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In re Estate of Dean

Court of Chancery of Delaware

July 13, 2017


          Date Submitted: November 29, 2016

          Draft Report: February 15, 2017

          Submitted (Briefing on Exceptions): April 25, 2017

         MASTER'S REPORT (Motion to Dismiss)

          James S. Green, Sr., Esquire and Jared T. Green, Esquire, of SEITZ VAN OGTROP & GREEN, P.A., Wilmington, Delaware; Attorneys for Petitioner.

          Sharon Oras Morgan, Esquire and Carl D. Neff, Esquire, of FOX ROTHSCHILD, LLP, Wilmington, Delaware; Attorneys for Respondent.

          David A. White, Esquire, of MCCARTER & ENGLISH, LLP, Wilmington, Delaware; Attorney Ad Litem.

          ZURN, Master.

         When then-Master LeGrow wrote about this case in 2014, she began: "Two children of an elderly, wealthy woman are engaged in what threatens to be only the opening act in a legal drama that may yet unfold between them."[1] The curtain has risen on the second act, and the first plot twist asks how procedural rules should govern this ancient grudge broken to new mutiny.[2]

         The protagonists are two brothers, one of whom holds power of attorney for their incapacitated mother. In the first act, the brothers battled over the extent to which their mother should reimburse her grandchildren's educational expenses, and the attorney-in-fact filed a petition for instructions. His brother counterclaimed, alleging the attorney-in-fact misappropriated their mother's funds and asking for an accounting and repayment. The educational expense issue and the request for an accounting went to trial, and the Court ordered an accounting with the explicit expectation that it would inspire or support further litigation over the attorney-in-fact's actions. And indeed, with the benefit of the accounting, the suspecting brother renewed his misappropriation claims in more detail by filing his own petition in this case in 2016.

         The second act opens with the brothers disagreeing as to the nature of that 2016 petition. The attorney-in-fact moved to dismiss, asserting the 2016 petition started a new action and should be dismissed as untimely and violative of the doctrine against claim splitting. The petitioner characterizes the 2016 petition as a second phase of the case that originated in 2012, so the clock did not restart on his claims and they are not split between two actions.

         I recommend denying the motion to dismiss. This case has been building to a determination of the attorney-in-fact's liability since 2012. All understood that this case would proceed to that determination upon receipt of the accounting: the Master made that clear in her report recommending the accounting. If this case were to end now, after intermission, the first act will have been a waste of time and resources, without any resolution as to the attorney-in-fact's actions. An accounting that is not followed by an opportunity to remedy alleged bad acts it reflects is useless. While the unusual posture of this case grates against some of this Court's procedural rules, this case's history and this Court's preference for adjudicating cases on the merits lead me to conclude that the motion to dismiss should be denied. This is my final report.

         I. Background[3]

         William Kemble Ketcham ("Kem") and J.S. Dean Ketcham ("Dean") are the sons of Paulina du Pont Dean ("Paulina").[4] Paulina's will names both sons as the beneficiaries of her residuary estate. Paulina named Kem her attorney-in-fact via a durable power of attorney executed October 26, 2004. Paulina resides in Tortola, BVI, where Kem has several business interests. In the late 1990s, Paulina opened two accounts at Banco Popular in Tortola: an account ending in '919 ("the 919 Account") and an account ending in '955 ("the 955 Account"). The 955 Account paid Paulina's expenses, while Kem used the 919 Account as a "holding account" to hold larger balances, pay more significant expenses, and fund investments. Paulina was declared incompetent in 2009. Kem's use of the 919 Account is at the heart of this case.

         "In 2008, if not before, Dean began raising questions about his mother's financial affairs."[5] Dean obtained Paulina's written permission to receive information about the 919 Account and one of Kem's Tortola businesses, Tortola Home, LLC ("THL"). Dean learned from that review and from Kem that the 919 Account had been reimbursing Kem's children's educational expenses. Dean's children's educational expenses had been reimbursed until 2001 or 2002, when Dean moved to Maine and began paying his family's expenses himself. In 2010, when Dean learned Kem had continued to receive reimbursement, Dean decided he too should seek reimbursement. Paulina was by then incapacitated, and Kem, as Paulina's attorney-in-fact, refused to reimburse Dean's children's educational expenses. The brothers conferred for several months, but on April 16, 2012, Kem began this civil action by filing a petition for instructions regarding reimbursement of Dean's children's educational expenses ("Kem's 2012 Petition").

         Dean filed an answer on May 7, 2012. Dean also counterclaimed ("Dean's 2012 Counterclaim"), alleging that Kem had improperly transferred Paulina's funds for Kem's and Kem's family's benefit and committed other breaches of fiduciary duty.[6] Dean pled that in 2010, he noticed Kem had transferred approximately $500, 000 from Paulina to Kem, and that when Dean asked about it, Kem responded that the transfers were for tuition reimbursement.[7] Dean pled, "By making transfers from Mrs. Dean's account(s) to or for his own benefit, upon information and belief, Kem has breached the fiduciary duties he owes to Mrs. Dean and to Dean."[8] Dean pled that Kem improperly kept rental income from a home Paulina owned through a limited liability company.[9] Dean requested that Kem reimburse "any and all amounts paid to or received by Kem in breach of his statutory, contractual and/or fiduciary obligations."[10] He asked the Court to "compel Kem to account for and repay any amounts he has improperly transferred."[11] Kem replied to Dean's 2012 Counterclaim on May 22, 2012, denying Dean's allegations that Kem had breached his fiduciary duties to Paulina. Kem did not plead any affirmative defenses.

         The parties engaged in discovery, including on Kem's use of the 919 Account. Dean requested a forensic reporting on Paulina's THL investment, and on August 10, 2012, Frank D. Morris of Morris Accounting & Consulting LLC issued a report titled "Analysis of Paulina duPont Dean's Investment in Tortola Home Limited" (the "THL Report").[12] Kem answered deposition questions regarding THL, including about the THL Report and loans from Paulina and Kem to THL and another entity called Loblolly.[13] Kem also answered questions about the ownership and distribution of proceeds from the sale of a company called Tortola Concrete Limited.[14]

         Then-Master LeGrow held a trial in May 2013. The pretrial stipulation mentioned repayment by Kem but Dean did not present any breach of fiduciary duty claim for the Master's consideration.[15] In post-trial briefing, Dean asserted Kem had breached his fiduciary duties and that Kem should repay Paulina over one million dollars.[16] Kem objected to the timing of Dean's assertions.[17] At post-trial argument, Dean and the Master agreed the Court could not address Kem's alleged breaches of fiduciary duty before an accounting was performed.[18]

         In the post-trial final report dated June 30, 2014, then-Master LeGrow noted that "although the post-trial briefing foreshadow[ed] many other disputes that may arise, " at that time she needed only to determine "(1) whether Kem is required to account for his transactions on behalf of Paulina and, if so, the appropriate period for such accounting, and (2) the extent to which Dean is entitled to reimbursement from Paulina's estate for Dean's children's educational expenses."[19] As to the former, she concluded Kem should provide a forensic accounting as of the date of the durable power of attorney. She also concluded Dean was entitled to the reimbursement he sought for his children's educational expenses, and that Kem was entitled to pay his attorneys' fees from Paulina's estate subject to Dean's right to seek to recoup those funds for the estate in a later proceeding.

         Kem took exception to the Master's final report on the grounds that the Master erred in finding the power of attorney (and therefore the duty to account) became effective shortly after it was executed, and in awarding reimbursement of Dean's children's educational expenses.[20] Vice Chancellor Glasscock affirmed the accounting portion of the Master's report.[21] Then-Master LeGrow entered a Judgment Order on June 5, 2015, ordering a forensic accounting of all transactions conducted by Kem on Paulina's behalf as her attorney-in-fact from October 26, 2004, to the present.

         The forensic accounting was issued on December 4, 2015. On February 3, 2016, Dean filed a Verified Petition for Breach of Statutory and Fiduciary Duties and to Remove and Replace Attorney-In-Fact ("Dean's 2016 Petition") in this action. Therein, Dean alleges Kem commingled his funds with Paulina's, used her funds for his own expenses and projects, and lent her money to his business entities without appropriate documentation or security. He alleges several specific transactions in the forensic accounting are suspect, including funding Loblolly and THL and the distribution from the sale of Tortola Concrete. Dean also alleges Kem transferred ownership and control of the company that owned Paulina's house to himself, kept the rental income, and used Paulina's funds to pay for landscaping not only for the company-owned properties, but also for Kem's personal residence down the street. Dean's Count I claims a breach of fiduciary duty, and Count II claims a breach of the Durable Personal Powers of Attorney Act ("DPPOA"). Dean requests damages, revocation of Kem's status as Paulina's attorney-in-fact and Dean's appointment to that role, and a constructive trust over misappropriated property.

         Kem moved to dismiss on March 2, 2016 ("Kem's Motion") on the grounds that Dean's 2016 Petition started a new action and was therefore untimely and violated the rule against claim splitting. Dean responded to Kem's Motion and did not amend Dean's 2016 Petition; Kem replied. In keeping with Vice Chancellor Glasscock's prior directive, I requested the parties select another attorney ad litem to represent Paulina (since Vice Chancellor Slights had joined the Court in the meantime). They selected David White, Esquire, who requested time to confer with the parties. I granted his request, and upon receiving Mr. White's supplemental report requesting a hearing on Kem's Motion, held that hearing on November 29, 2016.

         I submitted a draft report on February 15, 2017, recommending denial of Kem's Motion. Kem took exception, and the parties briefed Kem's exceptions. This is my final report.

         II. Analysis

         When considering a motion to dismiss under Court of Chancery Rule 12(b)(6), the Court "should accept all well-pleaded factual allegations in the Complaint as true, accept even vague allegations in the Complaint as 'well pleaded' if they provide the defendant notice of the claim, draw all reasonable inferences in favor of the plaintiff, and deny the motion unless the plaintiff could not recover under any reasonably conceivable set of circumstances susceptible of proof."[22] This reasonable "conceivability" standard asks whether there is a "possibility" of recovery.[23] If the well-pled factual allegations of the complaint would entitle the plaintiff to relief under a reasonably conceivable set of circumstances, the court must deny the motion to dismiss.[24]

         A. Dean's 2016 claims effectively amended his 2012 counterclaims, and Kem may amend his reply to Dean's 2012 counterclaims.

         Kem claims Dean's claims for breach of fiduciary duty and breach of the DPPOA are untimely under a three-year limitations period. Kem dates Dean's claims as of February 3, 2016, the date of Dean's 2016 Petition. Kem asserts that because the 919 Account transactions underlying Dean's claims occurred more than three years before February 3, 2016, Dean was required to plead a tolling exception for his claims to survive. Kem contends Dean did not and could not have done so because Dean had inquiry notice of his claims about the 919 Account in the mid-2000s or 2008 at the latest, as evidenced by Dean's 2012 Counterclaim and related discovery.

         Dean responds that his claims arose when he received 919 Account documentation in the second half of 2009, so Dean's 2012 Counterclaim brought within three years thereafter is timely. Dean argues he could not have fully litigated his breach of fiduciary claim against Kem before the forensic accounting was ordered and completed, and that then-Master LeGrow ruled as much in her post-trial final report. Dean also contends that because Kem did not plead laches in reply to Dean's 2012 Counterclaim, Kem waived that affirmative defense and cannot assert it against Dean's 2016 Petition.[25] Dean asserts Kem cannot show any prejudice, as Kem alone had access to and information about the accounts, and because Kem's legal expenses have been borne by Paulina. In reply, Kem asserts the timing of Dean's 2016 Petition prejudiced Kem "as a matter of law."[26]

A court considering timeliness as a basis for a motion to dismiss must draw the same plaintiff-friendly inferences required in a Rule 12(b)(6) analysis. This plaintiff-friendly stance does not govern the assertion of tolling exceptions to the operation of a statute of limitations (or the running of the analogous period for purposes of a laches analysis), however. A plaintiff asserting a tolling exception must plead facts supporting the applicability of that exception.[27]

         I find the first step in resolving the issues before me is to properly characterize Dean's 2016 Petition so it may be evaluated under the right standard.[28] Dean pled a breach of fiduciary duty counterclaim in 2012, along with his request for an accounting. Since then, Dean has consistently alleged Kem breached his fiduciary duties and asked this Court to require him to repay misappropriated funds to Paulina. Dean took discovery on some of Kem's transfers that he would later feature in Dean's 2016 Petition, and received a preliminary report on THL's finances.[29]

         The Court reviewed this record and concluded the accounting Dean sought was a necessary precursor to determining Kem's potential liability. After trial on the accounting issue, then-Master LeGrow said succinctly that the fiduciary duty issue "will be determined at another time and on a more complete record."[30] She repeatedly found it was premature to assess Dean's breach of fiduciary duty claim without the benefit of the accounting, and that the accounting would set the stage for this second act.[31] She noted the record was incomplete: "Some documents indicate Paulina 'invested' at least $3 million in THL between 2003 and 2008. The nature of those investments is not clear."[32] She also described the discovery and records that Kem provided to Dean, and noted they did not "amount to a proper accounting, " did not cover the entire time period, and either did not identify the purpose of transfers out of the accounts or offered inconsistent explanations.[33] In addressing who should bear fees relating to Dean's request for an accounting, she noted, "At this point, the record is not sufficiently developed for the Court to determine whether Kem should reimburse the estate for his attorneys' fees associated with this portion of the proceeding."[34] The Master went on:

None of this is intended to conclude that Kem misappropriated or mishandled Paulina's funds. Although Dean's post-trial briefs repeatedly strayed into arguments about whether Kem had acted in accordance with his fiduciary duties as Paulina's agent, at argument counsel conceded that the only thing before the Court at this time is whether Kem is required to account for the transactions he undertook on Paulina's behalf. Although Dean may elect to challenge certain transactions in either a separate action or a later iteration of this case, any such challenge is premature before an accounting is performed.[35]

         Neither party took exception to these many conclusions that the state of the record compelled deferring Dean's breach of fiduciary duty claim until after the accounting, essentially bifurcating the case. Even assuming the Master's comments are only factual findings, and not a ruling on bifurcation, the parties are deemed to have consented to them.[36] I, too, am bound by the Master's conclusions.[37]

         Dean has persistently alleged Kem breached fiduciary duties and misappropriated Paulina's funds since his 2012 Counterclaim. The Court concluded those allegations would be tested with the benefit of the accounting in a second stage of the case. Accordingly, Dean clarified and expanded upon his 2012 Counterclaim allegations in his 2016 Petition. Even though Dean filed a new petition instead of requesting leave to amend his 2012 Counterclaim, I will treat Dean's 2016 Petition as an amendment to his 2012 Counterclaim.

         Amended pleadings are governed by Court of Chancery Rule 15, which requires leave to amend to be freely given when justice requires. Unless Kem can show (1) undue delay, (2) bad faith or dilatory motive, (3) continued failure to cure deficiencies by prior amendments, (4) undue prejudice, or (5) futility of amendment, Dean's amendment must be permitted in the interest of resolving the case on the merits.[38] Rule 15 allows for liberal amendment in the interest of resolving cases on the merits.[39]

         Dean's 2016 Petition gave Kem the benefit of more specific allegations. Indeed, Kem asserts prejudice only "as a matter of law."[40] The accounting was issued on December 4, 2015, and Dean filed his 2016 Petition promptly thereafter on February 3, 2016. I find no bad faith or dilatory motive. If Dean is not permitted to develop his counterclaims (subject to Kem's defenses), then the accounting will have been a wasteful and pointless exercise. Dean will have more information about Kem's use of Paulina's funds, but no opportunity to recoup them if appropriate. Justice and the interest of resolving Dean's claims on the merits therefore compel permitting Dean's 2016 Petition to effectively amend Dean's 2012 Counterclaim.

         Under Court of Chancery Rule 15(c), an amendment of a pleading relates back to the date of the original pleading when the claim asserted arose out of the conduct, transaction or occurrence set forth in the original pleading. Dean's 2016 claims for breach of fiduciary duty and the DPPOA arise out of Kem's management of Paulina's accounts and properties as set forth in Dean's 2012 counterclaim.[41] Therefore, I conclude Dean's 2016 Petition relates back to the date of Dean's 2012 Counterclaim.

         I do not agree with Dean that Kem waived his untimeliness defense against Dean's 2016 Petition by not pleading it in reply to Dean's 2012 Counterclaim. A defendant may amend to add affirmative defenses that do not unduly surprise or prejudice the claimant.[42] Kem indicated in his post-trial briefing he believed laches barred Dean's effort to seek monetary damages for Kem's alleged breach of fiduciary duties, and Kem moved to dismiss Dean's 2016 Petition promptly. [43] Appropriately, Dean does not claim any surprise or prejudice.[44] Just as I strained the pleading rules in light of the unique posture of this case to permit adjudication of Dean's claims on the merits, I do the same to reach the merits of Kem's affirmative defense. I conclude Kem may effectively amend his reply to Dean's 2012 Counterclaim and that Kem's affirmative defense of laches is not waived.

         B. Whether Dean's claims are tolled by the fraudulent concealment exception should be evaluated with the benefit of discovery.

         I turn now to the ultimate issue of whether Dean's claims as of 2012 should be dismissed as untimely. In the usual case, in which a pleading initiates the matter in a factual vacuum and the Court is limited to facts appearing on the face of the pleadings, dismissal of a complaint based on an affirmative defense is inappropriate unless it is clear from the face of the complaint that an affirmative defense exists and that the plaintiff can prove no set of facts to avoid it.[45] "Laches can be applied at the pleadings stage only if the complaint itself alleges facts that show that the complaint is filed too late."[46] If a prima facie basis for laches exists from the face of the complaint, the plaintiff bears the burden to plead specific facts to demonstrate that the analogous statute of limitations was tolled.[47] I must draw all reasonable factual inferences in favor of the plaintiff.[48] Even where a complaint is presumptively late, affirmative defenses such as laches are not ordinarily well-suited for treatment on a motion to dismiss, even though the Court may reach a different answer with a more developed factual record.[49]

         The case law warning against granting motions to dismiss based on untimeliness is even more cogent in the unique procedural posture of this case. Kem's motion is in the context of not just Dean's pleadings, but also factual findings supporting tolling that cannot be ignored. Dean pleads that from October 26, 2004, through the present, Kem breached his fiduciary duties to Paulina. A prima facie basis for laches exists for these claims: a three-year statute of limitations is applied by analogy, and claims based on transactions from October 26, 2004, through April 16, 2009, were not brought within three years.[50] Dean pleads that Kem did not maintain adequate documentation of his administration of Paulina's funds and commingled his own funds with Paulina's.[51] Dean narrates the procedural history of this case and pleads that the forensic accounting, issued on December 4, 2015, "outlines numerous interested transactions, a lack of record keeping, transactions purely for the benefit of Kem, and other improper behavior by Kem."[52]

         Additionally, the Court has already made factual findings in this case that pertain to the timeliness of Dean's claims. After trial on Dean's 2012 request for an accounting, then-Master LeGrow found:

In 2008, if not before, Dean began raising questions about his mother's financial affairs. When he was not satisfied with answers he received from Kem, Dean went directly to his mother and obtained her written permission to receive information about both the 919 Account and THL. …
When Dean obtained access to Paulina's 919 Account, he noted a number of transfers from the 919 Account to other Banco Popular accounts, including three accounts ending in '928 (the "928 Account"), '937 (the "937 Account") and '946 (the "946 Account"). Dean pressed Kem about those accounts, and understood from Kem's explanation that the accounts belonged to Kem or his wife and ...

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