Fairbairn v. Fidelity Investments Charitable Gift Fund

Background

The Fairbairns donated approximately 1.93 million shares of Energous stock to their Fidelity Charitable donor-advised fund on December 28 and 29, 2017. A donor-advised fund is a charitable account in which the nonprofit organization receives legal title to donated assets while the donor retains advisory rights over investment and charitable distributions. Fidelity Charitable sold all of the shares on December 29 for approximately $44 million. The shares had a fair market value of $52 million for the Fairbairns’ 2017 tax deduction.

The Fairbairns alleged that Fidelity Charitable made promises to induce the donation and then violated those promises. They also alleged that Fidelity negligently liquidated the shares by selling them during the final 2.5 hours of trading on December 29, which they said drove down the stock price and reduced their tax deduction and the amount available in their donor-advised fund. Their state-law claims were intentional misrepresentation, promissory estoppel, breach of contract, violation of California’s unfair-business-practices law, and negligence.

Alleged Promises

The Fairbairns alleged four promises: Fidelity would not trade more than 10% of Energous’s daily trading volume; it would use sophisticated, state-of-the-art methods to liquidate the large block; it would let the Fairbairns advise on a price limit; and it would not sell any shares until 2018.

The court found that Kunz did promise that Fidelity would not sell more than 10% of the stock’s daily trading volume. Fidelity sold approximately 1.93 million shares on a day when about 28.4 million Energous shares traded, or approximately 6.7% of the daily volume. The court therefore found that Fidelity kept this promise.

The court found that the Fairbairns did not prove that Kunz promised to use sophisticated or state-of-the-art trading methods. The evidence showed that Fidelity used time-weighted-average-price and volume-weighted-average-price algorithms that divided the orders into smaller orders and took steps to conceal the trades from the market. The court also found that the Fairbairns did not prove promises allowing them to advise on a sale-price limit or delaying all sales until January 2018. Written records instead reflected Fidelity’s policy of automatically selling donated shares after they arrived in the donor-advised fund.

The court separately found that, even if the alleged promises had been made, the Fairbairns could not reasonably have relied on them when deciding to donate the stock. Emily had decided to transfer the shares before the alleged promises, and the court found that the Fairbairns had to make a charitable donation because of their anticipated tax liability.

Negligence Claim

For the negligence claim, the court explained that California generally does not allow recovery for purely economic losses unless a special relationship creates a duty of care. The court found that some factors supported a special relationship, including that the transaction was intended to benefit the Fairbairns through an immediate tax deduction and that harm from the liquidation was foreseeable. The court did not finally decide whether Fidelity owed a duty of care because the Fairbairns failed to prove a breach even assuming such a duty existed.

The court found that Fidelity’s trading was consistent with its published policy of generally selling donated publicly traded securities as soon as possible after receiving the required paperwork and securities in good order. Fidelity sold the shares using algorithms and within the market-volume limits it considered appropriate. The court also found that the Fairbairns did not prove that a reasonably prudent donor-advised fund would have spread the sale over several days, used one trading order instead of four, placed price limits on the parent orders, or used a block broker.

The court accepted that the trading more likely than not had some adverse effect on the stock price. But it concluded that price impact mattered only if Fidelity had breached the applicable standard of care, and the Fairbairns had not proved such a breach.

Disposition

Judge Jacquelyn Corley entered judgment in favor of Fidelity Charitable and against the Fairbairns on the misrepresentation, breach-of-contract, promissory-estoppel, California unfair-business-practices, and negligence claims. The opinion is the court’s findings of fact and conclusions of law following a bench trial.