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Petition Denied to Remove Wilmington Trust as the Trustee of du Pont Family Trusts

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October 26, 2017
By: Albert H. Manwaring, IV
Delaware Business Court Insider

Wilmington Trust serves as the sole trustee for certain du Pont Family Trusts established in the 1940s and 1950s. For many years, Wilmington Trust was closely associated with the du Pont family, and was managed in part by family members. Following the near collapse of its business in the 2008 financial crisis, Wilmington Trust was acquired by M&T Bank. Today, Wilmington Trust is a wholly-owned subsidiary of M&T Bank, and no member of the du Pont family serves on Wilmington Trust’s board. In 2013, at the prompting of the current trusts’ beneficiary, Douglas du Pont, Wilmington Trust agreed to modify the trusts to authorize Mr. du Pont to serve as the “Investment Direction Advisor” for the trusts’ assets, which limited Wilmington Trust to a principally ministerial role in the trusts’ on-going administration. In October 2016, alleged tensions between Mr. du Pont and Wilmington Trust led Mr. du Pont to petition the Court of Chancery to seek to remove Wilmington Trust as the trustee altogether, and to appoint a successor trustee.

In a rare decision interpreting the statutory provisions for judicial removal of a trustee under the Delaware Trust Code, the Court of Chancery dismissed Mr. du Pont’s petition to remove Wilmington Trust as trustee on the grounds that the petition failed to state a legally sufficient basis for removal under 12 Del. C. Section 3327(3),  Du Pont v. Wilmington Trust, C.A. No. 12836-VCS (Del. Ch. Oct. 6). The court first set forth the bases for judicial removal of a trustee under the Delaware Trust Code. In the absence of a breach of trust for a trustee’s violation of a duty owed to a beneficiary of a trust, and “having due regard for the expressed intention of the trustor and the best interests of the beneficiaries,” the court may remove a trustee under 12 Del. C. Section 3327(3): for “a substantial change in circumstances”; if “the trustee is unfit, unwilling, or unable to administer the trust properly”; or if “hostility between the trustee and beneficiaries … threatens the efficient administration of the trust.”

The court held that Mr. du Pont’s petition failed to satisfy any of the grounds for judicial removal of Wilmington Trust as trustee under 12 Del. C. Section 3327(3). First, the court found that Mr. du Pont had failed to assert a “substantial change in circumstances” that would justify removal. Relying on an official comment to Section 706 of the Uniform Trust Code, which contains a similar removal provision to Section 3327(3) of the Delaware Trust Code, the court explained that changed circumstances “‘justifying removal of a trustee might include a substantial change in the character of the service or location of the trustee. A corporate reorganization of an institutional trustee is not itself a change of circumstances if it does not affect the service provided [to the trust].’” While pointing to “federal-government investigations, lawsuits, and indictments” following Wilmington Trust’s near collapse in the 2008 financial crisis, Mr. du Pont did not allege any connection between Wilmington Trust’s “legal tribulations” and its delivery of trustee services. Nor did Mr. du Pont allege how M&T’s acquisition of Wilmington Trust affected, if at all, the delivery of trustee services. Finally, the modification of the trusts, which was prompted by Mr. du Pont, and limited Wilmington Trust to a principally ministerial role as trustee was not a sufficient change in circumstances to warrant removal.

The court next found that Mr. du Pont failed to establish that Wilmington Trust was unwilling, unfit or unable to administer the trusts properly. Unwillingness includes cases where the “trustee refuses to act,” but also applies when a trustee exhibits “a pattern of indifference” to a beneficiary. Here, allegations of “minimal contact” by Wilmington Trust, a single miscalculation of a trust distribution, and its refusal to cover Mr. du Pont’s tax liabilities from the trusts’ assets without a finding that Mr. du Pont was unable to pay these taxes from other sources, which finding was required by the terms of the trusts, fell well short of a “pattern of indifference” to support removal. Mr. du Pont also asserted that Wilmington Trust was unfit to serve as trustee because of its separate role as lender and estate planner to Mr. du Pont. The court noted, however, that a trustee is not prohibited from dealing directly with beneficiaries, who consent “to the transaction after full disclosure of relevant information.”  “Where a trustee lends money to a beneficiary, the transaction also must be fair to the beneficiary.” Here, allegations that Wilmington Trust “overextended credit” to Mr. du Pont, required him to collateralize personal assets to secure the loan, and caused him “to liquidate low-basis assets” to pay down a portion of the loan, were unremarkable in an arms-length loan transaction, and thus, were insufficient to show that any of the loan terms or lending practices were unfair. Turning to Wilmington Trust’s alleged failure to disclose that certain irrevocable trusts established for Mr. du Pont’s children would bypass his wife, the court ruled that “more than mere negligence” in the performance of a trustee’s duties is necessary to warrant removal. Here, Mr. du Pont failed to allege that Wilmington Trust as estate planner or trustee knowingly or even recklessly withheld relevant information from him.

Finally, the court found that the Mr. du Pont’s alleged loss in confidence in Wilmington Trust, creating friction between the parties, did not rise to a level of hostility between a trustee and a beneficiary that threatened the efficient administration of the Trusts to support removal.  To warrant removal, the Court ruled that “the friction or hostility must be of such a nature as to make it impossible for the trustee to properly perform his duties.”  Here, Mr. du Pont failed to establish that any such friction or hostility would prevent Wilmington Trust from performing its principally ministerial duties under the modified trust agreements.

Practice Point

In the absence of a breach of trust, the Delaware Trust Code provides a high threshold for both a qualifying change in circumstances, and the level of hostilities between a trustee and a beneficiary, to justify judicial removal of a trustee.

Delaware Business Court Insider | October 26, 2017

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