he can ignore his obligations as trustee and the limitations imposed on his
ability to invade the trust principal if he promises to pay back the amounts taken upon his
death. Setting aside the fact that it would be difficult to enforce this promise against Bob
303
See supra notes 204–08 and accompanying text.
304
Trial Tr. at 574:14–21, 577:16–23 (Bob).
305
Bob also violated his duty of disclosure, which required him to disclose to Plaintiffs
information needed to protect their interests. Depleting the BST Trust of its principal
represents a material change that Bob was obligated to disclose. Defendants argue that
laches bars Plaintiffs’ claims regarding the NKS loan, which this decision finds did not
breach Bob’s duties in any event. See Dkt. 454, Def. Robert F. Tigani, Sr.’s and Nominal
Def. N.K.S. Distributors, Inc.’s Joint Answering Post-Trial Br. (“Defs.’ Post-Tr.
Answering Br.”) at 83–84. Defendants do not make a laches argument as to the Florida
Condo and Ty Air transactions, which Bob admits he did not disclose to Plaintiffs. See
Trial Tr. at 576:5–18, 580:21–581:6 (Bob).
306
Defs.’ Post-Tr. Answering Br. at 78–79; Trial Tr. at 652:1–6 (Bob).
56
when he is dead, the argument would result in a giant loophole to the limitations imposed
by the BST Trust. This loophole would do injustice to the interpretive principles guiding
this analysis and Delaware law generally. Both the Florida Condo transactions and Ty Air
loan invaded the trust principal in violation of Bob’s duties and constituted acts of self-
dealing.
As a remedy, Plaintiffs ask this court to remove Bob as trustee of the BST Trust and
to order damages equal to “the difference between the value of the beneficiary’s rights
before and after the breach.” 307 Delaware law allows this court to exercise its discretion in
refusing to remove a trustee, even in the face of breach. 308 Because the severity of
removing a settlor-appointed trustee warrants caution and care, the court may refuse to
exercise this discretion. 309 In this case, such extreme relief is not warranted. Bob was
honest and forthright at trial and showed no signs of bad faith or hostile treatment toward
Plaintiffs. And although this decision rejects his promise-to-repay argument, his intent to
repay the BST Trust’s principal through a life insurance policy does mitigate any finding
of bad faith associated with his breach.
As a remedy, Bob must pay back to the BST Trust the principal attributable to the
Florida Condo and Ty Air transactions. The Florida Condo was purchased in 1997 for
Pls.’ Post-Tr. Opening Br. at 89 (quoting Reed v. Del. Tr. Co., 1996 WL 255903, at *2
307
(Del. Ch. May 7, 1996)).
308
See 12 Del. C. § 3327 (“A trustee may be removed by the Court of Chancery . . . .”
(emphasis added)).
309
See Catell, 38 A.2d at 469–70.
57
$112,000. 310 The Ty Air loan was in the amount of $119,000. 311 It is possible that portions
of this amount were repaid; the record is underdeveloped. Because this decision finds that
Bob breached his fiduciary duties by engaging in these transactions, the lack of evidence
on this point is construed against him, and Bob is responsible for repaying the full $231,000
amount to the BST Trust.
Plaintiffs seek interest on the $231,000 on the theory that Bob had an obligation to
prudently invest the principle of the BST Trust, but Plaintiffs misunderstand their interests
and Bob’s obligations under the BST Trust for a few reasons. For starters, the BST Trust
modified Bob’s duty to prudently invest by allowing him to “retain all property in the
original form received.” 312
More importantly, any interest accrued from prudent investments would have
flowed to Bob as the current income beneficiary and not to Plaintiffs. By way of further
explanation, there is usually a tension between the interests of current income beneficiaries
and remainder beneficiaries. 313 The latter have a present interest in preserving the trust
principal for their future investments. 314 The former seek to maximize a trust’s income,
which can incentivize risky investment decisions. The duty to prudently invest strikes a
310
JX-912.
311
JX-37.
312
BST Trust Art. 9 ¶ A(1).
313
See generally Restatement Second § 181 cmt. c (noting that a trustee generally has a
duty to invest money held in trust “so that it will produce an income”).
314
See generally Equitable Tr. Co. v. Pennetto, 142 A. 827, 829–30 (Del. Ch. 1928)
(describing the common law policy consideration of protecting remaindermen, noting that
this protection justifies imposing liability on trustees for failure to preserve trust assets).
58
balance between these interests by allowing a trustee to invest the trust principal but
foreclosing a trustee from engaging in overly risky investment decisions that might
“endanger[] the integrity of the trust corpus.” 315 Bob’s failure to invest the trust principal
harmed only Bob as the current income beneficiary; any interest generated by investing the
principal would have benefited Bob exclusively. Plaintiffs are therefore not entitled to an
award of interest on the $231,000.
Accordingly, damages for Bob’s breach of the BST Trust are limited to $231,000 to
be paid to the BST Trust. 316
4. Attorneys’ Fees
Plaintiffs seek recovery of costs and expenses, including attorneys’ fees, under the
bad faith exception to the American Rule and pursuant to 12 Del. C. § 3584. 317
Plaintiffs are not entitled to attorneys’ fees under the bad faith exception. The
American rule provides that “each party is generally expected to pay its own attorneys’
fees.” 318 As a limited exception to the American rule, a court will shift fees for bad faith
315
DuPont v. Del. Tr. Co., 320 A.2d 694, 697 (Del. 1974) (citing Coulter, 200 A.2d at
448); see also Law, 753 A.2d at 448 (observing that A trustee is thus “expected to preserve
principal as their primary strategy for investment” to ensure its availability for remainder
beneficiaries).
316
Defendants argue that certain of Chris’ claims are barred by a release executed in the
2011 Settlement Agreement. Because none of the other Plaintiffs are a party to that release
but are entitled to relief as beneficiaries of the BST Trust, the remedies imposed on behalf
of the BST Trust are unaffected by the release.
317
Pls. Post-Tr. Opening Br. at 94; Pls. Post-Tr. Reply Br. at 54.
Shawe v. Elting, 157 A.3d 142, 149 (Del. 2017) (citing Montgomery Cellular Hldg.
318
Co. v. Dobler, 880 A.2d 206, 227 (Del. 2005)).
59
conduct “to deter abusive litigation and to protect the integrity of the judicial process.”319
“The bad faith exception is not lightly invoked,” 320 and nothing in the record supports a
finding that Defendants engaged in bad faith in this litigation.
Plaintiffs also seek attorneys’ fees under Section 3584, which allows for an award
of attorneys’ fees and costs in “a judicial proceeding involving a trust . . . as justice and
equity may require.” 321 Those fees may come either from the opposing party or from “the
trust that is the subject of the controversy.” 322 To determine the propriety of fee-shifting
in trust litigation, this court must balance “the motives to initiate litigation and the benefits
litigation confers on a trust.” 323 Where the court believes a party initiated litigation
“seeking to prematurely end or otherwise irrevocably alter a trust instrument solely in its
own pecuniary interest,” the negative effects of such motives “outweigh any incidental
trust benefit produced by litigation.” 324
As to the 1986 Trust, because this decision finds no breach of trust, Plaintiffs’
litigation produced no benefit and their request for statutory fee-shifting is denied.
Id. (citing Johnston v. Arbitrium (Cayman Islands) Handels AG, 720 A.2d 542, 545
319
(Del. 1998)); accord Montgomery, 880 A.2d at 227 (internal quotation marks omitted).
Ravenswood Inv. Co. v. Winmill & Co., 2014 WL 2445776, at *4 (Del. Ch. May 30,
320
2014) (quoting Beck v. Atl. Coast PLC, 868 A.2d 840, 851 (Del. Ch. 2005)).
321
12 Del. C. § 3584.
322
Id.
323
In re Unfunded Ins. Tr. Agreement of Capaldi, 870 A.2d 493, 498 (Del. 2005).
324
Id. (“Under these circumstances, the balancing of benefit and motive is properly within
the broad discretion accorded to the Vice Chancellor.”).
60
As to the BST Trust, this decision does find breach warranting some recovery of
attorney’s fees and expenses, although a fraction of what is requested commensurate to the
level of victory achieved by Plaintiffs. As a rough estimate, Plaintiffs were successful on
no more than 10% of their claims. In a generous gesture, this decision grants that 10% of
Plaintiffs’ total attorneys’ fees and expenses shall be paid from the BST Trust.
B. Fiduciary Duties to NKS
Plaintiffs claim that Bob mismanaged NKS. Any harm resulting from
mismanagement of NKS would be a derivative harm to the Company. 325 As established
by well-settled Delaware law, claims seeking to address harm to a corporation must be
brought on behalf of the corporation. 326 Because Plaintiffs are not stockholders of NKS
and do not purport to bring their claims on behalf of the Company, they do not have
standing to bring derivative claims.
III. CONCLUSION
For the foregoing reasons, judgment is entered in favor of Defendants as to all
claims related to the 1986 Trust and NKS. Regarding the BST Trust, judgment is entered
in favor of Plaintiffs only to the extent that Bob must return the BST Trust principal used
in the Florida Condo transactions and the Ty Air loan. Plaintiffs request for fee-shifting is
granted to a limited degree. The parties shall confer on a form of order implementing this
decision.
325
See, e.g., Kramer v. W. Pac. Indus., Inc., 546 A.2d 348, 353 (Del. 1988).
See, e.g., Cumming ex. rel. New Senior Inv. Grp., Inc. v. Edens, 2018 WL 992877, at *11
326
(Del. Ch. Feb. 20, 2018).
61