New Jersey Chancery Division Applies Delaware Principal and Income Act in Denial of Summary Judgment Motion Classifying Income from Sale of Entity’s Assets Paid and Distributed to Marital Trust Beneficiary as a Liquidation Event
Harris v. Harris, Docket No. MON-C-41-22 (N.J. Super. Ch. Div. Apr. 21, 2025)
The case involves plaintiffs Timothy J. Harris, Megan Harris Loewenberg, and Kristen C. Harris, who alleged that their mother, Mary Ellen Harris, and others interfered with their vested rights to assets from the estate of their late father, Dr. Robert H. Harris. The plaintiffs claimed that First Republic Trust Company of Delaware, LLC, as trustee of the marital trust, breached its fiduciary duties by transferring $38,200,000 to Mary Ellen Harris, which they argued should be considered principal rather than income.
The funds in question originated from the sale of patent and licensing rights to an anti-seizure medication, Vimpat, by Harris FRC Corp., which sold these rights for approximately $342,000,000 in July 2020. The proceeds were subsequently distributed to the shareholders of Harris FRC Corp. The Robert H. Harris 2015 Delaware Living Trust (the “Marital Trust”) was a shareholder of Harris FRC and received over $71,000,000 from this sale.
First Republic, as Trustee of the Marital Trust, distributed $38,200,000 of those funds to Mary Ellen at her request, because the Marital Trust entitled her to the trust’s “entire net income.”
The court focused on whether the funds transferred to Mary Ellen Harris should be classified as principal or income under the Delaware Principal and Income Act, specifically 12 Del. Code § 61-401. The defendants argued that 401(b) – which states “a trustee shall allocate to income money received from an entity” – required that the funds be classified as income. The plaintiffs argued that the funds should be allocated to principal under § 61-401(c)(3), because the monies were received in total or partial liquidation of Harris FRC.
The court found support for the plaintiffs’ contention, noting that the sale of the licensing and patent rights of the medication comprised all or substantially all of Harris FRC’s assets. Therefore, the sale could constitute a total or partial liquidation, which aligns with the statutory provision for allocating funds to principal. The court emphasized that the plaintiffs’ claims need not be proven at this stage, only that there is sufficient support for their allegations to defeat a summary judgment motion.
Ultimately, the court denied the motions to dismiss filed by First Republic Trust Company of Delaware, LLC, and Mary Ellen Harris, concluding that the applicable law may support the plaintiffs’ view that the funds should be considered principal.
This decision is significant for estates attorneys and fiduciaries as it underscores the importance of correctly classifying trust distributions between principal and income as well as the potential implications of statutory interpretations on fiduciary duties.
The New Jersey equivalent to the Delaware statute is the New Jersey Principal and Income Act, N.J.S.A. § 3A:14A-1 to 9.