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Cargill, Inc. v. JWH Special Circumstances LLC, C.A. No. 3234-VCP (Del. Ch. November 7, 2008)

November 7, 2008

The plaintiffs and counterclaim defendants, Cargill, Inc. (“Cargill”) and Cargill Investor Services, Inc. (“CIS,” and, together with Cargill, the “Cargill Plaintiffs”) were the grandparent and parent of CIS Investments (“CISI”). CISI is the Managing Owner of the defendant and counterclaim plaintiff, JWH Global Trust (the “Trust”). The Trust is a publicly registered commodities pool that trades futures and forwards contracts on currencies, interest rates, energy and other commodities. Over time, the Trust had over 13,500 investors (the “Unitholders”). CIS was also the Trust’s futures and forwards broker. Another of Cargill’s wholly owned subsidiaries, CIS Financial Services, Inc. (“CISFS”), was the Trust’s foreign currency and precious metals broker.  The Trust’s deposits were held with CIS and CISFS. The Trust and CISFS had a Foreign Exchange Account Agreement (“Forex Agreement”) with CISFS which stated that CISFS would pay the Trust a risk-free rate of return for the Trust’s cash deposits with CISFS. The Trust’s primary credit risk was its counterparty risk with CISFS. CISFS minimized that risk with forward contracts with well-capitalized institutions and back-to-back contracts with the Trust.

In June of 2005, Cargill sold part of its financial services business, including the assets of CIS, which included control of CISI, to Refco Group Ltd., LLC (“Refco”) in exchange for $4 billion in payments and assumed liabilities (the “Refco Transaction”). As a result of the Refco Transaction, the Trust’s futures accounts were transferred from CIS to Refco and the foreign currency accounts were transferred from CISFS to Refco Capital Markets (“RCM”), a allegedly unregulated Bermuda entity. In a July 2005 monthly report, the Unitholders were informed of the acquisition. However, they were never informed that the Forex Agreement would be assigned or that the Trust’s assets held by CISFS would be turned over to RCM.

On October 10, 2005, Refco disclosed publicly that it was carrying a fraudulent $430 million receivable on its books; and that RCM, the Trust’s new foreign exchange broker, should have had $3.7 billion in client assets, but only had $1.9 billion. On October 17, 2005, Refco, RCM and other Refco affiliates filed a voluntary chapter 11 bankruptcy petition in the United States Bankruptcy Court for the Southern District of New York. A liquidation ensued and the Trust recovered only $20,870466 of the $56,544,205 the Trust had in its account with RCM. In December 2006, the Trust created JWH Special Circumstance LLC (“JWH”) for the purpose of pursuing, selling or settling claims on the Trust’s behalf.

On September 17, 2007, the Cargill Plaintiffs filed an action seeking declaration that they do not owe and never owed any fiduciary obligation to the Trust, a declaration that they never breached any fiduciary obligation to the Trust or its Unitholders and an award of costs and expenses incurred by the Cargill Plaintiffs in this action. JWH answered and brought six counterclaims. Counts One and Two accuse Cargill and CIS of breaching their fiduciary duties to the Trust; Counts Three and Four accuse Cargill and CIS of aiding and abetting breaches of fiduciary duty committed by CISI, as the Managing Owner; and Counts Five and Six assert claims against each of the Cargill Plaintiffs for negligence. The Cargill Plaintiffs moved to dismiss JWH’s counterclaims, and in the alternative, for judgment on the pleadings.

Among the counterclaims was a charge that the Cargill Plaintiffs aided and abetted CISI’s breach by circumventing the Trust Agreement’s requirement that the Unitholder approve any change of the Managing Owner. The Court held that JWH did not assert a cognizable claim because the Managing Owner never actually changed. The Court explained that, even though control of CISI at both management and shareholder levels changed, the entity survived. Thus, the “circumvention” provision was not triggered. The Court also noted that the parties could have included a “change of control” provision, but they did not.

The Court first next turned to determining whether the Cargill Plaintiffs breached fiduciary duties wed to the Trust. The Court held that neither the Trust Agreement nor the Delaware Statutory Trust Act preempted duties owed by the Cargill Plaintiffs to the Trust. The Court noted that Section 3825(b) and, Section 3806(c) and (e) of the Act highlights the freedom of contract, which enables parties to negotiate modifications or the elimination of standard duties and liability. The Court explained that the fiduciary duties under trust law are more stringent than those for corporations and in particular said that a breach of loyalty occurs when the trustee fails to follow the requirements set forth in the Trust Agreement. The Court then held that the Trust Agreement did not contain a provision eliminating all fiduciary duties that the Cargill Plaintiffs could have owed to the Trust under the law of trusts.

The Court then explained when agency between the two entities creates a fiduciary duty for the parent. The Court looked first to the third sentence of Section 3806(a) of the Act, which states that the “exercise of power” over a Trust’s managing owner does not alone subject that entity to the fiduciary duties of a trustee. Therefore, a claim against the managing owner’s parent asserting that the managing owner acted as the parent’s agent would not succeed. However, when the Court examined the last sentence of Section 3806(a), it held that in order for an entity who controls the managing owner to owe no fiduciary duty to the Trust, the Act requires there must be a provision in the Trust Agreement eliminating the fiduciary duties of those who control the managing owner. The Court then found no such provision and concluded that nothing in the Act preempted an application of default fiduciary duties drawn from the Delaware Trust law to the Cargill Plaintiffs.

When examining the actual claim for the direct breach of fiduciary duties, the Court turned to partnership law. The Court held that JWH adequately plead facts leading to a reasonable inference that the Cargill Plaintiffs had and breached a fiduciary duty to the Trust. The Court held that JWH demonstrated a reasonable inference that (1) the Cargill Plaintiffs might owe a duty to the Trust, (2) the Cargill Plaintiffs exercised control over the Trust and its assets with regard to the Refco Transaction and (3) Cargill’s or CIS’s control of CISI benefitted the Cargill Plaintiffs at the expense of the Trust. The Court found that the Cargill Plaintiffs may owe a fiduciary duty to the Trust. The Court came to this conclusion by drawing from a line of partnership cases beginning with In re USA Cafes, L.P. Litigation, 600 A.2d 43 (Del. Ch. 1991), where the Chancellor extended fiduciary duties taken from trust law to limited partnerships and held that directors of a corporate general partner who controlled the underlying partnership could be liable  for breaching the fiduciary duty owed to the limited partners.

The Court further found that several events alleged by JWH, when added together, lead to reasonable inference that the Cargill Plaintiffs exercised control over the Trust with regard to the Refco Transaction. The Court found most persuasive the fact that Cargill agreed with Refco that it would prevent CISI from terminating the Trust’s Forex Agreement with CISFS without Refco’s prior written consent. The Court found that this effectively “tied the hands of CISI” by reducing the number of ways CISI could have reacted to the imminent Refco Transaction. Additionally, there was significant overlap between the Cargill Plaintiffs and CISI, namely the fact that CISI’s employees were all employees of the Cargill Plaintiffs and received compensation from the Cargill Plaintiffs, not CISI. Further, in the agreement for the Refco Transaction, Cargill agreed to “use all reasonable best efforts to obtain all consents.” Employees of CISI were told to “do everything necessary to facilitate and expedite the closing transaction with Refco.” Finally, a Vice President of CISI was instructed by counsel, who also represented Refco and was later indicted for this connection, to sign the consent to the assignment of the Forex Agreement without being told to seek independent legal advice or conduct an independent analysis as to whether this transfer was in the best interest of the Trust.

Finally, the Court held that Cargill’s or CIS’s control of CISI benefitted the Cargill Plaintiffs at the expense of the Trust. The Court found the circumstances surrounding the consent to the assignment of the Forex Agreement suspicious. Further, the Court noted that it could be reasonably inferred that the Cargill Plaintiffs were receiving a benefit from the sale of the Forex Agreement. The Court also concluded that based on the counterparty risk RCM created for the Trust but did not compensate them for and the fact that this counterparty risk had not existed with CISFS, the consent to the assignment was made at the expense of the Trust. Therefore, the Court denied the motions to dismiss and the judgment on the pleadings for the claims of the Cargill Plaintiffs direct breach of fiduciary duties.

The Court then turned to the aiding and abetting claims regarding the Managing Owner’s breach of fiduciary duty. The Court held that the claim alleged all four elements for aiding and abetting a breach of fiduciary duty: (1) the existence of a fiduciary relationship; (2) the fiduciary breached its duty; (3) a defendant, who is not a fiduciary, knowingly participated in the breach; and (4) damages to the plaintiff resulted from the concerted action of the fiduciary and the nonfiduciary. The Court found that the Trust Agreement contained the fiduciary duties the Managing Owner owed to the Trust. The Court then held that JWH pled facts that, if true, lead to a reasonable inference that the Managing Owner breached its fiduciary duties, namely the increased credit risk to the Trust from the Forex Transaction assignment to RCM and Refco’s allegedly known poor industry reputation and past regulatory violations. Next, the Court held that it had enough facts to support a reasonable inference that the Cargill Plaintiffs knowing participated in CISI’s breach of fiduciary duties by agreeing with Refco to use its “best efforts” to obtain CISI’s consent and Cargill’s agreement with Refco to prevent CISI from terminating the Forex Agreement without Refco’s consent. Finally, the Court found that the JWH allegations supported a reasonable inference that the assignment of the Forex Agreement led to Trust losses. Therefore, the Court denied the motion to dismiss and judgment on the pleadings for the claim that the Cargill Plaintiffs aided and abetted the Managing Owner’s breach of fiduciary duties.

Finally, the Court noted that it needed to give more careful consideration to the negligence claim by JWH and also needed have a more developed record regarding the negligence arguments. The Court, therefore, denied the motion to dismiss on the negligence claims.

The full opinion is available here