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J.P. Morgan Trust Company of Delaware v. Fisher

Court of Chancery of Delaware

December 5, 2019


          Date Submitted: November 19, 2019

          Richard L. Renck, Oderah C. Nwaeze, Jocelyn M. Borowsky, DUANE MORRIS LLP, Wilmington, Delaware; Counsel for Petitioner.

          Jeffrey S. Goddess, ROSENTHAL, MONHAIT & GODDESS, P.A., Wilmington, Delaware; Michael H. Friedman, KURZMAN EISENBERG CORBIN & LEVER, LLP, White Plains, New York; Counsel for Hadley Fisher.

          Christopher P. Simon, Kevin S. Mann, CROSS & SIMON LLC, Guardian Ad Litem for Michael Fisher and the interests of other minor and unborn issue of Hadley Fisher.


          LASTER, V.C.

         A trustee sued the trust's beneficiaries seeking a broad declaration that the trustee had acted properly in all respects. During discovery, the trustee invoked the attorney-client privilege for otherwise relevant and responsive documents. The beneficiaries moved to compel production, relying on Riggs National Bank of Washington, D.C. v. Zimmer, 355 A.2d 709 (Del. Ch. 1976).

         The beneficiaries have made the showing necessary under Riggs to obtain production. Contrary to the trustee's position, Riggs remains good law and has not been abrogated by statute. The motion to compel is therefore granted.


         The facts are drawn from the parties' submissions in connection with the motion to compel. Given the procedural posture, this decision does not make findings of fact. It rather describes how matters appear at this stage of the case for purposes of this ruling.

         A. The Creation Of The Trust

         In February 2006, with his health deteriorating, Richard Fisher entered into an option agreement with a newly formed Delaware limited liability company named RLF Assets, LLC (the "Company"). Upon Richard's death, the option would give the Company the right to purchase Richard's ownership interest in Fisher Brothers, a real estate business valued in the hundreds of millions of dollars (the "Fisher Brothers Option").[1]

         The members of the Company were Richard's three children: Winston, Hadley, and Alexandra. Richard gave Winston a full member interest that carried both voting and economic rights. The LLC agreement designated Winston as the Managing Member of the Company with sole authority to conduct its business and affairs. Richard created trusts for Hadley and Alexandra. Each trust received a special member interest that did not carry any voting rights and initially did not have any economic rights. As special members, the trusts did not have any authority over the Company's business or affairs.

         If Winston caused the Company to exercise the Fisher Brothers Option, then the Company would begin making distributions to the special members. During each of the first ten years after the exercise of the Fisher Brothers Option, the Company would distribute at least $600, 000 to each special member and, if sufficient net cash flow was available, up to $1, 200, 000. Beginning in the eleventh year after exercise, the minimum distribution would increase to $700, 000 and the maximum to $1, 400, 000. Any remaining net cash flow would go to Winston.

         The exercise of the Fisher Brothers Option would also give the Company the right to acquire the special member interests after ten years (the "Special Member Buyout"). The LLC agreement set the purchase price for each special member interest at $10 million.[2]

         Soon after executing these documents, Richard died. Shortly thereafter, Winston exercised the Fisher Brothers Option.

         B. J.P. Morgan Becomes Successor Trustee.

         After Richard's death, disputes arose among his widow, his children, and the administrators of his estate. In March 2010, the parties settled. As part of the settlement, the original trustees for Hadley's trust resigned. Petitioner J.P. Morgan Trust Company of Delaware took over as the successor trustee.

         From the outset of its service as trustee, J.P. Morgan hoped to recast Hadley's trust as a directed trust in which Hadley would act as the investment advisor and J.P. Morgan's duties would be limited to following his directives and performing administrative functions. Hadley never agreed to the amendments. As a result, J.P. Morgan has all of the duties of a traditional common law trustee, except to the extent modified by the terms of the trust agreement and Delaware statutory law.

         C. The Special Member Buyout

         In May 2016, Winston initiated the process for the Special Member Buyout. On behalf of Hadley's trust, J.P. Morgan engaged in discussions with Winston. An attorney from Duane Morris LLP represented the trust and conducted the discussions.

         In October 2016, Winston offered two alternatives to the contractual mechanism: either a cash purchase of the trust's special member interest for $11.5 million or an exchange of the special member interest for a pool of securities that Winston would select. Both would generate a significant tax burden for the trust. Hadley asked J.P. Morgan to propose a third alternative: a tax-advantaged distribution of real estate that would be held through a special purpose entity. In an internal email, J.P. Morgan described that alternative as "not something that is acceptable to us" and declined to pursue it. Dkt. 80 Ex. I at '375.

         On November 1, 2016, Hadley threatened to sue J.P. Morgan if it accepted either of Winston's proposals. See id. Ex. J ("He essentially said he will sue if we take one of the deals on the table. He wants us to arbitrate [against Winston]."). Later that month, J.P. Morgan accepted the cash proposal.

         D. This Litigation

         On November 4, 2016, three days after accepting Winston's proposal, J.P. Morgan filed this action against Hadley and his minor son, Michael Fisher, who is a contingent beneficiary of Hadley's trust. J.P. Morgan's petition seeks an expansive declaratory judgment that it complied with its legal and equitable duties in all respects:

Petitioner [J.P. Morgan] therefore seeks a declaration from this Court that the Petitioner did not abuse its discretion or otherwise breach its duty with respect to any of the conduct described in this Petition, including, but not limited to, its acts or omissions with respect to the Buyout, or with respect to its decision not to pursue a claim against Winston or any of the Co-Trustees for their acts or omissions related to the Estate Settlement, RLF Agreement or ratification of the Operating Agreement including the Buyout Clause.

Dkt. 10 ¶ 64.

         Hadley contends that J.P. Morgan should have disputed Winston's ability to trigger the Special Member Buyout. Hadley maintains that Winston faced a conflict of interest because he was both a partner in Fisher Brothers and the sole manager of the Company. Hadley argues that in his latter capacity, Winston owed fiduciary duties to the Company and all of its members, including Hadley's trust. Hadley believes that a loyal trustee would have raised Winston's conflict, disputed whether the Special Member Buyout complied with the Company's LLC agreement, and potentially commenced an arbitration against Winston under the LLC agreement.

         Hadley believes that J.P. Morgan gave in to Winston and accepted the cash alternative because of its own conflicts of interest. First, J.P. Morgan had financial incentives to cooperate with Winston, because he and Fisher Brothers provide the bank with substantial revenue. Second, J.P. Morgan had long wanted to exit from its role as a common law trustee responsible for a non-diversified interest in a closely held business, and the cash alternative would achieve that goal. Third, the cash alternative would generate a pool of investable funds that J.P. Morgan could manage, creating a stream of future revenue for the bank.

In discovery, Hadley has developed some evidence to support his theory:
• In a memorandum from April 2010 addressing whether J.P. Morgan should accept the role of trustee, J.P. Morgan noted that although the fee for Hadley's trust was only $7, 500 annually, "[t]he Executive Wealth Group expects to earn around $1, 000, 000 from the Fisher family relationship in 2010." Dkt. 80 Ex. A at '124.
• In an October 2012 email exchange in which J.P. Morgan considered withdrawing from its role as trustee, a J.P. Morgan representative noted, "The critical decision is if [the relationship manager] thinks JPM resignation will jeopardize his ...

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