Merrill Lynch Trust Company v. Campbell, 2009 Del. Ch. LEXIS 160 (Sept. 2, 2009)

In 1996, Mary Campbell, age 74, met with a broker at Merrill Lynch, Pierce, Fenner & Smith, Inc. (Pierce). She met with Pierce on instructions from her husband, who was no longer able to manage the family's finances due to illness. Mary and her husband's primary assets supporting their retirement were 10,000 shares of Exxon stock that he had acquired as an employee of the company. Although the stock had greatly appreciated over the years, it paid only modest dividends.

The Pierce broker persuaded Mary to place the stock in a charitable remainder unitrust with Merrill Lynch Trust Company as trustee (Pierce was an affiliate of Merrill Lynch Trust Company). At the time of the trust's formation, the stock had a market value of $840,000.

The trust provided for an annual payout to Mary of a 10% unitrust amount during her lifetime, then to her husband during his lifetime, and then among Mary's children during their lifetimes. At the death of the last surviving child, the trust would terminate, and the remainder would be distributed in equal shares to five charities. The expected duration of the trust was 48 to 50 years.

Shortly after forming the trust, Mary's financial needs increased due to her husband's poor health, an ill sister, and a child in need of assistance. Mary called the Pierce broker, who communicated to Merrill Lynch her need for more income. Merrill Lynch changed the investment strategy for the trust to "growth" from "growth and income," and increased the equities in the trust portfolio from 60% to as high as 99%, with a corresponding increase in the market risk.

Mary was unaware that her request for income would affect the investment strategy and incur higher risk. Merrill Lynch sent Mary a letter to sign approving the change, and on instructions from the Pierce broker, Mary signed it. By the end of 2002, the value of the trust assets dropped from $840,000 to $356,000.

The severe loss in value also reduced the unitrust payments to Mary, which aggravated the strain on Mary from the death of her husband, the reduction in her pension payments, and her cancer diagnosis. She called the Pierce broker about her concerns, but did not receive a satisfactory answer. She then called a friend's son who was also a Pierce broker, who opined that the trust was too heavily invested in equities. With the help of her children, Mary commenced arbitration proceedings against Pierce. Merrill Lynch, although not a party to the arbitration, joined with its affiliate Pierce in seeking to enjoin the arbitration. Merrill Lynch was dismissed from the arbitration and no injunction issued.

When she did not prevail in the arbitration, Mary sought to replace Merrill Lynch as trustee.
Merrill Lynch refused to resign and transfer the trust assets unless Mary released both Merrill Lynch and its affiliates, including Pierce. Mary refused, and Merrill Lynch sued Mary and the other beneficiaries of the trust to approve its accountings and obtain a declaratory judgment approving its actions as trustee.

Mary counterclaimed seeking refund of all trustee, brokerage, investment, and advisory fees, refund of legal fees taken by Merrill Lynch from the trust, delivery of the trust assets to a successor trustee, and other damages and costs.

In count I, Mary alleged she was induced to enter into the trust by misleading representations by Pierce and Merrill Lynch. Because the alleged misrepresentations occurred and her cause of action arose in 1996, the court dismissed this count as barred by the applicable three-year statute of limitations. In count II, she challenged the investment strategy for the trust. In count III, she challenged Merrill Lynch's involvement in the arbitration and the filing of the accounting action.

The Delaware Chancery Court observed that Pierce and Merrill Lynch failed to adequately inform Mary about the trust and the investment risks, and expressed doubt that a CRUT with a 10% payout was a good investment choice for Mary, noting that the trust only provided Mary with a $6,237 charitable deduction. The court observed that a trust with a 10% annual payout and a term of 50 years was highly unusual, and that this was never conveyed to Mary. Pierce, in contrast, counseled Mary that trusts with 10% payouts were common and acceptable, and projected annual investment returns as high as 12%.

Although the court found the facts surrounding the formation of the trust "distasteful," the court refused to charge Merrill Lynch with responsibility for the actions concerning the trust formation because Pierce and Merrill Lynch are separate legal entities, and there was no evidence that the relationship between the two entities was improper or misrepresented. The court also found that Mary's claims concerning the formation of the trust were time barred.

In considering Mary's claims concerning the investment losses, the court observed (based on expert testimony at trial) that the unusual terms of the trust (with a high unitrust payout and long duration) required an equity mix above 50% in order to have any chance of lasting until its projected termination date. The court rejected the suggestion that Merrill Lynch should have recognized the impairment of the remainder interest form the outset, and focused on Mary's needs on the basis of the duty owed to all classes of beneficiaries. In light of the unusual circumstances of the trust, the court found Merrill Lynch's heavy investment in equities to be reasonable.

The court also rejected Mary's claim that the investment mix was changed solely due to her request and without a deliberative process. The court acknowledged that had Merrill Lynch acted solely on Mary's request, Merrill Lynch's failure to exercise any judgment would have been an abuse of discretion. However, the court held that although the record was thin, it did indicate that Merrill Lynch had standard practices concerning investment changes, and there was no evidence that those processes were not followed. The court also observed that the unusual nature of the trust supported Merrill Lynch's investment decisions, even though those decisions would not have been appropriate in a more conventional trust or a trust with a lower payout requirement or shorter term.

The court approved the payment of Merrill Lynch's attorneys' fees for the accounting action out of the trust because of language in the trust instrument specifically approving the fees (and observed that in the absence of such language, Merrill Lynch might be required to pay those fees directly because the action was brought for its own benefit). However, the court ordered Merrill Lynch to reimburse the trust for the attorneys' fees incurred in connection with the arbitration, with interest, because those fees were for the protection of its affiliate Pierce, and not for the trust or its beneficiaries. The court also required Mary to bear her own attorneys' fees.