Court Opinion

ID: 9732061
Source: CourtListenerOpinion
Date Created: 2023-08-26 16:06:24.453571+00
Date Added: 2024-06-11T18:26:22.850030
License: Public Domain

NIGRO, Justice,
dissenting.
I respectfully dissent as I believe that John Warehime’s actions constituted a breach of his fiduciary duties to the trust beneficiaries, that the whole effort to retain control of the voting trusts beyond their expiration dates was a glaring example of self-dealing involving an impermissible clash between John Warehime’s private interests and the interests of the beneficiaries, and that the possible outcome (e.g. alleged stability of the company) does not justify the means (breach of undivided loyalty to the beneficiaries) of achieving that result.
The Superior Court crafted a thoroughly researched and well-reasoned majority opinion defining the duty of a trustee from which I borrow liberally. Relying heavily on accepted treatises due to the dearth of Pennsylvania case law on this subject, the court summarized the powers and duties of a voting trustee as follows:
The trustees have voting powers and such as are incident to their trust, but are not managers of the corporation, which is the function of the directors elected by their votes. Nor does the creation of the voting trust give the trustee the power to destroy the beneficial ownership interests in any manner.
Voting trustees should be held to adhere to the usual fiduciary principles of a trust. The trustees may deal with the depositing stockholders, but do so under the disabilities of trustees generally.
Warehime v. Warehime, 722 A.2d 1060, 1063 (Pa.Super.l998)(quoting 5 Fletcher, Cyclopedia Corp. § 2091.1, at 481-82. See also George G. Bogart, The Law of Trusts & Trustees § 252, at 320 (rev.2d ed.l992)(explaining that general rules of trust law apply to voting trusts))(emphasis added).
Thus, as the treatises recognize, a voting trustee clearly has a duty of loyalty to the beneficiaries no less than the duty placed on all trustees of any trust. Nonetheless, the majority *420opinion seeks to sanction the actions of John Warehime by selecting a single provision of the trust documents executed by Alan Warehime1 as evidence that the Warehime Trust permitted the lesser standard of “best judgment” and “good faith” to govern the trustee’s actions. While the two Warehime Voting Trust agreements (collectively Warehime Trust) do direct the trustee to use his “best judgment” and to act “in good faith,” these terms do not pertain to the duty of loyalty imposed on a trustee. Rather, they define the required standard of care a trustee must use in exercising his powers. Thus, I believe that while the majority' opinion properly characterizes the broadness of the scope of a trustee’s powers, it does not adequately acknowledge the more constraining duty of absolute loyalty to the beneficiaries which must pervade any and all actions a trustee undertakes.2
*421In finding that no breach of the trustee’s fiduciary duty occurred here, the majority opinion places primary emphasis on the notion that the terms and conditions of the Warehime Trust agreements “could have” included a definition of the fiduciary obligation more restrictive than the standards of “best judgment” and “good faith,” but did not. I do not find the omission or inclusion of such language dispositive of the intent of the trust, as the accepted tenets of the law of trusts and trustees regarding any specific trust provide that the duty of loyalty is inherent in the trust relationship itself. See Bogart, supra, § 543, at (217-18) (emphasis added). In other words, merely by being named trustee, the trustee’s duty of complete loyalty to the beneficiaries attaches. Thus, the trustee’s actions are governed first and foremost by the threshold “usual fiduciary principles of a trust,” regardless of what standard of care is set forth in the trust documents. I would therefore read the best judgment/good faith provision of the Warehime Trust documents as presuming that the voting trustee is already acting under complete loyalty to the beneficiaries before exercising his best judgment or acting in good faith.
Furthermore, while the majority opinion focuses on the idea that specific language of the Warehime Trust agreements “could have” delineated the subjects on which the trustee had unrestricted voting rights and those on which he did not, I believe the proper focus is on the plain language of the Warehime Trust agreements that the voting trust was to expire ten years after its execution, and that no language in the agreements provides any leeway whatsoever to override that restriction. The Superior Court explained:

The powers and duties of the trustees are to be determined from the trust agreement as a whole, not reading one provision to nullify another and thus defeat the trust.

*422* * ❖ *
It is a breach of trust to vote contrary to its terms, or for personal advantage outside of and contrary to its purpose. It has been held that voting trustees could not elect themselves or others as directors for terms of office that would outlast the duration of the voting trust.
Warehime, 722 A.2d at 1063 (quoting 5 Fletcher, Cyclopedia Corp. § 2091.1, at 481-82. See also Bogart, supra, § 252, at 320)(emphasis added). Thus, I believe that focusing on what could have been included in the trust agreement but was not, instead of what explicitly was included in the agreement, is a circuitous way of giving special dispensation to John Warehime’s actions. By using the trust’s shares to adopt amendments that would extend the ten-year term of the voting trust another five years, John Warehime voted contrary to the trust’s terms and for personal advantage, plain and simple.3 Had he acted with undivided loyalty to the beneficiaries, the only proper procedure would have been to allow the trusts to expire and return the right to vote their shares to the individual beneficiaries. The beneficiaries could then vote, if they so chose, to form another voting trust of designated duration and reinstate John Warehime as trustee. Instead, in using the voting trusts to perpetuate his own power to vote those shares, John Warehime not only “destroy[ed] the beneficial ownership interests” by depriving the beneficiaries of their right to vote the shares themselves, but clearly put himself in a position where his own interests — keeping control of the company — impermissibly conflicted with the interests of the trust’s beneficiaries. Thus, as the Superior Court noted, John Warehime’s actions breached his duty of loyalty because they “fundamentally alter[ed] the very corpus of the trust — the voting rights held in trust for the beneficiaries.” Warehime, 722 A.2d at 1068.
*423Similarly, sanctioning acts done merely in “good faith” by the trustee does not justify a breach of complete loyalty. The Superior Court explained:
Good faith on the part of the trustee is not a defense against a claim of disloyalty. The ignorance or innocence of the trustee is irrelevant in deciding whether the act was disloyal, although it may be of some influence in determining the relief granted the beneficiary.
It is not necessary that the trustee shall have gained from the transaction in order to find that it is disloyal. If the dealing presented conflict of interest and consequent temptation to the trustee, it will be voided at the option of the beneficiary, regardless of gain or loss to the trustee.
With respect to self dealing transactions the rule of undivided loyalty has been applied primarily to deter trustees from the temptation to favor themselves individually over their beneficiaries. For this reason a defense that the trustee acted in good faith ... or that the trust incurred no loss (or actual benefit accrued to the trust) has not been allowed by the courts.
Warehime, 722 A.2d at 1064 (quoting Bogert, supra, § 543, at 217-18) (emphasis added).
In light of the above, I fail to see how John Warehime’s actions, which effectively disenfranchised the beneficiaries of their right to assume voting control of their shares upon the natural expiration of the trusts, can be reconciled "with the absolute duty of loyalty imposed on all trustees. The black letter law of trusts and trustees finds that the “best judgment” standard should only be applied to decisions once the duty of complete loyalty has been satisfied.4 Furthermore, *424the duty of the trustee accommodates neither “ignorance or innocence of the trustee” nor “good faith” as a defense to abrogating the trustee’s loyalty obligations to the beneficiaries. Consequently, John Warehime’s protestations that the creation of another class of voting stock was done by an “independent” committee selected by an “independent” board rings hollow, as he was bound by duty to vote against proposed amendments that would serve to diminish the beneficiaries’ voting interests. Nor do I find room to accept an alleged beneficial outcome such as “stability of the company” as justification for the trustee’s breach of his duty of loyalty. I therefore agree with the Superior Court that “such a radical structural transformation of the voting rights of the [beneficiaries] should only take place with the approval of the majority of the [beneficiaries’] voting shares, with all shares being voted by their actual or beneficial owners and not the voting trustee.” Warehime, 722 A.2d at 1068.
Finally, I note that at its core, this case is about the meaning of the word “trust”-not merely in its legal sense but pursuant to the everyday, ordinary understanding of the word, i.e., “a charge or duty imposed in faith or confidence or as a condition of some relationship ... the obligation to promote to the largest extent possible the welfare of [those depending on the relationship],” and connotes the same qualities as the legal concept, i.e., “reliance ... honesty ... worthiness.... ” See Webster’s Third New International Dictionary of the English Language 2456 (1998). It is axiomatic, therefore, that regardless of whatever authority John Warehime had to exercise his “best judgment” and act in “good faith,” common decency dictates that no person placed in a position of trust can meet even the everyday expectations of that status without first, last, and always being loyal to the people who placed the trust in him. Instead, John Warehime went to extraordinary legalistic lengths to attempt to defeat even the ordinary meaning of trust. I would not permit a dilution of either the *425familiar or the legal meaning of the word trust any more than I would permit a diminution of these beneficiaries’ voting rights.
As the law of trusts and trustees provides that “[i]f the dealing presented conflict of interest and consequent temptation to the trustee, it will be voided at the option of the beneficiary, regardless of gain or loss to the trustee,” Bogert, supra, § 543, at 217-18, I would find that the votes cast by John Warehime in favor of the proposed amendments should have been voided and an injunction barring him from voting in favor of the amendments to create a new class of dispute-resolution stock should have been granted.
I would therefore affirm the Superior Court based on its well-reasoned opinion.
Justice CASTILLE joins in the dissenting opinion.

. The provision of the Warehime Trust Agreement cited by the majority states:
The Trustee will use his best judgment in voting upon the stock held by him, but assumes 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, 4/5/86, at 2; Warehime Voting Trust Agreement, 12/1/88, at 3 (emphasis added).

. The Superior Court summarized the trustee’s duly of loyalty as follows:
Perhaps the most fundamental duty of a trustee is that he must display throughout the administration of the trust complete loyalty to the interests of the beneficiary and must exclude all selfish interest and all consideration of the interests of third persons.
A trustee's duty of loyalty has been described as inherent in the trust relationship. The duty is sometimes stated as the rule of undivided loyalty, or simply the loyalty rule. Though sometimes it has been difficult for the courts to determine whether the rule should be applied under the circumstances of the particular case, nevertheless the loyalty rule may be simply stated:
A trustee is under a duty to the beneficiary of the trust to administer the trust solely in the interest of the beneficiary. The trustee must exclude all self interest, as well as the interest of a third party, in his administration of the trust solely for the benefit of the beneficiary. The trustee must not place himself in a position where his own interests or that of another enters into conflict, or may possibly conflict, with the interest of the trust or its beneficiary. Put another way, the trustee may not enter into a transaction or take or continue *421in a position in which his personal interest or the interest of a third party is or becomes adverse to the interest of the beneficiary.
Warehime, 722 A.2d at 1064 (quoting Bogert, supra, § 543, at 217-18) (emphasis added).

. I believe it is instructive that the proposed amendments were adopted less than one year prior to the voting trust's termination and that John Warehime was the only shareholder at the meeting and the only shareholder to vote for the amendments.

. I find the majority’s reliance on Flagg’s Estate, 365 Pa. 82, 73 A.2d 411 (1950), for the proposition that the trustee may proceed to act in “good faith” where conflicting interests for the trustee are created by the settlor, to be misplaced. As the Superior Court noted, Flagg involved a simple matter of administration of the trust where application of a “good faith” standard was acceptable, whereas Warehime *424involves the fundamental alteration of the nature of the corpus of the trust — a diminution of the property rights held by the beneficiaries— where undivided loyalty is required. Warehime, 722 A.2d at 1067.