Master Finds that Individual Trustee’s Poor Investments Were Not Made in Good Faith, Resulting in a $72 Million Judgment Against Him

Delaware Fiduciary Litigation Blog

Posted December 15, 2014

Mennen v. Wilmington Trust Company, et al. C.A. No. 8432-ML (December 8, 2014) 

       This is the summary of the draft report issued by Master LeGrow after a trial on whether the individual co-trustee of a family trust breached his fiduciary duties to the beneficiaries by his poor investments that, the beneficiaries alleged, were made in bad faith.

       The plaintiffs/beneficiaries in this case sought to remove the co-trustees of the trust and sought damages in excess of $100 million as a result of alleged breaches of the co-trustees’ fiduciary duties. The defendant trustees included an individual who has a separate trust created for his benefit.  We’ve blogged this case several times before, and most significantly on the issue of whether the beneficiaries could pierce the trustee’s trust—a Delaware spendthrift trust—in order to obtain their sought-after damages. The grantor created four trusts: one for each of his four children and their issue; the defendant individual co-trustee is one of the grantor’s children. The other defendant co-trustee, Wilmington Trust Company, settled with the beneficiaries on the eve of trial and was dismissed from the case.

       The trust was once valued at over $100 million and was reduced to roughly $25 million through a series of debt and equity investments at the direction of the individual co-trustee. The question before the court was whether—without Monday-morning-quarterbacking—the challenged transactions exposed the trustee to liability.

       The trust agreement modified the trustee’s default duties and exculpated the trustees from liability unless they acted in bad faith or with willful misconduct. The Court concluded that the trustee had engaged in non-exculpated breaches of trust with regards to the vast majority of the transactions at issue. And perhaps most notably, the Court found that the bulk of the transactions made in bad faith were not the result of the trustee seeking to gain an immediate pecuniary benefit for himself, but rather most of the challenged transactions were motivated by the trustee’s pride. This was because, according to the Court, the trustee’s personal fortune was not accessible to him, as it was locked in his own trust, and so, the trustee turned to his brother’s trust and treated it as if it was his own bank account where he could readily withdraw funds to fund a few private companies in which he had a stake in and were what he thought would be the “next big thing.” The Court held that the trustee willfully ignored his duties to the beneficiaries so that he could, in the Court’s words, subsidize his “self-aggrandized standing as a financier.”

       There was no question that the transactions were bad investments. The issue before the Court was whether the trustee made the transactions in bad faith. Unsuccessfully, the trustee argued that the question of whether he failed to act in good faith or acted in bad faith should be determined by the subjective standard. The Court found that there was no precedent for this and applied the objective, reasonable judgment standard. The Court also found the trustee’s equitable defenses of laches and acquiescence unavailing.  As a result of the Court’s factual findings and findings of law, the Court concluded that the beneficiaries were entitled to damages in the amount of $72,448,299.93.

Author(s)

Phillip Giordano
Associate
Gordon, Fournaris & Mammarella, P.A.