IMO DANIEL KLOIBER DYNASTY TRUST U/A/D DECEMBER 20, 2002
Submitted August 1, 2014.
[Copyrighted Material Omitted]
W. Donald Sparks, II, Chad M. Shandler, Beth Gansen Knight, RICHARDS, LAYTON & FINGER, PA, Wilmington, Delaware; Matthew P. D'Emilio, Jeremy D. Eicher, Jennifer E. Smith, COOCH & TAYLOR, P.A., Wilmington, Delaware; Attorneys for Petitioner PNC Delaware Trust Company.
Kevin G. Abrams, J. Peter Shindel, Jr., Matthew L. Miller, ABRAMS & BAYLISS LLP, Wilmington, Delaware; Attorneys for Petitioner William Nicholas Kloiber.
Grover C. Brown, Peter S. Gordon, William M. Kelleher, Joseph Bosik IV, Phillip A. Giordano, GORDON, FOURNARIS & MAMMARELLA, P.A., Wilmington, Delaware; Attorneys for Respondent Daniel Joseph Kloiber.
Michael A. Weidinger, Kevin M. Capuzzi, PINCKNEY, WEIDINGER, URBAN & JOYCE LLC, Wilmington, Delaware; Attorneys for Respondent Beth Ann Jenkins Kloiber.
LASTER, Vice Chancellor.
In the eyes of the law, respondents Daniel Joseph Kloiber and Beth Ann Jenkins Kloiber remain husband and wife. They have separated and are parties to a contested divorce proceeding pending in Kentucky before the Fayette Family Circuit Court (the " Kentucky Family Court" ). That case has been tried, and a decision is expected soon.
Until recently, Dan  was the primary beneficiary and Special Trustee of the Daniel Kloiber Dynasty Trust (the " Dynasty Trust" ). The Special Trustee has exclusive authority to instruct the trustee of the Dynasty Trust (the " Trustee" ) on making distributions and investing the Dynasty Trust's assets. The Trustee only can act to the extent instructed by the Special Trustee. Dan also served as the sole manager of three limited liability companies
whose member interests constituted assets of the Dynasty Trust. The Trustee cannot exercise control over the LLCs unless instructed by the Special Trustee.
During the divorce proceeding, the Kentucky Family Court issued status quo orders designed to prevent the parties from dissipating marital assets before the court could determine ownership and allocate the assets equitably. The status quo orders restricted Dan in his capacity as a human being over whom the Kentucky Family Court had personal jurisdiction, thereby restricting his actions in his other capacities, such as Special Trustee or sole manager of the LLCs.
On May 15, 2014, Dan resigned as Special Trustee, and on May 29, he resigned as sole manager of the LLCs. He appointed Nick as Special Trustee. Nick proceeded to take action contrary to the status quo orders. The Kentucky Family Court issued a rule to show cause why Nick should not be held in contempt (the " Rule to Show Cause" ).
PNC Delaware Trust Company (" PNC" ) is currently the Trustee. PNC and Nick have filed petitions seeking instructions and declarations from this court (the " PNC Petition" and the " Special Trustee Petition," respectively). They contend that the Kentucky Family Court has asserted jurisdiction improperly over the Trustee, the Special Trustee, and the Dynasty Trust and is requiring them to take actions contrary to the trust agreement and their fiduciary duties. They argue that this court has primary jurisdiction over the Dynasty Trust and must intervene to curb the perceived excesses of the Kentucky Family Court. Most pressingly, Nick seeks a temporary restraining order (" TRO" ) that would prevent Beth from seeking to enforce the status quo orders, including through the pending Rule to Show Cause. This decision denies Nick's application.
I. FACTUAL BACKGROUND
The facts for purposes of this decision are drawn from the pleadings, two motions to expedite, the motion for a TRO, a motion for a status quo order, the supporting exhibits to these documents, and representations made by counsel. What follows are not formal factual findings, but rather how the facts appear at this early stage.
A. The Dynasty Trust
On December 20, 2002, Glenn F. Kloiber settled the Dynasty Trust. Glenn is Dan's father. The instrument governing the Dynasty Trust is an irrevocable trust agreement dated December 20, 2002, between Glenn and PNC Bank, Delaware (the " Trust Agreement" or " TA" ). PNC is the successor to PNC Bank, Delaware.
The Trust Agreement selects Delaware as the original situs for the Dynasty Trust. TA § 10.2. As long as Delaware is the situs, the Trust Agreement calls for Delaware law to govern the " [t]he validity, construction and effect of the provisions" of the Dynasty Trust and for the Dynasty Trust to be " administered in accordance with the laws of Delaware." Id. § 10.1.
The Trust Agreement actually creates two trusts: an Exempt Trust and a Non-Exempt Trust. The division is an estate planning vehicle designed to minimize the amounts the federal government can collect under the generation-skipping transfer tax. The Exempt Trust holds assets that are exempt from the generation-skipping transfer tax. The Non-Exempt Trust holds all other assets. The distinction is not relevant to this decision, which will refer simply to the Dynasty Trust and the trust assets without distinguishing between the trusts. The Trust Agreement also contemplates the possible creation of
additional trusts. No one has identified any, so this decision assumes none exist.
The Trust Agreement awkwardly refers throughout to the " Grantor's son." Section 13.3 clarifies matters by providing that " [a]ll references in this Trust Agreement to the 'Grantor's son' are to DANIEL J. KLOIBER." Id. § 13.3. The Trust Agreement also awkwardly refers throughout to the " children of the Grantor's son" and the " Grantor's son's children." Section 13.5 helpfully states that these phrases refer to Dan's four sons and identifies them by name. Id. § 13.5.
The Trust Agreement takes a noticeably different approach with the term " wife of the Grantor's son," which also appears throughout the Trust Agreement. Although the Dynasty Trust was created and funded while Dan and Beth were married, the Trust Agreement does not equate " wife of the Grantor's son" with Beth. Instead, Section 13.4 defines " wife of the Grantor's son" in the following transitory terms:
All references in this Trust Agreement to the " wife of the Grantor's son" or to the " Grantor's son's wife" are, during the Grantor's son's lifetime, to the person to whom the Grantor's son is legally married and with whom the Grantor's son is then cohabiting or, subsequent to the Grantor's son's death, the person to whom the Grantor's son was legally married on the date of his death. The Grantor's son is currently legally married to BETH J. KLOIBER.
Id. § 13.4. Beth is thus never defined as the " wife of the Grantor's son." The Trust Agreement simply observes that when the Trust Agreement was executed, Dan was " currently legally married to Beth." Dan, Nick, and PNC have taken the position that Beth only qualified as the " wife of the Grantor's son" as long as she was both legally married to and cohabiting with Dan. As soon as she and Dan stopped cohabiting, Beth stopped being the " wife of the Grantor's son." If the Kentucky Family Court grants Dan and Beth a divorce, that will reinforce Beth's non-wife status. Except as the " wife of the Grantor's son," Beth has no rights under the Dynasty Trust.
Dan is the primary beneficiary of the Dynasty Trust. During each calendar year, he has the right to withdraw up to five percent of the net fair market value of the trust estate. Id. § 1.1.1. He also has special powers of appointment, exercisable during his lifetime or in his will, that permit him to appoint the principal of the trust estate to the " wife of the Grantor's son," to what are essentially Dan's blood relations (his children and their issue, or his siblings and their issue), or to a charitable organization. Id. § § 1.1.8, 1.1.9. In addition, the Trustee " shall pay to or apply for [Dan's] benefit" such amounts as " shall be necessary or advisable from time to time for [Dan's] health, education, support and maintenance." Id. § 1.1.3. The Trustee also may use funds from the trust estate to provide and maintain a personal residence for Dan. Id. § 1.1.7.
The " wife of the Grantor's son" is also a beneficiary of the Dynasty Trust. During Dan's lifetime, the Trustee " shall pay to or apply for [her] benefit" such amounts as " shall be necessary or advisable from time to time for [her] health, education, support, and maintenance." Id. § 1.1.4. After Dan's death, and to the extent he did not exercise his testamentary power of appointment, the " wife of the Grantor's son" receives rights similar to those held by Dan during his lifetime, including the five percent withdrawal right, funds for a personal residence, and the special powers of appointment. Id. § 1.1.10.
Dan's children and their children are also beneficiaries. During Dan's lifetime
and, if she lives longer than Dan, the lifetime of the " wife of the Grantor's son," the Trustee " shall pay to or apply for [their] benefit" such amounts as " shall be necessary or advisable from time to time for [their] health and education." Id. § 1.1.5. After the death of whoever was the " wife of the Grantor's son" at the time of Dan's death, and to the extent the " wife of the Grantor's son" did not exercise her testamentary power of appointment, the Trust Agreement provides for the remaining trust estate to be subdivided into additional trusts and distributed to Dan's descendants in prescribed amounts at prescribed times. Id. § 1.1.10(i).
B. The Roles Of The Trustee, Special Trustee, Advisory Committee, Holder, And Trust Protector
The Trust Agreement establishes a series of roles, each with specific powers. The roles include the Trustee, the Special Trustee, the Advisory Committee, the Holder, and the Trust Protector.
Nick contends in his petition that PNC " has very broad powers with respect to the administration of the Trust." Special Trustee Petition ¶ 3. This is true, after a fashion. The Dynasty Trust is a directed trust. This means that although Article FOURTH of the Trust Agreement appears to give the Trustee very broad powers, the Trustee cannot actually exercise any of those powers unless instructed by someone in one of the other roles, and then only to the extent instructed. Thus, under Section 4.6, the Trustee is entitled to exercise all investment and management powers granted to it " only upon the written direction of the Special Trustee." TA § 4.6. When exercising its authority as directed by the Special Trustee, the Trustee " shall be under no duty to inquire into or monitor, and shall have no liability of any kind with respect to, the investment of the trust assets or the directions of the Special Trustee or the Advisory Committee." Id. Likewise, under Section 4.7, the Trustee has the power to own Special Holdings, which are defined as shares of non-public entities, but the Trustee is only permitted to act " with respect to the retention, voting, purchase, sale, exchange, tender, and other transactions affecting the ownership of Special Holdings" if it has received " the written direction of the Special Trustee." Id. § 4.7. The same is true for discretionary distributions. Despite nominally having the power to make distributions for the benefit of Dan and other beneficiaries, Section 4.8 states that " the Trustee shall not make any discretionary distributions (including distributions made pursuant to a standard) . . . or exercise any power of the Trustee to allow the use or consumption of any asset held as a part of the trust estate . . . except upon the written direction of the Special Trustee." Id. § 4.8.
The Trust Agreement removes from the Trustee all fiduciary duties that a trustee traditionally would owe at common law. It waives the duty of loyalty, the rule against self-dealing, and the " prudent person" standard that ordinarily would apply. See id. § 4.3. It also waives duties of disclosure that the Trustee otherwise would owe. See id. § § 4.1, 5.11. The Trust Agreement nevertheless purports to confirm that " [e]very act done, power exercised or obligation assumed by the Trustee pursuant to the provisions of this Agreement shall be held to be done, exercised or assumed, as the case may be, by the Trustee acting in a fiduciary capacity and not otherwise." Id. § 4.4.
This usage of the term " fiduciary capacity" is a radical one that anyone familiar with the common law concept would have difficulty recognizing. Rather than meaning that the Trustee is actually acting as a fiduciary on behalf of a cestui que trust,
the Trust Agreement conceives of this role as a liability-limiting device. Thus, after stressing the Trustee's " fiduciary capacity," Section 4.4 of the Trust Agreement continues by identifying the following implication of this term, at least as the drafters of the Trust Agreement conceived it:
[E]very person, firm, corporation or other entity contracting or otherwise dealing with the Trustee shall look only to the funds and property of the trust estate for payment under such contract or payment of any money that may become due or payable under any obligation arising under this Agreement, in whole or in part, and the Trustee shall not be individually liable therefor even though the Trustee did not exempt himself, herself or itself from individual liability when entering into any contract, obligation or transaction in connection with or growing out of the trust estate.
Id.; see also id. § 4.3 (explaining that the Trustee " shall exercise all of the Trustee's powers and authority under this Agreement solely in a fiduciary capacity and shall only be liable for any loss incurred by any trust hereunder caused by the Trustee's own willful misconduct proved by clear and convincing evidence in the court then having primary jurisdiction over the trust" ).
Section 5.9 of the Trust Agreement, entitled " Duties of Trustee," sets forth the actual duties that the Trustee is expected to carry out without explicit instructions from someone acting in one of the other roles. It states that " [i]n addition to the Trustee's other duties hereunder," which have been summarized above, the Trustee shall have the following " exclusive duties" :
(i) to maintain or arrange for custody, in the jurisdiction serving as situs of the trust, of some or all of the trust property; (ii) to maintain records for the trust on an exclusive or nonexclusive basis; and (iii) to prepare or arrange for the preparation of fiduciary income tax returns for the trust.
Id. § 5.9. That is all the Trustee actually does.
The standard of care that applies to the Trustee further emphasizes its limited role. Section 5.11 of the Trust Agreement states:
The Trustee shall be liable hereunder only for the Trustee's willful misconduct proved by clear and convincing evidence in the court then having primary jurisdiction over the trust. The Trustee shall not be personally liable for acts of any other fiduciary acting herein, nor for making any delegation that is authorized under this Agreement, nor for any action taken without the Trustee's express agreement, nor for any failure to act, absent willful misconduct. The Trustee shall not be liable for relying absolutely on (i) any apparently valid documents and certifications including, but not limited to, tax reports and other tax information provided to the Trustee by any entity in which the trust estate holds an ownership interest; and (ii) the opinions of counsel or any accountant to any trust.
Id. § 5.11.
The Special Trustee stands at the other end of the power spectrum. The Trust Agreement named Dan as the Special Trustee and gave him the power to appoint a successor or substitute Special Trustee. Id. § 8.1. As noted, the Trustee cannot exercise the powers it nominally holds except at the direction of the Special Trustee. Article NINTH reiterates and reinforces the allocation of authority by granting the Special Trustee the following powers:
o Sole authority to direct the Trustee with respect to investment of the trust estate,
id. § 9.1;
o Sole authority to direct the Trustee with respect to Special Holdings,
id. § 9.2;
o Sole authority to direct the Trustee with respect to discretionary distributions,
id. § 9.3; and
o Sole authority to remove and replace the Trustee, id. § 9.4.
The Special Trustee can remove the Trustee " at any time, without or without cause."
Id. § 5.2.
The Advisory Committee is the backstop to the Special Trustee. The Trust Agreement names Dan's brother and his two brothers-in-law as the members of the Advisory Committee. Id. § 7.1. It has the same powers to direct, remove, and replace the Trustee as the Special Trustee. See id. § § 7.2-7.5. Language found in more specific sections of the Trust Agreement indicates that the Advisory Committee can exercise its powers only if there is no Special Trustee. See id. § § 4.6-4.8. After Dan's death, the Advisory Committee gains the power to appoint a successor Trust Protector and to remove and replace any successor Trust Protector. Id. § 7.6.
The " Holder" is a singular term used to refer to a group currently comprising Dan's three siblings and their spouses. Id. § 6.1. Although it looks and sounds like a committee, and although the persons named as the Holder could act jointly, any one person having Holder status can exercise the Holder's authority individually. Most importantly, the Holder has a special power to appoint as much of the principal of the trust estate as the Holder deems fit at any time for Dan's benefit, the benefit of his issue, or the benefit of the " wife of the Grantor's son." Id. Generally speaking, the Holder feature means that if Dan asks, and if any one of his three siblings or their spouses agrees, then Dan can access the principal of the trust estate.
The Trust Protector has limited and specific powers. The Trust Agreement identifies one of Dan's brothers-in-law as the initial Trust Protector and gives Dan the power to appoint his successor. Id. § 5.13. The Trust Protector can confer " additional powers and authority" on the Trustee to the extent " necessary or desirable, in the sole judgment of the Trust Protector, for prompt and effective administration of the trusts" and has the power to " amend any portion of this Agreement" for that purpose, except for certain enumerated provisions inserted for the protection of the Trustee. Id. § 5.12. The Trust Protector also has the power to re-constitute the Advisory Committee if it ever has no members. Id. § 7.1. Perhaps more significantly, the Trust Protector can change the situs of the Dynasty Trust by transferring the Dynasty Trust to a new jurisdiction and electing to have the Dynasty Trust " administered exclusively under the laws of . . . the jurisdiction to which it has been transferred." Id. § 10.2. Technically the Trustee must consent to the change of situs, but that requirement can be sidestepped by having the Special Trustee remove the existing Trustee and appoint a Trustee in the new jurisdiction.
C. The Funding Of The Dynasty Trust
Glenn initially funded the Dynasty Trust in 2002 with approximately $15,000. The Trust Agreement provides that any individual can contribute property to the Dynasty Trust. TA § 14.1. In early 2003, Dan sold 99.45% of his shares of Exstream Software, Inc. (" Exstream" ) to the Dynasty Trust for an unsecured promissory note with a face amount of $6 million.
In June 2007, the Dynasty Trust sold approximately 80% of its Exstream holdings to American Capital Strategies, Ltd. for approximately $250 million. In March 2008, the Dynasty Trust sold its remaining holdings in Exstream to Hewlett-Packard Company for approximately $60 million.
The trust estate currently consists of cash, marketable securities, and interests in closely held entities. The closely held entities include limited liability companies in which the Dynasty Trust owns the entire member interest. The three principal entities appear to be Kloiber Investments, LLC, Kloiber Holdings, LLC, and Kloiber Real Estate Holdings, LLC, and until recently, Dan served as the sole manager of those LLCs. Under the Trust Agreement, the LLCs appear to constitute " Special Holdings" over which the Trustee cannot exercise any control without specific instructions from the Special Trustee. The principal entities appear in turn to own stakes in other entities. The record before this court does not identify all of the entities or reveal the nature or extent of the Dynasty Trust's ownership.
D. The Kentucky Proceedings
Dan and Beth separated in April 2010, and Dan filed for divorce on December 9, 2010 (the " Kentucky Divorce Proceeding" ). Dan took the position that when the couple separated, Beth stopped qualifying as a beneficiary under the Trust Agreement because she was no longer the " wife of the Grantor's son" as defined in the Trust Agreement. Beth countered that the assets of the Dynasty Trust were ...