The Southern District of Texas’ decision in Occidental Petroleum Corp. v. Wells Fargo Bank, N.A, No. CV H-21-1126, 2022 WL 3566939, at *1 (S.D. Tex. Aug. 18, 2022), solidified that while COVID-19 may allow for more flexible and relaxed work from home standards, a trustee is nonetheless obligated to closely monitor compliance with its contractual duties.

In Occidental Petroleum Corp., Occidental Petroleum’s predecessor Andarko Petroleum, established a rabbi trust through a benefits trust agreement (trust agreement) in May 1995 with Wachovia Bank of North Carolina, N.A., as trustee. Wells Fargo became trustee in 2008 when it acquired Wachovia. The trust agreement provided that, before a change in control, Anadarko could direct the trustee to acquire, retain or dispose of investments. In August 2019, Occidental acquired Anadarko, triggering a change in control per the trust agreement. Anadarko’s stock in the trust then converted to the right to receive .2934 shares of shares of Occidental stock and $59 cash for each of the 6.5 million Andarko shares held by the trust.

Sale of Stock Delayed

Since the trust now held only one non-cash asset, Occidental stock worth $82 million, in October 2019, Wells Fargo suggested a sale of the stock to diversify the trust holdings. Occidental proposed to sell 381,420 shares a day over the course of a week beginning on Jan. 6, 2020 and ending with a final liquidation on Jan. 10, 2020.  Wells Fargo wrote back via email accepting this recommendation. Wells Fargo timely sold over 600,000 shares of the stock directly held in its Depository Trust Company (DTC) account. Equiniti, Wells Fargo’s transfer agent, held the rest of the shares. One of the Wells Fargo employees submitted several transaction requests to Equiniti, directing it to sell the rest of the shares, not knowing that Wells Fargo didn’t have control over these shares or that Equiniti, as a transfer agent, couldn’t guarantee the shares would be sold on a specific day. Several calls by Wells Fargo to Equiniti’s general customer service number couldn’t resolve the issue. In fact, what Wells Fargo should have done pursuant to standard industry practice was transfer the shares held by Equiniti to the Wells Fargo DTC account. Equiniti responded to these fumbling efforts by mailing a letter to Wells Fargo on Jan. 16, 2020 asking Wells Fargo to clarify the total number of shares they would like to sell. The pandemic intervened and the letter was left unopened on one of the Wells Fargo employee’s desks for a month. As a result, the Equiniti sale issues weren’t sorted out, and the remaining shares weren’t sold by the agreed Jan. 10, 2020 liquidation date. The sale was delayed until March 2020. Before the sale was finally executed in March, the stock suffered a $39 million price drop due to COVID’s effect on the stock market.

Lawsuit Filed

Occidental filed suit alleging that Wells Fargo breached its fiduciary duty as trustee, its contractual duty per the trust agreement and its contractual duty per a second contract formed by the parties’ email exchange in December 2019 agreeing to a schedule for liquidation of the stock by Jan. 10, 2020. The court dismissed Occidental’s claim of breach of fiduciary duties and held that the parties’ relationship was governed by the trust agreement as an express written contract, which the parties appeared to negotiate at arms-length. The court noted in dismissing the fiduciary duty claim that Wells Fargo’s breach didn’t arise from its general duties as trustee, but from the agreement to carry out a request by Occidental to sell certain shares from the trust on certain dates.

Though the court previously dismissed the breach of fiduciary duty claim, on summary judgment the court found that Wells Fargo breached its contractual duties to Occidental under the trust agreement and the contract formed via email in December 2019 to sell the remaining shares of stock by the Jan. 10, 2020 liquidation date. The court specifically noted that Wells Fargo:  (1) failed to follow industry practice by not transferring the remaining shares from Equiniti into its DTC account for prompt sale, (2) didn’t know how to execute trades by entering duplicate sell orders, (3) didn’t contact the Equiniti personnel specifically assigned to the Wells Fargo account, and (4) left the letter from Equiniti notifying Wells Fargo of the execution issues unopened on a desk for a month.

Key Takeaway

The actions by Wells Fargo exemplify that though the business world underwent dramatic changes caused by COVID-19, these conditions don’t excuse a trustee from performing its contractual duties under a trust agreement. Furthermore, a trustee’s contractual duties remain a viable avenue for plaintiffs who seek to enforce a trustee’s duty to carry out specific contractual obligations, even when breach of fiduciary duty claims may fail.

Elysia A. Lampert is an associate and William J. McKenna is a partner, both at Foley & Lardner, LLP

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