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HomeMy WebLinkAbout10-22-04 IN RE: ESTATE OF : JOSEPH D. BRENNER, SR., JOSEPH D. : IN THE COURT OF COMMON PLEAS BRENNER, JR., and MARGARET B. BUSHEY, : OF CUMBERLAND COUNTY, : PENNSYLVANIA Petitioners, ORPHANS' COURT DIVISION V. No. 21-2004-087 MANUFACTURERS AND TRADERS TRUST COMPANY, a New York corporation, DAVID C. GORITY, an individual, and CURT R. ' STAUFFER, an individual, Respondents. : PETITIONERS' HEARING BRIEF Petitioners Margaret B. Bushey, Joseph D. Brenner, Jr. ("Brenner J.~), and joseph D. Brenner, Sr. ("Brenner Sr" ...... · ) respectfully submit the following in antlmpatlon of the hearing to commence before Auditor James D. Bogar on November 2. I. Procedural History and Posture This is an action for breach of fiduciary duty, and aiding and abetting breach of fiduciary duty, in connection with four family trusts. Petitioners originally filed their claims against Respondents in a complaint in the Civil Division on August 22, 2003, but were subsequently directed to file a Petition in the Orphans' Division, which they did on February 2, 2004. Respondents filed objections to the Petition on March 9, 2004, which were argued before the Court, and decided on June 18, 2004. As a result of the preliminary objections, the Court stuck Petitioners' claim for punitive damages, and struck the specific figure cited in the Petition as a damages estimate. However, the Court rejected Respondents' objection to the claims against Gority and Stauffer, and rejected Respondents' objection to the manner in which Respondents requested a jury trial. In the meantime, shortly after Petitioners filed their complaint, Respondent M&T filed "First and Final Accountings" for the same four trusts in the Orphans Division on October 24, 2003. Petitioners filed objections to M&T's accountings on November 21, 2003. Petitioners object to confirmation of the accountings for the same reason they have filed claims against Respondents, i.e., because Respondents breached their fiduciary duties with respect to the trusts in several regards and thereby caused a substantial reduction in the value of the trust assets. The Court appointed James D. Bogar, Esq., as auditor for the accountings on December 19, 2003. On June 18, 2004, Respondents filed an Answer and New Matter, asserting various defenses to Petitioners' claims in the New Matter, including arguing that Petitioners failed to mitigate their damages by not repurchasing Tyco stock with the trust assets after June 12, 2002, and that Petitioners breached their own fiduciary duties by failing to diversify the trust assets. After a hearing before the Honorable Edgar B. Bayley regarding the scope of the auditor's duties, the Court ruled on October 8, 2004, that Auditor Bayley should hear Petitioners fiduciary duty claims against Respondents in addition to acting upon M&T's accountings. The hearing before Auditor Bayley is scheduled to commence on November 2. II. Statement of Facts This matter involves four trusts created by Petitioner Brenner Sr. and his wife Jane Brenner (deceased). On November 23, 1994, Brenner Sr. and Jane Brenner executed an Irrevocable Agreement of Trust, which created a trust for the benefit of their four children and, upon their children's deaths, their grandchildren (hereinafter "the Grandchildren's Trust"). On the same date, Jane Brenner also executed an Amendment and Restatement to Declaration of Trust with regard to the other three trusts at issue in this case, referred to as the Jane Brenner "B" Trust, the Jane Brenner "C" Trust, and the Blakely Trust (hereinafter, collectively, "the Children's Trusts"). The Jane "B" and Jane "C" Trusts are for the benefit of Brenner Sr. during his lifetime and, upon his death, the Brenners' children and grandchildren. The Blakely Trust is for the benefit of Nancy B lakely (one of the Brenners' four children) and her children. 2 By the terms of the trust instruments, Farmers Trust Company was to serve as co- trustee with Brenner Sr. of the Jane "B," Jane "C," and Blakely Trusts.~ Brenner Sr. owned stock in Farmers Trust and served on its Board. He knew the principal officers of Farmers Trusts and trusted them. David Gority was one of the officers of Farmers Trust who Brenner Sr. knew and trusted. In addition to the Children's Trusts, Farmers Trust was also to serve along with Petitioners Bushey and Brenner Jr. as co-trustees of the Grandchildren's Trust. In approximately 1997, Keystone Financial Bank acquired Farmers Trust and took over the co-trustee role for the trusts. When Keystone Financial was in turn acquired by Respondent M&T in late 2000, M&T took over the co-trustee role. The trust accounts have been maintained at M&T under the account numbers 32-1056-60-8 (Jane Brenner "B" Trust), 32-1057-60-6 (Jane Brenner "C" Trust), 41-7090-60-2 (Blakely Trust), and 43-1075-60-5 (Grandchildren's Trust). All four trusts were funded solely with shares of Amp, Inc. ("Amp") stock. Petitioner Brenner Sr. joined Amp, an electrical products company based in Harrisburg, Pennsylvania, after completing his service in World War 1I. He worked there for more than 40 years, eventually becoming its CEO and then Chairman of its Board. During his time at Amp, Brenner Sr. acquired numerous shares of Amp stock, many of which he gifted or put into trust for the benefit of his family, including the shares in the Children's and Grandchildren's Trusts. The Grandchildren's Trust, in fact, contains a provision that recognizes the assets placed in trust consist solely of Amp common stock and expressly releases the trustees fi.om "all responsibility and obligation to dispose of any portion of the AMP, Inc. stock by reason of the concentration of the investment of the Trusts in the stock of one corporation.''2 The Amp shares in the trusts were converted to shares of Tyco International Ltd. ("Tyco") stock when Tyco acquired Amp in 1998. Brenner Sr. was 80 years old in 1997 when his wife Jane died. Already suffering from profound hearing loss, Brenner Sr.'s physical and mental health began to decline noticeably z As to Nancy Blakely, Brenner Sr. also had limited power of attorney for Mrs. Blakely for many years, including in 2002, although he no longer has power of attorney for her. 2 The provision does not prohibit the trustees fi'om selling Amp stock. 3 after Jane's death. This decline was recognized by Gor/ty. Brenner Sr. had been in the habit of visiting the bank frequently and dropping in on Gority and other bank employees on an unannounced basis. In the time period after his wife's death, Brenner Sr.'s questions started to become repetitive, i.e., Brenner Sr. would ask Gority and others questions that they had akeady answered previously and sometimes multiple times. In the summer of 1998, Gority called Bushey into his office and politely, but clearly, raised his concerns about Brenner Sr., including Brenner Sr.'s confusion and the fact that Brenner Sr. was taking up a lot of the bank employees' time. Gority suggested that, from that time forward, either Bushey or Brenner Jr. should be present at all meetings between the bank and Brenner Sr., so that they could help him understand what was being said and so that Brenner Sr. could turn to Bushey or Brenner Jr. when he wanted the subject of a meeting explained to him or discussed again later. Bushey (and subsequently Brenner Jr.) agreed that this was an appropriate arrangement for dealing with their father's declining capacity. From that time forward, Bushey or Brenner Jr. attended all substantive meetings regarding the trusts, except the most important one--the June 12, 2002, meeting to which they were not invited and which resulted in the complete liquidation of the Tyco stock held in the trusts. Brenner Sr.'s accountant also attended at least one occasion to assist him. Brenner Sr.'s physical health and mental acuity continued to decline after 1998. By 2002, Brenner Sr. was 85 years old, suffered from profound hearing loss, had significantly impaired vision due to cataracts, and suffered from dementia associated with his advanced age. M&T, and in particular Gority, who had remained with the bank through its acquisitions and continued to have principal responsibility for the Children's and Grandchildren's Trusts, was well aware of these facts. Bushey regularly assisted Brenner Sr. with both his routine and significant business and personal affairs. Brenner Sr. willingly accepted her and Brenner Jr.'s assistance, and came to rely on them to help him with many things that he could no longer manage alone. In March 2001, Brenner Sr. granted a durable general power of attorney to Bushey, and to Brenner 4 Jr. in the event that Bushey was unable or unwilling to so act. This power of attorney replaced a prior power of attorney that no one was able to locate. M&T appears to have kept copies of this power of attorney in the trust files. Having Bushey and Brenner Sr. assist Brenner Sr. was an effective approach to managing Brenner Sr.'s reduced capacity. This solution worked effectively until June 2002, when the issue of Tyco concentration in the trusts came to head. Farmers Trust Company, the corporate co-trustee actually named in the trust instruments, had never objected to the fact that the Brenner trusts were funded solely with Amp stock. Keystone Financial, immediate successor to Farmers Trust and M&T's predecessor, asked Brenner Sr. to sign letters authorizing Keystone to continue holding all the Tyco shares in the Children's Trusts, acknowledging that Keystone had discussed with him the risk of not diversifying the portfolio, and stating that the authorization would remain in effect until he authorized the sale of any shares in writing. Brenner Sr. provided such letters in August 2000. M&T assumed co-trustee responsibilities for the Children's and Grandchildren's Trusts in approximately October 2001. Curt Stauffer, who was assigned to work with Gority on the trusts, made a presentation to all three Petitioners in November 2001 urging diversification. Shortly thereafter, Gority indicated in a letter to Petitioners that 20% liquidation was "well within the parameters we are comfortable with," and Stauffer recommended in a letter that a liquidation plan for the Children's Trusts be "carded out in a disciplined and timely manner" and that "market prices...need not dictate the progress of the liquidation plan." Petitioners Bushey and Brenner Jr. had already agreed to sell 40% of the Tyco shares in the Grandchildren's Trust previously. Petitioners decided not to sell any additional Tyco stock at that time. Unbeknownst to Petitioners, M&T considered the Tyco concentration in the stocks so unacceptable that it was considering resigning as co-trustee if it could not get Petitioners to agree to its Tyco divestiture plan. 5 In early Jnne 2002, events conspired to create an opporttmity for M&T to try to rome through its plan. On Monday, June 3, 2002, Tyco's CEO was arrested and charged with tax evasion, which caused a drop in Tyco's stock price. Petitioners were aware of the situation and had no immediate plans to sell Tyco shares. On Friday, June 7, 2002, Stauffer called petitioner Bushey in a panic. Stauffer told Bushey that Gority was on vacation so he was taking it upon himself to call the family to notify them that M&T was "eliminating its position in Tyco immediately" and recommend they do the same. Stauffer breathlessly described his concems about Tyco and indicated he would call Bushey again later to set up a time to meet the following week after Gority returned fi.om vacation. Stauffer made a similar call to Brenner Jr. The next contact with M&T regarding the trusts occurred on or about Tuesday, June 11, 2002, when Stauffer telephoned Brenner Sr. and asked him to come by M&T's office the following morning when Gority was back from vacation. Brenner Sr. agreed to come to the bank for a brief informational meeting about the Tyco situation. Stauffer did not contact Bushey or Brenner Jr. to advise them of the meeting or invite them to attend. When Brenner Sr. arrived at M&T on June 12, 2002, Stauffer and Gority were already on a conference call with John Klubosicky, a senior M&T employee in Buffalo, New York. During the course of the meeting, Stauffer, Gority, and Klubosicky persuaded Brenner Sr. to sign two papers purportedly authorizing the immediate sale of one-third of the Tyco shares in the Children's Trusts and the entry of a stop loss order at $9.00 on the remaining two-thirds of the Tyco shares in those trusts. One of the papers related to the Jane "B" and Jane "C" Trusts, and one of the papers related to the Blakely Trust. Brenner Sr. signed the papers under pressure from the meeting participants, including Stauffer, who pounded on the desk and said words to the effect "we have to do it now." Respondents took advantage of Brenner Sr.'s reduced capacity to achieve the diversification that M&T had wanted for the account and been frustrated it had not been able to achieve, without regard to the wisdom of the specific recommendation under the cimumstances or the fact that Brenner Sr. could not give meaningful consent. Brenner Sr. did not understand the 6 meaning of the documents he signed. Brenner Sr. did not understand and still does not understand what a stop loss order is or why it would be used in connection with the Children's Trusts. He was not told and did not understand the rationale for the $9.00 trigger price for the stop loss order. He did not understand and still does not believe that one of the papers related to the Blakely Trust. After Brenner Sr. left M&T's offices, Respondent Gority called Bushey. Gority informed Bushey that her father had just been at the office and had agreed to liquidate one-third of the shares in the Children's Trusts immediately and subject two-thirds to a $9.00 stop-loss order. Bushey was dumbfounded, and expressed her surprise to Gority. She did not know that her father had been at M&T that morning. She did know that when she had last spoken to him he had not been planning to sell any Tyco stock. Gority asked whether she agreed with the plan her father had purportedly agreed to. Bushey did not understand that Gority was asking whether she agreed to apply the same plan to the Grandchildren's Trust, but rather believed Gority was asking her to affirm her father's decision since she had not been invited to the meeting. Confused but under pressure, Bushey "agreed." However, she could not give meaningful consent since Gority had not explained the basis for the recommendation, had not explained what a stop loss order was or its benefits and disadvantages, did not explain why she had not been invited to the meeting, did not ensure that she understood he was talking about the Grandchildren's Trust, did not give her any time or opportunity to discuss the matter with the other co-trustees before responding, and did not discuss the consequences of the sale or how the proceeds would be invested. Indeed, according to Gority's own deposition testimony, Stauffer was the only person in the M&T hierarchy who should have been advising Respondents on investment matters (although that was not in fact tree), and he was not on the call. The call also lasted only a few minutes. Next, Gority called Brenner Jr. and again had only a few minute phone call in which he represented to Brenner Jr. that his father and sister had already consented to the Tyco 7 liquidation plan and that he should as well. Like Bushey, Brenner Jr. was surprised and confused by what Gority was telling him. However, Gority again provided minimal information to Brenner Jr., characterized the plan as "a done deal," and pressured Brenner Jr. to go along with his father's and sister's purported wishes. Brenner Jr. ultimately "agreed," but specifically expressed reservations about the stop loss order and said he would call back after speaking to Bushey and Brenner Sr. After getting off the phone with Gority, Brenner Jr. attempted to reach his father at home but he was not there. Brenner Jr. also called Bushey. It was in that conversation that Bushey learned she had allegedly agreed to allow M&T's liquidation plan to be applied to the Grandchildren's Trust over which she was co-trustee. Bushey never agreed or intended to agree to liquidate the Tyco shares in the Grandchildren's Trust. Brenner Jr. then called Gority, but had to leave a message when he was told Gority was at lunch. On June 12, 2002, at 11:33 a.m., M&T caused 4,533 shares of Tyco stock in the Jane Brenner "B" Trust (one-third of the total) and 13,866 shares of Tyco stock in the Jane Brenner "C" Trust (one-third of the total) to be sold at $10.23 per share. At 11:36 a.m., M&T caused 24,274 shares of Tyco stock in the Blakely Trust (one-th/rd of the total) to be sold at $10.23 per share. Less than thirty minutes later, at 12:05 p.m., M&T caused 11,134 shares of Tyco stock in the Grandchildren's Trust (one-third of the total) to be sold at $10.23 per share. It is unclear whether M&T entered the latter sale before or after speaking to Bushey and Brenner Jr. on the phone. Only a few hours later, on the same afternoon of June 12, 2002, Tyco's stock price fell below $9.00 for a short time and, as a result of the stop loss orders, all remaining Tyco shares were sold out of the four trusts at $8.75 per share. Specifically, M&T sold 9,067 shares out of the Jane Brenner "B" Trust, 27,734 shares out of the Jane Brenner "C" Trust, 48,468 shares out of the Blakely Trust, and 22,266 shares out of the Grandchildren's Trust. Gority had not yet called Brenner Jr. back when the stop loss executed on the Grandchildren's Trust. Several hours later, Brenner Sr. arrived home, with no idea that the Tyco stock had been completely liquidated fi.om the trusts. That night, Bushey attempted to explain to him, 8 for the first of what would be many times, what he had signed at M&T on the morning of June 12 and how the Tyco stock had come to be liquidated. Brenner Sr. did not believe Bushey that night, and to this day does not believe he agreed to the plan M&T executed. Only after Petitioners had an opportunity to talk to each other, which M&T had not allowed them earlier, were they able to start piecing together what had happened. Petitioners were upset about the events and in particular about Respondents' conduct and tried to figure out what to do. Bushey and Brenner Jr. refused to sign the written consent that Gority sent them to "confirm" their purported verbal consent on the telephone. Ultimately, Petitioners decided to pursue claims against Respondents based on the events of June 12, 2002, and to remove M&T as co-trustee on the accounts pursuant to their authority under the trust agreements. Petitioners appointed Orrstown Bank as successor trustee. Despite the efforts of Respondents and their counsel, however, M&T refused, without explanation, to release the assets so that Orrstown could reinvest them. On July 8, 2004, M&T's counsel finally offered to release the assets if Petitioners signed a proffered release. Petitioners did not believe they should be required to sign the release in order to exercise their right to appoint a successor co-trustee and by that time, due to M&T's delays, anticipated trial in the near future in any event. III. Arguments of Law M&T, aided and abetted by Gority and Stauffer, breached its fiduciary duties when it sold the entirety of the assets in the Children's and Grandchildren's Trusts in a matter of hours based on an ill-advised recommendation and without the true consent of the co-trustees who had joint investment authority. M&T also breached its fiduciary duties to the Children's and Grandchildren's Trusts by subsequently refusing to timely release the trusts assets to the designated successor trustee so that they could be appropriately reinvested. A. M&T is Liable for Multiple Breaches of Fiduciary Duty The elements that must be proven to establish liability for breach of fiduciary duty 9 are: (1) that the defendant (trustee) negligently or intentionally failed to act in good faith and solely for the benefit of plaintiff in ail matters for which he or she was employed; (2) that the plaintiff suffered injury; and (3) that the defendant's failure to act solely for the plaintiffs benefit was a real factor in bringing about plaintiffs injuries. See In re Church of St. James the Less~ 2003 WL 22053337 '19 (Pa. Com.P1. March 10, 2003) (quotation marks and citation omitted). Once the plaintiff shows a causal connection between the trustee's breach and the trusts' losses, the burden of persuasion shifts to the trustee to prove, as a matter of defense, that the loss would have occurred in the absence of a breach of duty. See Estate of Stetson, 463 Pa. 64, 84 (1975). Under Pennsylvania's "prudent investor rule," a fiduciary "shall invest and manage property held in a trust as a prudent investor would, by considering the purposes, terms, and other cimumstances of the trust and by pursuing an overail investment strategy reasonably suited to the trust." 20 Pa.C.S.A. § 7203(a). A fiduciary is to consider multiple factors in making investment and management decisions, including but not limited to: (1) the size of the trust; (2) the nature and estimated duration of the fiduciary relationship; (3) the liquidity and distribution requirements of the trust; (4) the expected tax consequences of investment decisions or strategies and of distributions of income and principal; (5) the role that each investment or course of action plays in the overall investment strategy; (6) an asset's special relationship or special vaiue, if any, to the purposes of the trust or to one or more of the beneficiaries * * *; (7) to the extent reasonably known to the fiduciary, the needs of the beneficiaries for present and future distributions authorized or required by the governing instrument; and (8) to the extent reasonably known to the fiduciary, the income and resources of the beneficiaries and related trusts. Id. § 7203(b). "The standard of care imposed upon a trustee is that which a man of ordinary prudence would practice in the care of his own estate. Ifa fiduciary has greater skill than that of a person of ordinary prudence, then the fiducia~y's standard of care must be judged according to the standard of one having this special skill." In re Estate of Scharlach, 809 A.2d 376, 384, 2002 10 Pa Super 279 (2002). Similarly, "a trustee who obtains the appointment as trustee by representing that he or she has greater skill than a person of ordinary prudence...will be held to that higher standard." Pew, supra, 440 Pa. Super. at 237. As a financial institution that specialized in fiduciary accounts, M&T owed a higher standard of care than an ordinary person. See Scharlach, supra, 809 A.2d at 384; see also In re Mendenhall. 484 Pa. 77, 82-83 (holding that trustee bank, which assigned an investment officer to each trust account, which organized investment committee to make recommendations as to trust acquisitions and retentions, and which employed outside investment analysts, possessed greater resources and skills than those of the ordinary individual trustee, and thus should be held to standard of care higher than "prudent man" standard in administering the trust). In addition to their investment obligations, fiduciaries must be held to a high standard of conduct in their dealings with co-trustees and trust beneficiaries. To do less abrogates the settlor's intent to have co-trustees jointly responsible for the trusts, and risks undermining the importance of the fiduciary relationship. "Many forms of conduct permissible in the work-a-day world for those acting at arms length, are forbidden to those botmd by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending. * * * Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd." In re Holmes' Trust., 139 A.2d 548, 551 (1958), quoting Meinhard v. Salmon, 164 N.E. 545,546 (N.Y. 1928). See also In re Dingee's Estate, 35 A.2d 577, 579 (Pa. Super. 1944) ("It is the duty of a trustee to keep the beneficiaries fully informed of his acts."). In this case, Petitioners will establish that M&T breached its standard of care in the administration of the Children's and Grandchildren's Trust, that the trusts were damaged, and that a causal relationship exists between M&T's breaches and the trusts' losses. With regard to the Children's Trusts, M&T breached its fiduciary duties by, inter alia, conducting a crucial 11 meeting without Bushey or Brenner Jr. present as agreed previously and as necessary in light of Brenner Sr.'s reduced capacity, failing to take reasonable measures to ensure that Brenner Sr. understood the recommendation being made, failing to provide adequate information about the rationale for the recommendation, failing to ensure that Brenner Sr. understood what he was signing, applying improper pressure to obtain Brenner Sr.'s "consent," and acting immediately upon Brenner Sr.'s purported "consent" without consideration of any of the foregoing. With regard to the Grandchildren's Trust, M&T breached its fiduciary duties by, inter alia, contacting Bushey and Brenner Jr. separately and solely by telephone, failing to provide an adequate explanation of the recommendation being made, failing to explain the benefits and disadvantages of the recommendation, failing to provide a meaningful opportunity for Bushey or Brenner Jr. to consider the recommendation and discuss it with each other and Brenner Sr. before making a decision, applying improper pressure, failing to clearly define the consent being sought in the conversation with Bushey, and failing to address Brenner Jr.'s express concern about the stop loss order prior to entering it. As a result of M&T's breaches, over 160,000 shares of Tyco stock, constituting 100% of the assets in the Children's Trusts and approximately 60% of the assets in the Grandchildren's Trust, were liquidated in a matter of hours, at the bottom of the market. Had M&T not breached its fiduciary duties, and had Respondents dealt honestly and fairly with the co-trustees and reacted to the situation in a calm and deliberate manner, the Tyco shares would not have been liquidated fi'om the trusts on June 12, 2002. With regard to both trusts, M&T breached its fiduciary duties by failing to release the trust assets to the successor trustee so that they could be appropriately reinvested. Had M&T properly released the funds, they would have been reinvested rather than remaining at M&T in the form of cash earning a very low rate of return. 12 B. Gority and Stauffer Are Liable for Aiding and Abetting M&T's Breaches of Fiduciary Duty Pennsylvania courts have only recently recognized a cause of action for aiding and abetting breach of fiduciary duty. The federal courts were the first to conclude that Pennsylvania law would recognize this tort. See Stone St. Services, Inc. v. Daniels, 2000 U.S. Dist. LEXIS 18904 *8 (E.D. Pa.) ("No Pennsylvania state courts have addressed whether a claim for aiding and abetting a breach of fiduciary duty is actionable in Pennsylvania. However, most Pennsylvania federal courts have concluded that the state courts would recognize the tort."); Adena, Inc. v. Cohn, 162 F. Supp. 2d 351,357 (E.D. Pa. 2001) (stating similar). The first Pennsylvania state court to recognize a cause of action for aiding and abetting breach of fiduciary under state law was the Commonwealth Court of Pennsylvania in 2003. See Koken v. Steinberg, 825 A.2d 723,731 (Pa. Commw. Ct. 2003) (concluding that aiding and abetting breach of fiduciary duty falls within the scope of "persons acting in concert" under Restatement (Second) of Torts § 876 and is a "viable cause of action in Pennsylvania"). Since then, the Court of Common Pleas has also recognized the cause of action. Sec Lichtman v. Taufer, 2004 WL 1632574 *8 (Pa. Com. P1. July 13, 2004).3 In order to make out a claim for aiding and abetting a breach of fiduciary duty under Pennsylvania law, the following elements must be proven: (1) a breach ora fiduciary duty owed to another; (2) knowledge of the breach by the aider and abettor, and (3) substantial assistance or encouragement by the aider and abettor in effecting that breach. See Lichtman, supra, 2004 WL 1632574 at *8; Koken, supra, 825 A.2d at 732. In this case, M&T committed 3 In their preliminary objections to the Petition, Respondents asked the Court to strike Petitioners' aiding and abetting breach of fiduciary claims against Gority and Stauffer, on the grounds that no such cause of action existed in Pennsylvania and that Petitioners had failed to state a claim even if such a cause of action existed. By order dated June 18, 2004, the Honorable Kevin A. Hess, Jr., rejected Respondent's objection and allowed the claims to proceed, while recognizing that the facts would have to be developed in order to determine whether a finding of liability was warranted. Although he reached the same conclusion, it appears that Judge Hess may have been without the benefit of Koken in making his decision, as neither party cited it to him, and Lichtman had not yet been decided. 13 multiple breaches of fiduciary duty (as discussed in the last section), Gority and Stauffer were aware of these breaches of fiduciary duty, and Gority and Stauffer acted in concert with each other and M&T to provide substantial assistance or encouragement in effecting the breaches of fiduciary duty. Respondents are expected to argue (as they did in their preliminary objections) that Gority and Stauffer could not aid and abet their employer's breach since it was effected through them as M&T's agents. However, while the Pennsylvania courts have not specifically addressed a situation like this one, courts in other states have allowed plaintiffs to pursue aiders and abetters who have relationships with the fiduciary. See, e.g., Winer Family Trust v. Queen, 2004 U.S. Dist. LEXIS 1825 *2-3 n.2 (E.D. Pa.) (identifying one person who was Vice President of one entity and a director of the other entity, and another person who was associate general counsel of one entity and director of the other entity, as the parties against whom aiding and abetting breach of fiduciary duty claims were asserted); Thompson v. Glenmede Trust Co., 1996 U.S. Dist. LEXIS 13675 '1-6 (£.D. Pa.) (identifying corporate officers and certain lawyers as the parties against whom aiding and abetting breach of fiduciary duties claims were asserted); Taita Chem. Co. v. Westlake Styrene, LP, 2003 U.S. App. LEXIS 23671 *5-6 (Sth Cir.); (corporation allegedly aided and abetted its directors' breaches of fiduciary duty); CCBN.com, Inc. v. Thomson Financial, Inc., 270 F. Supp.2d 146, 152 (D. Mass. 2003) (recognizing that corporation could be liable for aiding and abetting broach of fiduciary duty by its employees, who it had appointed as directors on another corporation's board); Ivanhoe Partners v. Newmont Mining Corp., 535 A.2d 1334, 1344 (Del. 1987) ("Of course we recognize that one who knowingly joins with a fiduciary, including corporate officials, in a breach of a fiduciary obligation is liable to the beneficiaries of the trust relationship."). By analogy, in the area of respondeat superior liability, it is well-established that the injured party may make a claim against the agent as well as the principal. See Henkels & McCoy, Inc. v. Adochio, 138 F.3d 491,493 (3d Cir. 1998); Brennan v. Huber, 112 Pa. Super. 14 299, 308-09, 171 A. 122 (1934); see also. Restatement (Second) of Agency § 217A cmt. a ("Ia] principle is jointly and severally liable with the agent for whose tortious conduct he is responsible"). At least one Pennsylvania court has suggested that respondeat superior principles may apply to breach of fiduciary duty claims. See In re Papercraf~ 187 B.R. 486, 495 n.7 (Bankr. W.D. Pa. 1995), rev'd and remanded on other ~rounds, 211 B.R. 813 (W.D. Pa. 1997), affd, 160 F.3d 982 (3d Cir. 1998) ("As a matter of law, Muqaddam [the vice president of CVC] was CVC's agent and, under the doctrine of respondeat superior, CVC is liable for Muqaddam's breach of fiduciary duty."). In this case, Respondents Gority and Stauffer acted in concert with one another and provided substantial assistance to one another and to M&T in breaching M&T's fiduciary duties regarding the Children's and Grandchildren's Trusts. M&T could not achieve its goal of diversification in the manner it desired without Gority and Stauffer working together to ensure that M&T received the superficial "agreement" of its co-trustees to proceed with its plan, even if it meant taking advantage of Brenner Sr.'s reduced capacity and improperly pressuring the co- trustees, in breach of M&T's fiduciary duties. C. Damages M&T, Gority, and Stauffer are jointly and severally liable for the damages caused to the trusts by their actions. There is no legal or factual support for Respondents' expected assertion that Petitioners failed to mitigate damages and/or breached their own fiduciary duties to the trusts. 1. M&T is Liable for Compensatory Damages Petitioners are entitled to compensatory relief sufficient to make the trusts whole for the unauthorized sale of the Tyco shares. The Pennsylvania Superior Court has adopted the measure of damages recognized in Restatement (Second) of Trusts § 205, stating: Restatement § 205 provides, "If the trustee commits a breach of trust, he is chargeable with (a) any loss or depreciation in value of the trust estate resulting from the breach of trust; or (b) any profit made by him through the breach of trust; 15 or (c) any profit which would have accrued to the trust estate if there had been no breach of trust." Comment (a) explains that in choosing among these three remedies, the beneficiary has the option of pursuing the remedy that will place him in the position in which he would have been if the trustee had not committed the breach. In re Estate of Scharlaeh, 809 A.2d 376, 386 (Pa. Super. 2002) (citing Restatement (Second) of Trusts § 205); see also Restatement (Second) of Trusts § 208, Illustration to cmt. d ("A bequeaths shares of stock to B in trust for C and directs him not to sell the shares. B sells the shares for $10,000. C sues B for breach of trust. At the time of the decree, the shares are worth $12,000. B is chargeable with $12,000 and the amount of dividends on the shares."); Application of Kettle, 423 N.Y.S.2d 701 (N.Y.A.D. 1979) (ordering trustee to repurchase wrongfully sold shares and restore to the trusts). In this case, M&T did not have authority to dispose of the trust assets without the consent of the co-trustees. The trust instruments' appointment of co-trustees would be meaningless if it were sufficient for the corporate co-trustee to mn roughshod over the individual co-trustees to acquire superficial indications of "consent," rather than true consent, to their unilateral investment plans. Respondents should be ordered to pay damages to restore the trusts to the position they would have been in had M&T not breached its fiduciary duties. See Scharlach, 809 A.2d at 386. M&T sold a total of 53,807 shares of Tyco stock from the four trusts at $10.2313, and a total of 107,535 shares of Tyco stock from the four trusts at $8.75. Respondents should pay damages in the amount of the difference between the price at which the shares were sold, and the price at which the shares could be purchased on the open market on the date judgment is entered.4 Respondents should also pay damages for all fees associated with the June 12 sales transactions. Finally, M&T should be ordered to immediately release the trust assets to the successor trustee, or else be ordered to pay additional damages for any increase in the open market price of Tyco between the time judgment is entered and the time the trust assets are actually released to the successor trustee. 4 For context, the closing price of Tyco stock was $29.78 per share on October 20, 2004. 16 2. Gority and Stauffer are Jointly and Severally Liable with M&T Aiders and abetters are subject to joint and several liability for breach of fiduciary duty. See Jackson v. Smith, 41 S.Ct. 200 (1921) (stating that persons who knowingly join a fiduciary in an enterprise that constitutes a breach of his fiduciary duty of trust are jointly and severally liable for any injury which results); Gotham Partners~ L.P.v. Hallwood Realty Partners~ L.P., 817 A.2d 160, 172 (Del. Supr. 2002) (holding members of the board of directors of the General Partner jointly and severally liable with the general partner for aiding and abetting the General Partner's breach of fiduciary duties created by the Partnership Agreement). Compare 70 Pa C.S.A. § 1-503 (Pennsylvania statute imposing joint and several liability on anyone who materially aids in a act or transaction constituting a violation of certain securities laws); Jairett v. First Montauk Securities Corp., 153 F.Supp.2d 562, 577 (2001) (citing same). 3. Petitioners Did Not Fail to Mitigate Their Damages Respondents argue that Petitioners could have mitigated their damages by repurchasing shares of Tyco stock with the proceeds from the June 12 sale, but refused or failed to do so. Respondents ignore the fact that M&T had a sell order on Tyco stock. Gority asserts that he had no investment authority over the trusts as of June 2002, and Stauffer and Klobusicky have testified that a sell order from M&T's internal analysts is non-discretionary. M&T was also strongly opposed to the lack of diversification in the trusts prior to June 12, 2002. Petitioners could not unilaterally reinvest the trust assets in Tyco stock after June 12 (both as a legal matter because they did not have unilateral investment authority, and as a practical matter because they did not have physical control of thc assets). It is implausible to suggest that M&T would have voluntarily agreed to repurchase Tyco shares into the trust accounts at all, let alone reestablish the entire Tyco position. IfM&T wished to mitigate damages, it should have released the trust assets to the successor trustee. 4. Petitioners Did Not Damage the Trusts by Retaining Tyco Stock Respondents assert that Petitioners' failure to diversify the Children's Trusts, or to 17 further diversify the Grandchildren's Trust, was manifestly unreasonable and a per se breach of fiduciary duty. However, Petitioners were not required to diversify under Pennsylvania law. Pennsylvania does currently have a statute requiring a fiduciary to "reasonably diversify" investments. See 20 Pa. C.S.A. § 7204(a). However, that statute--which was enacted on June 25, 1999, and made effective December 25, 1999---expressly does not apply to trusts that became irrevocable before December 25, 1999, even if the tmstee's actions occur after December 25, 1999. See id. at § 7204(b). The Grandchildren's Trust has been irrevocable since its inception in 1994, and the Children's Trusts became irrevocable upon Jane Brenner's death in October 1997. As such, section 7204% requirement to "reasonably diversify investments" has never applied to the Children's or Grandchildren's Trusts. Section 7204 was not made applicable to trusts created prior to its effective date "because Pennsylvania had not required diversification" prior to December 25, 1999. Official Comment to 20 Pa. C.S.A. § 7204; see also, e.g., Saeger Estates, 240 Pa. 73, 76 (1940) ("we conclude that...there is no authority in the law of this State for the doctrine, contended for by appellants, that trust investments, otherwise legal and entirely proper under all the recognized standards, are necessarily improvident per se for any claimed lack of proper diversification"). Moreover, Pennsylvania law has always recognized the uniqueness of inception assets, and has continued to do so by expressly exempting inception assets fi.om the diversification requirement of § 7204. See 20 Pa. C.S.A. § 7205 ("Retention of inception assets") (stating that "[al fiduciary, in the exercise of reasonable care, skill and caution, may retain any asset received in kind, even though the asset constitutes a disproportionately large share of the portfolio"); see also Estate of Pew, 440 Pa. Super. 195,240 (1994) ("The mere retention of stocks which the trustee received from the settler is not, in itself, negligence. Especially when such stocks have produced a high rate of return for the trust over an extended number of years."); Trust of Munro, 373 Pa. Super. 448, 453 (1988) ("Where the trustee is authorized to retain certain stock, an exceptant to the trustee's account has the burden of proving that retention of the stock was negligent."). 18 Petitioners had no duty to sell Tyco shares simply to diversify the trusts. Petitioners properly considered relevant factors, including those identified in Pennsylvania's prudent investor rule, in deciding to retain the respective concentrations of Tyco shares in the Children's and Grandchildren's Trusts. See 20 PA C.S.A. § 7203. With regard to the Grandchildren's Trust in particular, Article IV of the trust instrument specifically releases the trustees from "all responsibility and obligation to dispose of any portion of the AMP, Inc. stock by reason of the concentration of investments of the Trusts in the stock of one corporation," and Bushey and Brenner Jr. had already diversified that trust by agreeing to sell 40% of the Tyco shares in 1999. The Brenner family's investments in Tyco stock, both generally and specifically in the trusts, had proven a wise investment over the years. Cf. Pev~, supra, 440 Pa. Super. at 241 ("Over the long haul, the decisions of the original trustees and the co-successor trustees to continue to fund the trust principal with the Sun Company common stock and later the Oryx common stock has proven to be a wise decision."). Under the circumstances, it would have been virtually impossible for Petitioners to have sought a surcharge of M&T for failure to diversify the trust assets. It is similarly inappropriate for M&T to seek to essentially surcharge Petitioners for retaining the inception assets in the trust. It is also illogical to the extent that the trust assets would have continued to perform well, as they had historically, but for Respondents' decision to force through their own investment plan, at the worst possible time, regardless of the views of the co-trustees. IV. Conclusion Based on the foregoing facts, which will be proven at hearing, and the cited legal authority, Petitioners respectfully ask the Auditor to recommend to the Court that Respondent M&T be surcharged for its breaches of fiduciary duty, that Respondents Gority and Stauffer be 19 held jointly and severally liable for aiding and abetting M&T's breaches of fiduciary duty, and that Respondent M&T be ordered to release the trust assets to the successor trustee. DATED this 21st day of October, 2004. TONKON TORP Wil~liam F. tt(,lartson, Jr., OSB No. 72163 Robyn E. Ridler, OSB No. 00016 Attorneys for Petitioners 20 CERTIFICATE OF SERVICE ! hereby certify that I served the foregoing HEARING BRIEF on: Mark D. Bradshaw Stevens & Lee P. O. Box 11670 Harrisburg, PA 17108-1670 Of Attorneys for Respondents [] by mailing a copy thereof in a sealed, first-class postage prepaid envelope, addressed to each attorney's last-known address and depositing in the U.S. mail at Portland, Oregon on the date set forth below; [] by causing a copy thereof to be hand-delivered to said attorneys at each attorney's last-known office address on the date set forth below; [~by sending a copy thereof via overnight courier in a sealed, prepaid envelope, addressed to each attorney's last-known address on the date set forth below; or [] by faxing a copy thereof to each attorney at each attorney's last-known facsimile number on the date set forth below. DATED this 21 st day of October, 2004. TONKON TORP I~I~p William F. Martson, Jr., OSB No. 72163 Robyn E. Ridler, OSB No. 00016 Attorneys for Petitioners 031590~0001 ~595304 VO01 21