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Hurd v. Hurd

Court of Chancery of Delaware

March 26, 2018

Marie Ann Hurd, Plaintiff,
v.
Leonard Hurd, Jr., Individually and as Trustee Of the Marie Ann Hurd Trust, Defendant.

          Submitted: March 6, 2018

          John V. Work, Esquire, of the Law Office of John V. Work, Wilmington, Delaware: Attorney for Plaintiff.

          J. Jackson Shrum, Esquire, of Austria Shrum, LLC, Wilmington, Delaware: Attorney for Defendant.

          MASTER'S REPORT

          GRIFFIN, Patricia.

         BACKGROUND

         At issue is a trust that was established to provide resources to the settlor's wife, Marie Ann Hurd (hereinafter "Mrs. Hurd"), after the death of Leonard Hurd, Sr. (hereinafter "Mr. Hurd") in 2000, during her lifetime. The trust agreement provided that the Marie Ann Hurd Trust (hereinafter "the Trust") was to be funded with four items of settlor's property (his travel trailer, pick-up truck, condominium at 7 Rockford Road, D-15, Wilmington, Delaware, and Delmarva Power common stock), as well as "an amount equal to the excess, of any, of Five Hundred Thousand Dollars ($500, 000.00) over the value determined as of the date of settlor's death of the other property passing under this paragraph."[1] All net income from the Trust was to be paid to Mrs. Hurd in regular installments ("at least quarterly and preferably monthly"), and distributions from the Trust principal made for the health, education, support or maintenance of Mrs. Hurd.[2]

         The trust agreement also established irrevocable lifetime trusts for the benefit of Leonard Hurd, Jr. (hereinafter "Leonard" or "the trustee"), Mr. Hurd's son from a previous marriage. The lifetime trusts terminate at Leonard's death, with the trust proceeds being distributed according to Leonard's will or to Leonard's surviving heirs, if Leonard doesn't provide for distribution of the proceeds. Upon Mrs. Hurd's death, the trust agreement provides that any principal remaining in the Trust will be distributed to Leonard's lifetime trusts, or according to Leonard's will or to his heirs, if Leonard does not survive Mrs. Hurd. Leonard was appointed the trustee of his stepmother's Trust.

         In 2009, Mrs. Hurd filed a complaint against Leonard, the trustee, alleging several breaches of fiduciary duty and seeking damages, an accounting of the trust and his removal as trustee. After trial and post-trial briefing, Master Ayvazian issued a final Master's Report on September 20, 2016 (hereinafter "Master's Report), finding that Leonard breached his fiduciary duty to the Trust's beneficiary, Mrs. Hurd, and recommending that the Court: (1) direct Leonard to provide a complete accounting of all Trust activities from the date of Mr. Hurd's death (April 18, 2000) to the present time, (2) direct Leonard to provide access to all documents regarding Trust income and assets, (3) enjoin and restrain Leonard from converting or using Trust income or assets, or taking further actions without court approval, (4) order Leonard to repay any amounts of Trust income or property wrongfully used or directed by him for his own benefit and/or the benefit of others affiliated with him, together with interest on all such amounts, (5) order Leonard to pay all costs associated with this litigation, including reasonable attorneys' fees, (6) suspend Leonard as trustee, (7) appoint a receiver to administer the Trust, and (8) order the immediate disbursement of all Trust income in escrow to the beneficiary.[3]

         Leonard filed exceptions to the Master's Report, which were briefed and argued before Vice Chancellor Glasscock on January 23, 2017.[4] Vice Chancellor Glasscock ordered that the parties confer on a third party receiver. Cover & Rossiter (hereinafter "the Receiver") was appointed receiver for the Trust by stipulated order on February 10, 2017 and ordered to conduct an audit and accounting of the Trust and present the Court and parties with a report on its findings.[5]

         Vice Chancellor Glasscock conducted an evidentiary hearing on February 15, 2017 on Leonard's credibility and intent, and issued a bench ruling denying the exceptions and affirming the Master's Report. Further, Vice Chancellor Glasscock ordered Leonard removed as trustee.[6]

         On April 26, 2017, Master Ayvazian held a contempt hearing concerning Leonard's failure to produce the documents requested by the Receiver and levied a coercive fine on Leonard to encourage the production of Trust documents requested by the Receiver.[7] Following subsequent letters from the parties' counsel concerning Leonard's failure to produce all documents requested, Master Ayvazian advised the parties on May 22, 2017 that the record shows that there are still missing documents that Leonard has not produced, and that "[a]s of today's date, the coercive fine is up to $1, 200.00 and increasing daily."[8] On May 26, 2017, Leonard filed a motion for reconsideration of the Court's April 26, 2017 order levying coercive fines, arguing for the elimination of any coercive fines due to the impossibility of his compliance. That motion was briefed after the Receiver completed its report in October 2017.

         The Receiver filed its report on October 27, 2017, containing its accounting of the Trust from April 19, 2000 through September 30, 2017, and its findings. Leonard submitted his objections to the Receiver's report on February 16, 2018, and Mrs. Hurd provided her response on February 19, 2018.

         After review of the Receiver's report and consideration of the parties' responses, I recommend that the Court reject Leonard's objections, approve the Receiver's report, and order that Leonard pay the Trust $611, 971.44 in income, plus any additional income deficiencies that have accrued since September 30, 2017 (when the reporting period for the Receiver's report ended), and $450, 559.64 in cash in principal, as well as 6, 075 shares of Nucor stock, or cash representing its value on the date that the Trust is repaid for this stock. I further recommend that the Court order the full amount of the income due be paid within 45 days after this report becomes final and that that all net income owed to the Trust by Leonard be distributed forthwith to Mrs. Hurd upon its payment into the Trust, consistent with the terms of the trust agreement.[9] Leonard's payment of the principal due should occur within six months following his repayment of the income obligation.

         I also recommend that the Court grant Leonard's motion for reconsideration of the Court's April 26, 2017 order levying coercive fines on Leonard for his failure to provide requested documents to the Receiver, and find that, given all of the circumstances surrounding Leonard's production of documents for the Receiver during April and May of 2017, the coercive fine levied as of May 22, 2017 is vacated. This is a final report.

         ANALYSIS

         1. RECEIVER'S REPORT ON PROPERTY WRONGFULLY WITHHELD FROM THE TRUST

         In the September 20, 2016 Master's Report, Master Ayvazian found that the trust agreement was clear and unambiguous and required that, "if the total value (as of the date of settlor's death) of the first four gifts of property equals less than $500, 000, then additional property is to be gifted to the Trust to make up the difference in value."[10] The initial funding of the Trust may be with "no less than $500, 000 worth of property."[11] Therefore, the first four gifts composing the Trust would be valued as of the date of Mr. Hurd's death, while the funds or property needed to bring the value of the Trust up to $500, 000 would be valued at the time of the initial funding of the Trust.

         Further, she concluded that Leonard, as trustee of the Trust, violated his fiduciary duty to his stepmother and engaged in self-dealing through his actions, including: his failure to transfer the Delmarva Power common stock, which had become Conectiv stock by the time of Mr. Hurd's death, into the Trust when it was initially funded (despite including that stock as an asset on the Trust's initial accounting); his failure to attribute dividend income from that, or other stocks, to the Trust; his removal of assets from the Trust (to bring the value of the Trust down to "the maximum value of $500, 000 per Trust document"), and shifting of those assets to himself; his charging of unreasonable rates for his services as trustee; and his refusal to reimburse Mrs. Hurd for the cost of a new refrigerator.[12]

         Vice Chancellor Glasscock approved the Master's Report and found that Leonard acted in bad faith and not in the best interest of the beneficiary, and specifically noted Leonard's withholding of Trust payments from Mrs. Hurd for six years during the litigation, and that Leonard's actions - in taking assets from the Trust and placing them into an account owned by him - were "the epitome of bad faith."[13]

         The Receiver completed its report, including its accounting and findings, on October 27, 2017. I highlight salient aspects of the Receiver's report below.

         Underfunding of the Trust at its inception: The Trust was initially funded by the trustee based upon the values of a mobile home, travel trailer, pick-up truck, and condominium, minus combined losses from the sales of the mobile home, trailer and pick-up truck, plus cash. In addition, the Trust's initial accounting included shares of Conectiv (formerly Delmarva Power stock), Telefonos de Mexico (hereinafter "Telefonos"), Lonestar Steakhouse, Bergen Brunswig Corporation, Computer Associates, and Nucor stock.[14] The Receiver's report found that the Trust was underfunded at its inception, mainly because the trustee used the date of death value (as of Mr. Hurd's death - April 2000) for all of the stock contributed to the Trust, rather than the value of those investments (except for Conectiv stock) when the Trust was actually funded - in July 2001.[15] The items of property specified in the trust agreement to be included in the Trust - his trailer, pick-up truck, condominium and Delmarva Power (Conectiv) stock - were valued at the time of Mr. Hurd's death, consistent with the trust agreement.[16] However, the trust agreement provided that the Trust must be worth $500, 000 at the time it was initially funded, so the assets needed to bring the value of the Trust up to $500, 000 must be determined as of the time they are placed in the Trust when it was initially funded. Further, the Receiver determined that the Conectiv stock (or its successor stocks) were never transferred into the Trust, so that changes in its value over the years, as well as the full dividends from that stock, were not included as Trust principal or income.[17] Completing its review of the initial funding of the Trust, the Receiver found that the cash actually contributed to the Trust was approximately $12, 000 less than as shown by the trustee on the Trust's initial accounting, resulting in the underfunding of the Trust, at its inception, by $57, 973.48.[18]

         Trustee's removal of stocks from the Trust: The Receiver found two instances where the trustee had removed stocks from the Trust principal, representing a combined amount due the Trust of approximately $460, 459.[19] First, 6, 075 shares of Nucor stocks were transferred from the trust on March 7, 2007. For the Nucor stock, the Receiver determined that the Trust principal is due for this stock (which had a market value of $340, 443 as of September 30, 2017), as well as income to replace the lost dividends since the date of the stock's removal. Second, 6, 500 shares of Telemex Internacional stock (hereinafter "Telemex") were transferred out of the Trust on June 16, 2008.[20] The Trust is due the value of the Telemex stock, as determined at the time of its merger with American Movil on June 20, 2010 ($120, 016), along with interest on that value since the merger, and lost dividends between the date of the stock's removal from the Trust and its merger.

         Trustee's removal of cash from the Trust: The Receiver found instances in which cash had been removed from the Trust by the trustee and those funds were not transferred to any known Trust account. The largest amount removed at one time was $65, 640, which was transferred out of the Trust on December 15, 2006 (and represented the same amount received by the Trust, on the same day, for the sale of its Lonestar Steakhouse stock).[21] The Receiver calculated the combined amount of these transfers at $113, 256.53.

         Total income and principal due the Trust: The Receiver calculated the combined income and principal due the Trust at approximately $1, 402, 974.08 (which will fluctuate depending upon the market value of Nucor shares at the time the shares, or its cash equivalent, is returned to the Trust). The Receiver noted that "this amount is a conservative calculation as it does not contemplate market appreciation on principal assets once they left the Trust, with the exception of Nucor."[22]

         Income: The Receiver assessed the amount of income due the Trust from the trustee as $611, 971.44. The interest was calculated by using the legal rate of interest of 5% over the federal discount rate and compounding the interest annually. The Receiver determined that the interest should be compounded because of the length of years where the Trust was deprived of the interest. Lost dividends were calculated based upon public dividend payout records.

         Principal: Based upon the Receiver's analysis, the Trust principal is due 6, 075 shares of Nucor stock (or its cash equivalent at the time the value of the stock is returned to the Trust) and $450, 559.64 in cash, for a combined approximate amount of $791, 002.64 to be paid the Trust.

         Comparison of payments to trustee vs. to beneficiary: The Receiver calculated the total payments to the trustee over the lifetime of the trust, including amounts paid by the trust to the trustee and assets and income which the trust was deprived of by the trustee, as $918, 616.92.[23] The payments from the Trust to the beneficiary during April 19, 2000 and September 30, 2017 totaled $61, ...


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