In O’Connor v. Redstone, 1110 Mass. 129 (2008), the
Supreme Judicial Court pondered the latest high-profile billionaire family
squabble. In the decision, the SJC considered a variation of the discovery rule
and held if a trustee had a conflict of interest that interfered with the
initiation of a claim for breach of fiduciary duty against a former trustee,
the claim is tolled until a beneficiary learns of the wrongdoing. The SJC also
explored the duty of a successor trustee to bring claims against a predecessor
and reaffirmed the concept that parties’ interactions may create a fiduciary
duty even in the absence of a formal fiduciary relationship.
In the case, media mogul Sumner Redstone and his brother,
Edward Redstone, were sued by Edward’s son, Michael Redstone, and the current
trustees of three trusts that held shares in National Amusements, Inc. (“NAI”)
for the benefit of Sumner and Edward’s children. The action was commenced in
2006, although the alleged breaches of fiduciary duty occurred in 1972 and
1984. The SJC granted direct appellate review after the Superior Court (Van
Gestel, J) granted summary judgment in favor of the defendants on the grounds
that the statute of limitations barred all claims. The case contains extensive
analysis of whether or not the usual three-year statute of limitations was
tolled in the decades between the alleged wrongful conduct and the commencement
of litigation.
The factual history of the case is lengthy and complex, traced
to 1959 when Sumner and Edward’s father, Mickey, registered 100 shares of NAI
in both Sumner and Edward’s names. Mickey and Sumner contended Sumner and
Edward each owned 50 shares of NAI and each held 50 shares is oral trusts for
the benefit of their four children; contrary to Mickey and Sumner’s position,
Edward denied the existence of the oral trust for the benefit of his children,
Michael and Ruth Ann, and claimed that he was entitled to the entire 100 shares
of NAI in his name.
In 1968, Mickey established a formal trust for the
benefit of his grandchildren funded with an additional 50 shares of NAI (the
“Grandchildren’s Trust”). The beneficiaries were Michael, Ruth Ann and Sumner’s
two children. Sumner was a trustee.
In the early seventies, disputes arose between Edward, on
one hand, and Mickey, Sumner and NAI, on the other. Litigation ensued. As part
of the litigation, the parties disputed the number of NAI shares Edward owned.
In 1972,
Edward entered into a settlement agreement with Sumner and NAI. A key provision
of the agreement included a written assertion that Edward had been holding
shares of NAI in trust for his children but that he disputed the percentage of
shares. The agreement also included a statement that Mickey asserted that at least
50 percent of the stock (i.e. 50 shares) in Edward’s name was for benefit of
his children. The agreement
ultimately provided that Edward owned 66 2/3 shares of NAI, which he would
redeem for $5 million. With the remaining 33 1/3 shares of NAI, Edward agreed
to establish irrevocable trusts for his two children (the “Michael Trust” and
the “Ruth Ann Trust”). Edward agreed to appoint Sumner as the sole trustee of
these trusts. During the litigation and settlement negotiations, Edward was
represented by attorney James R. DeGiacomo.
In 1984, Sumner and Edward’s children pushed for
redemption of their shares of NAI held in the Grandchildren’s Trust, the
Michael Trust and the Ruth Ann Trust. As part of the redemption process, Sumner
appointed DeGiacomo as “independent counsel” on behalf of the Michael Trust and
the Ruth Ann Trust. DeGiacomo appeared to engage in significant due diligence
to ascertain the true value of the shares. Evidence of his good faith included
his rejection of a value of $9 million from Sumner’s accountant; his hiring
valuation experts; and his insistence upon the inclusion of previously
unconsidered NAI real estate holdings. After purportedly hardball negotiations,
DeGiacomo and Sumner agreed to redeem the grandchildren’s NAI shares for $15
million.
After the redemption, Sumner appointed DeGiacomo trustee
of the Michael Trust and the Ruth Ann Trust, the trusts established as part of
the 1972 settlement agreement. Thus, Edward’s former lawyer became trustee of
the trusts for the benefit of Edward’s two children.
Fast forward to 2006. Michael and the current trustees
brought claims against his father, Edward, for breach of fiduciary duty as
trustee of the oral trusts Mickey allegedly created in 1959 and for converting,
through the 1972 settlement agreement, 16 2/3 shares held in the oral trusts
(50 shares that Mickey allegedly allocated to the oral trust less the 33 1/3
shares that Edward allocated to the Michael Trust and the Ruth Ann Trust in
1972). Michael alleged that Sumner
and NAI aided and abetted Edward’s wrongdoing. Michael also claimed that
Sumner, when he was trustee of the Michael Trust, the Ruth Ann Trust and the
Grandchildren’s Trust, breached his duty to the grandchildren by causing the
NAI shares to be redeemed for inadequate consideration in 1984. Michael claimed
that the NAI shares redeemed in 1984 were actually worth three to five times
$15 million.
To counter a statute of limitations defense, Michael
implicated the discovery rule and claimed that he did not have actual knowledge
that Mickey and Sumner asserted that his trust share might actually be higher
until 2004. Michael stressed that in 1972, when Edward entered into the
settlement agreement, Michael was a minor and not represented by independent
counsel or a guardian ad litem.
The SJC’s analysis focused on whether the statute of
limitations was tolled during Sumner and DeGiacomo’s tenures as trustees of the
trusts. Sumner, Edward and NAI seemed to concede that the statute of
limitations was tolled while Sumner was trustee. The Court stressed that even
though Sumner knew that via the 1972 settlement agreement Edward ended up
owning shares of NAI that Sumner and Mickey actually believed belonged to
Edward’s children, the 1972 settlement agreement furthered Sumner and NAI’s own
interests. Citing another epic family dispute, the Court stressed that the
statute of limitations is tolled while a fiduciary “either benefited from, or
acquiesced in, the activities that are the basis of the plaintiff’s claims. .
.” Demoulas
v. Demoulas Super. Mkts., Inc., 424 Mass, 522-523 (1997).
The Court next considered Sumner, Edward and NAI’s
argument that the statute of limitations began to run when DeGiacomo became
trustee of the Michael Trust and the Ruth Ann Trust. They argued that DeGiacomo
knew of Mickey and Sumner’s contention that Edward actually held 50 shares of
NAI in an oral trust for his children notwithstanding the settlement agreement
that established trusts with only 33 1/3 shares. They argued that armed with
this knowledge, DeGiacomo had a duty to initiate a claim for the
misappropriated 16 2/3 shares.
But, stressing that DeGiacomo was Edward’s agent, the
Court concluded that statute of limitations had not run. DeGiacomo agreed with
Edward that no oral trust ever existed. Without belaboring the obvious conflict
of interest, and without imputing any wrongdoing to DeGiacomo, the Court
concluded that DeGiacomo’s prior position as Edward’s counsel tolled the
statute of limitations.
The Court remanded to the Superior Court the issues of
whether oral trusts were created in 1959; whether they could be revoked or
modified; how many shares were held in the trusts; and who was appointed
trustee and when. The Court expressed skepticism about whether the plaintiffs
could prove the establishment of the oral trusts, but noted that damages could
include the value of the shares in 1984, when the other NAI shares were
redeemed.
The Court then considered Michael’s claim that Sumner
caused the NAI shares to be redeemed for inadequate consideration in 1984.
Michael alleged that Sumner concealed from DeGiacomo NAI’s true value. On this
claim, the Court agreed with the defendants that the statute of limitations had
run.
The Court concluded that DeGiacomo, appointed successor
trustee of the Michael Trust and the Ruth Ann Trust in 1984, had the obligation
to bring any claim against Sumner for breach of fiduciary duty. The Court noted
that a successor trustee has a duty to initiate a claim against a predecessor
trustee when the successor knows or should know of the breach. The Court found
that because DeGiacomo had intimate knowledge of the transaction when he became
a trustee in 1984, the statute of limitations began to run with respect to any
action against Sumner.
In addition to DeGiacomo’s knowledge, the Court also
considered his status. Unlike the claim related to Edward’s actions in 1972,
DeGiacomo had no “disqualifying agenda” or relationship to Sumner. Although
DeGiacomo was entwined with the Redstone family in many ways, he never
represented Sumner and was not paid by him.
Interestingly, the Court also found that the
Grandchildren’s Trust’s claims related to the 1984 redemption were also
time-barred. The Court stressed that the beneficiaries of the Grandchildren’s
Trust requested the redemption. And although DeGiacomo was not a trustee or
“independent counsel” of the Grandchildren’s Trust, he believed that the
redemption was in the beneficiaries’ best interest and knew that his
determination of fairness on behalf of Michael and the Ruth Ann Trust would also
impact the other beneficiaries of the Grandchildren’s Trust. The Court thus
concluded that DeGiacomo was a fiduciary as a matter of law of the
Grandchildren’s Trust. The Court focused less on the title of DeGiacomo’s role
and more on the de facto, trusting nature of the parties’
relationship.
O’Connor v. Redstone explores and expands the
discovery rule. If a trustee has a conflict, the statute of limitations is
tolled until the beneficiary or a successor trustee has the requisite knowledge
and impartiality to commence suit. While the case presents a very fact-intensive
analysis, it provides several considerations for any successor trustee.
Successor trustees are often family members or, in the case of institutional
trustees, a corporate acquirer. Such relationships create conflicts of interest
that not only can toll the statute of limitations, but also can create
liability for the successor trustee if he breaches his duty to initiate a good
faith claim for breach of fiduciary against a predecessor. The case highlights the duty of
successor trustees to scrutinize potential actions against their predecessors.
This duty is yet another aspect of the obligation of good faith and loyalty
owed to beneficiaries.
Patricia L. Davidson is a partner in Mirick O’Connell’s Litigation Department and leads its Probate, Trust and Fiduciary Litigation Group.