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N H B Advisors, Inc. v. Monroe Capital LLC

Court of Chancery of Delaware

December 27, 2013

N H B Advisors, Inc.
Monroe Capital LLC, et al.

Submitted: November 21, 2013

Dear Counsel:

The Plaintiff here, NHB Advisors, Inc. ("NHB, " or "the Trustee"), seeks a declaratory judgment endorsing its proposed course of conduct as a trustee. One trust beneficiary, Monroe Capital LLC ("Monroe"), opposes the relief sought, on various grounds. This Letter Opinion addresses Monroe's attempted imposition of the unclean hands doctrine as a bar to relief For the reasons that follow, I find that Monroe has not met its burden to demonstrate that tainted conduct on the part of NHB, as a matter of equity, should preclude the declaratory judgment NHB seeks here, and that Monroe's unclean hands defense must therefore fail.

I. Background

NHB is the trustee and liquidator of the Butler Liquidation Trust. One asset of that Trust is a lawsuit maintained by the Trust against certain former directors and officers of Butler Services International, Inc. and their insurer, Chartis Insurance (the "underlying lawsuit"); that suit is currently being litigated on the Trust's behalf by the Trustee's litigation counsel, Bragar Wexler Eagel & Squire, P.C. A settlement offer in that litigation is pending. NHB seeks a declaratory judgment that it may accept the settlement offer without the unanimous approval of two beneficiaries who are the sole members of the Trust's Liquidation Committee, Monroe Capital LLC ("Monroe") and Garrison Funding 2008-1 Ltd ("Garrison"). Monroe wishes to reject the settlement offer but Garrison wishes to accept it. NHB therefore sought guidance, via this action, as to whether it is permitted to rely on advice of independent counsel opining that rejection of the settlement offer would breach NHB's fiduciary duties to the Trust's beneficiaries.

On June 22, 2012, I issued a bench decision on the parties' cross Motions for Summary Judgment, determining that an advice of counsel provision in the Trust Agreement operated such that, should the Liquidation Committee refuse to accept a settlement offer, the trustee could accept the offer upon its counsel's advice that the trustee's fiduciary duty to the beneficiaries required it to do so; in other words, where counsel opined that failure to accept the settlement offer would constitute a breach of NHB's fiduciary duties.[1] Subsequently, independent counsel Grover Brown opined that NHB did have a fiduciary duty to accept the settlement offer.

After I issued my June 22 bench decision, and the Supreme Court rejected Monroe's interlocutory appeal of that decision, NHB moved for entry of a final order. Monroe opposed that Motion; that opposition was the subject of my July 19, 2013 Letter Opinion. In that Letter Opinion, I found that NHB was entitled to a final order entering a declaratory judgment in its favor, unless Monroe's affirmative defenses prevailed.[2] I permitted the parties to submit supplemental memoranda on Monroe's remaining affirmative defense: whether NHB had acted inequitably in dealing with Monroe such that its request for a declaratory judgment should be denied under the doctrine of unclean hands.

NHB seeks a declaratory judgment that, under the terms of the Trust Agreement, it may rely on advice of counsel to accept the settlement offer; Monroe argues that because NHB has come to this litigation with unclean hands, such relief is foreclosed. Monroe alleges that NHB was not motivated by its fiduciary duties to accept the settlement offer; instead, NHB breached its fiduciary duties by participating in secret meetings with Garrison to circumvent the Trust Agreement's requirement that Garrison and Monroe unanimously approve a settlement offer; by failing to inform Monroe of those meetings or that it was seeking advice of counsel; and by acting outside the scope of its powers under the Trust Agreement by seeking advice of counsel. I address these contentions below.

II. Analysis

This case is before me on NHB's Motion for Entry of a Final Order, which followed the parties' cross Motions for Summary Judgment. "Where the parties have filed cross motions for summary judgment and have not presented argument to the Court that there is an issue of fact material to the disposition of either motion, the Court shall deem the motions to be the equivalent of a stipulation for decision on the merits based on the record submitted with the motions."[3] Although Monroe has complained of receiving only "limited discovery, "[4] it did not represent in its Motion for Summary Judgment that there existed an issue of material fact regarding its unclean hands defense or other affirmative defenses, nor has it filed a motion requesting additional discovery since that Motion was denied more than a year ago.[5] I therefore evaluate the memoranda on Monroe's unclean hands defense on the record which the parties deemed sufficient when they filed their cross Motions for Summary Judgment, supplemented by NHB's Motion for Entry of a Final Order and the additional fact that NHB has obtained advice from independent counsel Grover Brown advising that rejection of the settlement offer would breach NHB's fiduciary duty to its beneficiaries.

Monroe's Memorandum of Law Regarding Affirmative Defenses focuses solely on the doctrine of unclean hands.[6] As the defendant, Monroe "bear[s] the burden of pleading and proving 'unclean hands' as an affirmative defense."[7] Monroe is incorrect that the burden is on NHB at the summary judgment stage; as stated above, the matter is before me on cross-motions and functionally submitted upon a stipulated record, therefore the Plaintiff bears the burden for its claims and the Defendant bears the burden for its affirmative defenses. The doctrine of unclean hands provides that he who comes into equity must come with clean hands; in other words, equitable relief will be denied to a party who has engaged in inequitable conduct related to the matter in which he is seeking such relief.[8] The purpose of the doctrine is to vindicate this Court's status as a court of equity. "The Court of Chancery jealously guards its domain as a court of equity, " and accordingly, "the Court will refuse equitable relief in circumstances where the litigant's own acts offend the very sense of equity to which he appeals."[9]

In its Memorandum, Monroe argues that NHB breached its duties "to remain impartial, to convey information, and to follow the provisions of the Trust Agreement, "[10] and that those breaches constitute inequitable conduct related to this action. I will address these arguments in turn.

1. NHB's Duty to Remain Impartial

First, Monroe alleges that NHB engaged in "secret congress" with Garrison to Monroe's detriment.[11] Monroe contends that NHB and Garrison met without Monroe to discuss the settlement offer, and that in considering that offer NHB did ...

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