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IMO Estate of Rose

Court of Chancery of Delaware

July 9, 2019

IMO The Estate of Helen L. Rose

          Draft Report: June 24, 2019

          Date Submitted: April 23, 2019


         Dear Counsel:

         Pending before me are exceptions to the first and final accounting for an estate. The main issues are whether the executrix breached her fiduciary duties by selling the estate's real property to herself, and by paying off a loan debt of the estate to herself as a part of the property settlement. I find the executrix breached her fiduciary duty by selling the estate property to herself in a self-dealing transaction and recommend the Court surcharge the executrix by requiring either she pay the estate the difference between the sale price and the value of the property or the sale to her will be voided. I also find the executrix had an equitable mortgage lien on the estate property, although the amount of the debt was less than the amount assessed against the estate. I recommend an award of the exceptants' attorney's fees, with the amount to be determined later, that the executrix be directed to pay attorney's fees incurred in defense of this action, and address other claims. This is a final report.

         I. Background

         Helen Rose ("Decedent") executed her Last Will and Testament ("Will") on April 27, 2005, in which she named her stepdaughter, Patricia Rose, as executrix and ordered Patricia to sell her real property located at 801 West Mt. Vernon Street, Smyrna, Delaware ("Property"), "in whatever manner my Executrix, in her discretion, deems most appropriate and advisable," and after payment of the estate debts and of the specific bequests in the Will, to distribute the remaining proceeds "in accordance with [her] residuary clause."[1] She also devised $2, 000.00 to her grandson-in-law or, if he predeceased the Decedent, to her granddaughter, Terri Fioravaniti; $10, 000.00 to her granddaughter, Tammy Carlton, and $5, 000.00 to her step-son or, if he predeceased the Decedent, to her granddaughter, Sara Rose.[2]

         The Decedent named her son, George Rose, her daughters, Mary Hilte, Doris Buckingham and Patricia, as equal residuary beneficiaries of her estate.[3] The Decedent died on January 5, 2012 and letters testamentary were granted to Patricia on or about January 10, 2012.[4]

         Patricia submitted a claim against the estate related to monies she had loaned the Decedent under a promissory note ("Note") providing that Patricia would pay the Decedent $500.00 monthly from April 1, 2005 until the Decedent's death or through March 1, 2025, whichever occurred first.[5] The Note was secured by a mortgage ("Mortgage") on the Property. Both the Note and Mortgage were dated April 1, 2005.[6] There is no evidence that either document was recorded or notarized, and the copy of the Mortgage in evidence was signed by the Decedent and witnessed by her sister Mary.[7] The evidence indicates that Patricia's payments to the Decedent ended in November of 2011.

         The inventory was filed on March 12, 2012.[8] Patricia listed the Property on the inventory with a value of $120, 000.00, which she testified was what she estimated its value to be.[9] The evidence showed the Property was listed for sale in or around January of 2012 for $129, 900.00, and remained on the market until December of 2012.[10] There were approximately ten appointments to show the Property while it was listed but those persons were turned away by George, who lived on the Property rent-free and refused to leave.[11] The Property was shown only twice and there was only one verbal offer for the Property at $90, 000.00 within a couple of months after the Property was listed.[12] Patricia discussed the $90, 000.00 offer with Mary and then turned it down.[13] After the listing expired with no additional offers, Patricia consulted attorneys about removing George from the Property, but did not take legal action to do so.[14] Patricia testified that George would not let them enter onto the Property, and the Property was not again listed for sale.[15] Patricia testified that she considered selling the Property to Mary but, when those efforts fell through, she sold the Property to herself for $80, 000.00 on September 20, 2017.[16] Patricia discussed her purchase of the Property with Mary in advance, who consented to it, but the evidence did not show she discussed her purchase, or obtained approval for the purchase, with any other beneficiary.[17]During settlement, Patricia received $54, 557.02 in credit for repayment of the balance on the Mortgage loan, and $5, 196.60 in credit for tax and insurance payments.[18] George left when the Property sold and Mary moved in, with Mary working jointly with Patricia to make improvements on the Property.[19]

         The first and final accounting for the estate was filed on July 6, 2018.[20] Exceptions were filed by Terri, Doris and Tammy ("Exceptants") on October 1, 2018, alleging that Patricia breached her fiduciary duties by neglecting the Property; failing to sell the Property and allowing their brother, George, to live in the Property rent-free for more than five years, before selling the Property to herself at a price approximately $40, 000.00 below its value; and by paying off an unsupported estate loan debt to herself as a part of the Property settlement. Exceptants seek relief either as payment representing the full value of the property, or the voiding of the sale to Patricia, disallowance of estate attorney's fees, closing costs and executrix's commission, an accounting of the loan payoff on the Note, and their attorney's fees and costs. Patricia responds that she did not breach her fiduciary duties-she sold the property to herself for the price that would have been obtained based upon a previous potential sale, handled the estate competently and the loan debt owed to her was supported. A hearing on the exceptions was held on April 23, 2019.

         II. Analysis

         Court of Chancery Rule 198 specifies the burden of proof in exceptions to an account.[21] Once exceptions are filed in compliance with Rule 198, the burden of proof falls on the executrix to demonstrate that the accounting was properly prepared.[22] That burden shifts, however, where the exceptant seeks a surcharge. In those instances, the exceptant "must demonstrate affirmatively that a surcharge is warranted."[23] Exceptions are addressed by issue below.

         A. Executrix's Purchase of the Property is Self-Dealing

         The first issue is whether Patricia's purchase of the Property was a self-dealing transaction. To so hold, I need to find that Patricia owed and breached fiduciary duties to the estate. Patricia, acting as executrix of the estate, stands in the position of a fiduciary.[24] Her duty is to carry out the "wishes of the decedent as expressed in the will."[25] The Will charged her with selling the Property to pay the estate debts, funding the specific bequests in the Will, and distributing any remaining funds to the residuary beneficiaries. As a fiduciary, Patricia has a duty of loyalty requiring her to act, at all times, in the best interests of the estate, and is "under a duty not to sell to [herself] either by private sale or at auction, whether the property has a market price or not, and whether or not the [fiduciary] makes a profit thereby."[26] Under current Delaware law, self-dealing transactions are "voidable at the behest of the beneficiary."[27] A court "will uphold such a transaction against a beneficiary challenge only if the [fiduciary] can show that the transaction was fair and that the beneficiaries consented to the transaction after receiving full disclosure of its terms."[28]

         Patricia's sale of the Property to herself was a self-dealing transaction. Such a transaction is voidable if challenged by a beneficiary, as it has been here. The presumption of invalidity can be overcome if Patricia shows that the transaction was fair and the beneficiaries gave their informed consent. I find Patricia has not met her burden and the transaction cannot be upheld.

         Based upon the evidence, I cannot conclude that the transaction in which Patricia purchased the Property was fair. The evidence shows that Patricia sold the Property to herself for $80, 000.00 on September 20, 2017. She testified she based the $80, 000.00 sale price on the $90, 000.00 verbal offer on the Property in 2012, minus reductions the realtor who listed the Property indicated would have been taken off at the sale.[29] Patricia argues she was taking a significant risk in purchasing the Property without seeing the inside of the house because George lived in the house and prevented her from entering the house. She testified that the condition of the Property when she bought it was poor and that she and Mary made improvements on the Property, which included putting in all new hardwood and tile floors, replacing toilets, and addressing plumbing and electric issues.[30]

         However, other evidence indicates the Property had a much higher value than what Patricia paid for it in September of 2017. It had been listed for sale in or around January of 2012 for $129, 900.00, and, although there was only one verbal offer on the Property for $90, 000.00 during the year that it was on the market, the evidence shows interest in the Property was stymied by George, who turned potential buyers away from the Property. The realtor who listed the Property testified that the Property's condition was not very good in 2012, and the listing price reflected that condition, as well as the attractiveness of the Property's location.[31]

         And, the Property was appraised at $128, 000.00 as of January 25, 2019, with the notation that the Property is a "30 year old home in overall average condition by local market standards."[32] Contrary to Patricia's claims that the improvements she made following her purchase of the Property greatly enhanced its value, the appraiser testified that improvements, such as new flooring, do not add substantial value to the Property but contribute to the overall condition.[33] And, as executrix, Patricia was responsible for protecting the Property against damage caused by George and cannot claim that damage, which was worsened by her inaction, to justify selling the Property to herself for a lower price.[34]

         The evidence supports a finding that the Property's actual value at the time of Patricia's purchase far exceeded the $80, 000.00 purchase price, given its valuation on the inventory at $120, 000.00, its $129, 900.00 listing price in 2012, and its $128, 000.00 appraised value approximately one year after the sale.[35] There is no value of the Property in evidence as of the time Patricia purchased it. Since it is Patricia's burden to show the value was fair, and she has not provided evidence of the Property's value at the time of purchase, nor to support her claim that the Property's value was increased by the improvements she made following the purchase, I find it reasonable to set the Property's fair value at the time of purchase at $128, 000.00.[36] The damage to the estate caused by Patricia's self-dealing is $48, 000.00 (the difference between the $128, 000.00 value and the sale price of $80, 000.00).

         In addition to showing the fairness of the transaction, to overcome the presumption of invalidity with a self-dealing transaction, Patricia also needed to show the beneficiaries gave their informed consent to the transaction. Here, the only estate beneficiaries who had notice of Patricia's purchase were Mary and Patricia herself. There was no evidence that the remaining estate beneficiaries- Tammy, Terri, Doris, Sara, or George-were notified about, or consented to, the sale.[37]

         Accordingly, I conclude Patricia has engaged in self-dealing and that her purchase of the Property is voidable. Exceptants seek relief either as payment representing the full value of the property, or the voiding of the sale to Patricia. I recommend the Court order Patricia to either refund the estate $48, 000.00 within 60 days after my report becomes final, or if she fails to do so or notifies the Court that she will not pay the difference within the same time frame, void the sale of the Property.

         B. Executrix's Equitable Lien on the Property

         The second issue is whether the loan debt arising from the Note held by Patricia is sufficiently proven and whether it is secured by a valid mortgage lien against the Property. Exceptants claim the loan debt was unsubstantiated and, in addition, was unfairly paid off in advance of other estate debts.

         A mortgage "is a conveyance of an estate, by way of pledge for the security of debt, and to become void on payment of it."[38] "The sine qua non of a 'mortgage' is not the form of the document but the intention of the parties to secure a debt with a pledge of real property."[39] The Delaware Supreme Court recognized the Court of Chancery's "equitable power to disregard defects in the execution of a mortgage," based upon the principles that "(1) equity regards substance rather than form," and (2) "equity regards that as done which in good conscience ought to be done."[40] Further, Delaware's "form of mortgage" statute expressly states that "documents not conforming with its prescribed pattern may nevertheless be valid and fully effectual."[41] Technical defects, such as the failure to acknowledge the mortgage before a notary or to record it, do not necessarily invalidate the mortgage.[42] The key to establishing an equitable mortgage is the intent of the parties to create a mortgage or lien on secured property.[43] Substance transcends form and instruments intended as mortgages to pledge property to secure debts are enforceable as equitable mortgages, even if they are not regarded as legal mortgages because of defects.[44]

         Neither the Mortgage nor the Note were recorded or notarized. But the evidence shows that the Decedent executed the Mortgage intending to create an equitable lien on the Property, and that Patricia paid $500.00 per month to the Decedent from April of 2005 through November of 2011 under the Note.[45] The loan amortization schedule submitted with the Note and Mortgage to the Register of Wills related to Patricia's claim indicates that, as of November of 2011, the balance owed by the Decedent to Patricia on the loan would have been $47, 447.74.[46] However, the settlement sheet for Patricia's purchase of the Property shows that $54, 557.02 was deducted from the amount due the estate on that loan.[47] When asked about the discrepancy, Patricia testified that, at settlement, "interest and taxes and insurance" were added together with the amount owed on the Note to make up the $54, 557.02 as a single line item on the settlement sheet.[48] However, the settlement sheet shows Patricia was also credited for the payment of $5, 196.60 in taxes and insurance separately from the outstanding loan.[49]

         I find the Mortgage was an equitable mortgage against the Property securing Patricia's loan debt under the Note. And, it is reasonable to conclude that the estate owes Patricia the $54, 557.02 assessed against the estate related to the loan, including taxes, insurance and interest. However, I find the settlement sheet incorrectly assessed an additional $5, 196.60 against the estate for taxes and insurance, when Patricia's testimony shows that those expenses were already included in the $54, 557.02 calculation, and I add $5, 196.90 to what Patricia is required to pay the estate, if she pays the surcharge.

         C. Exceptants' Other Claims

         Exceptants' other claims focus on Patricia's neglect of the Property while allowing George to live in the Property rent-free for more than five years, and the additional relief they seek include the disallowance of estate attorney's fees, closing costs, commissions, and attorney's fees and costs. Patricia alleges that George refused her entry on the Property while he lived there so she could not maintain the Property. As a fiduciary, her obligations included taking care of the Property and taking appropriate actions to remove George from the Property, which should have taken far less than five years to do so. I recognize the difficulties Patricia experienced in her efforts to remove George from the Property, including the legal advice she received from one attorney and the cost of hiring a different attorney to take legal action. And, Exceptants have not provided evidence of damages caused by neglect. Further, since I recommend to the Court that, to remedy her self-dealing, Patricia be ordered to either pay the difference in value or return the Property, any damages resulting from neglect will be addressed.[50]

         With regard to Exceptants' request to the Court for the disallowance of estate attorney's fees, "[t]he general rule is that fees paid to the attorney for the personal representative are considered an expense of the estate."[51] "The rational[e] behind this rule is that the personal representative and his or her attorney is providing a service to the estate and its beneficiaries by properly and efficiently administering the estate."[52] When an executrix breaches her fiduciary duty, she may be found to be acting in her own best interest rather than to benefit the estate, and ordered to pay her own attorney's fees.[53] Here, the exceptions focused on Patricia's self-dealing, which benefitted herself not the estate. I find that, through her self-dealing, she breached her fiduciary duty. It would be unfair to shift the ...

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