First Union Nat. Bank v. Pictet Overseas Trust

• Decision Date: 09 December 2003
• Docket Number: No. 02-2467.,02-2467.
• Parties: FIRST UNION NATIONAL BANK, as Trustee of the Southeast Timber Leasing Statutory Trust, Plaintiff, v. PICTET OVERSEAS TRUST CORP., LTD., as Trustee of the Henrietta Y. Jones Trust, Defendant. Pictet Overseas Trust Corp., Ltd., as Trustee of the Henrietta Y. Jones Trust, Counter Claimant/Appellant, v. First Union National Bank, as Trustee of the Southeast Timber Leasing Statutory Trust, Counter Defendant/Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

351 F.3d 810

FIRST UNION NATIONAL BANK, as Trustee of the Southeast Timber Leasing Statutory Trust, Plaintiff, v. PICTET OVERSEAS TRUST CORP., LTD., as Trustee of the Henrietta Y. Jones Trust, Defendant.

Pictet Overseas Trust Corp., Ltd., as Trustee of the Henrietta Y. Jones Trust, Counter Claimant/Appellant, v. First Union National Bank, as Trustee of the Southeast Timber Leasing Statutory Trust, Counter Defendant/Appellee.

No. 02-2467.

United States Court of Appeals, Eighth Circuit.

Submitted: April 14, 2003.

Filed: December 9, 2003.

Philip E. Kaplan, argued, Little Rock, AR, for appellant.

Teresa Maria Wineland, argued, El Dorado, AR, for appellee.

Before WOLLMAN, FAGG, and RILEY, Circuit Judges.

WOLLMAN, Circuit Judge.

Pictet Overseas Trust Corporation, Ltd., (Pictet), trustee of the Henrietta Y. Jones Trust (Jones Trust), appeals the district court's ruling that Pictet's counterclaims for breach of fiduciary duty and conversion were moot in light of the earlier entry of judgment in Pictet's favor under Arkansas statutes furnishing appraisal rights to dissenting corporate shareholders. We reverse and remand for further proceedings.

I.

The Jones Trust owned approximately six percent of First Land and Timber Corporation (FLT) when FLT proposed a corporate merger structured to shift ownership of FLT to an acquisition company. The acquisition company was itself owned by a trust administered by the Appellee, First Union National Bank (First Union).¹ The merger agreement provided that FLT shareholders would receive $65,000,000 total consideration, or about $631.00 per share, for relinquishing FLT ownership. The total consideration was subject to certain adjustments and a 5% holdback escrowed to pay claims and expenses incidental to the merger. Any remaining holdback was scheduled for distribution to non-dissenting former FLT shareholders in two payments after the merger, one on December 31, 1998; the second on December 31, 1999.

Under the proposed merger terms, the Jones Trust would have received approximately $3.7 million for its 6,000 FLT shares. Not satisfied with this figure, Pictet dissented from the proposed merger. It delivered written notice of dissent to FLT and voted against the proposed transaction.

Over Pictet's dissent, a majority of shareholders approved the merger, which occurred on June 24, 1998. Shortly thereafter, FLT merged yet again. Its assets ultimately became part of the Southeast Timber Leasing Statutory Trust (Southeast Trust), a business trust organized under Connecticut law, see Conn. Gen.Stat. Ann. §§ 34-500 et seq. (West 2003), and administered by First Union as trustee for the benefit of First American Acquisitions, Inc. (First American).

After the mergers, non-dissenting former FLT shareholders received payment for 95% of their pro-rata share of the merger consideration. The remaining 5% holdback, an amount slightly over $3 million, was held in escrow by Sun Trust Bank in Atlanta, Georgia. First Union also deposited $3.7 million, an amount equal to Pictet's pro-rata share of the merger consideration at the merger agreement price, into a passbook account with Golden Gate Bank in San Francisco, California.

On July 1, 1998, First Union notified Pictet that shareholders had approved the merger and advised Pictet of the procedures available for demanding the value of its shares. By letter dated July 13, 1998, Pictet demanded payment and, three days later, deposited its share certificates with First Union. Although Arkansas law mandated that Pictet receive payment for the estimated fair value of its dissenting shares, see Ark.Code. Ann. § 4-27-1325 (Michie 2001), First Union did not pay Pictet, so Pictet again demanded payment on October 30, 1998, estimating the fair value of its shares at approximately $5.1 million plus interest.

First Union did not immediately respond, and meanwhile, on December 31, 1998, 2.5% of the holdback in Sun Trust Bank was distributed to non-dissenting shareholders. A week later, First Union offered to settle Pictet's claim on the same terms provided in the original merger agreement (i.e., it offered to tender 97.5% of $3.7 million to Pictet plus interest, and stated that it would tender the remaining 2.5% holdback on December 30, 1999, less deductions for claims under the merger agreement). Pictet rejected the offer and reiterated its demand for $5.1 million plus interest.

On March 15, 1999, First Union filed suit against Pictet in the Chancery Court of Union County, Arkansas, to determine the fair value of Pictet's shares. Pictet then removed the case to federal district court based upon diversity and filed a counterclaim alleging that First Union's untimely lawsuit fixed the value of Pictet's shares at $5.1 million plus interest. See Ark.Code. Ann. § 4-27-1325 (Michie 2001) (providing that corporation's failure to seek judicial appraisal within sixty days obligates corporation to pay dissenter "the amount demanded"). While the claims were pending, the remaining holdback monies held in Sun Trust Bank were distributed to non-dissenting shareholders. In addition, at First American's directions First Union financed legal expenses and some of First American's obligations to third parties out of the funds in Golden Gate Bank.

On May 8, 2000, and pursuant to a consent order, First Union tendered $3.7 million to Pictet from the Golden Gate Bank account, an amount that included no interest. First Union also agreed not to disburse any additional funds from the Golden Gate Bank account while litigation with Pictet was pending. That June, however, Pictet discovered that only about $300,000 remained in the corpus of Southeast Trust, most of it in the Golden Gate Bank account. Pictet then amended its counterclaims, adding claims that First Union had converted funds from Southeast Trust and breached a fiduciary duty to Pictet by disbursing Southeast Trust's monies to amounts below those necessary to fully compensate Pictet.

Pictet sought summary judgment on its statutory valuation claim, and First Union sought summary judgment on Pictet's claims for breach of fiduciary duty and conversion. Noting First Union's delay and its "gross failure to comply with statutory procedures," the district court granted Pictet's motion for summary judgment and awarded Pictet $5.1 million plus interest and costs from the assets of Southeast Trust. In a second order, the district court determined the appropriate interest due and dismissed Pictet's remaining counterclaims as moot. Notwithstanding its observation that First Union's delay in paying Pictet "rises towards conversion," the district court concluded that any claim of conversion "evaporates for lack of damage in the face of the interest awarded pursuant to the statutory requirement." Dist. Ct. Order of March 15, 2002, at 1. The district court also found that First Union "owed a duty to Pictet," but concluded that "any damage in excess of the interest awarded [on Pictet's statutory valuation claim] above would be duplicative and contrary to equitable principles." Id.

The district court denied Pictet's motion for reconsideration of the dismissal of its remaining counterclaims, stating that the only parties to the action were Pictet, in its representative capacity for the Jones Trust, and First Union, in its representative capacity for Southeast Trust. The court stated: "To the extent Pictet continues to urge that First Union Bank breached its fiduciary duty to [Jones Trust], Pictet is seen to urge that First Union standing in its own shoes has injured [Jones Trust]. That is not the subject of this action because those are not the parties to this action." Dist. Ct. Order of April 24, 2002, at 1 (emphasis in original).

II.

Neither party challenges the district court's judgment that Southeast Trust must pay Pictet $5.1 million plus interest, so the only issue before us is the district court's disposition of Pictet's counterclaims for breach of fiduciary duty and conversion. The district court's denial of these claims as moot is a matter we review de novo. Midwest Farmworker Employment and Training, Inc. v. United States Dept. of Labor, 200 F.3d 1198, 1201 (8th Cir.2000).

The district court's mootness finding turns on its conclusion about the appropriate parties to this lawsuit. If First Union is a party only as a representative of Southeast Trust, as the district court believed, then a damages award on Pictet's claims for breach of fiduciary duty and conversion might indeed duplicate the judgment on Pictet's statutory valuation claim.² Seizing on this observation, First Union now contends that Pictet never sued First Union "individually," but only in its "official" or representative capacity as trustee of Southeast Trust. We disagree.

Historically, a trust estate was not a juridical entity, hence the observation that "a suit by strangers to the trust must be brought against the trustees thereof individually and not against the fictional entity." Yonce v. Miners Mem'l Hosp. Ass'n, 161 F.Supp. 178, 188 (W.D.Va.1958); Richardson v. Klaesson, 210 F.3d 811, 813 (8th Cir.2000). Moreover, at common law, trustees were personally liable for contracts entered and torts committed during administration of the trust, and the important question — at least from the trustee's perspective — was the ability to receive indemnification from trust assets. See Richardson, 210 F.3d at 813 (noting that "the usual rule, absent a statute, is that a trust is not liable for the torts of its trustees, even torts committed in the course of the trust's administration."); Betts v. Hackathorn, 159 Ark. 621, 252 S.W. 602, 604 (1923) (finding that the trustee's personal liability is the creditor's guarantee); Restatement (Second) of Trusts §§ 261, 265 (1959).

Over time, some courts relaxed these rules and permitted suits against trustees in a "representative capacity" to reach trust assets directly. See Jerome J. Curtis, The Transmogrification...