Trustees take note: In O’Connor v. Redstone, the SJC explores a successor trustee’s obligation to seek redress for a predessor’s misconduct

Issue Vol. 11 No. 1 January 2009 By Patricia L. Davidson

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.