In the Context of Fiduciary Duty Action Brought Against Trustees for Mismanagement, Master LeGrow Issues Draft Report Refusing to Pierce the Spendthrift Clause in a Separate Trust Created for the Benefit of the Defendant Individual Trustee
Kathryn Mennen v. Wilmington Trust Company, a Delaware corporation, C.A. No. 8432-ML (January 17, 2014)
The plaintiffs in this case, who are the beneficiaries of a trust, are seeking the removal of the co-trustees and damages in excess of $100 million as a result of alleged breaches of the co-trustees’ fiduciary duties. The defendant trustees include an individual who has a separate trust created for his benefit. If the plaintiffs succeed in their claims against the individual trustee of the trust, they may be entitled to tens of millions of dollars in damages that the individual trustee likely will not be able to pay. Hence, if they are awarded damages, Plaintiffs seek to pierce the individual trustee’s separate trust, but that trust has a spendthrift clause. 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.
In addition to arguing that summary judgment on this issue was not ripe because there remained disputed issues of fact, plaintiffs disputed the enforceability of the spendthrift provision against them, arguing first that they are not potential creditors under the trust’s terms or 12 Del. C. § 3536, and second that, even if they are potential creditors, they may pierce the spendthrift trust because (1) public policy precludes enforcing a spendthrift trust against tort claimants of the plaintiffs’ variety, or (2) the trusts at issue are essentially sub-trusts, and the Plaintiffs are entitled to impound the individual trustee’s interest in his separate trust.
The Master rejected all those arguments. In so doing, she noted that, “[a]lthough the policy arguments against enforcement of spendthrift clauses are interesting and compelling, the passage of Section 3536 made clear that this Court must enforce such clauses, subject only to the limits contained or permitted in the statute.” She went on to note that while spendthrift clauses are not “entirely unassailable,” Plaintiffs arguments for an exception under these facts are unavailing. Specifically, the Master concluded that if Plaintiffs were successful at trial, they would merely become creditors of the individual trustee within the meaning of Section 3536. The Plaintiffs argued that as tort claimants and family members they should be entitled to pierce the trust. But the Master explained that there is ample precedent that tort claimants are creditors within the meaning of Section 3536. And as far as being family members, the Master noted that the claims at issue were not “support obligations” or the like, but instead traditional fiduciary breach allegations.
The Master further explained that Delaware law does not recognize an exception to spendthrift clauses for beneficiaries who engage in repeated acts of wrongdoing. And the Master found that impoundment also isn’t applicable as the trusts at issue are separate trusts and Plaintiffs’ impoundment theory would violate Section 3536 (and in any event, would be “legally impossible” because there was no identifiable share in the separate trust). For all those reasons, the Master recommended granting the individual trustee’s motion for summary judgment.
