Wilmington Trust Co. v. Coulter

• Decision Date: 22 March 1965
• Citation: 42 Del.Ch. 253,208 A.2d 677
• Parties: WILMINGTON TRUST COMPANY, a corporation of the State of Delaware, in its separate corporate capacity and as Trustee under the Will of George P. McNear, Jr., Deceased, Third-Party Plaintiff and Cross-Defendant and Counter-Claim Defendant, v. J. Russel COULTER, Trustee under the Will of George P. McNear, Jr., Deceased, Cross-Claimant, and Elizabeth M. McNEAR, et al., Third-Party Defendants and Counter-Climants.
• Court: Court of Chancery of Delaware

Page 677

208 A.2d 677

42 Del.Ch. 253

WILMINGTON TRUST COMPANY, a corporation of the State of

Delaware, in its separate corporate capacity and as Trustee under the Will of George P. McNear, Jr., Deceased, Third-Party Plaintiff and Cross-Defendant and Counter-Claim Defendant, v. J. Russel COULTER, Trustee under the Will of George P.

McNear, Jr., Deceased, Cross-Claimant,

and

Elizabeth M. McNEAR, et al., Third-Party Defendants and

Counter-Climants.

Court of Chancery of Delaware, New Castle County.

March 22, 1965.

Robert H. Richards, Jr., of Richards, Layton & Finger, and William S. Potter, of Berl, Potter & Anderson, Wilmington, for Wilmington Trust Co.

Clair John Killoran and John VanBrunt, Jr., of Killoran & Van Brunt, Wilmington, and Stuart S. Ball, Richard J. Flynn, James G. Archer, of Sidley, Austin, Burgess & Smith, Chicago, Ill., for third-party defendants and Counter-Claimants.

H. James Conaway, Jr., of Morford, Young & Conaway, Ill., Wilmington, and Philip W. Tone, of Raymond, Mayer, Jenner & Block, Chicago, Ill., for J. Russel Coulter.

David Snellenberg, II, of Killoran & VanBrunt, Wilmington, Guardian ad litem for minor third-party defendants and counter-claimants.

SEITZ, Chancellor:

This is the decision on certain applications for attorneys' fees arising out of litigation which resulted in a surcharge against the corporate trustee.

While the facts are set out at length in the surcharging opinion of this court (Pennsylvania Company v. Wilmington Trust Company, 40 Del.Ch. 567, 186 A.2d 751) and the affirming opinions of the Supreme Court of Delaware (Wilmington Trust Co. v. Coulter (Del.Ch.), 200 A.2d 441), some background is basic to an understanding of the issues herein resolved.

Pennsylvania Company ('Pennsylvania') sued Wilmington Trust Company ('Trust Company') and J. Russel Coulter ¹ as co-trustees of the McNear testamentary trusts. It sought specific performance or, alternatively, damages based upon an alleged breach of an agreement dated April 15, 1955 by which the trustees agreed to sell Pennsylvania certain shares of stock of the Toledo, Peoria and Western Railroad ('TP & W') owned by the trusts. The Trust Company filed a third party complaint against the trust beneficiaries seeking, in effect, to be exonerated from any liability in its non-trustee status on the Pennsylvania claims. The individual co-trustee then filed his answer which contained a cross-claim against the Trust Company seeking to require it in effect to pay in its non-trustee ('individual') capacity any sum which Pennsylvania might thereafter recover. The beneficiaries filed their answers to the third party complaint and included therein counterclaims also seeking to hold the Trust Company individually liable for any recovery by Pennsylvania. Subsequently, but without prejudice to the surcharge claims, all parties consented to a settlement between the Trust Company and Pennsylvania by which Pennsylvania was paid $500,000 from the trust. Thereafter the cross-claim and counterclaims came on for trial and resulted in a decision by which the Trust Company, individually, was required to pay $500,000 plus interest to the trust estate.

The court is now concerned with applications for attorneys' fees filed by the attorneys for the individual co-trustee, the attorneys for the beneficiaries and the attorneys for the Trust Company. This is the decision after final hearing.

I first consider the application of the Trust Company that its expenses including counsel fees be assessed in whole or in part against the trust estate.

The Trust Company seeks to justify its application on the theory that the conduct for which it was surcharged was so lacking in culpability that it should not be deprived of indemnification for expenses from the trust estate. The beneficiaries vigorously ² contend that its application is not allowable under the law or the facts.

When a surcharged trustee seeks reimbursement for attorneys' fees and expenses the court in disposing of the matter, in the final analysis, is called upon to exercise a sound discretion. A denial of such a request does not follow as a matter of law from the mere fact of surcharge. The nature of the breach must be considered. Compare In re Sellers Estate, 31 Del.Ch. 158, 67 A.2d 86.

Looking to the two grounds of surcharge, the question is whether the Trust Company's conduct in the total setting should move this court to exercise its discretion in its favor in connection with its present petition.

Preliminarily, for purposes of clarity only, this court desires to point out that it intended to hold the Trust Company subject to surcharge on two independent grounds. Although the Supreme Court in its first opinion said that this court also supported its surcharge on a third ground, this court had not intended to express a conclusion on the so-called third ground, viz., as to whether the Trust Company was guilty of breach of trust in entering into the so-called April 15 agreement. Rather, this court intended to decide that the Trust Company was liable for not withdrawing from the April 15 agreement at a time when it could have done so with relatively clear legal impunity and because the Trust Company failed during the same period to notify its co-trustee of the substantially higher Hineman offer. This court was affirmed on both of the grounds on which it intended to rely in imposing the surcharge.

I now consider in order the points relied upon by the Trust Company as the basis for the request that the trust fund bear its expenses. It first makes the point that it has been a faithful trustee in all other aspects of the administration of the trusts. This is presumably true but it must not be overlooked that the Trust Company has been paid and is being paid not insubstantial trust commissions for such services.

The Trust Company next urges that the negotiations for the sale of the TP & W stock were difficult and complex and it ultimately obtained what was presumably the best price for it. However, these facts have to be evaluated in the light of other considerations. First, the Trust Company was practically forced against its will to obtain the best price, as the surcharging opinions will reveal. Next, this court allowed the Trust Company a special fee of $175,000, with the approval of the adult beneficiaries, for its work and the services of its counsel in connection with the sale of the TP & W stock. In addition, the former individual co-trustee and the present co-trustee were allowed an aggregate special fee of $175,000 for their services in the same connection.

The Trust Company says it had the advice of counsel at important stages of the transaction following the execution of the agreement of April 15, 1955. This fact, rather than being in its favor is, by implication, a negative factor. Admittedly, the Trust Company did not, after receiving the higher Hineman offer, consult its counsel during the crucial period about the possibility of withdrawing from or postponing the effectiveness of the April 15 agreement. This fact is all the more difficult to understand in view of conferences with counsel during the period on other related matters. Certainly, this was an important stage of the transaction. Thus, the principle of reliance on the advice of counsel is not affirmatively involved in this aspect of the case.

The Trust Company next says that the Pennsylvania claim, which was ultimately settled, involved a close question of law to which it provided a reasonable defense. Conceding this to be so, the claim and the defense were only made 'close' by the fact that the Trust Company failed to take appropriate steps to withdraw from its still inchoate agreement with Pennsylvania when it could have done so without any reasonable probability of liability. The Supreme Court so noted in its second opinion. Indeed, the Trust Company never gave its counsel or co-trustee an opportunity to advise it on this issue at a time when it would have been of probable ultimate significance.

I come then to the really important contention of the Trust Company that the conduct for which it was surcharged involved a close question of law which did not include any fraud, self-dealing or active negligence, and justified the Trust Company in defending the surcharge claim.

The Trust Company was surcharged for two independent acts of negligence, viz.:

1. In effect ignoring the substantially higher Hineman offer until after Pennsylvania's board acted, and

2. Failing seasonably to notify its co-trustee of the higher Hineman offer.

Are these acts of negligence of such a character in the circumstances as to dictate an exercise of discretion against the granting of the Trust Company's present petition?

I believe the Trust Company's acts of negligence require the denial of its petition, even though no acts of fraud or self-dealing were involved. I so conclude because the acts for which the surcharge was imposed, in their setting, involved more than mere passivity. The Trust Company was not confronted with a totally new development when the higher Hineman offer was received. It had been 'exposed' to his interest and increasing offers for some time. The very magnitude of the offer in relation to the price fixed in the Pennsylvania and Santa Fe agreement of April 15 should have been a signal flag of arresting hue. Yet, the Trust Company did not consult its counsel about this major development until it was too late. It apparently made no attempt, even in its own organization, to determine whether it was then legally bound to Pennsylvania. Certainly, this was negligence when judged by more than mere hindsight. When this factor is combined with the conscious decision not to communicate the much higher offer promptly to its co-trustee, again presumably without consultation with its counsel, the total picture created is one of negligence and resulting loss that connot be excused as the mere 'poor judgment' of an...