Case Title: McNeil v. McNeil et al.

Citation: 

Docket Number: 

State: delaware

Court: Delaware Supreme Court

Date: 2002-05-16T00:00:00Z

Document:
IN THE SUPREME COURT OF THE STATE OF DELAWARE
CAMERON McNEIL and JUSTIN
§
McNEIL,
§
§
Defendants Below,
§
Appellants,
§ Nos. 490, 2001
§          497, 2001
v.
§          505, 2001
§
HENRY SLACK McNEIL, JR.,
§    CONSOLIDATED
§
Plaintiff Below,
§ Court Below: Court of Chancery
Appellee,
§ of the State of Delaware in and 
§ for New Castle County
JOHN C. BENNETT, JR., CHARLES E. § C.A. No.  15875
MATHER, III, PNC BANK, N.A. and
§
WILMINGTON TRUST COMPANY, as
§
Trustees U/A with Henry Slack McNeil
§
dated January 2, 1959, BARBARA 
§
McNEIL JORDAN, MARJORIE 
§
McNEIL FINDLAY and ROBERT
§
DOUGLASS McNEIL,
§
§
Defendants Below,
§
Appellees.
§
Submitted: April 9, 2002
Decided:
May 16, 2002
Before WALSH, HOLLAND, BERGER, STEELE, Justices and HARTNETT,
Justice (Retired),* constituting the Court En Banc.
Appeal from Court of Chancery.  AFFIRMED IN PART.  REVERSED IN
PART.
____________________
*Sitting by designation pursuant to Del. Const. art. IV, § 38 and 29 Del. C. § 5610.
2
Thomas R. Hunt, Jr., Esquire (argued), David J. Teklits, Esquire, and
Thomas W. Briggs, Jr., Equire, Morris, Nichols, Arsht & Tunnell, Wilmington,
Delaware, for Appellants and Cross Appellants  John C. Bennett, Jr., Charles E.
Mather, III, PNC Bank, N.A. and Wilmington Trust Company.
Lawrence C. Ashby, Esquire (argued) and Richard I. G. Jones, Jr., Esquire,
Ashby & Geddes, Wilmington, Delaware, for Appellees Barbara McNeil Jordan,
Marjorie McNeil Findlay, Robert Douglas McNeil, and their Adult Lineal
Descendants.
Grover C. Brown, Esquire (argued), Gordon, Fournaris & Mammarella,
P.A., Wilmington, Delaware, Guardian Ad Litem for Unborn Lineal Descendants
of Henry S. McNeil, Sr.
Wayne N. Elliott, Esquire (argued), Elizabeth M. McGeever, Esquire, and
D. Benjamin Snyder, Esquire, Prickett, Jones & Elliott, Dover, Delaware and John
Treitz, Esquire, Ogden, Newell & Welch, Louisville, Kentucky, for Appellants
Cameron McNeil & Justin McNeil.
James M. Mulligan, Jr., Esquire, Collins J. Seitz, Jr., Esquire and Samuel D.
Brickley, II, Esquire, Connolly Bove Lodge & Hutz LLP, Wilmington, Delaware
and Lawrence T. Hoyle, Jr., Esquire (argued), R. David Walk, Jr., Esquire, and
Elliot C. Fertik, Esquire, Hoyle, Morris & Kerr LLP, Philadelphia, Pennsylvania
and Ralph A. Jacobs, Equire, Ralph A. Jacobs & Associates LLC, Philadelphia,
Pennsylvania, for Appellant Henry Slack McNeil, Jr.
WALSH, Justice:
1McNeil v. Bennett,  792 A.2d 190 (Del. Ch. 2001).
3
This is an appeal from a decision of the Court of Chancery which determined
that the trustees of a large inter vivos trust had breached their fiduciary duties by
ignoring the interests of a beneficiary.  By way of a remedy, the court ordered a
make-up distribution to the petitioner, surcharged the trustees, and removed certain
of the trustees.  The court rejected the beneficiary’s request to further divide the
trust and prevent the adoption of a unitrust formula.  Upon full review of the record,
we conclude that the Vice Chancellor properly exercised his discretion under
applicable trust law in granting relief to the beneficiary, except with respect to the
replacement of a trustee.  As to that latter ruling, we conclude that the trust
instrument, in the first instance, controlled the process for replacement.
Accordingly, we affirm in part and reverse in part.
I
The decision of the Court of Chancery is contained in a seventy-four page
opinion detailing the court’s factual findings and legal conclusions following a six
day trial.1  Because the parties do not dispute the factual findings of the Vice
4
Chancellor, we recite only those facts necessary for an understanding of the
contentions of the parties.
The trust in dispute was one of five trusts established by Henry Slack McNeil,
Sr. (“McNeil, Sr.”) in 1959 from the proceeds of the sale of a pharmaceutical
company owned by him to Johnson and Johnson.  Four of the trusts, referred to as
the “Sibling Trusts,” were designated for the benefit of McNeil, Sr.’s four children:
Henry, Jr. (“Hank”), Barbara, Marjorie, and Robert.  The fifth trust, established by
McNeil, Sr. for his wife, Lois, came to be known as the Lois Trust.  Each of the
separate children’s trusts was intended to accommodate the needs of the respective
beneficiary with authorization to the trustees to afford each the means to live an
affluent lifestyle.  The children were quite young at the time of the creation of the
trusts, ranging in age from eight to fifteen.  It was not until some years later that the
trustees of the Sibling Trusts were called upon to provide the children an
independent source of income.
Although the children were under the impression, an impression apparently
fostered by their father, that their interests in the Lois Trust were that of
remaindermen, the terms of the trust provided otherwise.  The trust instrument gave
its trustees considerable discretion to “distribute any part or all of the income and
5
principal of the trust to or among my lineal descendants and their spouses, and
Lois.” Thus, all of McNeil, Sr.’s children, and their descendants, were not
remaindermen but current beneficiaries.  It was the lack of such knowledge and its
unequal dissemination that is at the root of the litigation between Hank and the
trustees, with Hank’s siblings (“The Other Siblings”) also joined as defendants.
The original trustees of the Lois Trust included three individuals, George
Brodhead, Robert C. Fernley, and Henry W. Gadsden, as general trustees, and
Wilmington Trust Company as the administrative trustee.  Later, Gadsden and
Fernley were replaced by Charles E. Mather, III, a close friend of McNeil, Sr., and
Provident National Bank (“PNC”). There is little question that Brodhead, a close
friend and attorney for McNeil, Sr., was the dominant trustee, to whom the other
trustees, and all the siblings, deferred.  There is also no doubt, however, that all
trustees, including the administrative trustees, were aware that the McNeil siblings
enjoyed the status of current beneficiaries of the Lois Trust.
At some point, Hank became estranged from his parents and his siblings.  A
direct result of this estrangement was that Hank received nothing under his father’s
will and, upon the later death of his mother, only two million dollars, a paltry sum
in comparison to that received by his siblings.  Hank was not without substantial
2Bishop v. McNeil, 1999 WL 743489 (Del. Ch. 1999).
6
wealth, however, since his own trust responded to many, but not all, of his requests
for distribution.  Eventually, Hank sued the trustees of his trust, who were
essentially the same as the trustees of the Lois Trust, seeking a greater distribution.
The trustees requested Hank’s own children, Cameron and Justin, take a position on
Hank’s petition because, under a mirror image provision of the Lois Trust, Hank’s
children were also current beneficiaries.  Thus, it could be argued that Hank’s
request for additional distributions was adverse to all of his living descendants.
Prior to the trustees’ notification, Cameron and Justin had been unaware of their
status.  The question of Hank’s right to distribution under his trust, vis-a-vis the
entitlement of his children to share a current distribution, ultimately resulted in
separate litigation in the Court of Chancery.2
Claiming to have been misled, if not deceived, by the trustees of the Lois
Trust concerning his current beneficiary status, Hank filed a complaint in the Court
of Chancery seeking, inter alia, a make-up distribution from the trust, removal of
and a surcharge against the trustees, and a restructuring of the trust operation.  In
addition to the trustees, other interested parties joined, or were joined, in the
3At the time of trial in the Court of Chancery, the Lois Trust had a value in excess of $300
million dollars.
7
litigation, including Hank’s siblings, Cameron and Justin, and a guardian ad litem
representing the unborn beneficiaries of the Lois Trust.
II
 The Vice Chancellor ultimately concluded that Hank’s “outsider” status,
which began during his father’s lifetime, was continued by the trustees of the Lois
Trust.  By contrast, however, The Other Siblings not only benefitted directly from
their parents’ estates, but were made privy to many aspects of the operation of all
five trusts and, through their participation in a family holding company, Claneil
Industries, were never “outside the loop.”  The Vice Chancellor further concluded
that not only did the trustees rebuff Hank’s efforts to learn the specifics of the Lois
Trust, they acquiesced in Lois’ wish, expressed strongly during her lifetime, not to
invade  principal.  That principal consisted primarily of Johnson and Johnson stock
and had appreciated substantially in value over the life of the trust.3  The Other
Siblings were content with Lois’ direction to permit principal to grow but the matter
came to a head upon Lois’ death in 1998, when the trustees proposed to make
distribution of the Lois Trust in four equal divisions.  The trustees also sought to
8
adopt a “unitrust” approach for distribution under which the beneficiaries would
receive a percentage of the total value of the trust, both principal and income, each
year.
After trial, the Vice Chancellor determined that the trustees had breached their
fiduciary duties by failing to inform Hank of his current beneficiary status in a
timely fashion, showing partiality to The Other Siblings, and allowing the trust to
operate “on autopilot.”  Since the trustees had considerable distribution discretion,
the court recognized that it was somewhat “speculative” to fashion a remedy for the
failure of the trustees to respond to requests never made, particularly given Lois’
strongly expressed desire to maintain the trust corpus.  Nevertheless, the court
concluded that any uncertainty with respect to the appropriateness of the remedy
should be resolved against the trustees, who failed to fulfill their obligation to
consider the interests of different generations of the McNeil Family.  A make-up
distribution equal to 7.5 percent of the value of Hank’s resulting trust was ordered
to be shared by Hank with Cameron and Justin under the unitrust formula. 
The Vice Chancellor also determined that the trustees’ failure to discharge
their fiduciary duties warranted some penalty.  In particular, he faulted the
institutional trustees, PNC and Wilmington Trust, who “failed to bring their
9
professional expertise to bear in assisting lay trustees.”  PNC was removed as a
trustee and  all Lois Trustees were surcharged one-fifth of commissions received for
the years 1987 to 1996.  The Vice Chancellor declined to remove certain other
individual trustees but appointed Edward L. Bishop, one of Hank’s trustees, as a
replacement trustee for PNC for the resulting trusts.
III
The individual and corporate trustees of the Lois Trust, John C. Bennett, Jr.,
Charles E. Mather, III, PNC Bank, N.A. and Wilmington Trust Company (the
“Lois Trustees”) have appealed from that portion of the Vice Chancellor’s decision
imposing a surcharge on their trustees’ commission and removing PNC as a trustee.
While accepting the Vice Chancellor’s factual findings, they nonetheless argue that
those findings do not permit the conclusion that any breach of fiduciary duty owed
to Hank occurred.  They point to the language of the trust instrument, which confers
on the trustees extraordinarily broad authority to manage the trusts, as indicative of
McNeil, Sr.’s intention to protect the trustees from personal liability and “judicial
second-guessing.”  The conduct of the Lois Trustees, it is contended, must be
reviewed over the span of forty years, during which time they deferred to the wishes
10
of McNeil, Sr. and his wife, and, as a consequence, the trust prospered and all
beneficiaries, including Hank, ultimately benefitted.
Initially, we note a disagreement between the parties concerning the standard
of review in this case.  The Lois Trustees urge a de novo standard, asserting that
since the factual findings of the Vice Chancellor are not disputed, the conclusions
to be drawn from them are matters of law, both at the Court of Chancery level and
upon appeal.  The various appellees, for the most part, contend that the Vice
Chancellor’s findings of fact enjoy the standard set forth in  Levitt v. Bouvier, 287
A.2d 671, 673 (Del. 1972), subject to reversal only if “clearly wrong” and the
interests of justice so require.  
In our view, the issues posed in this appeal require a hybrid approach.  To the
extent that no party to the appeal disputes the factual findings of the Court of
Chancery, the record may be considered a settled one, analogous to that presented
by a “paper” record underlying cross-motions for summary judgment.  In that
posture, the reviewing court draws “its own conclusions with respect to the facts if
the findings below are clearly wrong and if justice requires, especially where the
findings arise from deductions, processes of reasoning or logical inferences.”
Fiduciary Trust Co. v. Fiduciary Trust Co., 445 A.2d 927, 930 (Del. 1982).  With
11
respect to the Court of Chancery’s application of remedies for breach of a trustee’s
duties, however, that court, in the exercise of its plenary equitable authority over the
supervision of trusts, is accorded broad discretion.  Law v. Law, 753 A.2d 443, 445
(Del. 2000) (citing Hogg v. Walker, 622 A.2d 648, 654 (Del. 1993) (Court of
Chancery has “broad latitude to exercise its equitable powers to craft a remedy”)).
The Lois Trustees rely upon the express terms of the trust instrument as
defining their duties.  Three provisions of the Lois Trust appear to bear on this
issue.  Article II(a) gives the trustees wide discretion to distribute income or
principal to any, all, or none of the beneficiaries as they see fit.  Statements of this
type are generally viewed as a definition of the trustees’ powers, not as exculpatory
of the liability of a trustee.  See George Gleason Bogert, The Law of Trusts and
Trustees, § 542 (1993) (“The grant of absolute or uncontrolled discretion to the
trustee in the administration of the trust, without an exculpatory clause, may not
relieve the trustee of liability for imprudent exercises of his powers...”).  Further,
Article III(e) of the Lois Trust specifies, “Decisions by the committee [of trustees]
. . . [are] not subject to review by any court.”  Courts, however, flatly refuse to
enforce provisions relieving a trustee of all liability.  Id. (noting that exculpatory
clauses that “provide[] that the trustee is not to be accountable to anyone . . . [are]
4See 12 Del. C. § 3302(a) (providing that a fiduciary of a trust “shall act with the care,
skill, prudence and diligence under the circumstances then prevailing that a prudent person acting
in a like capacity and familiar with such matters would use to attain the purposes of the account”).
5See Bogert, supra, § 542 (noting that courts enforce exculpatory clauses that “seem clearly
intended to relieve the trustee from his duty to use ordinary skill and prudence”).
12
not upheld”).  A trust in which there is no legally binding obligation on a trustee is
a trust in name only and more in the nature of an absolute estate or fee simple grant
of property. 
Finally, Article IV(c) states, “Any action taken by the trustees in good faith
shall be proper, and I relieve the trustees of all personal liability except for gross
negligence or willful wrongdoing.”  Generally, a trustee must act as the reasonable
and prudent person in managing the trust.4  Courts often permit the settlor of a trust
to exculpate a trustee for failure to exercise due care, however, so long as such
conduct does not rise to the level of gross negligence.5
A reasonable construction of these provisions, read together, is that the Lois
Trustees were exculpated for ordinary negligence, but not the duty to (i) inform
beneficiaries or (ii) treat them impartially. The duties to furnish information and to
act impartially are not subspecies of the duty of care, but separate duties.  See 
Restatement (Second) of Trusts §§ 173, 174, and 183 (1959) (devoting separate
sections to a trustee’s duty of care, duty to furnish information, and duty to act
13
impartially).  Whatever may have been McNeil, Sr.’s intention in this regard, he did
not expressly relieve the trustees of the duties which formed the basis for Hank’s
petition in the Court of Chancery.  
There is ample record support for the Vice Chancellor’s conclusion that the
Lois Trustees violated their duty to provide information.  It may be the case that
McNeil, Sr. and Lois did not favor treating their offspring as current beneficiaries
of the Lois Trust, and that it was defensible for some of the trustees who served later
on to assume that notification had already been accomplished.  Nevertheless, both
PNC and Wilmington Trust, institutional trustees with policies of notification, should
have known better.  Moreover, Henry’s repeated attempts to get information should
have put the trustees on notice that he did not know he was a current beneficiary.
A trustee has a duty to furnish information to a beneficiary upon reasonable request.
Furthermore, even in the absence of a request for information, a trustee must
communicate essential facts, such as the existence of the basic terms of the trust.
That a person is a current beneficiary of a trust is indeed an essential fact.
The Lois Trustees, and Brodhead in particular, denied important information
to Hank even after he made a reasonable request for information.  PNC’s
representative rebuffed a similar request, and Wilmington Trust’s representative
14
even misled Henry by telling him he was a remainderman in the Lois Trust.  The
trustees each had a vested interest in the way they had been doing business, and
giving Hank information would have forced them to re-examine that method.
Although Brodhead obviously dominated the trustees and controlled their approach
to Hank, each trustee was charged with an independent fiduciary obligation which
did not permit them to defer to Brodhead’s exclusionary views.
At the same time they were excluding Hank from knowledge of the terms of
the trust and its operating results, the Lois Trustees shared that information with The
Other Siblings, albeit in an indirect fashion through their participation in Claneil.
This partiality precluded Hank from making distribution demands under
circumstances not shared by his siblings.  The trustees’ claim that they distributed
tens of millions of dollars to Hank from his own trust is no defense to their blatant
failure to inform him of his current beneficiary status in the Lois Trust.  As the Vice
Chancellor noted, Hank “was at an obvious informational disadvantage to his
Siblings with regard to the Lois Trust.”  The record amply supports the Vice
Chancellor’s conclusion that the Lois Trustees failed to discharge the fiduciary duties
owed to all beneficiaries of the trust.  Accordingly, we affirm that ruling.
15
IV
A.
The Lois Trustees next contend that even if they were deficient in the
discharge of their duties, the remedy ordered by the Court of Chancery was not
proportionate to any harm done.  In particular, they argue that in the absence of
proof that the trust res has suffered a loss, there is no basis for an assessment of
damages.  In order to assess damages where none have been proved, the argument
runs, a court must adopt a punitive rationale, an approach clearly not appropriate
here where there has been no finding of malice or bad faith.
The Court of Chancery imposed a one-fifth surcharge against the trustees on
commissions earned from 1987 to 1996, an amount which the court viewed as not
“substantial.”  In view of our affirmance of the Vice Chancellor’s findings of
dereliction, we find no abuse of discretion in surcharging the trustees who had not
“properly” rendered the service for which compensation was given.  See
Restatement (Second) of Trusts § 243, cmt. a (1959).  The conduct in question was
not isolated but resulted from a pattern of deception and neglect over a span of many
years.  Imposing a surcharge representing a mere fraction of the commission
charged to the trust is not out of proportion and we affirm.
16
B.
The Lois Trustees, joined by The Other Siblings, also dispute the Court of
Chancery’s ordering a make-up distribution of 7.5 percent of the value of Hank’s
resulting trust, “as part of the equitable remedy for breaches of the Lois Trust.”
Although he did not file a cross appeal from this portion of the Court of Chancery
decision, Hank questions the source of the make-up distribution, contending that the
court should have assessed the entire Lois Trust, not merely his resulting trust.
The imposition of a make-up distribution as a partial remedy in this case is,
to a certain degree, speculative because it assumes that (a) Hank would have
requested distribution had he known his status as a current beneficiary and (b) the
trustees would have granted his request, particularly in the absence of similar
requests from his siblings.  There is ample reason to believe that Hank would have
satisfied the demand requirement since he was continually seeking additional
distribution for his own trust.  Whether the trustees would have honored Hank’s
request is open to question but any doubt in that regard must be resolved against the
trustees whose conduct led to the litigation and ultimate resolution of Hank’s
entitlement.  Given the concerted efforts of the trustees over a long period of time
to “wall-off” Hank from the operation of the trust they are ill-suited to complain
17
about the discretionary remedy ordered here.  In any event, the make-up distribution
does not invade the resulting trusts of The Other Siblings and, in effect, simply
provides for a partial distribution of funds to which Hank had, at least, an equitable
claim in previous years.  We find no abuse of discretion with respect to this aspect
of the remedy.  Finally, permitting Cameron and Justin to share in the make-up
distribution is clearly consistent with the pattern approved in the companion litigation
and was equally within the court’s discretion.
V
We next address the contention of the guardian ad litem that the Vice
Chancellor’s approval of the plan to divide the Lois Trust into four resulting trusts
should be reversed as contrary to the settlor’s intent.  The class for which the
guardian ad litem appears consists of a projected 119 individuals, representing the
anticipated descendants of McNeil, Sr. who will be living at the time the trust
expires in 2060.  The guardian ad litem complains that the Court of Chancery’s
approval of the plan of the trustees of the Lois Trust to divide that trust into four
resulting trusts creates a “pour-over” effect for the benefit of the siblings and their
18
living descendants to the possible detriment of future generations of lineal
descendants for whom the Lois Trust would have been intact.
There is no dispute that the trustees have the power to divide the Lois Trust.
Article II(a) of the trust confers on the trustees the authority to “distribute any part
or all of the income and principal of the trust to or among [the settlor’s] lineal
descendants and their spouses, and Lois.”  Article II(b) allows the trustees to make
such distribution either “outright to, or in trust for, any one or more of the class
among which they may distribute.”  The trustees decision to pour-over the Lois
Trust into four resulting trusts did not occur because the Court of Chancery ordered
it done to remedy a perceived inequity in the trust operation.  The division was the
decision of the trustees, who, in effect, sought the approval of the Court of Chancery
in the course of the litigation.  Given the express authority conferred in the trust
instrument, the Court of Chancery, or this Court on review, can disturb the trustees
decision to divide the Lois Trust only if a division of the trust was unreasonable
under the circumstances, i.e., lacking a basis in prudence and care.  12 Del. C. §
3303 (stating provisions of trust instrument control absent wilful misconduct);
Wilmington Trust Co. v. Coultier, 200 A.2d 441 (Del. 1964).  
19
The Vice Chancellor approved the division of the Lois Trust as a “rational
reaction” to the differing needs and desires of four different families.  We agree and
further add that the division will also reduce the likelihood of dispute and litigation
over claims of uneven distribution.  The guardian ad litem’s claim that the interests
of future unborn beneficiaries might be at risk is not persuasive.  His protest, though
well intentioned, is premature.  The trustees are vested with broad discretionary
powers of distribution and should they exercise this power improperly in the future,
redress is available, as this litigation attests.  Finally, given the large size of the
resulting trusts, and the unitrust distribution plan discussed hereafter, it does not
appear likely that there will be a dissipation of the corpus to the detriment of unborn
lineal descendants.
VI
Hank has cross-appealed from the Vice Chancellor’s approval of the Lois
Trustees’ adoption of the Unitrust Policy, under which the trustees proposed to treat
5 percent of the trust principal as distributable on an annual basis.  Hank argues that
the unitrust approach is not a satisfactory substitute for the broad discretion enjoyed
20
by the trustees to invade principal to meet the reasonable demands of the
beneficiaries, himself included.
The unitrust approach is designed to preserve principal by establishing a fixed
and ascertainable pay out while at the same time broadening the source of
distribution in periods, as at present, when income, particularly dividends, are of
minor significance in measuring the growth of an equities-based trust.  The Vice
Chancellor approved the unitrust policy as within the discretion of the trustees in
order to place the beneficiaries on notice of what distributions were available
(approximately $4 million dollars annually per branch) and to encourage them to
plan for such an allowance.  Moreover, as the Court noted, the unitrust approach is
merely a policy for distribution.  The trustees continue to have the authority to
invade principal to accommodate any unusual needs.  We agree and add that along
with the adoption of the pour-over separate trusts, the unitrust policy may also serve
to redress the uncertainty and potential for friction between beneficiaries which
engenders litigation.  We find no basis to disturb the Vice Chancellor’s approval of
the unitrust.
21
VII
A.
Perhaps the most contentious issue in this appeal, and one which has placed
the disputants in odd alignment, is the disagreement over the Vice Chancellor’s
removal and/or replacement of trustees charged with administering the separate
resulting trusts.  We review that ruling under an abuse of discretion standard but
only to the extent the Court of Chancery had full authority to select new trustees.
The Lois Trustees, joined by Cameron and Justin, argue that the court should not
have removed PNC.  Henry supports the removal of PNC and defends the
appointment of Bishop but complains that the court should also have removed
Mather who participated equally in the trustees’ misconduct.  Cameron and Justin
separately argue that the court lacked the authority to appoint Bishop to replace
PNC.
The Court of Chancery has the power to remove a trustee as “ancillary to its
duty to see that the trust is administered properly.”  In Re Catell’s Estate, 38 A.2d
466, 469 (Del. Ch. 1944).  While that authority should “be exercised sparingly,” the
court enjoys the discretion to remove a trustee who fails to perform his duties
through more than mere negligence.  Id. at 470.
22
The Vice Chancellor removed PNC because it had failed in its fiduciary duties
to Hank, both in its handling of his trust and as a trustee of the Lois Trust.  The
court felt so strongly about PNC’s conduct that it suggested it also resign from
Hank’s trust.  PNC violated its own administrative policies in failing to inform Hank
that he was a current beneficiary of the Lois Trust and, in view of its role in
disputing Hank’s request for distribution from his own trust, it surely knew that
Hank was keenly interested in securing additional distributions from any trust
source.  Moreover, PNC pointedly rebuffed the efforts of Hank’s lawyer to gain
information about the Lois Trust.  Apart from the question of whether the trust,
itself, was damaged by its action, PNC’s studied course of conduct cannot be
condoned and we find no abuse of discretion in its removal.
While removal of PNC as a trustee was clearly within the court’s discretionary
power, a different question arises with respect to its replacement of PNC as trustee
with Edward Bishop.  Cameron and Justin argue that the court’s appointment of
Bishop as a trustee of the Lois Trust exceeded the court’s authority to the extent it
contravened the intent of the settlor under the terms of the trust.  This claim poses
a legal question subject to de novo review.
23
Under Article III (c) of the Lois Trust, each trustee was given authority to
name his own successor, and, in the event a trustee failed, or was unable to so
designate, the remaining general trustees could fill the vacancies or increase or
decrease the number of general trustees.  PNC became a general trustee in 1978
when it was selected to replace Robert Fernley, who resigned.  Unlike Wilmington
Trust who functioned as an administrative trustee, PNC exercised full authority as
a general trustee.  Despite the explicit provisions  of the trust instrument setting forth
the mechanism for replacement of a trustee who resigns, or, as in this case, leaves
involuntarily, the Court of Chancery did not seek the input of the trustees left in
place, Mather and O’Malley, nor did it explain why it gave no consideration to the
terms of the trust.
The Court of Chancery possesses undoubted authority to appoint a trustee if
the trust instrument fails to do so.  Craven v. Wilmington Teachers Ass’n., 47 A.2d
580, 584 (Del. Ch. 1946).  Where the terms of the trust provide a method for filling
vacancies by some method other than by appointment of the court, however, the
designated method of replacement should be followed.  Scott on Trusts (Fourth ed.)
§ 388.  Even when a court seeks to exercise its residual authority of appointment,
it should do so “only in rare circumstances,” since the identity and number of the
24
trustees is central to the structure of the trust and a key indicator of the intent of the
settlor.  Schildberg v. Schildberg, 461 N.W.2d 186, 191(Iowa 1990).  See also
Matter of Guardianship of Brown, 436 N.E.2d 877, 889 (Ind. App. 1982) (holding
court should defer to procedure prescribed in trust instrument “absent a showing that
to do so would frustrate the purpose of the trust or be detrimental to the interests of
the beneficiaries”).
In selecting Bishop as a successor to PNC in the Lois Trust, the Vice
Chancellor was apparently motivated by Bishop’s compatibility with Hank in the
operation of Hank’s trust and the prospect that joint trusteeship would have some
advantages.  While these are worthwhile considerations, and perhaps entitled to
deference were the Court of Chancery writing on a clean slate, they do not excuse
disregard of the settlor’s plan for replacement of trustees.  In permitting Mather and
Bishop to remain as trustees, the Vice Chancellor recognized their suitability to
discharge their duties as trustees.  The selection of a replacement trustee is a
stipulated duty under the terms of the trust.   The designation of replacement trustees
is a matter for the settlor’s determination in the first instance and, where that
intention is expressed, should not be disregarded in the absence of compelling
circumstances such as the unsuitability of a designated replacement.  Accordingly,
25
we reverse that portion of the Vice Chancellor’s decision designating Bishop as a
replacement for PNC in the resulting trusts and remand for further consideration on
this issue, taking into account the settlor’s intention.
B.
With respect to the Vice Chancellor’s refusal to remove Mather, of which
Hank complains, we defer to the Vice Chancellor’s discretion.  It is true that Mather
was a trustee at the time Hank was misled by PNC and Wilmington Trust, but
apparently Mather did not join in that deception.  Moreover, as the Vice Chancellor
noted, Mather was a layperson who relied upon the institutional trustees and
Brodhead, who was a lawyer.  Having observed Mather in two trials, the Vice
Chancellor concluded that Mather acted in good faith with “sincere concern for all
Family members.”  Given the Vice Chancellor’s advantage of personal observation
we are not inclined to disturb his judgment.
26
VIII
Finally, we find no abuse of discretion in the refusal of the Court of Chancery
to require the Lois Trustees to pay Hank’s legal fees and in permitting the trustees
to be reimbursed for their fees from the Lois Trust.
The American rule, which is of general application, requires each side to bear
the cost of its attorney’s fees.  Brice v. State Dept. of Correction, 704 A.2d 1176,
1178 (Del. 1998).  The Court of Chancery may exercise its discretion to award
attorneys’ fees as an exception to this rule where a fund is created or, as here, the
distribution of a trust is in dispute.    Appropriate factors may include: (i) whether
the trustees’ breach of duty was fraudulent or in bad faith; (ii) the nature and extent
of the wrongful conduct; and (iii) whether the action resulted in a benefit to the trust.
See Wilmington Trust v. Coulter, 208 A.2d 677, 682 (Del. Ch. 1965); Bogert,
supra, § 871 at 191, 193.  Here, Henry’s suit did not benefit the trust, only him.
Although the extent of the breach was serious (and extended), the Court of Chancery
specifically  concluded that the trustees’ actions were ill considered and wrong, but
not in bad faith.  Finally, the Court of Chancery observed that Hank was not
successful in a significant portion of the claims he asserted in the litigation. 
27
Although the Court of Chancery imposed a surcharge on the trustees, that fact
alone does not preclude the recovery of counsel fees incurred in defending the
litigation since success is not the test.  Restatement (Second) of Torts, § 188 cmt. b
(1959); Wilmington Trust Company v. Coulter, 208 A.2d 677 (Del. Ch. 1965).
Here, the Vice Chancellor, in the exercise of his discretion, concluded that the
conduct of the Lois Trustees, particularly the individuals, did not warrant departure
from the usual rule that trustees who defend litigation against the trust are entitled
to  look to the trust for reimbursement of that expense.  We find no basis for
disturbing that discretionary ruling.
IX
In sum, we affirm all rulings of the Court of Chancery which are the subject
of the appeals and cross-appeals in this matter save one: the replacement of PNC
with Bishop.  As to that ruling, we reverse and remand to the Court of Chancery for
further proceedings consistent with this opinion.