DUANE C. HARDY, Plaintiff,
SHERRY L. HARDY and MICHAEL T. HARDY, individually and as Trustees of the Duane C. Hardy 2011 Trust, and TOLMIROS, LLC, Defendants.
Date Submitted: April 16, 2014.
William X. Moore, Esq., Edward H. Wilson, II, Esq., ROEBERG, MOORE & FRIEDMAN, P.A., Wilmington, Delaware; Attorneys for Plaintiff Duane C. Hardy.
Richard K. Goll, Esq., LAW FIRM OF RICHARD K. GOLL, Millville, Delaware; Represented Defendants Sherry L. Hardy, Michael T. Hardy and Tolmiros, LLC at trial, but was permitted to withdraw as counsel on April 16, 2014.
Sherry L. Hardy and Michael T. Hardy, Pro Se Defendants.
PARSONS, Vice Chancellor.
The plaintiff, Duane C. Hardy, received a large cash settlement as a member of the class that brought sexual abuse charges against the Catholic Diocese of Wilmington (the "Diocese"), among others. In anticipation of receiving his first settlement payment, the plaintiff, with the assistance of counsel, created a trust, naming himself as the beneficiary, and appointed his sister and nephew, Sherry L. Hardy and Michael T. Hardy, respectively, as co-trustees. The plaintiff's choice of trustees proved to be disastrous. This case arises out of the beneficiary's allegations that the trustees breached their fiduciary duties by engaging in self-interested transactions and failing to administer the trust for its intended purpose. By the time of trial, the trust accounts had a zero balance. Duane seeks to recover losses the trust incurred as a result of the trustees' breaches of fiduciary duties. The relief he requests includes an award of money damages with prejudgment interest, the imposition of a constructive trust on items purchased with the trust corpus, and an award of his attorneys' fees and expenses.
In response, Sherry and Michael deny any liability, because, they allege, Duane consented to all or most of their self-interested transactions. In addition, the defendants contend that, even if they may have breached their fiduciary duty, they are absolved from any monetary damages by the exculpation clause of the Trust Agreement.
For the reasons stated in this post-trial opinion, I hold Sherry and Michael jointly and severally liable for their self-interested purchases and for many of the other expenditures the plaintiff challenged based on their failure to account for money withdrawn from the trust. I do not find the defendants liable for approximately $30, 000 that was gifted to Duane's friends and family, allegedly at Duane's behest, and for certain of the other challenged expenditures. By way of relief, I award Duane money damages and I have imposed a constructive trust on the two vehicles the defendants purchased with trust assets and on Sherry's 8.3% property interest in a residence located at 412 W. 3rd Street, Wilmington, DE, 19801. Based on Sherry and Michael's breaches of their duties to the Trust, their egregious pre-litigation conduct, and certain actions taken vexatiously or in bad faith during the course of this litigation, I award Duane his attorneys' fees and expenses in connection with this litigation.
Finally, this Memorandum Opinion reflects my findings of fact and conclusions of law on Plaintiff's recently filed motions to set aside Michael's fraudulent transfer of one of the automobiles and for contempt. The defendants did not respond to these motions. Based primarily on my finding that the disputed transfer was fraudulent, I grant most of the relief sought by these two motions.
A. The Parties
Plaintiff, Duane, is the settlor and beneficiary of the Duane C. Hardy 2011 Trust (the "Trust").
Defendant Sherry and her son Michael are the co-trustees of the Trust (collectively, "Trustees" or "Defendants"). Sherry is Duane's older sister and Michael is Duane's nephew.
Defendant Tolmiros, LLC ("Tolmiros") was a business entity formed under the laws of Delaware on October 31, 2011. Michael established Tolmiros for the purpose of making investments, but it never engaged in any actual business transactions. The Court entered a default judgment against Tolmiros on January 16, 2013, due to Tolmiros's failure to obtain legal counsel as required under Delaware law. The January 16 Order stated that a hearing on damages against Tolmiros would be scheduled to coincide with the trial on the merits against Defendants Sherry and Michael. No material evidence or argument was presented at trial on behalf of Tolmiros. Therefore, to the extent a money judgment or constructive trust is entered against Sherry or Michael, the Court also will award the same relief, jointly and severally, against Tolmiros.
1. Creation of the Trust
Duane was a party in a class action suit, which ultimately ended in a settlement, against the Diocese for abuse he endured as a child. Under the settlement, Duane was to receive an initial disbursement of $533, 508.13, followed by two smaller disbursements. Before he received the funds, Duane, who suffers from bi-polar disorder and schizophrenia, and has struggled with drug and alcohol addiction, indicated to his attorney that to preserve his money, he wanted others to manage his settlement proceeds. Duane has stated that he drinks a six-pack of beer daily. Duane also has only a ninth grade education. On August 31, 2011, Duane created an irrevocable trust, the Duane C. Hardy 2011 Trust, of which he was both the Settlor and the Beneficiary. His older sister Sherry and her adult son Michael were appointed co-trustees of the Trust. At the time of the Trust's inception, an attorney explained to Defendants the duties and obligations required of them as trustees and reviewed with them the terms of the Trust.
The stated purpose of the Trust was "to insure that . . . the physical necessities, comfort, happiness and best interests of the Beneficiary . . . be met.- The Trust Agreement states that the Beneficiary, Duane, "has a disability" and that the Grantor's wish was that "the Beneficiary attain the highest level of life satisfaction and achievement, consistent with the Beneficiary's disability.- In order to prevent the Trust from supplanting Duane's Social Security Disability Insurance income of $650.00 per month, the Trust Agreement provided that the Trust funds were to supplement any public assistance Duane received. Article 2 of the Trust Agreement further clarified that despite any language to the contrary within that agreement, "no trust or principal shall be paid to or expended for the benefit of the Beneficiary, so long as his care, comfort and welfare needs are adequately provided by programs designed to provide support needs to beneficiaries with disabilities . . . .- The Trust Agreement provided the Trustees "sole and uncontrolled discretion" to "distribute or apply as much of the net income or principal of the Trust for the care, comfort, welfare, education or training of the Beneficiary, " as the Trustees deemed to be in Duane's best interest. Article 8 required the Trustees to "prepare an annual report of receipts and disbursements to the Beneficiary" and to make Trust records available for the Beneficiary's inspection at all reasonable times.
Under an exculpation clause in Article 7, the Trustees are "not liable for any act or omission in the administration of the trust or for the loss or damage to trust property, except as caused by the Trustee's intentional misconduct or gross negligence.-
2. Rapid depletion of the accounts
a. Initial deposit in October
On October 27, 2011, Duane received the initial distribution of his settlement proceeds, totaling $345, 676.88 after payment of attorney fees and costs. The next day Defendants deposited $336, 676.88 of the funds into two separate accounts at Wilmington Saving Funds Society ("WSFS") —$172, 838.44 into a money market account ("Account 1") and $163, 838.44 into a high interest bearing checking account ("Account 2").Notably, the initial deposits totaled $9, 000 less than the amount of the settlement check. Defendants have provided varying accounts as to what happened to the $9, 000. That question and the facts related to the disbursements made from the Trust accounts are discussed in the Analysis infra.
b. Payments to friends and family
The first significant withdrawals from the Trust accounts included a $15, 000 check written out to cash on November 4, 2011, and a $21, 700 debit withdrawal on November 8, 2011, for a total of $36, 700. Michael testified that, at Duane's behest, he gifted a majority of the $36, 700 to various family members and friends of Duane. According to several witnesses, Duane made a list of names and corresponding dollar amounts reflecting gifts he wished to give his family and friends from the settlement proceeds. Defendants did not attempt to put any list in evidence, but did provide copies of the cashier's checks given to each donee. For his part, Duane denied making a list and maintained that he only authorized two payments in the nature of gifts, totaling $3, 000.
c. Sherry and Michael buy themselves cars
In the years preceding Duane's settlement, Sherry did not own a car. At various times throughout his adult life, Duane was in prison. During his most recent incarceration, Duane apparently wrote his sister Sherry a letter, dated September 23, 2009, updating her on his pending case against the Diocese. After reminding Sherry to send him money, Duane concluded the letter by stating "I saw your car in the paper— Lincoln MKX. You desirve [sic] it sis[.] I hope you enjoy it.- Before he actually received any money from the class action settlement, Duane told Sherry,  her daughter Shalon,  and others that he expected to receive as much as $44 million in the settlement. Just over two years after he allegedly wrote the September 23, 2009 letter, Duane received his first settlement payment. Then, within two weeks of depositing the funds from the settlement into the Trust accounts, Sherry purchased a 2011 Lincoln MKX (the "Lincoln") for $49, 920 with funds from the Trust. Relying on the 2009 letter, Sherry testified that Duane wanted her to have the vehicle.
The Lincoln was titled to Tolmiros, a "financing" business Michael started shortly after he became a Trustee, and was Tolmiros's sole asset. Michael described his business plan for Tolmiros as being to "look for rental properties that [he] could invest Duane's money in.- Michael also believed that a luxury car would attract potential investors for the now-defunct business.
On the same day Sherry purchased the Lincoln, Michael bought himself a 2006 Mercedes Benz CL5 (the "Mercedes") for $33, 120 and spent an additional $5, 362.81 on an extended warranty. All of the money for these purchases came from the Trust.
By the end of November 2011, after Defendants had spent $83, 402.81 on the Lincoln and the Mercedes, dispersed gifts to Duane's family and friends, and made various cash withdrawals, more than half of the original $345, 676.88 was gone. Only $162, 033.63 remained in the Trust. d. Renovating the 412 W. 3rd Street property
Duane and his sister Sherry each inherited from their mother an 8.3% interest in a property located at 412 W. 3rd Street, Wilmington, Delaware (the "Hardy Residence"). Both Defendants reside permanently in the Hardy Residence. Duane lived there on and off through the years. After his release from prison in June 2011, he returned to the Hardy Residence and remained there until approximately November 7, 2011, when Defendants moved Duane to an apartment in Newark, Delaware. Sherry and Michael spent approximately $2, 500 from the Trust furnishing that apartment.
In late November 2011, after Duane moved to Newark, Defendants began a major renovation project at the Hardy Residence. Ultimately, Sherry and Michael spent over $75, 000.00 on various upgrades and repairs. Among other things, they purchased all new appliances for the house and installed granite counter tops in the kitchen. When questioned at her deposition about the renovation expenditures, Sherry stated that Duane gave her permission to use Trust funds to pay them, because it would have made his mother "proud to see the house fixed.- Michael considered the renovation a good investment for Duane. He apparently believed that using Duane's Trust to fund the improvements would somehow increase Duane's 8.3% ownership interest.
e. Duane signs the Consent Document
At some point in December 2011, people close to Duane began to express concerns regarding Sherry and Michael's spending habits. In order to "cover [themselves] just in case somebody would try to sue [them] outside of Duane, -Defendants drafted a document (the "Consent Document") for Duane's signature that effectively would give Defendants carte blanche to use the Trust funds any way they wanted. The document states as follows:
I, Duane Hardy, gave Michael Hardy and Sherry Hardy[, ] my trustees[, ] the consent to use my trust fund to buy new and used cars for business and personal use. Also to repair 412 W. 3rd Street, Sherry Hardy's home, as much funds as possible to complete the task. Duane Hardy has also gave [sic] the consent to Michael Hardy and Sherry Hardy to use Duane Hardy's trust funds for any other personal uses.
Sherry and Michael took Duane to have the Consent Document notarized on December 20, 2011, at which point the Trust held $106, 972.97. By the end of December, $93, 972.97 remained. f. Defendants close the original accounts and open new ones Shortly after signing the Consent Document, Duane received further warnings regarding Sherry and Michael's spending. Frustrated that Defendants had yet to provide him with any Trust records or account statements despite his repeated requests, Duane visited a local WSFS branch and obtained account information directly from a bank teller. Seemingly in response, on January 19, 2012, Defendants withdrew the entire balances of Account 1, $64, 536.16, and Account 2, $4, 201.12,  and deposited the money in two new accounts at WSFS ("Account 3" and "Account 4, " respectively). After the transfer, Defendants continued to draw from the accounts, by, for example, making out sizeable checks to cash. There is no evidence however, that Defendants advised Duane about the existence or status of the new accounts. By the end of January, 2012, Accounts 3 and 4 had a combined balance of $56, 277.25.
In a further attempt to conceal the status of the Trust accounts, on February 8, 2012, Sherry sent to Jacobs and Crumplar, P.A., the law firm that handled the lawsuit against the Diocese and helped create Duane's Trust, a letter requesting that only members of the firm, the co-trustees, and their attorneys receive information about the Trust. Sherry further requested that Jacobs and Crumplar "not follow the directions of Mr. Duane C. Hardy, his lawyer, or anyone who holds Mr. Hardy's power of attorney.-
3. The continued dissipation of the Trust
On February 28, 2012, when only $34, 385.58 remained in the Trust,  Duane filed a complaint against Defendants in this Court alleging a breach of trust through intentional misconduct and gross negligence. Two days after Michael and Sherry formally were served, Michael signed and had notarized a written statement in which he promised: (1) to show Duane bank statements at Duane's request; and (2) to purchase Duane a vehicle. On March 15, 2012, Duane dismissed his complaint without prejudice.
Undeterred by the threat of litigation, Defendants continued to withdraw large amounts of money from the Trust. Defendants' recordkeeping system, or lack thereof, however, makes it difficult to determine how most of the remaining Trust funds were spent. Defendants claim to have kept receipts for some of the purchases they made, but the only consistent records reflecting disbursement of Trust funds were the actual bank statements. Unfortunately, those statements generally do not show what the money was spent for or to whom it was paid. The bank statements do show, however, that the account balance declined precipitously and, by the end of March, only $3, 654, or roughly 1% of the original deposit into the Trust, remained. Thus, in a period of only five months, virtually all of Duane's settlement with the Diocese was gone.
4. The receipt book
With only a negligible balance remaining in the Trust and facing the possibility that Defendants would have access to the funds from the two smaller settlement distributions, totaling $30, 118.54,  Duane initiated this action by filing another complaint against his sister and nephew on May 15, 2012. During their depositions on August 7, 2012, Duane's counsel questioned Sherry and Michael regarding their recordkeeping for the Trust. Neither Defendant could identify any specific procedure they had implemented for documenting Trust expenditures. In fact, both Defendants seemed unsure about whether any records existed, and said they would have to go home and look. For example, Sherry testified as follows:
Q: So you didn't keep track of where the money went?
A: Sometimes I did and sometimes I didn't.
Q: Well, when you did, how did you do that?
A: I may have written it down. I'm not sure.
Q: So, is what you are telling me, you don't know if you did or didn't keep track of where the money went.
A: I probably did.
Michael gave similarly ambiguous and vague responses.
Q: Do you have any sort of records of the trust expenditures?
Q: Okay. Where do you think that might be?
A: I would have to look around.
On January 22, 2013, Duane's counsel served a Request for Production, seeking "copies of all financial records maintained by trustees, but not limited to accounting books, spreadsheets, checking account balances, and other related documents indicating withdrawals and deposits from the Duane C. Hardy 2011 Trust.- Yet, Sherry and Michael failed to turn over any additional records in response to that request. On May 1, 2013, the Court granted Motion to Compel by Plaintiff and ordered Defendants to respond within five days. Once again, Sherry and Michael failed to produce any records. On August 5, 2013, Plaintiff filed a second Motion to Compel. The Court also granted that motion and imposed a deadline of September 4, 2013 for Defendants to produce any responsive documents or be barred from introducing or referencing any documents not produced by the deadline. On September 4, Defendants produced to Plaintiff's counsel copies of numerous receipts from an alleged receipt book.
Several characteristics of the receipts Defendants produced, however, raise questions about their authenticity and reliability. First, neither Defendant mentioned the receipts during their deposition, despite specific questions regarding trust recordkeeping. Second, although, the receipts presumably were bound in a book initially, no book or portion of a book was produced. Third, the receipts bear preprinted numbers and have blanks to fill in information about the expenditure, including the date. Yet, when the receipts Defendants produced are placed in sequential order based on the receipt number, the handwritten dates on the receipts are not in order. For example, receipt number 465809 is dated November 9, 2011, but the immediately preceding receipt number 465808 is dated April 24, 2012. Even receipts bearing the same date are not in consecutive order; instead, they are spread throughout the receipt number sequence.
In addition, the compilation of receipts contains instances where the receipts suggest that, on the same day, Duane received multiple disbursements of the same amount of money. For example, on March 28, 2012, the receipts show that Duane received three separate payments of $1, 225. When the corresponding receipts are arranged in receipt number order, they are: 465831, 465801, and 465854. Furthermore, the bank records indicate that on March 28, 2012, there were two, rather than three, separate withdrawals from the Trust ...