Summary
The Delaware Supreme Court held that trustees breached their fiduciary duties by failing to ensure that a testamentary trust was fully funded and by failing to timely file required accountings. The court reversed the finding that the trustees breached their duties by investing the trust corpus solely in tax-exempt government bonds. The judgment was affirmed in part, reversed in part, and remanded for further findings regarding damages, costs, and attorney fees.
Topics
Practice areas
Questions Presented
- Whether the trustees breached their fiduciary duties by failing to ensure that the testamentary trust was funded with the $225,000 specified in the will.
- Whether the trustees breached their fiduciary duties by investing the trust corpus solely in tax-exempt government bonds rather than using a strategy designed to increase the corpus.
- Whether the trustees breached their duties by failing to file the biannual accountings required by Court of Chancery Rule 114, and whether later disclosure rendered the violation harmless.
- What damages, costs, expert fees, and attorney fees were recoverable in light of the Supreme Court's partial affirmance and reversal.
Holdings
- The trustees breached their fiduciary duties by failing to question why the trust was funded with less than the $225,000 required by the will. The damages attributable to that breach were the remaindermen's actual one-third interest in the shortfall, $6,794.33, rather than the entire shortfall.
- The trustees did not breach their fiduciary duties by investing the trust corpus solely in tax-exempt government bonds and paying the income to the life beneficiary.
- The trustees breached the trust by failing to timely file the biannual accountings required by Court of Chancery Rule 114. Their eventual provision of information to the remaindermen did not make the violation harmless.
- The award of damages, expert-witness fees, and attorney fees had to be reconsidered because only the inadequate-funding and accounting breaches remained. Damages for the funding breach were $6,794.33, while damages for the accounting breach could consist only of costs incurred in ultimately obtaining the accountings.
Key quotations
“We hold that the Court of Chancery correctly held that the Appellants, Kathryn and Gary Law, breached their fiduciary duties as Trustees under the Trust created by the will of their mother, Virginia M. Law, because they failed to dispute the incorrect amount of money received to fund the Trust from the Executor and because they failed to timely file the accountings required by Court of Chancery Rule 114.” (444)
“We also hold that the Court of Chancery incorrectly held that the trustees breached their fiduciary duties to the Trust by investing the corpus in tax-exempt government bonds.” (444)
“We therefore affirm the Court of Chancery's holding that the Trustees violated Court of Chancery Rule 114.” (450)
Factual background
Virginia M. Law's 1982 will directed that $225,000 be placed in trust for her husband during his lifetime, with the remainder passing to descendants. The executor transferred approximately $204,610 after deducting estate expenses, and the trustees did not question the shortfall. The trustees invested the corpus solely in tax-exempt government bonds, paid the income to the life beneficiary, and did not file the required biannual trust accountings. After the life beneficiary died in 1994, the remaindermen learned of their interests and sued the trustees.
Procedural history
The remaindermen filed suit in the Court of Chancery alleging insufficient funding of the trust, imprudent investment, and failure to file required statutory accountings. The Court of Chancery granted summary judgment on liability and later awarded $394,118.60 in damages, costs, and attorney fees. The Delaware Supreme Court affirmed the findings concerning inadequate funding and untimely accountings, reversed the finding that investment in tax-exempt government bonds breached fiduciary duties, and remanded for reconsideration of damages, expert fees, and attorney fees.
Remand instructions
The Court of Chancery was directed to make further findings and reconsider damages, expert-witness fees, and attorney fees in light of the holdings that only the inadequate-funding and untimely-accounting breaches were established. Jurisdiction was not retained.