Court Opinion

ID: 9626923
Source: CourtListenerOpinion
Date Created: 2023-08-22 08:27:54.228877+00
Date Added: 2024-06-11T15:18:34.645710
License: Public Domain

POPOVICH, J.,
dissenting:
Under Pennsylvania law, the fiduciary standard applicable in the present case is that of good faith. Therefore, I cannot join the majority in holding John Warehime to a duty of undivided loyalty.
The “legality of an agreement concerning the voting rights of corporate stock is to be adjudged by the law of the State of incorporation.” Deibler v. Chas. H. Elliott Co., 368 Pa. 267, 275, 81 A.2d 557, 561 (1951) (citations omitted). Our Business Corporation Law permits shareholders to enter into voting trust agreements and assures that the Commonwealth of Pennsylvania will respect the terms and conditions of such agreements:
One or more shareholders of any business corporation may, by agreement in writing, transfer all or part of their shares to any person for the purpose of vesting in the transferee voting or other rights pertaining to the shares upon the terms and conditions and for the period stated in the agreement.
15 Pa.C.S.A. § 1768(a) (1988) (emphasis added); accord 15 P.S. § 1511(A) and (B) (1967) (repealed 1988). Nothing in § 1768 prohibits shareholders from creating a trust that alters the traditional fiduciary obligations of a trustee, which is precisely what the settlors of the Warehime Voting Trust did.
The controversy before this Court involves no more than a question of law, which requires for its resolution the proper interpretation of a written agreement. The second clause of the trust instrument empowers the trustee with the sole voting authority over the trust stock. Warehime Voting Trust, 4/5/88, p. 2 (“the Trustee shall be entitled to exercise all rights of every kind granted to the Stockholders except as such rights shall be specifically limited by the terms of this agreement ...”). The third clause of the trust instrument expressly defines and limits the trustee’s duty to the beneficiaries. It provides:
The Trustee will use his best judgment in voting upon the stock held by him, but *1072assumes no responsibility for the consequence of any vote cast, or consent given by him, in good faith, and in the absence of gross negligence.
Warehime Voting Trust Agreement, 4/5/88, at 2. This is clear, unmistakable and explicit language that limits the trustee’s fiduciary obligation to one of good faith. Since the language of the voting trust is clear and unambiguous, we cannot overlook our obligation to enforce its terms. See In re Deed of Trust of McCargo, 438 Pa.Super. 570, 652 A.2d 1330, 1336 (Pa.Super.1994), reargument denied, appeal denied, 543 Pa. 693, 670 A.2d 141 (1995).
“It is old, settled law that persons may alter by express agreement the legal relationship they would normally have had by operation of law.” Ress v. Barent, 378 Pa.Super. 397, 548 A.2d 1259, 1265 (Pa.Super.1988) (citing Germantown Trust Co. v. Stanley Co. of America, 338 Pa. 533, [536], 13 A.2d 406, 408 (1940)). When the parties to an agreement have chosen to address a particular aspect of their legal relationship by contract, it is the terms of the agreement, as manifestly expressed, that is to determine the rights and liabilities of the parties. See Ress, 548 A.2d at 1265 (citation omitted). Despite this Court’s obligation to give effect to every word and clause in the trust instrument if reasonably possible, see In Re Grier’s Estate, 403 Pa. 517, 525, 170 A.2d 545, 549 (1961), the majority ignores the exculpatory provision of the trust instrument, and, instead, superimposes a heightened standard of care upon the trustee, that of loyalty.
I cannot assent to this construction of the instrument as it renders the exculpatory clause of the instrument futile. See Stonehedge Square Limited Partnership v. Movie Merchants, Inc., 454 Pa.Super. 468, 685 A.2d 1019, 1025 (Pa.Super.1996), aff'd, 552 Pa. 412, 715 A.2d 1082 (1998); McCargo, 652 A.2d at 1337. From a policy standpoint,, “[directors and investors must be able to rely on the stability” of their agreements and “the absence of judicial interference” when those agreements “comply with the State’s statutory prescriptions.” Williams v. Geier, 671 A.2d 1368, 1385, n. 36 (Del.Supr.1996). Today, the majority introduces an undesirable degree of uncertainty into our corporate law and eviscerates accepted principals of corporate draftsmanship by disregarding the terms of the trust instrument and imposing its own set of obligations upon the trustee of the Warehime Voting Trust.1
This court has no authority to fashion a new and different agreement for the parties; our task is to interpret the agreement which they made for themselves. Stonehedge, 685 A.2d at 1025. If the parties had intended to limit the trustee’s authority to vote their shares in any manner, then they would have included a provision that defined the specific subjects on which the trustee had unrestricted voting rights and those on which the trustee did not have such rights.2 They chose not to do so. Instead, they granted the trustee virtually unrestricted voting powers, and the only limit placed upon the trustee was that he exercise such power in good faith.
The instrument complies with the statutory prescriptions for voting trust agreements and limits the trustee’s duty to one of good faith. The majority has found that “the rec*1073ord supports the trial court’s finding that John Warehime voted the trust shares for the proposed amendments in the good faith belief that they were in the best interest of the company.” By casting the votes in good faith, John Warehime complied with the terms of the trust instrument. Such compliance shields his actions from judicial interference.
Moreover, even if the instrument had not included an exculpatory clause, this Court still would have an obligation to construe the contract in accordance with the common law, see Ress, 548 A.2d at 1265, and, under Pennsylvania common law, the fiduciary standard applicable to the Warehime trustee is one of good faith rather than absolute loyalty.
The majority correctly observes that in Flagg, our Supreme Court held the trustee to the standard of good faith rather than of undivided loyalty because the settlor of a trust had expressly approved of a trustee’s conflict of interest arising from his dual roles as trustee under the trust and as an executive responsible for the direction and management of the company. See In Re Flagg’s, 365 Pa. 82, 73 A.2d 411 (1950). Although conceding that here, as in Flagg, “the set-tlors of the Warehime Voting Trust contemplated and created an inherent conflict of interest for the voting trustee,” the majority, relying upon Brown v. McLanahan, 148 F.2d 703 (4th Cir.1945), finds Flagg inapposite because the presently-contested transaction results in the diminution of the voting rights of the stock in trust. Our Supreme Court has made no such distinction and, indeed, has applied the principles espoused in Flagg to cases where the trustee voted, in his capacity as a trustee or as an officer of the corporation, in favor of corporate measures which diminished the voting strength of trust shares. See In Re Steele’s Estate, 377 Pa. 250, 103 A.2d 409 (1954), overruled in part by In re Trust of Catherwood, 405 Pa. 61, 173 A.2d 86 (1961), overruled in part by In re Trust Estate of Pew, 411 Pa. 96, 191 A.2d 399 (1963); overruled in part by Estate of Tyler, 447 Pa. 40, 289 A.2d 441 (1972) and overruled in part by Estate of Tyler, 474 Pa. 148, 377 A.2d 157 (1977); see also In Re Pincus’ Estate, 378 Pa. 102, 105 A.2d 82 (1954).
In Steele, the beneficiary of a testamentary trust challenged the trustee’s vote in favor of a transaction that worked “substantial damage to the trust by reason of reducing its voting strength,” on the grounds of, inter alia, the conflict of interest arising from the trustee’s roles as an officer of the Easton Publishing Company, trustee of a trust holding 49% of the stock of the publishing company and beneficiary of the same trust.3 See Steele, 377 Pa. at 253, 103 A.2d at 411. The court found Flagg to be directly on point and, accordingly, held the trustee to a standard of good faith despite dilution in the trust’s voting strength.
In Pincus, the trustee exchanged his own, privately-held stock in a manufacturing corporation for the stock of a retail company. The beneficiary argued that the trustee violated his duty of loyalty in that he personally benefited, both as a manager of the business and as a beneficiary of the trust created, from the stock exchange and, at the same time, diluted the voting power of the trust and foreclosed any possibility of the beneficiary aligning with other shareholders and exercising voting control over the manufacturing corporation.4 Pincus, 378 Pa. at 107, *1074105 A.2d at 85. Again, our Supreme Court applied Flagg and refused to disqualify the trustee from entering into the stock exchange transaction because “bad faith on the part of the fiduciary [was not] affirmatively shown.” Id., 378 Pa. at 102, 105 A.2d at 86.
Here, as in Steele and Pincus, “the most important, complete and controlling” reason to uphold the acts of the trustee is enunciated in Flagg. Steele, 377 Pa. at 257, 103 A.2d at 413. Indeed, the rationale espoused in Flagg, Steele and Pincus is even more compelling in the present case, where the parties have expressly provided that the trustee’s actions will be measured under the good faith standard. The present trust instrument contemplates and sanctions the existence of a conflict of interest. Under such circumstances, the evidence of the conflict of interest does not ipso facto disqualify the trustee from voting in favor of the contested transaction. In order to effect such disqualification “bad faith on the part of the fiduciary must be affirmatively shown.” See Pincus, 378 Pa. at 109, 105 A.2d at 86; accord Flagg, 365 Pa. 82, 73 A.2d 411; Steele, 377 Pa. 250, 103 A.2d 409.
Like the settlor in Steele, the settlors in the present case set no specific limitations on the trustee’s authority other than an expressed desire that he exercise the rights therein entrusted “in accordance with his best judgment.” Warehime Voting Trust at 2. There is no limitation in this paragraph— no indication that the trustee must preserve the voting power underlying the stock intact and without alteration until the termination of the trust, but, on the contrary, merely a desire that the shares be cast in the manner the trustee, in good faith, thinks proper. See Steele, 377 Pa. at 255, 103 A.2d at 412 (1954). If the settlors intended to prohibit the trustee from voting the trust shares in favor of proposals that diluted the voting strength of the trust, then they should have included a provision to this effect in the voting trust agreement.
Our Supreme Court has held that the duty of good faith, rather than absolute loyalty, applies in cases where the settlor expressly approves the conflict of interest position; and, absent a contrary decision by that Court, it is the duty of this Court to adhere to that authority, see Stonehedge, 685 A.2d at 1026 (citation omitted), especially when, as in the case sub judice, the trust instrument expressly limits the trustee’s culpability to actions taken in bad faith. The conferred right to exercise plenary powers of voting, combined with the effect of the exculpatory provisions of the instrument, necessarily modified or displaced the absolute duty of loyalty. The record supports the trial court’s finding that John Warehime acted in good faith, and, accordingly, we should affirm its judgment. See Flagg, 365 Pa. 82, 73 A.2d 411; Steele, 377 Pa. 250, 103 A.2d 409; Pincus, 378 Pa. 102, 105 A.2d 82. Hence, I dissent.

. The majority relies upon the fact that the trust expired after a period of ten years to conclude that the settlors did not intend to authorize the trustee to vote upon a matter which would have an effect upon their shares after the expiration of the trust. At the time the settlors created the trust, a voting trust which did not contain a provision limiting the term of the trust to a period of ten years or less was invalid and unenforceable. See 15 P.S. § 1511 (1967) (repealed 1988); see also Christopher v. Richardson, 394 Pa. 425, 147 A.2d 375 (1959). Thus, the ten year provision in the trust reflects nothing more than the scrivener’s desire to comply with the applicable laws extant when the trust was made. If we glean anything from this provision, it should be the settlors’ intent to endow the trustee with the maximum authority then permitted under the business corporation law, as opposed to an intent to limit or circumscribe the power of the trustee.

. For example, the parties could have vested the trustee with the right to vote for the election of directors and relatively routine matters such as the selection of auditors, but not for fundamental transactions of the type that give rise to dissenters’ rights. In those situations where the trustee has no discretion to vote on certain subjects, the agreement ■ should provide how the underlying shares will be voted.

. Specifically, the beneficiaries objected to the distribution of a stock dividend from the trust on the grounds that Mrs. Fretz, whom the court earlier noted was "a life tenant under this trust, as well as co-trustee,” Steele, 377 Pa. at 257, 103 A.2d at 412, in her capacity as one of the directors for the corporate trust company,
voted for the stock dividend knowing she would receive it in kind, and knowing that the market value of the stock held in the trust as well as its so-called working voting control would be reduced.
Id., 377 Pa. at 257, 103 A.2d at 413. While the distribution did not reduce the number of shares held in trust, it did increase Beneficiary Fretz's voting power as an individual and correspondingly decrease the future voting power of the trust’s other beneficiary, the appellant, St. John's Lutheran Church.

. As the Court summarized,
The gravamen of the present complaint of the petitioners is that Irwin Nat Pincus violated his duty of loyalty to the beneficiaries of decedent’s estate in that he personally benefited by the stock exchange transactions, both as manager of the business and as beneficiary of the trust created by his father, and at the same time caused a corresponding detriment to the *1074beneficiaries of decedent’s estate of which he was executor and trustee in that said beneficiaries were relegated to the position of a minority corporate interest without any possibility of combining with any other interest to acquire control of the corporation ... Petitioners complain that the transfer of Jacob's interest to Nathan has foreclosed the possibility of the Henry interest participating in any combination capable of exercising control....
With respect to the other executor, Samuel A. Goldberg, Esquire, the complaint is that he made no effort to prevent the execution of the stock exchange agreement by or with Nat Pincus but, on the contrary, facilitated it, and that he knew or should have known that these agreements were detrimental to the best interests of the beneficiaries of decedent’s estate.
Pincus, 378 Pa. at 107, 105 A.2d at 85.