Delaware Court of Chancery Removes Trustees of Trust Set up for the Benefit Sex Abuse Victim after the Trustees Spend the Majority of Trust Funds in Only Five Months

Delaware Fiduciary Litigation Blog

Posted August 12, 2014

Hardy v. Hardy, et. al. C.A. No. 7531-VCP (July 29, 2014)

The Delaware Court of Chancery recently removed the trustees of a trust set up for the benefit of an individual who had received over $300,000 for the settlement of sex abuse case against the Catholic Diocese of Wilmington. The trustees spent the majority of the settlement in only five months. The court awarded the beneficiary his attorneys’ fees and costs under the bad faith exception to the American Rule.

The trustees bought two luxury vehicles and renovated their own residence, expending approximately $150,000 of the funds on just those items. In an attempt to convince the court that the beneficiary had authorized the use of the funds, the trustees presented a signed and notarized “consent agreement” executed by the beneficiary that permitted the funds to be used on these expenses. The Vice Chancellor was unswayed, finding that the transactions were self-interested and that the consent agreement was ineffective because the beneficiary had never received any competent impartial advice regarding the transactions at issue. The court found that by spending the funds in this manner, the trustees violated their fiduciary duty of loyalty to the beneficiary and that the beneficiary was entitled to removal of the trustees and damages in the amount of the funds expended.

The Vice Chancellor also found that the trustees violated their fiduciary duties to the beneficiary by failing to account for approximately $120,000 withdrawn from the trust's bank account. Although the court questioned the veracity of the trustees’ testimony and their record-keeping, the Court determined that at least some of those monies went to pay off the beneficiary’s debts and held the trustees liable for only $90,000 of the unaccounted-for funds.

The trust instrument’s exculpation clause did not shield the trustees from liability because they were, in the court’s eyes, at least grossly negligent in their use of the trust funds.

Finally, the court awarded the beneficiary his reasonable attorneys’ fees under the bad faith exception to the American Rule. The court found that the trustees’ pre-litigation conduct showed an “utter disregard for the purpose of the Trust.” Further, the trustees’ bad faith litigation conduct in making false statements under oath at depositions, as well as noncompliance with orders of the court, was sufficiently egregious to merit an award of attorneys’ fees.

Author(s)

William M. Kelleher, Director
Director
Gordon, Fournaris & Mammarella, P.A.
Kate Mahoney – Law Clerk