Nakahara v. NS 1991 AMERICAN TRUST

• Decision Date: 20 March 1998
• Docket Number: C.A. No. 15905.
• Citation: 739 A.2d 770
• Parties: Kiiko NAKAHARA and Jean-Paul Renoir, Plaintiffs, v. The NS 1991 AMERICAN TRUST, a Delaware business trust, Defendant, v. Nihon Sangyo Kabushiki Kaisha, a Japanese corporation, Defendant-Intervenor.
• Court: Court of Chancery of Delaware

739 A.2d 770

Kiiko NAKAHARA and Jean-Paul Renoir, Plaintiffs, v. The NS 1991 AMERICAN TRUST, a Delaware business trust, Defendant, v. Nihon Sangyo Kabushiki Kaisha, a Japanese corporation, Defendant-Intervenor.

C.A. No. 15905.

Court of Chancery of Delaware, New Castle County.

Submitted: November 25, 1997.

Decided: March 20, 1998.

Edward M. McNally, Richard D. Kirk, and Nancy R. Walsh, of Morris, James, Hitchens & Williams, Wilmington, Delaware, for plaintiffs.

Stephen E. Jenkins, of Ashby & Geddes, Wilmington, Delaware, for defendant.

David S. Eagle, of Klehr, Harrison, Harvey, Branzburg & Ellers LLP, Wilmington, Delaware; and Abbe F. Fletman, and Glen A. Weiner, of Klehr, Harrison, Harvey, Branzburg & Ellers LLP, Philadelphia, Pennsylvania, for defendant-intervenor.

OPINION

CHANDLER, Chancellor.

Plaintiffs are managing trustees of a Delaware business trust seeking advance indemnification from the trust under an advancement provision in the trust's governing instrument. The trust agrees that plaintiffs are entitled to advancement. A beneficiary of the trust's parent trust objects to the advancement on the grounds that the Delaware Business Trust Act does not permit business trusts to advance litigation expenses to trustees and, even so, plaintiffs have not satisfied the pre-conditions set forth in the business trust's advancement provision. I find that Delaware's Business Trust Act does permit business trusts to make advancements to their trustees. I further find that plaintiffs have satisfied all prerequisites imposed by the advancement provision of the American Trust's governing instrument. Because I find that plaintiffs suffer from unclean hands, however, I cannot authorize the payment of these advancements in this case.

This is my decision on defendant NSKK's motion for partial summary judgment as well as my decision on the merits of the case following the trial held on November 25, 1997. Part I of this decision reviews the factual and procedural history of the case. Part II contains my discussion and decision on the partial summary judgment motion. Finally, Part III contains my discussion of and decision on the merits of the case.

I. FACTUAL AND PROCEDURAL HISTORY

Plaintiffs Kiiko Nakahara ("Nakahara") and her husband, Jean-Paul Renoir ("Renoir") (collectively, "plaintiffs"), are the managing trustees of defendant The NS 1991 American Trust (the "American Trust"), a Delaware business trust formed in November 1991. Nakahara and Renoir are named as two of several defendants in two actions pending in the Supreme Court of the State of New York, New York County concerning, among other things, rightful ownership of the Empire State Building in New York City.¹ Pursuant to an indemnification provision in the American Trust's Declaration of Trust,² plaintiffs — as managing trustees of the American Trust — seek, via this Court of Chancery action, advancement of their litigation expenses in connection with defending the two New York lawsuits.

Central to the NSKK litigation is the question whether Hideki Yokoi ("Yokoi"), principal shareholder of the Japanese corporation Nihon Sangyo Kabushiki Kaisha ("NSKK"), gave Nakahara, his daughter and director of NSKK, $40 million to purchase the Empire State Building for NSKK as part of a business transaction or whether the $40 million was simply a gift from father to daughter. NSKK accuses Nakahara of breach of fiduciary duty, alleging that she improperly used a power of attorney to fraudulently transfer property belonging to NSKK into an offshore trust system of which Nakahara is the principal beneficiary.³ The NSKK litigation also asserts claims against Renoir for his participation in this "scheme to defraud" NSKK.

As of 1993, the principal asset of this offshore trust system was an interest in the Empire State Building.⁴ On October 27, 1993, via a deed executed by Renoir as managing trustee, the American Trust transferred its interest in the Empire State Building to its wholly-owned subsidiary, the NS 1999 American Company Ltd. (the "American Company"), of which Renoir is the president.⁵ Thereafter, the American Company joined with Trump Inc. to form Trump Empire State Partners, controlled by Nakahara, Renoir and Donald Trump.⁶ The American Company transferred its interest in the Empire State Building to this general partnership on or about June 28, 1994.⁷ These transfers, ultimately to Trump Empire State Partners, are attacked in the NSKK litigation and are central to the dispute in the Empire State litigation.

The Empire State litigation is brought by the owner of the long-term lease on the Empire State Building against plaintiffs, Trump, NSKK and certain entities within the offshore trust system. That litigation specifically attacks the offshore trust system's transfer of the Empire State Building interest into Trump Empire State Partners. It also alleges that the subsequent actions taken by Trump Empire State Partners in its ownership capacity constitute interference with and violations of the leaseholders' rights.

As previously noted, the Isle of Man Trust indirectly owns the American Trust.⁸ The beneficiaries of the Isle of Man Trust are NSKK and Nakahara.⁹ In the NSKK litigation, NSKK alleges that the offshore trust system should never have been created and that NSKK should be the owner of the Empire State Building or at least should be the sole beneficiary of the Isle of Man Trust.

This dispute between plaintiffs and NSKK regarding the rightful beneficiary of the Isle of Man Trust led to a hearing before an Isle of Man Court with jurisdiction over the Isle of Man Trust. At this hearing, the Isle of Man Court instructed Abacus Trust Company ("Abacus") — trustee of the Isle of Man Trust — to obtain independent counsel for the American Trust and the American Company in the New York litigations.¹⁰ As a result, Reid & Priest LLP undertook the representation of the American Trust and the American Company in the New York litigations, with the express approval of the Isle of Man Court.¹¹ At the same time, the Isle of Man Court also directed Abacus and Reid & Priest to remain neutral between the two sets of beneficiaries (i.e., Nakahara and NSKK) and to preserve the assets of the Isle of Man Trust and its holdings for whomever is ultimately determined to be the rightful beneficiary.¹²

In order to effect this neutrality, Abacus had plaintiffs sign an agreement dated September 12, 1995, ("standstill agreement") in which they promised not to "engage in any transactions in the [American] Trust, the [American Company], Trump Empire State Partners, [the Dutch companies], or any of their affiliates, without the prior written consent of the Abacus Trust Company as Trustee of the [Isle of Man] Trust."¹³ This standstill agreement enabled Abacus to have plaintiffs to remain in place as managing trustees of the American Trust and managing directors of the American Company, without fear that plaintiffs would self-deal or otherwise act without "neutrality".¹⁴

In a letter dated December 10, 1996, plaintiffs made a formal request for advancement from the American Trust of the litigation expenses incurred in the New York litigations. Pursuant to § 4.2 of the American Trust's Declaration of Trust, Abacus then sought Reid & Priest's opinion, as an independent counsel, whether plaintiffs satisfied the conditions therein and were entitled to advancement.¹⁵ Reid & Priest assigned attorney Richard P. Swanson to this project. Pursuant to § 4.2(d), Swanson reviewed all "readily available facts" and offered an opinion on May 22, 1997, expressing the view that Delaware law required advancement of reasonable legal expenses in this case, given the wording of the trust agreement and Delaware law.¹⁶

Even though Swanson provided this Opinion Letter, due to the contentious nature of the New York lawsuits, the threat of a lawsuit by NSKK against Abacus — as trustee of the Isle of Man Trust — if litigation expenses were paid over to plaintiffs, and the instruction from the Isle of Man Court that Abacus remain neutral between plaintiffs and NSKK, Abacus sought judicial approval before the American Trust advanced litigation expenses to Nakahara and Renoir.¹⁷ Thereafter, on May 23, 1997, Abacus petitioned the court in the Isle of Man for permission to pay approximately $300,000 to two law firms — Patterson, Belknap and Markham & Read, co-counsel for Nakahara and Renoir in the New York litigations — for expenses previously incurred in connection with defending the New York lawsuits.¹⁸ At the hearing, held on August 1, 1997, the Isle of Man Court declined to decide the advancement issue on forum non conveniens grounds. The Isle of Man Court concluded that the appropriate forum for this question was a state court of Delaware, because that was where the American Trust was organized.¹⁹

Within days of the Isle of Man hearing, on or about August 6, 1997, plaintiffs engaged in "self-help," transferring approximately $700,000 from the American Trust accounts to an account controlled by Patterson, Belknap.²⁰ Plaintiffs had arranged for Patterson, Belknap to distribute this money to plaintiffs' various counsel in the New York litigations. Abacus objected to these withdrawals as violations of the standstill agreement and made verbal and written demands that the money be returned.²¹ Portions of the funds had already been distributed overseas, and counsel in France and the Isle of Man have refused to return the money. Currently, the balance of the $700,000 remains in the custody of Patterson, Belknap, held in escrow pending the outcome of this advancement litigation.²² At about the same time, Abacus discovered that Renoir had previously withdrawn approximately $200,000 from an American Trust account on July 18 and 29, 1997 — dates prior to plaintiffs' alleged termination of the standstill agreement and prior to the hearing held by the Isle of Man Court to decide Abacus' May 23, 1997 petition for...