Hardy v. Hardy
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Opinion
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
DUANE C. HARDY, ) ) Plaintiff, ) ) v. ) ) C.A. No. 7531-VCP SHERRY L. HARDY and MICHAEL T. ) HARDY, individually and as Trustees ) of the Duane C. Hardy 2011 Trust, and ) TOLMIROS, LLC, ) ) Defendants. )
MEMORANDUM OPINION
Date Submitted: April 16, 2014 Date Decided: July 29, 2014
William X. Moore, Esq., Edward H. Wilson, II, Esq., ROEBERG, MOORE & FRIEDMAN, P.A., Wilmington, Delaware; Attorneys for Plaintiff Duane C. Hardy.
Richard K. Goll, Esq., LAW FIRM OF RICHARD K. GOLL, Millville, Delaware; Represented Defendants Sherry L. Hardy, Michael T. Hardy and Tolmiros, LLC at trial, but was permitted to withdraw as counsel on April 16, 2014.
Sherry L. Hardy and Michael T. Hardy, Pro Se Defendants.
PARSONS, Vice Chancellor. The plaintiff, Duane C. Hardy, received a large cash settlement as a member of the
class that brought sexual abuse charges against the Catholic Diocese of Wilmington (the
―Diocese‖), among others. In anticipation of receiving his first settlement payment, the
plaintiff, with the assistance of counsel, created a trust, naming himself as the
beneficiary, and appointed his sister and nephew, Sherry L. Hardy and Michael T. Hardy,
respectively, as co-trustees. The plaintiff‘s choice of trustees proved to be disastrous.
This case arises out of the beneficiary‘s allegations that the trustees breached their
fiduciary duties by engaging in self-interested transactions and failing to administer the
trust for its intended purpose. By the time of trial, the trust accounts had a zero balance.
Duane1 seeks to recover losses the trust incurred as a result of the trustees‘ breaches of
fiduciary duties. The relief he requests includes an award of money damages with
prejudgment interest, the imposition of a constructive trust on items purchased with the
trust corpus, and an award of his attorneys‘ fees and expenses.
In response, Sherry and Michael deny any liability, because, they allege, Duane
consented to all or most of their self-interested transactions. In addition, the defendants
contend that, even if they may have breached their fiduciary duty, they are absolved from
any monetary damages by the exculpation clause of the Trust Agreement.
For the reasons stated in this post-trial opinion, I hold Sherry and Michael jointly
and severally liable for their self-interested purchases and for many of the other
1 Because the three main actors in this dispute have the same surname, i.e., Hardy, I refer to them by their first names in the interest of brevity and clarity. No disrespect is intended.
1 expenditures the plaintiff challenged based on their failure to account for money
withdrawn from the trust. I do not find the defendants liable for approximately $30,000
that was gifted to Duane‘s friends and family, allegedly at Duane‘s behest, and for certain
of the other challenged expenditures. By way of relief, I award Duane money damages
and I have imposed a constructive trust on the two vehicles the defendants purchased
with trust assets and on Sherry‘s 8.3% property interest in a residence located at 412 W.
3rd Street, Wilmington, DE, 19801. Based on Sherry and Michael‘s breaches of their
duties to the Trust, their egregious pre-litigation conduct, and certain actions taken
vexatiously or in bad faith during the course of this litigation, I award Duane his
attorneys‘ fees and expenses in connection with this litigation.
Finally, this Memorandum Opinion reflects my findings of fact and conclusions of
law on Plaintiff‘s recently filed motions to set aside Michael‘s fraudulent transfer of one
of the automobiles and for contempt. The defendants did not respond to these motions.
Based primarily on my finding that the disputed transfer was fraudulent, I grant most of
the relief sought by these two motions.
I. BACKGROUND
A. The Parties
Plaintiff, Duane, is the settlor and beneficiary of the Duane C. Hardy 2011 Trust
(the ―Trust‖).
Defendant Sherry and her son Michael are the co-trustees of the Trust
(collectively, ―Trustees‖ or ―Defendants‖). Sherry is Duane‘s older sister and Michael is
Duane‘s nephew.
2 Defendant Tolmiros, LLC (―Tolmiros‖) was a business entity formed under the
laws of Delaware on October 31, 2011. Michael established Tolmiros for the purpose of
making investments, but it never engaged in any actual business transactions. The Court
entered a default judgment against Tolmiros on January 16, 2013, due to Tolmiros‘s
failure to obtain legal counsel as required under Delaware law.2 The January 16 Order
stated that a hearing on damages against Tolmiros would be scheduled to coincide with
the trial on the merits against Defendants Sherry and Michael. No material evidence or
argument was presented at trial on behalf of Tolmiros. Therefore, to the extent a money
judgment or constructive trust is entered against Sherry or Michael, the Court also will
award the same relief, jointly and severally, against Tolmiros.
B. Facts3
1. Creation of the Trust
Duane was a party in a class action suit, which ultimately ended in a settlement,
against the Diocese for abuse he endured as a child. Under the settlement, Duane was to
receive an initial disbursement of $533,508.13, followed by two smaller disbursements.
Before he received the funds, Duane, who suffers from bi-polar disorder and
schizophrenia, and has struggled with drug and alcohol addiction, indicated to his
2 Scheduling Conference and Pl.‘s Mot. for Default Judgment as to Def. Tolmiros, LLC and the Court‘s Ruling at 3, 6 (D.I. No. 103); See Poore v. Fox Hollow Enters., 1994 WL 150872, at *2 (Del. Super. Mar. 29, 1994). 3 The facts recited herein constitute the Court's post-trial findings of fact. Unless otherwise noted, these facts are drawn from the stipulated facts section of the parties‘ Joint Pre–Trial Stipulation and Order, filed September 18, 2013.
3 attorney that to preserve his money, he wanted others to manage his settlement proceeds.
Duane has stated that he drinks a six-pack of beer daily.4 Duane also has only a ninth
grade education.5 On August 31, 2011, Duane created an irrevocable trust, the Duane C.
Hardy 2011 Trust, of which he was both the Settlor and the Beneficiary. His older sister
Sherry and her adult son Michael were appointed co-trustees of the Trust. At the time of
the Trust‘s inception, an attorney explained to Defendants the duties and obligations
required of them as trustees and reviewed with them the terms of the Trust.6
The stated purpose of the Trust was ―to insure that . . . the physical necessities,
comfort, happiness and best interests of the Beneficiary . . . be met.‖ 7 The Trust
Agreement states that the Beneficiary, Duane, ―has a disability‖ and that the Grantor‘s
wish was that ―the Beneficiary attain the highest level of life satisfaction and
achievement, consistent with the Beneficiary‘s disability.‖8 In order to prevent the Trust
from supplanting Duane‘s Social Security Disability Insurance income of $650.00 per
month, the Trust Agreement provided that the Trust funds were to supplement any public
4 Tr. 196. 5 Id. at 171 (Duane). 6 Tr. 9–10 (Sherry); id. at 118 (Michael). Citations in this format are to the trial transcript. If the identity of the witness is not clear from the associated text, the witness‘s name is indicated parenthetically. 7 JX A at 1. 8 Id.
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
DUANE C. HARDY, ) ) Plaintiff, ) ) v. ) ) C.A. No. 7531-VCP SHERRY L. HARDY and MICHAEL T. ) HARDY, individually and as Trustees ) of the Duane C. Hardy 2011 Trust, and ) TOLMIROS, LLC, ) ) Defendants. )
MEMORANDUM OPINION
Date Submitted: April 16, 2014 Date Decided: July 29, 2014
William X. Moore, Esq., Edward H. Wilson, II, Esq., ROEBERG, MOORE & FRIEDMAN, P.A., Wilmington, Delaware; Attorneys for Plaintiff Duane C. Hardy.
Richard K. Goll, Esq., LAW FIRM OF RICHARD K. GOLL, Millville, Delaware; Represented Defendants Sherry L. Hardy, Michael T. Hardy and Tolmiros, LLC at trial, but was permitted to withdraw as counsel on April 16, 2014.
Sherry L. Hardy and Michael T. Hardy, Pro Se Defendants.
PARSONS, Vice Chancellor. The plaintiff, Duane C. Hardy, received a large cash settlement as a member of the
class that brought sexual abuse charges against the Catholic Diocese of Wilmington (the
―Diocese‖), among others. In anticipation of receiving his first settlement payment, the
plaintiff, with the assistance of counsel, created a trust, naming himself as the
beneficiary, and appointed his sister and nephew, Sherry L. Hardy and Michael T. Hardy,
respectively, as co-trustees. The plaintiff‘s choice of trustees proved to be disastrous.
This case arises out of the beneficiary‘s allegations that the trustees breached their
fiduciary duties by engaging in self-interested transactions and failing to administer the
trust for its intended purpose. By the time of trial, the trust accounts had a zero balance.
Duane1 seeks to recover losses the trust incurred as a result of the trustees‘ breaches of
fiduciary duties. The relief he requests includes an award of money damages with
prejudgment interest, the imposition of a constructive trust on items purchased with the
trust corpus, and an award of his attorneys‘ fees and expenses.
In response, Sherry and Michael deny any liability, because, they allege, Duane
consented to all or most of their self-interested transactions. In addition, the defendants
contend that, even if they may have breached their fiduciary duty, they are absolved from
any monetary damages by the exculpation clause of the Trust Agreement.
For the reasons stated in this post-trial opinion, I hold Sherry and Michael jointly
and severally liable for their self-interested purchases and for many of the other
1 Because the three main actors in this dispute have the same surname, i.e., Hardy, I refer to them by their first names in the interest of brevity and clarity. No disrespect is intended.
1 expenditures the plaintiff challenged based on their failure to account for money
withdrawn from the trust. I do not find the defendants liable for approximately $30,000
that was gifted to Duane‘s friends and family, allegedly at Duane‘s behest, and for certain
of the other challenged expenditures. By way of relief, I award Duane money damages
and I have imposed a constructive trust on the two vehicles the defendants purchased
with trust assets and on Sherry‘s 8.3% property interest in a residence located at 412 W.
3rd Street, Wilmington, DE, 19801. Based on Sherry and Michael‘s breaches of their
duties to the Trust, their egregious pre-litigation conduct, and certain actions taken
vexatiously or in bad faith during the course of this litigation, I award Duane his
attorneys‘ fees and expenses in connection with this litigation.
Finally, this Memorandum Opinion reflects my findings of fact and conclusions of
law on Plaintiff‘s recently filed motions to set aside Michael‘s fraudulent transfer of one
of the automobiles and for contempt. The defendants did not respond to these motions.
Based primarily on my finding that the disputed transfer was fraudulent, I grant most of
the relief sought by these two motions.
I. BACKGROUND
A. The Parties
Plaintiff, Duane, is the settlor and beneficiary of the Duane C. Hardy 2011 Trust
(the ―Trust‖).
Defendant Sherry and her son Michael are the co-trustees of the Trust
(collectively, ―Trustees‖ or ―Defendants‖). Sherry is Duane‘s older sister and Michael is
Duane‘s nephew.
2 Defendant Tolmiros, LLC (―Tolmiros‖) was a business entity formed under the
laws of Delaware on October 31, 2011. Michael established Tolmiros for the purpose of
making investments, but it never engaged in any actual business transactions. The Court
entered a default judgment against Tolmiros on January 16, 2013, due to Tolmiros‘s
failure to obtain legal counsel as required under Delaware law.2 The January 16 Order
stated that a hearing on damages against Tolmiros would be scheduled to coincide with
the trial on the merits against Defendants Sherry and Michael. No material evidence or
argument was presented at trial on behalf of Tolmiros. Therefore, to the extent a money
judgment or constructive trust is entered against Sherry or Michael, the Court also will
award the same relief, jointly and severally, against Tolmiros.
B. Facts3
1. Creation of the Trust
Duane was a party in a class action suit, which ultimately ended in a settlement,
against the Diocese for abuse he endured as a child. Under the settlement, Duane was to
receive an initial disbursement of $533,508.13, followed by two smaller disbursements.
Before he received the funds, Duane, who suffers from bi-polar disorder and
schizophrenia, and has struggled with drug and alcohol addiction, indicated to his
2 Scheduling Conference and Pl.‘s Mot. for Default Judgment as to Def. Tolmiros, LLC and the Court‘s Ruling at 3, 6 (D.I. No. 103); See Poore v. Fox Hollow Enters., 1994 WL 150872, at *2 (Del. Super. Mar. 29, 1994). 3 The facts recited herein constitute the Court's post-trial findings of fact. Unless otherwise noted, these facts are drawn from the stipulated facts section of the parties‘ Joint Pre–Trial Stipulation and Order, filed September 18, 2013.
3 attorney that to preserve his money, he wanted others to manage his settlement proceeds.
Duane has stated that he drinks a six-pack of beer daily.4 Duane also has only a ninth
grade education.5 On August 31, 2011, Duane created an irrevocable trust, the Duane C.
Hardy 2011 Trust, of which he was both the Settlor and the Beneficiary. His older sister
Sherry and her adult son Michael were appointed co-trustees of the Trust. At the time of
the Trust‘s inception, an attorney explained to Defendants the duties and obligations
required of them as trustees and reviewed with them the terms of the Trust.6
The stated purpose of the Trust was ―to insure that . . . the physical necessities,
comfort, happiness and best interests of the Beneficiary . . . be met.‖ 7 The Trust
Agreement states that the Beneficiary, Duane, ―has a disability‖ and that the Grantor‘s
wish was that ―the Beneficiary attain the highest level of life satisfaction and
achievement, consistent with the Beneficiary‘s disability.‖8 In order to prevent the Trust
from supplanting Duane‘s Social Security Disability Insurance income of $650.00 per
month, the Trust Agreement provided that the Trust funds were to supplement any public
4 Tr. 196. 5 Id. at 171 (Duane). 6 Tr. 9–10 (Sherry); id. at 118 (Michael). Citations in this format are to the trial transcript. If the identity of the witness is not clear from the associated text, the witness‘s name is indicated parenthetically. 7 JX A at 1. 8 Id.
4 assistance Duane received.9 Article 2 of the Trust Agreement further clarified that
despite any language to the contrary within that agreement, ―no trust or principal shall be
paid to or expended for the benefit of the Beneficiary, so long as his care, comfort and
welfare needs are adequately provided by programs designed to provide support needs to
beneficiaries with disabilities . . . .‖10 The Trust Agreement provided the Trustees ―sole
and uncontrolled discretion‖ to ―distribute or apply as much of the net income or
principal of the Trust for the care, comfort, welfare, education or training of the
Beneficiary,‖ as the Trustees deemed to be in Duane‘s best interest.11 Article 8 required
the Trustees to ―prepare an annual report of receipts and disbursements to the
Beneficiary‖ and to make Trust records available for the Beneficiary‘s inspection at all
reasonable times.12
Under an exculpation clause in Article 7, the Trustees are ―not liable for any act or
omission in the administration of the trust or for the loss or damage to trust property,
except as caused by the Trustee‘s intentional misconduct or gross negligence.‖13
9 Id. 10 Id. 11 Id. at 2. 12 Id. at 6. 13 Id. at 5.
5 2. Rapid depletion of the accounts
a. Initial deposit in October
On October 27, 2011, Duane received the initial distribution of his settlement
proceeds, totaling $345,676.88 after payment of attorney fees and costs. The next day
Defendants deposited $336,676.88 of the funds into two separate accounts at Wilmington
Saving Funds Society (―WSFS‖) —$172,838.44 into a money market account (―Account
1‖) and $163,838.44 into a high interest bearing checking account (―Account 2‖).14
Notably, the initial deposits totaled $9,000 less than the amount of the settlement check.
Defendants have provided varying accounts as to what happened to the $9,000. That
question and the facts related to the disbursements made from the Trust accounts are
discussed in the Analysis infra.
b. Payments to friends and family
The first significant withdrawals from the Trust accounts included a $15,000
check written out to cash on November 4, 2011, and a $21,700 debit withdrawal on
November 8, 2011, for a total of $36,700.15 Michael testified that, at Duane‘s behest, he
gifted a majority of the $36,700 to various family members and friends of Duane.16
According to several witnesses, Duane made a list of names and corresponding dollar
amounts reflecting gifts he wished to give his family and friends from the settlement
14 JX C at 1; JX E at 1. 15 JX E at 1. 16 Tr. 114.
6 proceeds.17 Defendants did not attempt to put any list in evidence, but did provide copies
of the cashier‘s checks given to each donee.18 For his part, Duane denied making a list
and maintained that he only authorized two payments in the nature of gifts, totaling
$3,000.19
c. Sherry and Michael buy themselves cars
In the years preceding Duane‘s settlement, Sherry did not own a car.20 At various
times throughout his adult life, Duane was in prison.21 During his most recent
incarceration, Duane apparently wrote his sister Sherry a letter, dated September 23,
2009, updating her on his pending case against the Diocese.22 After reminding Sherry to
send him money, Duane concluded the letter by stating ―I saw your car in the paper—
Lincoln MKX. You desirve [sic] it sis[.] I hope you enjoy it.‖23 Before he actually
17 Tr. 318–19 (Allen Hardy); id. at 258 (Shalon Hardy); id. at 303 (Rashon Hardy). [I found this testimony credible, even though Allen, Shalon, and Rashon each benefitted from gifts they received from the Trust. Tr. 318 (Allen); id. at 271-72 (Shalon); id. at 305 (Rashon)]. 18 See JX L at 1–16. 19 Tr. 209–10 (Duane). 20 Tr. 22 (Sherry). 21 Tr. 205–06 (Duane). 22 JX X at 1. Duane denies having written this letter or causing it to be sent. Tr. 180. 23 Id.
7 received any money from the class action settlement, Duane told Sherry, 24 her daughter
Shalon,25 and others26 that he expected to receive as much as $44 million in the
settlement. Just over two years after he allegedly wrote the September 23, 2009 letter,
Duane received his first settlement payment. Then, within two weeks of depositing the
funds from the settlement into the Trust accounts, Sherry purchased a 2011 Lincoln MKX
(the ―Lincoln‖) for $49,920 with funds from the Trust. Relying on the 2009 letter, Sherry
testified that Duane wanted her to have the vehicle.27
The Lincoln was titled to Tolmiros, a ―financing‖ business Michael started shortly
after he became a Trustee, and was Tolmiros‘s sole asset.28 Michael described his
business plan for Tolmiros as being to ―look[] for rental properties that [he] could invest
Duane‘s money in.‖29 Michael also believed that a luxury car would attract potential
investors for the now-defunct business.30
24 Tr. 80 (Sherry). 25 Id. at 257 (Shalon). 26 Id. at 80 (Sherry). 27 Tr. 21. 28 Id. at 23–25 (Sherry). 29 Id. at 120 (Michael). 30 Id.
8 On the same day Sherry purchased the Lincoln, Michael bought himself a 2006
Mercedes Benz CL5 (the ―Mercedes‖) for $33,120 and spent an additional $5,362.81 on
an extended warranty. All of the money for these purchases came from the Trust.
By the end of November 2011, after Defendants had spent $83,402.81 on the
Lincoln and the Mercedes, dispersed gifts to Duane‘s family and friends, and made
various cash withdrawals, more than half of the original $345,676.88 was gone.31 Only
$162,033.63 remained in the Trust.32
d. Renovating the 412 W. 3rd Street property
Duane and his sister Sherry each inherited from their mother an 8.3% interest in a
property located at 412 W. 3rd Street, Wilmington, Delaware (the ―Hardy Residence‖).
Both Defendants reside permanently in the Hardy Residence. Duane lived there on and
off through the years. After his release from prison in June 2011, he returned to the
Hardy Residence and remained there until approximately November 7, 2011, when
Defendants moved Duane to an apartment in Newark, Delaware.33 Sherry and Michael
spent approximately $2,500 from the Trust furnishing that apartment.34
In late November 2011, after Duane moved to Newark, Defendants began a major
renovation project at the Hardy Residence. Ultimately, Sherry and Michael spent over
31 JX C at 3; JX E at 7. 32 JX C at 3; JX E at 7. 33 JX H at 2. 34 Id. at 4.
9 $75,000.00 on various upgrades and repairs.35 Among other things, they purchased all
new appliances for the house and installed granite counter tops in the kitchen. 36 When
questioned at her deposition about the renovation expenditures, Sherry stated that Duane
gave her permission to use Trust funds to pay them, because it would have made his
mother ―proud to see the house fixed.‖37 Michael considered the renovation a good
investment for Duane. He apparently believed that using Duane‘s Trust to fund the
improvements would somehow increase Duane‘s 8.3% ownership interest.38
e. Duane signs the Consent Document
At some point in December 2011, people close to Duane began to express
concerns regarding Sherry and Michael‘s spending habits.39 In order to ―cover
[themselves] just in case somebody would try to sue [them] outside of Duane,‖40
Defendants drafted a document (the ―Consent Document‖) for Duane‘s signature that
35 Tr. 33–34 (Sherry). 36 JX N at 1–2. 37 JX K at 58 (Sherry‘s Dep.). 38 JX P at 27. 39 Tr. 151 (Michael). 40 Tr. 153.
10 effectively would give Defendants carte blanche to use the Trust funds any way they
wanted.41 The document states as follows:
I, Duane Hardy, gave Michael Hardy and Sherry Hardy[,] my trustees[,] the consent to use my trust fund to buy new and used cars for business and personal use. Also to repair 412 W. 3rd Street, Sherry Hardy‘s home, as much funds as possible to complete the task. Duane Hardy has also gave [sic] the consent to Michael Hardy and Sherry Hardy to use Duane Hardy‘s trust funds for any other personal uses.42
Sherry and Michael took Duane to have the Consent Document notarized on
December 20, 2011, at which point the Trust held $106,972.97. By the end of December,
$93,972.97 remained.43
f. Defendants close the original accounts and open new ones
Shortly after signing the Consent Document, Duane received further warnings
regarding Sherry and Michael‘s spending.44 Frustrated that Defendants had yet to
provide him with any Trust records or account statements despite his repeated requests,
Duane visited a local WSFS branch and obtained account information directly from a
bank teller.45 Seemingly in response, on January 19, 2012, Defendants withdrew the
41 Sherry testified that the document was intended to protect Duane from ―greedy family members,‖ Tr. 65, but I do not find her testimony credible. By its terms, the Consent Document purports to protect only Defendants themselves. 42 JX U at 1. 43 JX C at 6; JX E at 11. 44 Tr. 176–77 (Duane). 45 Id. at 177.
11 entire balances of Account 1, $64,536.16, and Account 2, $4,201.12,46 and deposited the
money in two new accounts at WSFS (―Account 3‖ and ―Account 4,‖ respectively).
After the transfer, Defendants continued to draw from the accounts, by, for example,
making out sizeable checks to cash. There is no evidence however, that Defendants
advised Duane about the existence or status of the new accounts. By the end of January,
2012, Accounts 3 and 4 had a combined balance of $56,277.25.47
In a further attempt to conceal the status of the Trust accounts, on February 8,
2012, Sherry sent to Jacobs and Crumplar, P.A., the law firm that handled the lawsuit
against the Diocese and helped create Duane‘s Trust, a letter requesting that only
members of the firm, the co-trustees, and their attorneys receive information about the
Trust.48 Sherry further requested that Jacobs and Crumplar ―not follow the directions of
Mr. Duane C. Hardy, his lawyer, or anyone who holds Mr. Hardy‘s power of attorney.‖49
3. The continued dissipation of the Trust
On February 28, 2012, when only $34,385.58 remained in the Trust,50 Duane filed
a complaint against Defendants in this Court alleging a breach of trust through intentional
46 JX C at 9; JX E at 14. 47 JX D at 1; JX F at 1. 48 JX I at 1. Duane was not copied on the letter. 49 Id. 50 JX D at 5; JX F at 2.
12 misconduct and gross negligence.51 Two days after Michael and Sherry formally were
served, Michael signed and had notarized a written statement in which he promised: (1)
to show Duane bank statements at Duane‘s request; and (2) to purchase Duane a
vehicle.52 On March 15, 2012, Duane dismissed his complaint without prejudice.53
Undeterred by the threat of litigation, Defendants continued to withdraw large
amounts of money from the Trust.54 Defendants‘ recordkeeping system, or lack thereof,
however, makes it difficult to determine how most of the remaining Trust funds were
spent. Defendants claim to have kept receipts for some of the purchases they made, but
the only consistent records reflecting disbursement of Trust funds were the actual bank
statements. Unfortunately, those statements generally do not show what the money was
spent for or to whom it was paid. The bank statements do show, however, that the
account balance declined precipitously and, by the end of March, only $3,654, or roughly
1% of the original deposit into the Trust, remained.55 Thus, in a period of only five
months, virtually all of Duane‘s settlement with the Diocese was gone.
51 Verified Compl. ¶ 4, Hardy v. Hardy, No. 7288-ML (Del. Ch. dismissed Mar. 15, 2012). 52 JX W at 1. 53 Notice of Dismissal, Hardy v. Hardy, No. 7288-ML (Del. Ch. dismissed Mar. 15, 2012). 54 JX D at 6; JX F at 7. 55 JX D at 5, 7.
13 4. The receipt book
With only a negligible balance remaining in the Trust and facing the possibility
that Defendants would have access to the funds from the two smaller settlement
distributions, totaling $30,118.54,56 Duane initiated this action by filing another
complaint against his sister and nephew on May 15, 2012. During their depositions on
August 7, 2012, Duane‘s counsel questioned Sherry and Michael regarding their
recordkeeping for the Trust. Neither Defendant could identify any specific procedure
they had implemented for documenting Trust expenditures.57 In fact, both Defendants
seemed unsure about whether any records existed, and said they would have to go home
and look.58 For example, Sherry testified as follows:
Q: So you didn‘t keep track of where the money went? A: Sometimes I did and sometimes I didn‘t. Q: Well, when you did, how did you do that? A: I may have written it down. I‘m not sure. Q: So, is what you are telling me, you don‘t know if you did or didn‘t keep track of where the money went. A: I probably did.59
Michael gave similarly ambiguous and vague responses.
Q: Do you have any sort of records of the trust expenditures? A: Possibly.
56 JX J at 1–2. 57 JX K at 44–45 (Sherry‘s Dep.); JX P at 24–25 (Michael‘s Dep.). 58 JX K at 44–46; JX P at 24–25. 59 JX K at 46.
14 Q: Okay. Where do you think that might be? A: I would have to look around.60
On January 22, 2013, Duane‘s counsel served a Request for Production, seeking
―copies of all financial records maintained by trustees, but not limited to accounting
books, spreadsheets, checking account balances, and other related documents indicating
withdrawals and deposits from the Duane C. Hardy 2011 Trust.‖61 Yet, Sherry and
Michael failed to turn over any additional records in response to that request.62 On May
1, 2013, the Court granted Motion to Compel by Plaintiff and ordered Defendants to
respond within five days. Once again, Sherry and Michael failed to produce any records.
On August 5, 2013, Plaintiff filed a second Motion to Compel. The Court also granted
that motion and imposed a deadline of September 4, 2013 for Defendants to produce any
responsive documents or be barred from introducing or referencing any documents not
produced by the deadline. On September 4, Defendants produced to Plaintiff‘s counsel
copies of numerous receipts from an alleged receipt book.63
Several characteristics of the receipts Defendants produced, however, raise
questions about their authenticity and reliability. First, neither Defendant mentioned the 60 JX P at 24–25. 61 Pl.‘s Mot. to Compel Ex. A (D.I. No. 66). 62 Plaintiff filed his first Motion to Compel on February 20, 2013. Shortly thereafter, Defendants hand-delivered a response to the Second Request for Production, which stated, ―We do not have all of the documents requested.‖ Pl.‘s Post-Trial Opening Br. 21. 63 Although Sherry testified that the receipts Defendants produced came from a receipt book, Defendants never produced the receipt book itself. Tr. 38.
15 receipts during their deposition, despite specific questions regarding trust recordkeeping.
Second, although, the receipts presumably were bound in a book initially, no book or
portion of a book was produced. Third, the receipts bear preprinted numbers and have
blanks to fill in information about the expenditure, including the date. Yet, when the
receipts Defendants produced are placed in sequential order based on the receipt number,
the handwritten dates on the receipts are not in order. For example, receipt number
465809 is dated November 9, 2011, but the immediately preceding receipt number
465808 is dated April 24, 2012.64 Even receipts bearing the same date are not in
consecutive order; instead, they are spread throughout the receipt number sequence.65
In addition, the compilation of receipts contains instances where the receipts
suggest that, on the same day, Duane received multiple disbursements of the same
amount of money. For example, on March 28, 2012, the receipts show that Duane
received three separate payments of $1,225.66 When the corresponding receipts are
arranged in receipt number order, they are: 465831, 465801, and 465854. Furthermore,
the bank records indicate that on March 28, 2012, there were two, rather than three,
64 JX Z at 9–10. 65 JX Z at 38, 67 (February 7, 2012); JX Z at 9, 27 (April 24, 2012). 66 JX Z at 6, 24, 46.
16 separate withdrawals from the Trust accounts in the amount of $1,225.67 Lastly, Duane‘s
signature on each of the receipts varies greatly throughout the receipt compilation.68
C. Procedural History
Duane‘s May 15, 2012 complaint (the ―Complaint‖) accused Sherry and Michael
of breach of trust through intentional misconduct and gross negligence and asserted a
claim against Tolmiros, LLC for unjust enrichment. The Trustees and Tolmiros
answered on June 27, 2012. On January 15, 2013, Plaintiff moved for default judgment
against Tolmiros. The Court granted that motion on January 16, 2013, and ordered
Tolmiros to assign title of the Lincoln to Plaintiff‘s attorney within seven days. On the
same day, January 16, however, Plaintiff learned that Tolmiros had transferred title of the
Lincoln to Sherry the day before. Duane then moved to set aside the transfer of the
Lincoln to Sherry based on the Delaware Uniform Fraudulent Transfer Act.69 On January
29, 2013, after hearing argument, the Court granted the motion to set aside the fraudulent
transfer.
The parties actively engaged in discovery in the latter part of 2012 and much of
2013. As mentioned supra, that included two motions to compel by Plaintiff. The Court 67 See JX D at 6; JX F at 5. There are also other instances in which the receipts do not align with the bank statements. For example, the receipts indicate that on April 3, 2012, Defendants gave Duane three separate payments of $1,000. JX Z at 7, 25, 54. Yet, the bank statements indicate only two separate $1,000 withdrawals on April 4. JX F at 5. See also Pl.‘s Post-Trial Opening Br. 24 for additional examples. 68 See JX Z at 1–71. 69 6 Del. C. §§ 1301–1311.
17 held a two-day trial on the merits of this action on October 14 and 15, 2013. Duane and
Defendants submitted post-trial briefs, and on April 16, 2014, the Court heard post-trial
oral argument. By the time of the argument, Duane‘s counsel had learned that Michael
had transferred title to the Mercedes to a third party, in apparent violation of the Court‘s
January 29, 201370 and October 15, 201371 Orders, reflected in transcript rulings
prohibiting the undisclosed transfer or conveyance by Defendants of any asset purchased
with funds from the Trust. On April 22, 2014, Plaintiff filed a motion for contempt and a
motion to set aside Michael‘s conveyance of the Mercedes as fraudulent. Defendant
never responded to those motions. This Memorandum Opinion constitutes my post-trial
findings of fact and conclusions of law on the issues presented at trial and my rulings on
the motions for contempt and to set aside the conveyance.
D. Parties’ Contentions
Duane contends that Defendants, in their role as trustees, breached their fiduciary
duties by engaging in self-interested transactions, failing to administer the trust for its
intended purpose, and failing to maintain adequate records or to inform Duane of all
material facts relating to expenditures made from the trust. Duane seeks money damages
against Defendants and the imposition of a constructive trust over the Lincoln, the
Mercedes, and Sherry‘s 8.3% interest in the Hardy Residence, among other things.
70 Scheduling Conference and Pl.‘s Mot. for Default Judgment as to Def. Tolmiros, LLC and the Court‘s Ruling at 9-10 (D.I. No. 103). 71 Tr. 347.
18 Additionally, Duane requests that the Court remove Defendants as trustees and appoint a
professional trustee to manage the remainder of the Trust.
Defendants maintain that they did not breach any fiduciary duties owed to Duane
because Duane knew of and consented to most of their self-interested purchases. While
Defendants admit that they could have kept more accurate and complete records,72 they
insist that they regularly informed Duane of how they used the Trust funds and assert that
they did not provide Duane with bank statements in order to protect him from outside
influences.
II. ANALYSIS
A. The Trustees’ self-interested transactions
1. The legal standard
Inherent in the trust relationship is the duty of loyalty, which requires a trustee to
administer the trust solely for the interest of the beneficiary and exclude all selfish
interests and all consideration of the interests of third persons.73 Self-interested
transactions by fiduciaries are not prohibited altogether, but require the beneficiary‘s
voluntary consent to the transaction after full disclosure.74 Under Delaware law, when a
fiduciary has a close confidential relationship with the beneficiary, such consent requires
72 Defs.‘ Post-Trial Br. 7. 73 George Gleason Bogert, The Law of Trusts and Trustees, § 543, at 217–18 (2d rev. ed. 1993). 74 Estate of Carpenter v. Dineen, 2008 WL 859309, at *12 (Del. Ch. Mar. 26, 2008).
19 impartial advice from a competent and disinterested third person, sufficient to allow the
beneficiary to make an informed decision.75
Self-interested transactions involving a fiduciary or one in a confidential
relationship with another are presumptively fraudulent76 and voidable in equity.77 ―[I]f
the transaction is challenged, the burden of persuasion to justify upholding the transaction
is on the fiduciary. ‗That burden is even greater where the transfer of property is made
without consideration.‘‖78
2. Sherry and Michael breached the duty of loyalty
a. The Lincoln and the Mercedes
Sherry and Michael‘s automobile purchases were self-interested transactions,
which benefitted Defendants at Duane‘s expense. As self-interested transactions, they
are presumptively voidable. To overcome the presumptive invalidity of the transactions,
Defendants argue that Duane consented to and even encouraged the purchases, offering
the notarized Consent Document as proof. Duane‘s written consent is ineffective in the
circumstances of this case, however, for at least two reasons. First, Sherry and Michael
have not shown that Duane received any material consideration in exchange for the use of
his Trust fund to buy the two automobiles. In addition, Sherry and Michael failed to
75 Schock v. Nash, 732 A.2d 217, 229 (Del. 1999); see also Dorman v. Plummer, 2001 WL 32645, at *5 (Del. Ch. Jan. 9, 2001). 76 Peyton v. William C. Peyton Corp., 7 A.2d 737, 746–47 (Del. 1939). 77 Estate of Carpenter, 2008 WL 859309, at *12. 78 Id.
20 prove that Duane was fully informed as to the state of his Trust, the cost of the Lincoln
and Mercedes, and other relevant facts before he allegedly consented to those purchases.
Second, Sherry and Michael had a confidential relationship with Duane. ―A
confidential relationship exists where ‗circumstances make it certain the parties do not
deal on equal terms but on one side there is an overmastering influence or on the other
weakness, dependence or trust, justifiably reposed.‘‖79 In determining whether a
confidential relationship exists, this Court has considered factors such as ―reliance on
another for physical, emotional, or decisional support, a query informed by the
beneficiary‘s disposition and mental and physical capabilities, as well the existence and
extent of any additional support network. Kinship by blood or marriage is also a factor,
but is not itself determinative.‖80
Several factors in this case suggest that in addition to the formally recognized
fiduciary relationship between Defendants and Duane, as Trustees and Beneficiary, a
confidential relationship existed as well. Defendants are blood relatives of Duane.
Sherry is his older sister, and Michael is his nephew. Sherry and Michael also assisted
Duane in various ways, such as taking him shopping, helping him get his own apartment,
and occasionally providing transportation. Michael testified that ―[Sherry and I] would
79 In re Will of Wiltbank, 2005 WL 2810725, at *6 (Del. Ch. Oct. 18, 2005) (quoting In re Will of Szewzcyk, 2001 WL 456448, at *5 (Del. Ch. Apr. 26, 2001)). 80 Mitchell v. Reynolds, 2009 WL 132881, at *9 (Del. Ch. Jan. 6, 2009).
21 drop whatever we were doing and we would make sure he was okay,‖81 which confirms
Duane‘s reliance on Defendants. In addition, Defendants‘ willingness to assume the role
of Duane‘s caretakers, in light of Duane‘s mental illness and struggles with substance
abuse, put them in a ―relatively superior position‖82 with respect to Duane. In fact, the
Trust Agreement signed by Duane, Sherry, and Michael at a time when Duane had the
benefit of impartial advice from a competent and disinterested third person acknowledges
that Duane has a ―disability,‖ and describes the Trust‘s purpose and intent as follows:
By this trust, Grantor [Duane] intends to insure that, to the best extent possible, the physical necessities, comfort, happiness and best interests of Beneficiary [Duane] will be met. It is the Grantor‘s wish that the Beneficiary attain the highest level of life satisfaction and achievement, consistent with the Beneficiary’s disability.83
In contrast, nothing in the Trust Agreement authorizes Defendants, as Trustees, to
engage in self-interested transactions. Therefore, I find that Sherry and Michael had a
confidential, fiduciary relationship with Duane at all times relevant to this litigation. This
conclusion is buttressed by the fact that the Trust is designated as a Spendthrift Trust.
Specifically, Article 6A, entitled ―Spendthrift Clause‖ states: ―No Beneficiary will be
allowed to assign, transfer (voluntarily or involuntarily), pledge or anticipate any interest
in income or principal held or payable, and no Beneficiary‘s creditors (including a spouse
81 Tr. 159 (Michael). 82 Swain v. Moore, 71 A.2d 264, 267 (Del. Ch. Feb. 7, 1950). 83 JX A at 1 (emphasis added).
22 or former spouse of the Beneficiary) will be allowed to attach or otherwise reach any
such interest.‖84 This clause in the Trust Agreement suggests that, at a minimum,
Duane‘s ability to consent to the Trustee‘s making self-interested gifts or payments to
themselves would be limited. As previously noted, Duane was disabled in that he
suffered from bi-polar disorder and schizophrenia and has struggled with drug and
alcohol addiction.
Because the Court finds the existence of a confidential relationship, Sherry and
Michael‘s automobile purchases are presumed fraudulent, and therefore voidable, absent
proof that Duane consented to those transactions by signing the Consent Document or
otherwise after he received impartial advice from a competent and disinterested third
party. Sherry and Michael presented no evidence that Duane received such impartial
advice. Therefore, as to their respective purchases of the Lincoln and the Mercedes, I
find that Sherry and Michael breached their duty of loyalty. 85
In arguing that Duane did give his informed consent to the purchase of the two
automobiles, Defendants rely most heavily on the notarized Consent Document signed on
or about December 20, 2011. First, I note that there is no evidence that Duane received
any impartial advice from a competent and disinterested third party in connection with
84 Id. at 3. 85 Whether Defendants can be held personally liable for these and the other alleged breaches of duty discussed in this Memorandum Opinion depends on whether their conduct is exculpated under the Trust Agreement. I address that issue in Section II. E infra.
23 his signing that document. The record indicates that he dealt only with Sherry and
Michael in that regard, and they both were interested in that consent because it purported
to ratify and facilitate their engaging in self-interested transactions. For that reason
alone, the Consent Document is ineffectuated. Even if impartial advice were not needed
in this instance, however, I still do not find that the Consent Document constitutes
credible evidence that Duane gave his informed and voluntary consent to, for example,
Defendants‘ use of Trust funds to purchase the Lincoln and the Mercedes.
As Trustees, Defendants had to obtain Duane‘s fully informed consent regarding
the automobile purchases. Section 97 of the Restatement of Trusts provides in relevant
part that:
―A beneficiary who consented to or ratified, or released the trustee from liability for, an act or omission that constitutes a breach of trust cannot hold the trustee liable for that breach provided . . . the beneficiary (or the beneficiary‘s representative), at the time of the consent, ratification, or release, was aware of the beneficiary‘s rights and of all material facts and implications that the trustee knew or should have known relating to the matter . . . .‖86
In this case, Defendants presented no credible evidence that Duane ever received such
full disclosure.
b. The Renovations to the Hardy Residence
The use of the Trust to pay for various renovations to the Hardy Residence are
also self-interested transactions, because Duane no longer lived at the residence and
86 Restatement (Third) of Trusts § 97 (2012).
24 Sherry and Michael directly benefitted from the transactions. Accordingly, to meet the
requirements of the duty of loyalty and overcome the presumption that all transactions
related to the Hardy Residence renovations were invalid, Sherry and Michael, as
Trustees, had to prove that Duane voluntarily consented to the transactions after full
disclosure. Because Sherry and Michael had a close confidential relationship with Duane
as related to the Trust fund, they also had to prove that he received competent and
impartial, third-party advice. Again, Sherry and Michael failed to produce any
persuasive evidence on either of these issues. Therefore, I find that, as to the money
spent on repairs to the Hardy Residence, Defendants breached their duty of loyalty.
B. Gifts to family and friends
During their tenure as Trustees, Sherry and Michael gave money to Duane‘s
friends and family members, allegedly at Duane‘s behest, and they now have provided
documentation purporting to show that $30,200 of the Trust was allocated to these gifts.
Duane insists that he only instructed Sherry and Michael to give monetary gifts to two of
his friends, Mr. Sal and Harold Gregory, amounting to a total of $3,000.87 Duane
specifically denied authorizing such gifts to anyone else.88
Trust principles allow Duane, as beneficiary, to transfer his interests in the Trust,
absent any trust provisions to the contrary.89 Fiduciaries owe Duane, as beneficiary, not
87 Tr. 208. 88 Id. 89 See Restatement (Second) of Trusts § 132 (1959).
25 only a duty of loyalty, as previously discussed, but also a duty to exercise due care.90
That is, Sherry and Michael have a duty to administer the trust with ―the skill and care
that a man of ordinary prudence would exercise in dealing with his own property in light
of the situation existing at the time.‖91 The Trust Agreement for Duane‘s Trust gives
broad discretion to the Trustees. The only limitation on Defendants‘ authority to
effectuate gratuitous transfers to third parties at Duane‘s request relevant in this case is
their fiduciary duty of care.
The ultimate issue as to whether Defendants breached their duty of care regarding
the gifts is whether Duane directed the transactions, as Defendants maintain, or whether
Sherry and Michael gave the money away on their own volition, as Duane asserts. The
Court evaluates such a claim using a preponderance of the evidence standard.92 In
support of this aspect of his Complaint, the only limitations on discretion relied upon by
Duane were the requirements that the Trust be administrated for Duane‘s benefit and that
the Trustees comply with their duty of care.93 As Plaintiff, Duane bears the burden of
proof and must show by a preponderance of the evidence that he is entitled to relief.
90 Wilmington Trust Co. v. Coulter, 200 A.2d 441, 448 (Del. 1964). 91 Id. 92 Estate of Osborn v. Kemp, 2009 WL 2586783, at *4 (Del. Ch. Aug. 20, 2009). 93 Duane does not allege or argue that the Trustees‘ actions with respect to the gifts were self-interested, even though a number of the donees are blood relatives of Sherry and Michael. That may be because those same individuals are blood relatives of Duane, as well, and natural objects of Duane‘s bounty. In any event, because the transactions have not been challenged as self-interested, they are not
26 To resolve the conflicting evidence regarding the disputed gifts, the Court must
evaluate Duane‘s credibility as a witness. Based on his testimony at trial, I do not
consider Duane a particularly reliable witness. There is no dispute as to his being
diagnosed with bipolar disorder and schizophrenia. In addition, he currently has an
addiction to alcohol; he admittedly drinks, on average, at least a six pack of beer a day.94
In some respects, Duane fell back on his alcohol addiction as a crutch or excuse for
providing unhelpful or evasive testimony. In certain other respects, however, Duane‘s
testimony was coherent and credible. One example involved his efforts to gain access to
his bank records from Defendants and from WSFS. In yet other instances, Duane‘s
answers were so absolute and unqualified that they strained credulity. In that regard, I
find not credible Duane‘s denial that he ever visited the Hardy Residence after he was
moved to the Studio Green apartments in Newark, Delaware, especially because several
other witnesses testified to the contrary. When asked whether he had visited 412 West 3d
Street at any time in the two and one-half years before trial, for example, Duane
responded: ―No, not whatsoever. Since the house been fixed or since I left there, no, I
presumptively void and the burden of proof does not shift to Defendants to justify upholding those transactions.
Plaintiff did not contend that the Spendthrift Clause of the Trust Agreement limited his or the Trustees‘ ability to make gifts from the Trust. Accordingly, I do not address that issue. 94 Tr. 171, 196 (Duane).
27 haven‘t been there.‖95 Duane further asserted that any witness who testified to the
contrary would be lying.96 In a similar vein, Duane denied that he ever authorized any
gifts to anyone from the Trust other than to two individuals – namely, Mr. Sal and Harold
Gregory. Duane swore that they were ―the only two people that I ever gave money to,
because they‘re my best friends.‖97 That testimony, however, conflicts with the evidence
provided by several other witnesses and with a number of trial exhibits. Thus, while I do
accept some aspects of Duane‘s testimony, I find his testimony on the subject of gifts
from the Trust to be unreliable.
More than one witness stated that shortly after Duane received his settlement
money, he created or effectively dictated a list of family members and friends to whom
he wanted to make modest gifts.98 No such list was ever produced in the litigation or
made an exhibit at trial. Nevertheless, several witnesses identified certain specific
individuals who received gifts and the amounts they received. In addition, Joint Trial
Exhibit (―JX‖) L consists of a number of cashier‘s checks that allegedly reflect gifts
Defendants contend Duane authorized. There are copies of sixteen cashier‘s checks in
Exhibit L. Two of the checks, dated November 9 and November 16, 2011, respectively,
95 Tr. 203. 96 Id. at 204. 97 Id. at 209-10. 98 Tr. 318-19 (Allen); Tr. 258 (Shalon).
28 are to Sal Panariello for $3,000 and to Harold Gregory for $1,000.99 This evidence
corresponds fairly closely to Duane‘s testimony regarding the gifts he authorized to Mr.
Sal and Harold Gregory.100 With only three exceptions, all of the cashier‘s checks in JX
11 bear dates in November 2011, the first full month the Trust was in effect. The
exceptions are a check to Julius Allen Hardy for $700 dated January 23, 2012, one to
Vernell Hardy for $500 dated January 19, 2012, and one to Shalon Hardy for $1,000
dated March 9, 2012. Shalon, who helped Duane on occasion, testified that she asked
Duane for the $1,000 check to her.101 Based on the relatively small amounts of the gifts
to Julius and Vernell, and the fact that cashier‘s checks were used, I find that Duane did
authorize those gifts, as well.
The elements of a claim for breach of fiduciary duty are: (i) that a fiduciary duty
exists; and (ii) that a fiduciary breached that duty. 102 In considering a party‘s claims, ―the
relative weight given to any particular piece of evidence, and particularly witness
testimony, is a matter for the court to determine as the trier of fact.‖103 To disprove
Duane‘s testimony that he authorized only two gifts from the Trust, totaling $3,000,
99 JX L at 12, 14. 100 The only deviation is that Duane said he had given ―Mr. Sal‖ $2,000, instead of $3,000 as reflected on the cashier‘s check. 101 Tr. 272-73 (Shalon). 102 Heller v. Kiernan, 2002 WL 385545, at *3 (Del. Ch. Feb. 27, 2002), aff’d, 806 A.2d 164 (Del. 2002). 103 In re IAC/InterActive Corp., 948 A.2d 471, 493 (Del. Ch. 2008).
29 Defendants produced copies of cashier‘s checks they dispersed to a number of Duane‘s
family and friends. Defendants also called several witnesses who testified that Duane
promised them the money they received. Having considered all the evidence on the issue
of these gifts, I find that Duane did ask Sherry and Michael to give monetary gifts to a
select group of donees beyond the two persons Duane identified.
Considering Duane‘s history of reliance on others for money, housing, and other
necessities throughout his life, I find incredible his testimony that he did not intend to
make a relatively small monetary gift to a single member of his family after he received
his settlement. Furthermore, Defendants presented convincing contrary evidence,
including the fact that the Trustees used cashier‘s checks instead of cash for the alleged
gifts. By using cashier‘s checks, Defendants created a more reliable and transparent
record of what they had done. Because this supports Sherry and Michael‘s defense, I find
that Duane has failed to sustain his burden of proving by a preponderance of the evidence
that the disputed gifts were not authorized. Accordingly, I hold that Sherry and Michael
did not breach any fiduciary duty in connection with the $30,200 in documented gifts to
the indentified third parties. I deny, therefore, Duane‘s claim to that extent.
30 C. Unverifiable expenditures
1. The duty to account
As fiduciaries, trustees have a duty to account to beneficiaries for their disposition
of trust assets and bear the burden of proving that a disposition was proper.104
―[I]ncluded within the duty to account is a duty to maintain records that will discharge
the fiduciaries‘ burden, and that if that duty is not observed, every presumption will be
made against the fiduciaries.‖105 The other items for which Duane asserts claims for
breach of fiduciary duty and monetary relief generally relate to the failure of Sherry and
Michael to account to Duane for the performance of the Trust and to the existence of
numerous unverifiable expenditures. I turn to those issues next.
2. The $9,000 that was never deposited into the Trust account
While Duane‘s initial settlement disbursement was for $345,676.88, only
$336,676.88 was deposited into the Trust bank accounts. Each Trustee provided a
different explanation for how the missing $9,000 was spent. According to Sherry, Duane
received about $3,000 and about $6,000 went to household bills. When questioned
further, she also said some of the money may have gone to family members. Michael
testified that all of the money went to Duane, who spent most of it on a trip to Atlantic
City and gave the rest to family members. Because Sherry and Michael produced no
records to support their ―accounting‖ for the disposition of the $9,000, every presumption
104 Technicorp Int’l II, Inc. v. Johnston, 2000 WL 713750, at *3 (Del. Ch. May 31, 2000). 105 Technicorp Int’l II, Inc., 2000 WL 713750, at *3. Id.
31 must be made against them. Duane admitted that he took three separate trips to Atlantic
City and received $2,000 in cash from the Trust for each trip. 106 One of those trips
occurred immediately after he received the funds from the settlement. In addition, Duane
testified that the cost of his hotel room in Atlantic City was paid for in advance, so that
the $2,000 he received in cash was in addition to that.107 Assuming the cost of the hotel
room for a couple of nights was approximately $1,000, but otherwise making any
presumptions in favor of Duane and against Defendants, I find that Sherry and Michael
have failed to account for $6,000 of the $9,000 that was not deposited in the Trust
accounts in October 2011. Therefore, Sherry and Michael breached their duty to account
for that item to the extent of $6,000.
3. The unaccounted for $121,688
Of the $336,676.88 Sherry and Michael did deposit into the Trust accounts,
Plaintiff contends they withdrew approximately $319,100 of it in cash.108 Defendants
provided sufficient records or credible evidence to demonstrate how some, but not all, of
that cash was spent, leaving $121,688 unaccounted for. As Trustees, Sherry and Michael
bear the burden of proving that the disposition of the $121,688 was proper. In their
testimony, which Duane controverted, Defendants averred that Duane frequently asked
for large amounts of cash in order to support his drug addiction and pay off debts,
106 Tr. 190-91. 107 Tr. 215. 108 Pl.‘s Post-Trial Opening Br. 44 n.20.
32 presumably drug or alcohol-related, and that Defendants feared that Duane might be
harmed if they did not give him the money to repay the ―loans.‖ To resolve this factual
dispute, I must address a threshold issue regarding the admissibility and reliability of a
compilation of receipts Defendants produced at the end of the discovery period.
4. Is Defendants’ compilation of receipts (JX Z) admissible?
Defendants Sherry and Michael principally rely on their compilation of receipts to
rebut Duane‘s claims that they breached their duty to account as to more than $100,000 in
allegedly undocumented and unverifiable Trust dispositions. Defendants maintain that
the receipts show that most of the funds unaccounted for went directly to Duane in the
form of cash. Duane vigorously disputes the authenticity of the receipts and seeks to
have them excluded from evidence.
Several factors make the authenticity of the receipts highly suspect. Notably,
neither Sherry nor Michael mentioned the receipts during their depositions when asked
how they recorded transactions involving the Trust funds. The earliest receipt is dated
November 2, 2011, and the latest April 24, 2012. Sherry was deposed on August 7, 2012.
At that time, the bank records had been produced, but not the receipts. After Plaintiff‘s
counsel inquired about the numerous checks made out to cash, the following exchange
occurred:
Q: Did you keep track of how [the money was spent]? A: Somewhere, I guess. I have to check. I will have to check. Q: Did you have a checkbook, a check regist[er]? A: I will have to check. Q: But you are not answering my question. Did you write it down? Did you type it into a computer?
33 A: I’m not sure. Q: So you kept track of what all the money was for, but you are not sure how? A: Well, you can ask Michael that. Q: Well, I‘m asking you. A: I didn‘t do the stuff here. Q: So you didn‘t keep track of where the money went? A: Sometimes I did, and sometimes I didn‘t. … Q: So is what you are telling me, you don‘t know if you did or didn‘t keep track of where the money went? A: I probably did. Q: You probably did, and if you did, you wrote it down? A: Possibly.109
Sherry never mentioned the existence of the receipt book in her deposition. In fact,
Defendants did not disclose the existence of the receipts until September 4, 2013–a
deadline set by the Court after a later motion to compel.
Michael also was deposed on August 7, 2012. He, too, did not disclose the
existence of a receipt book:
Q: Do you have any sort of records of the trust expenditures? A: Possibly. Q: Okay. Where do you think that might be. A: I would have to look around. Q: Well, I will ask you another question. Did you make it a habit when an expenditure was made of writing down? You cashed all these checks. Did you write down where the money went? A: No. That‘s what bank records are for. Q: But the bank records just shows a check made out to cash. A: Right.110 109 JX K at 44-46 (emphasis added). 110 Tr. 242 (Michael) (emphasis added).
34 During the trial, however, Sherry and Michael both purported to describe in detail
the procedure they followed when Duane asked for money. That procedure allegedly
involved filling out the receipt book, having Duane sign the receipt every single time,
Michael keeping the yellow copy, and Duane receiving the white.111 If Defendants had a
consistent procedure for giving Duane money, it is unlikely that either Sherry or Michael
could have forgotten about the receipt book, especially considering how frequently they
claimed Duane asked for money. Indeed, Michael asserted at trial that he did not forget
about the receipts, but instead lied under oath during his deposition. Despite his evasive
answers during his deposition, Michael insisted at trial that he always recorded any
transactions in the receipt book, and simply ―chose not to tell the truth‖ during the
deposition.112 Michael‘s directly contradictory testimony on this issue undermines his
credibility generally and also raises serious questions about the authenticity of the
receipts.
Additionally, the belated timing of the production of the receipts raises questions
about whether the receipt book even existed before Defendants‘ depositions or, instead,
was created later. Sherry and Michael failed to mention the receipt book in their
depositions or in response to either of Plaintiff‘s two motions to compel Defendants‘
111 Tr. 236 (Michael). Duane denied signing or having any such receipts, and apparently did not have any of them in his possession. See Tr. 182 (Duane stating that the first time he saw the receipts was in his attorney‘s office). 112 Tr. 244 (Michael).
35 production of ―copies of all financial records maintained by trustees, but not limited to
accounting books, spreadsheets, checking account balances, and other related documents
indicating withdrawals and deposits from the Duane C. Hardy 2011 Trust.‖
Moreover, the receipts themselves contain multiple discrepancies that undermine
their validity. As previously stated, the dates of the receipts do not appear in the logical
order that one would expect if the receipts, in fact, were filled out each time Duane asked
for money. Also, Duane‘s signature on the receipts is inconsistent and the receipts often
do not match up to the bank statements. Further, the receipts indicate that Duane
received from Defendants $154,708.20 in cash. Yet, the verified expenditures, including
the Mercedes and the Lincoln, the renovations to the Hardy Residence, and Duane‘s rent
and other expenses,113 account for $214,988. If the receipts are accurate, then Defendants
spent $369,696, when the Trust only contained $345,676.88. Inferences reasonably
drawn from Defendants‘ contradictory testimony, the suspicious timeline of when
Defendants produced the receipt book, and the multiple discrepancies within the receipts
support the conclusion that Defendants created the receipt book after Duane initiated this
litigation, in an effort to avoid or minimize his liability. Therefore, I find that the receipts
113 The following are the documented transactions for the benefit of Duane: $8,516 for Duane‘s rent, $2,491 to furnish his apartment, $5,060.34 in MoneyGrams, $549.18 for groceries, approximately $9,500 for trips to Atlantic City.
36 do not constitute reliable evidence, and I will not consider them in the analysis of whether
the Defendants breached their duty to account and to maintain records.114
Despite Defendants‘ lack of records, after listening to Duane‘s testimony and even
drawing all reasonable inferences in his favor, I am convinced that at least some
relatively modest portion of the unaccounted for Trust funds went to Duane or to pay
―debts‖ he incurred to various individuals. Duane has struggled with drug and alcohol
addiction, although he claims he has not been using illegal drugs for more than three
years.115 In fact, during the trial, he asserted that he was intoxicated on a few specific
occasions to avoid responsibility for and circumvent the legal consequences of his
actions. For example, Duane claimed that when he signed the Consent Document, he did
not know what he was signing in part because he was ―under the influence of alcohol.‖116
In addition, I note that Duane created the Trust because he doubted his ability to manage
his money responsibly and knew that he was susceptible to the influence of others. To a
limited degree, therefore, I credit Defendants‘ poorly documented testimony that Duane
involved himself with and indebted himself to questionable people. For similar reasons, I
114 Essentially, Defendants failed to authenticate the compilation of receipts by failing to present probative evidence sufficient to support a finding that they are what Defendants claim. See D.R.E. (901)(a). 115 Duane was released from prison in June 2011. Tr. 174 (Duane). He denies having used any illegal drugs since that time. Tr. 197. 116 Tr. 187 (Duane).
37 do not consider trustworthy Duane‘s unqualified denial that he knew or owed money to
any of the people Defendants or other witnesses mentioned in their testimony at trial.
While I believe that at least some of the unaccounted for money went to Duane or
was spent for his benefit, in deciding how much, I must balance Duane‘s culpability with
the duty of care and the duty to account Sherry and Michael owed Duane. As Trustees,
Sherry and Michael are ―under a duty to the beneficiary in administering the trust to
exercise such care and skill as a man of ordinary prudence would exercise in dealing with
his own property.‖117 Sherry and Michael had a duty to exercise care and to account with
regard to all of the Trust transactions they engaged in as Trustees, including transactions
made at Duane‘s request. In establishing the Trust, Duane sought to rely on the Trustees‘
judgment, rather than his own, in order to protect his assets. Sherry and Michael insist
that all of the inadequately documented $121,000 in expenditures went to Duane. Even if
they had sufficient records to support that allegation, however, Defendants failed to
present any persuasive evidence that would justify their having given Duane such a large
percentage of his Trust in less than a year. While it might be prudent to give money to an
individual who may otherwise be in danger, distributing a total of over $120,000 in cash
within a six-month period in a series of numerous transactions to a person who suffers
from mental illness and drug addiction is grossly inconsistent with ―ordinary prudence.‖
In considering the circumstances and the evidence, therefore, I find that Defendants
117 In re Cook’s Trust Estate, 171 A. 730, 731 (Del. Ch. 1934).
38 breached their duty of care and duty to account as to $90,000 of the $121,685.87 in
unaccounted for Trust assets.
D. Are Sherry and Michael entitled to exculpation under the Trust Agreement for any of their breaches of fiduciary duty?
Under the Trust Agreement‘s exculpation clause (Article 7B), there are limits to
Sherry and Michael‘s liability. Article 7B provides in relevant part: ―The Trustee shall
not be liable for any act or omission in the administration of the trust or for the loss or
damage to trust property, except as caused by the trustee‘s intentional misconduct or
gross negligence.‖118 Thus, to succeed in holding Sherry or Michael or both liable for
monetary damages for breach of any fiduciary duty or loss of trust property, Duane must
prove that they engaged in intentional misconduct or acted with gross negligence. I turn
next, therefore, to a brief analysis of each of the instances in which Sherry and Michael
breached one or more of their fiduciary duties to determine whether their acts or
omissions in connection with that breach are exculpated.
Sherry and Michael breached their duty of loyalty to Duane and the Trust when
they spent over $158,000, nearly half of Duane‘s settlement, on luxury vehicles for
themselves and renovations to the Hardy Residence, where Duane no longer lived and in
which he held only a small ownership interest. Those actions directly contravened the
purpose and terms of the Trust and were not preceded or attended by any voluntary and
fully informed consent by Duane, let alone a consent based on the impartial advice of a
118 JX A at 6.
39 competent and disinterested third person. I find, therefore, that as to these breaches of
duty, Sherry and Michael engaged in intentional misconduct or, at a minimum, were
grossly negligent in the performance of their duties as Trustees.119 Thus, Sherry and
Michael are liable for any damages resulting from the purchase of the automobiles or the
improvements to the Hardy Residence not properly allocated to Duane.
As to the $6,000 of unaccounted for losses from the Trust principal that occurred
immediately before the opening of the two accounts at WSFS in late October 2011,
Plaintiff failed to prove that loss resulted from either intentional misconduct or gross
negligence. Rather, it appears to have been the product of simple negligence and
inadequate recordkeeping. I hold, therefore, that Sherry and Michael are not liable for
the loss of that $6,000 based on Article 7B of the Trust Agreement.
Finally, I address Defendants‘ breach of duty in failing to account for the
disposition of $90,000 of the Trust. In that regard, I note that Sherry and Michael
withheld from Duane bank statements and related information regarding the Trust
119 Gross negligence in the civil context is defined as a higher level of negligence representing an extreme departure from the ordinary standard of care. In other words, a finding of gross negligence requires more than ordinary inadvertence or inattention. The Delaware Supreme Court has referred to gross negligence as the functional equivalent of criminal negligence, which is defined as the failure to perceive a risk of harm of such a nature and degree that the failure to perceive it constitutes a gross deviation from the standard of conduct a reasonable person would observe. The words willful and wanton imply a degree of negligence higher than gross negligence. In order for conduct to be willful or wanton, it must reflect a conscious indifference or an ‗I don‘t care‘ attitude. Brown v. United Water Del., Inc., 291, 2010 WL 2052373, at *276 (Del. Super. May 20, 2010) (internal quotations omitted).
40 accounts, transferred the remainder of the Trust to two new bank accounts after learning
that Duane had gained access to account information regarding the original accounts, and
instructed the law firm handling the remainder of Duane‘s settlement to withhold from
Duane all information regarding the Trust. Based on Defendants‘ efforts deliberately to
conceal information from Duane and their failure to keep adequate records of the
expenditures they made, to whom, and for what purpose, I find that Sherry and Michael
engaged in willful misconduct or were at least grossly negligent with respect to the
$90,000 in unaccounted for funds. Therefore, I conclude that the exculpation clause does
not insulate Defendants from liability for that loss.120
E. Removal of Trustees
Part of the relief Duane seeks in this action is the removal of Sherry and Michael
as Trustees and the appointment of a professional trustee. The Court of Chancery has the
power to remove a trustee, but does so sparingly.121 Removal of a trustee is reserved for
situations in which the trust property is ―endangered by a lack of capacity, honesty or
fidelity,‖ and is not appropriate for ―some mere negligent breach of duty, arising largely
from an honest mistake.‖122
120 If Defendants‘ decision to comply with Duane‘s requests was merely imprudent and violative of their of care duty, the exculpatory clause could conceivably protect Sherry and Michael from liability for ordinary negligence. JX A at 5. Their evidence shows, however, that Defendants‘ actions were significantly more culpable than that. 121 In re Catell’s Estate, 38 A.2d 466, 469–70 (Del. Ch. 1944). 122 Id.
41 There is no better evidence to suggest that the Trust property is ―endangered by a
lack of capacity, honesty or fidelity,‖ than the zero balance that remains in both of the
Trust accounts. In fact, even Defendants acknowledge that they ―should have first
declined to serve and once they agreed to serve, they should have considered hiring a
third party to assist them in the administration of the trust.‖123 For the reasons stated in
Section II.A supra, I have determined that, in several instances, Sherry and Michael‘s
misadministration of the Trust not only breached their fiduciary duties, but also
constituted gross negligence or intentional misconduct. Defendants spent nearly half of
the Trust on self-interested transactions, while failing to leave Duane with enough money
to pay his rent much beyond the end of this year, 2014. Further, I am convinced by
Defendants‘ conduct, including their attempts to conceal account information from
Duane, lying under oath, and fraudulently conveying the Mercedes in direct violation of
the Court‘s orders, that if they remained as Trustees, their lack of honesty would
endanger what little additional funds Duane has left from his settlement with the
Diocese.124 Therefore, I conclude that Defendants‘ actions since the creation of the Trust
in October 2011 justify removing Sherry and Michael from their roles as Trustees.
123 Defs.‘ Post-Trial Br. 5. 124 The two smaller distributions Duane received from his settlement currently are being held in escrow by Jacobs & Crumplar.
42 By way of further relief, Duane seeks the appointment of Life Solutions, Inc., or
its equivalent, as substitute trustee.125 The Court of Chancery possesses the authority to
appoint a trustee if the trust instrument fails to do so. 126 ―Where the terms of the trust
provide a method for filling vacancies by some method other than by appointment of the
court, however, the designated method of replacement should be followed.127 Article 10
of the Trust Agreement deals with Successor Trustees. It provides:
At such time as SHERRY L. HARDY or MICHAEL T. HARDY is no longer willing to serve as co-Trustee hereunder, the other co-Trustee then serving shall continue as Trustee hereunder, serving as the sole Trustee. If a trustee is serving as sole trustee, that trustee may appoint one or more persons or institutions to serve either (or both) as co-trustee or as successor trustee (in that order named by the sole trustee).
Trustee may at any time appoint a qualified nonprofit organization, such as Delaware CarePlan, Inc., to serve as successor Trustee, and may amend this Trust Agreement, without the need for court approval, to conform the terms of this Agreement to those customarily used by such successor trustee.128
Having concluded that both Sherry and Michael intentionally or with gross negligence
repeatedly violated their fiduciary duties to the Trust, I will order that they be removed as
125 Pl‘s Post-Trial Opening Br. 46; Joint Pre-Trial Stip. and Order § IV.A(3). 126 McNeil v. McNeil, 798 A.2d 503, 513 (Del. 2002). 127 Id. (citing Austin Wakeman Scott & William Franklin Fratcher, Scott on Trusts, § 388 (4th ed. 1987)). 128 JX A at 6-7.
43 Trustees. Consequently, neither Michael nor Sherry will be in a position to appoint a
Successor Trustee.
Nothing in the terms of the Trust Agreement appears to provide an alternative
method for filling vacancies other than by a Trustee‘s appointment of nonprofit
organization or implicitly by appointment of the Court. The last paragraph of Article 10
of the Trust Agreement indicates that Duane, as Settlor of the Trust, was amenable to the
appointment of a qualified non-profit organization to serve as Successor Trustee. To the
extent possible, I will attempt to honor that expression of intent in appointing a Successor
Trustee.
Nothing in the record indicates that the successor Trustee requested by Plaintiff in
this litigation, Life Solutions, Inc. is a qualified non-profit organization129 as specified in
Article 10 of the Trust Agreement. Therefore, I provisionally will deny Duane‘s request
to have Life Solutions, Inc. appointed as substitute trustee, and appoint, instead,
Delaware CarePlan, Inc. to serve as successor trustee. If Delaware CarePlan is unwilling
to serve, the Court directs Plaintiff‘s counsel to submit a list of other qualified non-profit
organizations in Delaware that could fulfill that role, and to indicate any preference
Duane has in that regard. If there is no other qualified non-profit organization, the Court
will appoint Life Solutions, Inc. in accordance with the authority granted in 12 Del. C.
§§ 3501 and 3502.
129 I have no reason otherwise to question the competence of Life Solutions, Inc. to fill the role of Successor Trustee.
44 F. Duane’s attorneys’ fees and costs
a. The American Rule and its exceptions
Plaintiff requests that the Court hold Sherry and Michael liable for the entirety of
Duane‘s attorneys‘ fees and expenses on two grounds: (1) their egregious pre-litigation
conduct; and (2) their bad faith conduct during litigation. Under the American Rule,
litigants are generally responsible for their own legal fees, regardless of which party
prevails.130 Delaware law provides, however, that ―[i]n judicial proceedings involving
breaches of trust, the court, as justice and equity may require, may award costs and
expenses, including reasonable attorneys‘ fees, to any party, to be paid by another party
or from the Trust that is the subject of the controversy.‖131 In addition, an exception to
the American Rule exists where the party against whom attorneys‘ fees are sought to be
assessed acted in bad faith in bringing a case or in pursuing it in a way that increased the
litigation‘s cost or in the conduct that gave rise to the litigation, such that attorneys‘ fees
may be considered an appropriate part of damages.132 The decision to award attorneys‘
fees is within the Court‘s discretion.133
130 Tandycrafts, Inc., v. Initio P’rs, 562 A.2d 1162, 1164 (Del. 1989). 131 12 Del. C. § 3584. 132 Scion Breckenridge Managing Member, LLC v. ASB Allegiance Real Estate Fund, 68 A.3d 665, 687, 2013 WL 1914714, at *12 (Del. 2013). 133 McNeil v. McNeil, 798 A.2d 503, 514 (Del. 2002).
45 b. Attorneys’ fees for pre-litigation conduct
With respect to pre-litigation conduct, not ―every case of intentional fiduciary
wrongdoing justifies fee-shifting.‖134 Rather, the exception is normally applied only in
instances of bad faith, ―where the pre-litigation conduct of the losing party was so
egregious as to justify an award of attorneys‘ fees as an element of damages.‖135
Duane created the Trust Agreement on August 31, 2011 and the settlement funds
first were deposited in the Trust‘s accounts on October 28, 2011. Duane filed his
Complaint on May 15, 2012. On October 27, 2011, the Trust principal was over
$345,000. By the end of March 2013, all that remained was $3,654. Thus, on
Defendants‘ watch as Trustees, approximately 99% of Duane‘s Trust was dissipated in
five months with virtually no tangible benefit to Duane being evident.
Defendants‘ mishandling of the Trust demonstrates a glaring lack of financial
acumen and an utter disregard for Duane‘s best interest. The Trustees, who both were
unemployed when they assumed their fiduciary positions, never had managed a large sum
of money and had no money management training other than their ―life experience.‖136 If
their mismanagement of the Trust had stemmed predominantly from their lack of
education and financial training, I probably would not be inclined to find bad faith.
Sherry and Michael‘s actions, however, were more culpable than that. Within two weeks
134 Venhill Ltd. P’ship ex rel. Stallkamp v. Hellman, 2008 WL 2270488, at *33 (Del. Ch. June 3, 2008). 135 Estate of Carpenter v. Dinneen, 2008 WL 2950764 (Del. Ch. Mar. 6, 2008). 136 JX P at 24.
46 of obtaining the settlement funds, they each bought themselves luxury automobiles at
Duane‘s expense without informing him in advance of what they were doing or making
any reasonable effort to ensure that he understood the situation and its ramifications and
gave his fully informed consent to those transactions. Sherry and Michael also engaged
in similarly self-interested transactions regarding the improvements to the Hardy
Residence. In addition, Defendants not only breached their duty to account for the
performance of the Trust, Sherry and Michael actively restricted Duane‘s access to
account information and tried to conceal that information from him by opening new
accounts without telling Duane about them. Based on the evidence adduced at trial, I
find that Sherry and Michael acted egregiously and with utter disregard for the purpose of
the Trust–i.e., ―to insure that, to the best extent possible the physical necessities, comfort,
happiness and best interests of [Duane] will be met.‖ I conclude, therefore, that Sherry
and Michael‘s pre-litigation conduct amounted to bad faith and will require them to pay
Duane‘s reasonable attorneys‘ fees and expenses in connection with the prosecution of
this action as part of his resulting damages.
c. Attorneys’ fees for bad faith litigation
Plaintiff also seeks attorneys‘ fees on the grounds Sherry and Michael conducted
this litigation in bad faith. In extraordinary circumstances, Delaware courts have relied
on the bad faith exception to the American Rule and awarded attorneys‘ fees where
―parties have unnecessarily prolonged or delayed litigation, falsified records or
47 knowingly asserted frivolous claims.‖137 To satisfy the bad faith requirement, a party‘s
conduct ―must rise to a high level of egregiousness, such that their actions extend beyond
the realm of zealous advocacy.‖138 The Court does not lightly apply this exception and
imposes a ―stringent evidentiary burden of producing clear evidence of bad faith conduct 139 on the party seeking an award of fees.‖ The Delaware Supreme Court, in Johnston v.
Arbitrium (Cayman Islands) Handels AG,140 upheld this Court‘s award of attorneys‘ fees
when the litigants unnecessarily required the institution of litigation, delayed litigation,
falsified evidence, asserted frivolous motions, and provided inconsistent testimony to suit
their needs.141
Plaintiff contends that Defendants‘ refusal to respond to discovery requests, late
production of relevant documents, fraudulent transfers of the Lincoln and Mercedes in
contravention of the Court‘s order, and Michael‘s false statements under oath, among
other things, warrant fee shifting in this case. Defendants‘ disregard for the Court‘s
explicit orders as to the automobiles unnecessarily increased Duane‘s litigation expenses.
In addition, Michael admittedly lied during his deposition when asked about the existence
of accounting records for the admitted purpose of misleading opposing counsel. I find,
137 Johnston v. Arbitrium (Cayman Is.) Handels AG, 720 A.2d 542, 546 (Del. 1998). 138 Estate of Carpenter, 2008 WL 2950764, at *17. 139 Id. 140 720 A.2d 542 (Del. 1998). 141 Id. at 564.
48 therefore, that Plaintiff has shown that Defendants acted in bad faith during the course of
this litigation and award Duane his attorneys‘ fees on the basis of that misconduct and
Defendants‘ various breaches of their fiduciary duties as Trustees. Thus, Defendants are
liable for the reasonable attorneys‘ fees and expenses Duane incurred in connection with
this action.
G. Plaintiff’s motions to set aside Michael’s transfer of the Mercedes as fraudulent and for contempt
a. Background facts
On April 22, 2014, over six months after the trial, Duane moved to set aside an
alleged fraudulent transfer of the Mercedes from Michael to a woman who shared the
same address with him in Pennsylvania. The motion also sought to hold Michael in
contempt for the transfer. Despite the passage of more than three months since the filing
of that motion, neither Michael nor Sherry has responded to it. Accordingly, I consider
the motion ripe for decision at this time.
On May 15, 2012, Plaintiff filed his Complaint against Sherry and Michael
alleging intentional misconduct, gross negligence, and unjust enrichment in their capacity
as Trustees of the Trust.142 The Complaint specifically focused, among other things, on
Michael‘s purchase of the Mercedes with funds from the Trust. Duane alleged, and this
Court has found, that Michael purchased the Mercedes with funds from the Trust. A title
search conducted by Plaintiff‘s counsel indicated that Michael received title to the
142 Compl. ¶ 5.
49 Mercedes in Delaware on November 6, 2011.143 The search listed the Hardy Residence
as Michael‘s address.144 At the trial of this matter on October 15, 2013, Plaintiff‘s
counsel requested an order from the court that none of the Trust assets that were left be
sold or encumbered, pending the Court‘s decision on the merits.145 The Court granted
that request, stating that no ―assets from the trust should be transferred, conveyed, spent
[or] paid to anybody until [this] matter is resolved‖ (the ―October Order‖).146 Michael
was present when the Court issued that directive, and had testified earlier that same
day.147 Therefore, Michael knew the Mercedes was not to be transferred or conveyed.
The day after the October Order was entered, Duane‘s counsel requested a vehicle
record abstract for the Mercedes. The record, dated October 16, 2013, indicated the
Mercedes still was registered to Michael, but not at the Hardy Residence. Instead,
Michael‘s address was listed as 209 S. 4th Street, Apt. 2, Darby, Pennsylvania.148 An
updated vehicle record obtained on April 4, 2014 indicated that title to the Mercedes then
143 Pl.‘s Mot. to Set Aside Michael T. Hardy‘s Fraudulent Transfer and Mot. for Contempt Ex. A (D.I. No. 102) (hereinafter ―Pl.‘s Mot. for Fraudulent Transfer and Mot. for Contempt). 144 Id. 145 Tr. 346. 146 Tr. 347. 147 Tr. 235-53. 148 Pl.‘s Mot. for Fraudulent Transfer and Mot. for Contempt Ex. B (D.I. No. 102).
50 was held by Kristina Monique Moses,149 residing at the same address that had been listed
for Michael on the October 16 record.150 There is no evidence that any consideration was
paid for this transfer of title.
In Duane‘s motions, he argues that Michael violated the October Order by
transferring title to the Mercedes to Moses. Duane also asserts that the conveyance of the
Mercedes to Moses was fraudulent under the Delaware Uniform Fraudulent Transfer
Act.151
b. Was the transfer to Moses fraudulent?
Section 1304(a)(1) declares as fraudulent:
―a transfer made or obligation incurred by a debtor as to a creditor, whether the creditor‘s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation with actual intent to hinder, delay or defraud any creditor of the debtor.‖152
To prove Michael‘s transfer of the Mercedes to Moses was fraudulent under Section
1304(a)(1), therefore, Duane must show Michael actually intended to hinder, delay or
defraud him. Section 1304(b) lists eleven numbered factors that may be considered in
determining actual intent.
149 Id. Ex. C. 150 Id. Ex. B. 151 Pl.‘s Mot. for Fraudulent Transfer and Mot. for Contempt ¶ 24. 152 6 Del. C. § 1301(a)(1).
51 With relevance to this case, the following factors support a finding of actual intent
―to hinder, delay or defraud‖: (1) if the transfer or obligation was disclosed or
concealed;153 and (2) if before the transfer was made or obligation was incurred, the
debtor had been sued or threatened with suit.154 Both of these factors listed in Section
1304(b) support a finding that Michael had an actual intent to defraud here.155 First, the
transfer was concealed from both Duane and the Court. The Mercedes was first
registered in Delaware, then changed to Pennsylvania, and finally transferred to Moses.
No disclosure about the transfer was made to Plaintiff or to the Court even though
Michael was on notice that he could not sell or transfer the Mercedes without providing
advance notice to the Court until resolution of this case.156 Second, before the transfer
was made, Michael not only had been sued by Duane regarding the Trust, but Duane‘s
153 6 Del. C. § 1301(b)(3). 154 6 Del. C. § 1301(b)(4). 155 Several other factors under 6 Del. C. § 1301(b) also support the conclusion that Michael had an actual intent to hinder delay or defraud. For example, factor b(1) focuses on whether the transfer was made to an insider. The Act defines an ―insider‖ of a debtor who is an individual to include ―[a] relative of the debtor.‖ 6 Del. C. § 1301(a)(1). Moses shares the same address as Michael. Therefore, she conceivably could be an insider under the Act. Additionally, factors b(2) and b(7) similarly support this conclusion. 156 On January 16, 2013, during oral argument on Plaintiff‘s Motion to Set Aside Tolmiros, LLC‘s Fraudulent Transfer to Sherry L. Hardy, the Court notified Michael that he was not to transfer or sell the Mercedes without disclosing his intentions to the Court. Specifically, the Court ordered: ―If you are planning to sell the Mercedes or some sort of thing like that you are going to have to let the [Plaintiff] and [the Court] know.‖ Scheduling Conference and Pl.‘s Mot. for Default Judgment as to Def. Tolmiros, LLC and the Court‘s Ruling at 9-10 (D.I. No. 103).
52 claims had been tried and Michael was awaiting a possible judgment against him.157
Hence, I find that Michael‘s transfer of the Mercedes to Moses was made with actual
intent to hinder, delay or defraud Duane, and thus constitutes a fraudulent transfer. 158
c. Did Michael act in contempt of the October Order?
Court of Chancery Rule 70(b) authorizes the Court to provide relief ―[f]or failure
to obey a restraining or injunctive order, or to obey or to perform any order,‖ upon
defendant‘s knowledge of the order and facts constituting disobedience. In this case, the
Court orally granted Plaintiff‘s request for, in effect, a status quo order at trial.159
Specifically, the Court stated that ―no assets from the trust should be transferred . . . to
anybody until [this] matter is resolved.‖160 Michael knew from the pretrial proceedings
and the trial proceedings that same day that the Mercedes was alleged to be an ―asset
from the trust.‖
Because Michael was present when the Court gave the October Order, he was
aware of the Order when he transferred the Mercedes to Moses, apparently for no
consideration. Indeed, Michael was on notice since January 16, 2013, that the Mercedes
could not be sold or transferred without disclosing his intentions to the Court in
157 Hardy v. Hardy, No. 7531-ML (filed May 15, 2012). 158 6 Del. C. § 1304(a)(1). 159 Tr. 347. 160 Id.
53 advance.161 The Mercedes was purchased with money from Duane‘s Trust and, therefore,
was subject to the October Order. The vehicle record abstracts from the Pennsylvania
Department of Transportation demonstrate that Michael transferred title to the Mercedes
to Moses sometime after the October Order and before April 4, 2014. Based on these
facts, I find that Michael acted in contempt of the Court when he transferred the
Mercedes to Moses.
d. Relief for the fraudulent transfer and contempt
The relief Plaintiff seeks for the fraudulent conveyance and contempt largely
overlaps, so I discuss those issues together. First, Duane seeks to have Michael‘s
registration of the Mercedes in Pennsylvania for the apparent purpose of divesting this
Court of jurisdiction over it and his later conveyance of title in the vehicle to Moses set
aside as fraudulent transfers. I will grant this relief. As of February 15, 2013, the
Mercedes was registered to Michael in Delaware. In a telephone conference with the
parties and counsel on January 16, 2013, I directed that no changes be made with respect
to the Mercedes without prior notice to Plaintiff and the Court. On October 15, 2013, I
ordered that no assets from the Trust, which would include the Mercedes, be transferred
or conveyed pending the resolution of this matter. As of October 16, 2013, the Mercedes
was registered to Michael in Pennsylvania, and then by April 10, 2014 it was registered
in Pennsylvania to Moses. Under Section 1307(a) of the Uniform Fraudulent Transfer
Act, a creditor, such as Duane, may obtain ―[a]voidance of the transfer or obligation to
161 See supra, note 156.
54 the extent necessary to satisfy the creditor‘s claim.‖ That relief is appropriate here.
Therefore, I will set aside the transfer from Michael to Moses of the Mercedes and order
Michael to have the Mercedes promptly reregistered in Delaware.
Plaintiff also seeks an order directing Michael to transfer title and the keys to the
Mercedes to Plaintiff‘s counsel, as Plaintiff‘s representative, within five days of the
Court‘s order, and that a constructive trust be placed on the vehicle. Consistent with the
broad remedies for a fraudulent transfer authorized by Section 1307, I will grant that
relief in the sense that I will impose a constructive trust on the Mercedes and direct that it
be held by Plaintiff‘s counsel pending further order of the Court.
Finally, based on the Court‘s finding that Michael acted in contempt of the
October Order, I grant Plaintiff‘s request for an award of its attorneys‘ fees and expenses
in prosecuting the motions to set aside the transfer and for contempt. Thus, I will order
Michael to pay those fees and expenses.
III. CONCLUSION
For the reasons stated in this Memorandum Opinion, I conclude as follows:
(1) that Sherry and Michael breached their fiduciary duty of loyalty to the Trust
and Duane, as the Beneficiary, in connection with the purchase of the Lincoln and the
Mercedes and as to the Trust funds spent on repairs to the Hardy Residence, and are
liable to Duane for $158,402.81 in damages as a result of those breaches;
(2) that Duane failed to prove his claim for breach of fiduciary duty as to the
$30,200 in gifts that were made from Trust funds to identified family and friends of
Duane, and that aspect of his claim will be dismissed with prejudice;
55 (3) that as to the $9,000 from the settlement with the Diocese that was not
deposited into the Trust‘s two accounts at WSFS in October 2011, Sherry and Michael
breached their duty to account for $6,000 of that amount, but are exculpated from liability
for that breach under the Trust Agreement; therefore, this aspect of Plaintiff‘s claim will
be dismissed with prejudice;
(4) As to the $121,685.87 of the Trust funds that Plaintiff claims were not
accounted for, Sherry and Michael breached their duty of care and to account as to
$90,000 of that amount; I deny Plaintiff‘s claim for breach of fiduciary duty for anything
above that $90,000 and will dismiss with prejudice that aspect of Plaintiff‘s claim;
(5) that the breach by Sherry and Michael referenced in subparagraph 4 above
is not exculpated; so they are liable to Plaintiff for $90,000 on that aspect of his claim;
(6) that Sherry and Michael promptly shall be removed as Trustee of the Trust;
(7) that the Court will appoint Delaware CarePlan, Inc. (―DCP‖) as successor
trustee, subject to DCP‘s agreement to serve in that role and obtaining any necessary
modifications to the Trust Agreement; if complications arise in that regard, the Court will
proceed as stated in Section II. E of this Memorandum Opinion;
(8) that Plaintiff is entitled to reimbursement from Sherry and Michael for the
attorneys‘ fees and expenses Duane reasonably incurred in pursuing this action;
(9) that Duane is entitled to pre-judgment interest at the legal rate of interest
under 6 Del. C. § 2301(a), compounded quarterly, on the following amounts of damages
owed, jointly and severally, by Sherry and Michael from the dates indicated:
56 (a) for the Lincoln and Mercedes, $83,402.81 from November 30, 2011;
(b) for improvements to the Hardy Residence, $75,000, from November 30, 2011 from December 31, 2011, by which time it appears most, if not all, of the $75,000 had been spent;
(c) for $90,000 in unaccounted for Trust funds from December 31, 2011.
(10) that Plaintiff is entitled to the imposition of a constructive trust for Duane‘s
benefit on: (a) the 8.3% interest Defendant Sherry holds in the Hardy Residence; and (b)
the Lincoln and the Mercedes.162
For the reasons stated in this Memorandum Opinion, I also grant Plaintiff‘s
Motion to Set Aside Fraudulent Transfer and Motion for Contempt, both of which relate
to the Mercedes. On that basis, I will set aside the transfer of the Mercedes from Michael
to Moses and order Michael promptly to have the registration of the Mercedes changed
from Pennsylvania back to Delaware. I also will order Michael to transfer title and the
keys to the Mercedes to Plaintiff‘s counsel, as Plaintiff‘s representative, within ten days
of the Order that is being entered on this same date based on the rulings in this
162 Plaintiff also requests the Court to impose a constructive trust on items purchased to renovate the hardy Residence. Pl.‘s Post-Trial Opening Br. 44. A constructive trust is an equitable remedy as to which one factor a court generally considers is the balance of equities. See Real Estate of Shockley v. Foraker, 2004 WL 51260, at *4 (Del. Ch. Jan. 6, 2004) (internal citations omitted). I deny without prejudice, this aspect of Plaintiff‘s request for relief, because I consider such relief to be premature and potentially overly disruptive and unnecessary at this point. The relief could involve for example, attempts to remove appliances and fixtures such as granite countertops from the Hardy Residence.
57 Memorandum Opinion, and will place a constructive trust on the Mercedes for Duane‘s
benefit. In addition, based on my findings that Michael engaged in a fraudulent transfer
and acted in contempt of this Court‘s October 15, 2013 Order, I grant Plaintiff‘s request
for an award against Michael of his reasonable attorneys‘ fees and expenses incurred in
prosecuting the Motion to Set Aside the Fraudulent Transfer and the Motion for
Contempt.
Plaintiff‘s counsel shall file with the Court and promptly serve on Defendants
within twenty days of the Order accompanying this Memorandum Opinion appropriate
documentation for the reasonable attorneys‘ fees and expenses Plaintiff seeks to recover
in connection with the prosecution of this action and the recent motions. Defendants
shall have twenty days from the filing of that submission to object to the claimed
attorneys‘ fees and expenses on any appropriate grounds, including that specific fees and
expenses claimed are unreasonable in the circumstances. Thereafter, the Court will
determine the appropriate amount of attorneys‘ fees and expenses to be awarded on the
basis of the rulings set forth in this Memorandum Opinion.
Related
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