By Eric Feldman and Patrick Jamieson
In response to demands by trust beneficiaries seeking removal of two trustees pursuant to Delaware law governing fiduciary relationships generally as well as a declaratory judgment that one trustee acted with gross negligence or willful misconduct, the Delaware Court of Chancery denied the trustees’ motion to dismiss, finding it was reasonably conceivable that both trustees were unfit to serve and that the one trustee could have acted with willful misconduct.
Petitioners in United Brotherhood of Carpenters Pension Plan v. Fellner, C.A. No. 9475-VCN (Del. Ch. February 26, 2015) (Noble, V.C.) are trust beneficiaries who collectively hold a 78.61% beneficial interest in three trusts (the “Trusts”). Their interests stem from their 2008 purchase of limited partnership interests in a Delaware limited partnership whose general partner, BSF-TDC GP, LLC (“BSF-TSC”), was controlled by Michael Baumann. In 2012, Baumann converted the limited partnership into a publicly traded Real Estate Investment Trust (“REIT”). The limited partnership exchanged its ownership interests in various entities for 2,904,910 REIT common shares, then valued at $18. Following the conversion, the limited partnership held only the REIT shares and two adjoining parcels of land and consequently determined to transfer its assets into a liquidating trust (the “Master Trust”) pursuant to a Plan of Liquidation and Liquidating Trust Agreement. BSF-TDC was named as trustee of the Master Trust and the limited partners were designated as beneficiaries.
Following this transfer, Baumann divided the Master Trust’s assets among 3 series trusts, with two of such series trusts (the “Series Trusts”) holding a combined 98.5% of the Master Trust’s total equity value. He appointed his allegedly close friend, Michael Fellner, as trustee the Series Trusts, potentially in violation of the Plan of Liquidation’s independence requirements. As trustee, Fellner departed from a business plan that contemplated the development and sale of the real estate parcels previously held by the limited partnership, instead exchanging the Series Trusts’ interest in said parcels to the REIT, controlled by Baumann, for REIT common stock valued at $18 per share and preferred shares valued at $100 per share. About one year later, the REIT announced it had reached an agreement to repurchase the preferred shares for $45 per share, to which Fellner agreed. While the transaction was never consummated, the REIT’s common stock was valued below $7 per share by late 2013.
Petitioners asked the Chancery Court to remove Fellner and BSF-TDC as trustees of the Series Trusts and the Master Trust, respectively, pursuant to its equitable powers to remove trustees under 12 Del. C. §3327. While the Trusts were Delaware statutory trusts, pursuant to Section 3809 of the Delaware Statutory Trust Act, except as otherwise provided in a statutory trust’s governing instrument, Delaware law pertaining to trusts generally is applicable to statutory trusts. Petitioners alleged that Baumann appointed Fellner as trustee of the Series Trusts in order to exert influence over him and that Fellner agreed to the proposed transaction with the REIT to enrich Baumann, and that this provided sufficient grounds for the Court to remove both trustees. The Court found that “[a]ctions taken while operating under a conflict of interest would likely breach a duty of loyalty” and would be grounds for the Court to remove the trustee. Id. at *9.
As a result, the Court denied the motion to dismiss on all counts, finding (i) that it was reasonably conceivable that the Court might later deem BSF-TDC (i.e., Baumann) as unfit to serve as trustee of the Master Trust and (ii) that if Fellner “agreed to transactions to benefit Baumann, at the beneficiaries’ expense, it is reasonably conceivable the Court could later deem him unfit to serve as trustee. . . .” Id. at *10. In addition, the Court found that if Fellner approved the proposed transaction with the intent to enrich Baumann, Fellner could be charged with willful misconduct (which independently would entitle the Petitioners to vote to remove him as trustee of one of the Series Trusts pursuant to its trust agreement).