December 2014

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.

Posted December 10, 2014

Nationstar Mortgage LLC d/b/a Champion Mortgage Company v. Carey C.A. No. 9274-MA (November 26, 2014)

Nationstar (the “Plaintiff”) sought an equitable foreclosure on real property that was owned by the decedent. The heir of the decedent’s estate, acting as the personal representative, opposed the foreclosure due to alleged deficiencies in the complaint.

The decedent solely owned the real property. In 2009, the Plaintiff issued the decedent a loan and attached a mortgage to the property. The decedent died in 2013. Both the note and mortgage stated that the lender is entitled to immediate payment in full upon the death of the borrower, provided that the property is not the principal residence of at least one surviving borrower.

Among other things, the personal representative argued that the Plaintiff was in violation of federal law in its attempt to accelerate the note before the surviving spouse died or sells the property, and that the language in the mortgage permitting such acceleration was invalid.

The Court of Chancery held that while the personal representative was a surviving spouse, she was not a surviving borrower, and that the federal case cited by the personal representative did not affect the private contract at issue in this case. The federal case stated that that a federal statute allowed the Department of Housing and Urban Development ( “HUD”) to insure only reverse mortgages that came due after the death of both the homeowner-mortgagor and the spouse of that homeowner, regardless of whether that spouse was also a mortgagor. The federal court concluded that the federal regulation permitting HUD to insure reverse mortgages, like the one in this case, was invalid because they stated that the loan balance would be due and payable in full if the mortgagor died and the property was not the principle residence of at least one surviving mortgagor.

Following the federal court’s decision, HUD issued Mortgage Letter 2014-07 which provided that “for loans [initiated after August 4, 2014,], where there is a sole borrower who was married at the time of loan origination (and the spouse was not on the loan), the HECM documents will contain a provision deferring the due and payable status of the loan until the death of the non-borrowing spouse.” But, the Court of Chancery noted that the federal court also made clear that pursuant to the private contract between the mortgagee and mortgagor, the mortgagee may still choose to foreclose on the non-borrower surviving spouse, despite the fact that as a result of Mortgagee Letter 2014-07, HUD will no longer insure contracts that fail to protect a surviving spouse. And since the loan at issue in this case was issued in 2009, nothing in the federal case cited by the personal representative or in Mortgage Letter 2014-07 precluded the Plaintiff from seeking foreclosure against the personal representative, a non-borrower surviving spouse.