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WILLIAMS v. J.P. MORGAN & CO. INC.

March 11, 2003

LUIZ EDUARDO FONTES WILLIAMS, PLAINTIFF
V.
J.P. MORGAN & CO. INCORPORATED, DEFENDANT. MORGAN GUARANTY TRUST COMPANY OF NEW YORK, THIRD-PARTY PLAINTIFF, V. MARIA THEREZA FONTES WILLIAMS, THIRD-PARTY DEFENDANT.



The opinion of the court was delivered by: VICTOR Marrero, District Judge

DECISION AND ORDER

Plaintiff Luiz Eduardo Fontes Williams ("Williams") is a remainderman of an inter vivos trust (the "Gem Trust"). Invoking the Court's diversity jurisdiction under 28 U.S.C. § 1332, Williams filed suit against the trustee of the Gem Trust, defendant J.P. Morgan & Co. Incorporated ("Morgan"), seeking damages for breach of fiduciary duty and an accounting. Morgan then impleaded third-party defendant Maria Thereza Fontes Williams ("Maria Williams"), asserting the right to contractual indemnification, indemnification by estoppel and unjust enrichment if Morgan is found liable to Williams. Maria Williams now moves for summary judgment on the third-party complaint filed by Morgan. For the reasons set forth below, the Court GRANTS Maria Williams's motion in its entirety.

I. BACKGROUND

The principal facts underlying Williams's claims against Morgan are set forth in the Court's Decision and Order, dated May 7, 2002. Williams v. Morgan, 199 F. Supp.2d 189 (S.D.N.Y. 2002) ("Williams I"). Here, the Court will outline the facts relevant to the third-party complaint that is the subject of the instant motion for summary judgment.*fn1

Williams is a remainderman of the Gem Trust, which was created in 1958 by his father, John Williams, who was also Maria Williams's husband, with a corpus of approximately $500,000. Morgan, a New York corporation, was appointed the trustee. Maria Williams, a citizen and resident of Brazil, is the income beneficiary of the Gem Trust. Upon her death, Gem Trust's assets are to be distributed to her surviving descendants.

In the late 1960's, Davis Polk & Wardell ("Davis Polk"), as well John and Maria Williams, became aware of a bilateral tax treaty that was in the process of negotiation between the United States and Brazil, but would not take effect until ratified by the legislatures of both countries (the "Proposed Treaty")*fn2 According to the Proposed Treaty, the Brazilian tax authorities would be empowered to request information from the files of the Internal Revenue Service with respect to Brazilian citizens. As of January 1971, the United States Senate had ratified the Proposed Treaty, with certain reservations, but the Brazilian Congress had not yet accepted the Proposed Treaty. Historically, such treaties are made retroactive to January 1 of the year in which they become effective.

Upon consultation with Davis Polk, John and Maria Williams grew concerned that, because the Proposed Treaty set forth provisions allowing for an exchange of information between the tax authorities of the two governments, Maria Williams and her children could suffer severe consequences for having failed to report the money in the Gem Trust, and Maria Williams's income therefrom, to the Government of Brazil, including financial and criminal penalties, if the Brazilian authorities learned of the existence of the Gem Trust. Therefore, Maria and John Williams worked with Davis Polk and Morgan to develop a plan of action to avoid potential adverse consequences to the Williams family of the possible ratification of the Proposed Treaty. In the process of determining the best course of action, Davis Polk requested the law firm of Curtis, Mallet-Prevost, Colt & Mosle ("Curtis Mallet") to provide two opinion letters regarding the possible penalties Maria Williams would suffer under Brazilian law if Brazilian authorities learned of the Gem Trust. (See Declaration of R. Scott Greathead ("Greathead Decl."), dated September 16, 2002, Exhs. B, C.) To avoid the possible penalties Maria Williams and her children could suffer under the effects of the Proposed Treaty, the plan of action developed was for the Gem Trust's assets to be reinvested solely in tax-exempt bonds so that the assets would no longer be reported for tax purposes in the United States.

Having decided on this course, Maria Williams authorized Morgan to liquidate the Gem Trust's tax-generating investments beginning in late 1970. This direction to Morgan was reduced to writing in a letter, dated January 18, 1971, from Maria Williams to William H. Hobson, a vice president at Morgan (the "Letter"). (See Greathead Decl. Exh. E.) Davis Polk drafted the Letter on Maria Williams's behalf, and the Letter was reviewed by Morgan before Maria Williams signed it. The Letter explains the nature of the Proposed Treaty, including the fact that, as of that time, the treaty was only in the negotiation stage. However, opining that such ratification was likely, the Letter tracks the conclusion stated in Curtis Mallet's opinion letters concerning Maria Williams's potential liability if the Proposed Treaty were ratified, and directs Morgan, as trustee, "to take whatever steps necessary in order to assure that [Maria Williams's] name and nationality will not appear on the trust's tax returns filed with [the U.S.] Internal Revenue Service after January 1, 1971." (Id. at 2-3.) Maria Williams also indicates in the Letter that she understands that such disclosure could be avoided by selling the assets in the Gem Trust and reinvesting the proceeds of such sales into tax-exempt securities and therefore authorizes this action. Finally, and crucial to the instant motion, Maria Williams also relates to Morgan her own undertaking of responsibility with regard to the decision to sell the assets in the Gem Trust, a taxable event, and the subsequent reinvestment in tax-exempt bonds:

I hereby release and discharge you from any liability to me for making such sales and causing the trust to incur a net current decrease on account of capital gain taxes. In addition, I hereby agree to indemnify you against any claims made by other beneficiaries of the trust arising out of my requested action.

(emphasis added). (Id. at 4.)

Based on these instructions from Maria Williams, Morgan proceeded early in 1971 to liquidate the assets of the Gem Trust, reinvesting the proceeds in tax-exempt securities. In order to receive further reassurance concerning the propriety of its actions with regard to the Gem Trust, while still in the process of reinvesting the Gem Trust assets, Morgan requested that Davis Polk provide an opinion letter endorsing the strategy authorized by Maria Williams, which Davis Polk did on February 10, 1971 ("Opinion Letter"). (See Greathead Decl. Exh. F.) In its Opinion Letter, Davis Polk repeats the background circumstances leading up to the liquidation and reinvestment of the Gem Trust in tax-exempt securities, and the process by which Davis Polk came to the conclusion that this was the best course of action. The Opinion Letter explains that Maria Williams's concern that the Brazilian Congress would soon ratify the Proposed Treaty did not provide Morgan sufficient reason to conclude that ratification was imminent or probable, but concludes that:

[I]t is our opinion that [Morgan] may properly sell all of the securities in the trust which generate taxable income and reinvest the proceeds in securities generating tax-exempt income and that [Morgan] may maintain the trust portfolio invested entirely in securities which earn tax-exempt income until [Morgan] ha[s] reason to believe that the income beneficiary and the remaindermen will no longer be in danger and so long as the investment of the trust portfolio entirely in securities earning tax-exempt income will relieve [Morgan] of the duty of disclosing the name, address and nationality of the income beneficiary and remaindermen to the Internal Revenue Service.

Id. at 4-5.

The United States and Brazil never entered the Proposed Treaty. Williams thus claims that by the mid-1970's it was clear that the Proposed Treaty no longer posed a risk to the income beneficiary's interests and that Morgan breached its fiduciary duty as trustee at that point by not appropriately reinvesting the assets in the Gem Trust in light of the fact that the threat from the Proposed Treaty had disappeared.

Morgan seeks recovery in its third-party complaint from Maria Williams for any liability it may incur to Williams for its alleged failure as trustee of the Gem Trust to recognize that the Proposed Treaty was no longer relevant and, accordingly, to reconsider the propriety of the investments in the Gem Trust. Morgan bases its third-party complaint on theories of contractual indemnification, indemnification by estoppel and unjust enrichment.

II. DISCUSSION

A. STANDARD OF REVIEW

A motion for summary judgment should be granted where "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c); see Rodriguez v. Hahn, 209 F. Supp.2d 344, 346 (S.D.N.Y. 2002) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986)). The role of the Court is not to resolve issues of fact but, rather, "to determine as a threshold matter whether there are genuine unresolved issues of material fact to be tried." Gibson v. Am. Broad. Companies, Inc., 892 F.2d 1128, 1132 (2nd Cir. 1989). The moving party bears the initial burden of "informing the district court of the basis for its motion" and identifying the matter that "it believes demonstrate[s] the absence of a genuine issue of material fact." Celotex, 477 U.S. at 323. The nonmoving party ...


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