Cargill & Statutory Preemption

One of the issues in Cargill, Inc. v. JWH Special Circumstance LLC, C.A. No. 3234-VCP (Del. Chan. Ct. November 7, 2008) is whether the Delaware Statutory Trust Act preempts claims for breaches of fiduciary duty.  This post discusses that portion of the Cargill opinion, Slip Op. at 33-38.

As with most of the recent Delaware unincorporated business entity statutes, the Delaware Statutory Trust Act embodies the principle of party autonomy in the formation of unincorporated business forms. DSTA § 3825(b), (d) & (e).  As might be expected, the question is not so much that principle, but how it plays out in a particular form and its statute.  In the view of the court, the key provision is Sec. 3806(a), which consist of four sentences:

[I] Except to the extent otherwise provided in the governing instrument of a statutory trust, the business and affairs of a statutory trust shall be managed by or under the direction of its trustees.

[II] To the extent provided in the governing instrument of a statutory trust, any person (including a beneficial owner) shall be entitled to direct the trustees or other persons in the management of the statutory trust.

[III] Except to the extent otherwise provided in the governing instrument of a statutory trust, neither the power to give direction to a trustee or other persons nor the exercise thereof by any person (including a beneficial owner) shall cause such person to be a trustee.

[IV] To the extent provided in the governing instrument of a statutory trust, neither the power to give direction to a trustee or other persons nor the exercise thereof by any person (including a beneficial owner) shall cause such person to have duties (including fiduciary duties) or liabilities relating thereto to the statutory trust or to a beneficial owner thereof.

See, Cargill, Slip Op. at 34 n.79.

The key dispute is the different approaches of the 3rd and 4th sentences of Sec. 3806(a), both of which deal with persons having, or exercising, the power to direct a trustee (or managing owner). 

• Sentence III indicates that such a person shall not be deemed to be a trustee unless the governing document provides otherwise.
• Sentence IV indicates that, to the extent that the governing document so provides such a person shall not have "duties (including fiduciary duties) or liabilities."

Vice Chancellor Parsons agrees with Balotti & Finkelstein (id. at 37 n.86) that sentence III prevents liability of controlling persons as fiduciaries, but distinguishes conduct by a controlling person that causes the fiduciary to act without regard to the best interests of the Trust.  Id. at 37-38.  I am not comfortable with that reasoning.  In my view, the rationale behind imposing fiduciary duties on controlling persons is that such persons arrogate the power of the statutory managers, so should be subject to the same fiduciary duties as apply to the controlled managers.  Thus, the "USA Cafes" duty is not separate from, but is identical to, the fiduciary duties of the controlled person.

So, how do we reconcile the difference between sentences III and IV?  Here, I must admit to complete befuddlement.  The first puzzle of sentences III and IV is why status as a trustee should be treated separately from duties and liabilities to the trust.  The two seem to go hand-in-hand.  The reason why one would want to avoid being deemed to be a trustee is to avoid the duties and liabilities of a trustee.  So far as I can tell, the only other consequence of trusteeship is the right of a trustee to hold trust property in its own name. 

Given the separation, the second puzzle is why the governing documents should have different roles.  The difference thus becomes a trap for the unwary. Perhaps the legislature meant to distinguish between the traditionally onerous duties of a trustee and the usual fiduciary duties of the managers of businesses.  If that was the intent, surely it could have been more clearly expressed.

posted by Gary Rosin