Mennen v. Fiduciary Trust International of Delaware , 2016 Del. LEXIS 534 ( 2016 )

IN THE SUPREl\/IE COURT OF THE STATE OF DELAWARE
KATHRYN i\/lENNEN, SARAH
MENNEN, ALEXANDRA
MENNEN, SHAWN l\/HENNEN, and
JOI-H\I MENNEN,
Plaintiffs Below-
AppellantS/Cross-Appellees,
V.
FIDUCIARY TRUST
INTERNATIONAL OF
DELAWARE, in its capacity as the
individual trustee of the TRUST
ESTABLISHED BY GEORGE S.
i\/HENNEN FOR THE BENEFIT OF
GEORGE JEFF MENNEN, a
Delaware trust,
Defendant BeloW-
Appellee,
v.
GEORGE IEFF MENNEN,
Defendant Below-
Cross-Appellant.
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N0.1,2016
Court BeloW_Court of Chancery
of the State of Delaware
C.A. No. 8432
Subrnitted: September 21 , 2016
Decided: October 11, 2016
Before STRINE, Chief Justice; HOLLAND and SEITZ, Justices.
Upon appeal from the Court of Chancery. REMANDED.
Kevin G. Abrams, Esquire, J. Peter Shindel, Jr., Esquire, Matthew L. Miller, Esquire,
Abrams & Bayliss LLP, Wilrnington, Delaware, Herbert J. Stern, Esquire, Kevin M.
Kilcullen, Esquire, Brian J. DeBoer, Esquire, Stern & Kilcullen LLC, Florham Park,
New Jersey, Attorneys for Plaintiffs BeloW-Cross Appellants/Cross Appellees.
Brian C. Ralston, Esquire, Aaron R. Sims, Esquire, Potter Anderson & Corroon LLP,
Wilmington, Delaware, Carol A. Harrington, Esquire, Jared R. Cloud, Esquire,
Daniel R. Campbell, Esquire, McDermott Will & Emery LLP, Chicago, Illinois,
Attorneys for Defendant BeloW-Appellee.
Jeffrey S. Cianciulli, Esquire, Weir & Partners LLP, Wilrnington, Delaware, Ralph
T. Lepore, III, Esquire, Benjamin M. McGovern, Esquire, Holland & Knight LLP,
Boston, Massachusetts, Attorneys for Defendant Below, CroSs-Appellant.
HOLLAND, Justice:
At issue in this appeal is whether five beneficiaries of a Delaware trust_John
Mennen (“John”), Kathryn Mennen, Shawn Mennen, Sarah Mennen, and Alexandra
Mennen (the “Beneficiaries”}-may recover on their $88 million judgment against
George J eff Mennen (“Jeff”), the brother of John and uncle to the other
Beneficiaries. That judgment arises from Jeff’s alleged bad faith and willful
misconduct as individual trustee of a trust established by the father of John and J eff
for the benefit of John and his issue (the “Trust”). That damages judgment is the
subject of Jeff’ s cross-appeal in this matter.
A Master held that the spendthrift clause in Jeff’s Trust precludes the
Beneficiaries Hom obtaining any relief against Jeff' s interest in Jeff’ s Trust (the
“Spendthrift Ruling”). The Court of Chancery held that, because the Beneficiaries’
notice of exceptions to the Master’s final report on its Spendthrift Ruling was
purportedly one-week late, the Beneficiaries forfeited their right to challenge the
Spendthrif``t Ruling. In this proceeding, the Beneficiaries appeal both the procedural
and the substantive rulings.
This opinion only addresses the procedural claim. In that regard, the
Beneficiaries argue that the Court of Chancery committed two separate legal errors
when it determined that the Beneficiaries’ notice of exceptions to the Master’s final
report on its Spendthrift Ruling was untimely. First, the Beneficiaries contend that
the Court of Chancery erred when it determined that the Beneficiaries’ claims
against Jeff"s interest in Jeff’s Trust were expedited for purposes of post-trial
proceedings Second, the Beneficiaries contend that the Court of Chancery erred by
failing to address whether any untimeliness in the filing of the Beneficiaries’ notice
of exceptions was the result of excusable neglect.
We have concluded that both of the Beneficiaries’ procedural arguments are
correct. Therefore, this matter must be remanded to the Court of Chancery to
consider the merits of the Beneficiaries’ exceptions to the Master’s Spendthrift
Ruling.
F acts Regarding Expedited Proceedings
Although the Master granted the Beneficiaries’ motion to expedite on April
19, 2013, the Master did so to expedite resolution of whether the Trust’s incumbent
trustees had acted disloyally and were unfit to continue to serve. Af``ter the co-
trustees resigned_Wilmington Trust Company (“WTC”) on May 28, 2013, and J eff
following trial in February 2013_the parties and the Master returned to a non-
expedited schedule to address the Beneficiaries’ damages claims.
On November l, 2013, Owen Roberts, the Trustee of Jeff's Trust,1 filed a
motion for summary judgment. He argued that 12 Del. C. § 3536 (the “Spendthrift
Statute”) barred recovery by the Beneficiaries against Jeff’ s interest in Jeff’s Trust.
1 Roberts served as the individual trustee of Jeff’ s Trust through trial and all post-trial proceedings
Prior to this appeal, Fiduciary Trust International of Delaware replaced Roberts as trustee of Jeff’ s
Trust.
4
After briefing and oral argument, the Master issued a draft report on January 17,
2014 recommending that the Court grant Jeff s Trust’s summary judgment motion
(the “Draft SJ Report”). ln the Draft SJ Report, the Master stayed exceptions to that
Report until the issuance of a draft report on the merits, which occurred nearly eleven
months later, on December 8, 2014.
The Beneficiaries filed exceptions to the Draft SJ Report on December 15,
2014 and an opening brief in support on January 23, 2015. Jeff s Trust filed an
answering brief on February 13, 2015, On April 24, 2015, more than two years after
the Complaint was filed, and nearly fifteen months after the Draft SJ Report, the
Master issued the Final SJ Report, which maintained each of the key positions in the
Draft SJ Report.
On May 4, 2015, ten days after the Final SJ Report was issued and in
accordance with new Court of Chancery Rule 144(d)(1), the Beneficiaries filed a
notice of exceptions to the Final SJ Report (the “Beneficiaries’ Exceptions”) that
repeated the Beneficiaries’ December 15, 2014 exceptions to the Draft SJ Report.
On May 15, 2015, Jeff’s Trust filed a motion to strike the Beneficiaries’ Exceptions
on the grounds that the three-day deadline under Rule l44(d)(2) applied and,
therefore, the Beneficiaries’ Exceptions were untimely (the “Strike Motion”).
After briefing and without oral argument, the Court of Chancery granted the
Strike Motion. The entire Strike Order reads as follows: “This matter is expedited,
rendering the notice of exceptions untimely under the plain language of Rule
144(d)(1).” Having granted the Strike Motion, the Court of Chancery refused to
consider the merits of the Beneficiaries’ Exceptions to the Spendthrift Ruling and
adopted the Master’s Final SJ Report as an Order of that Court.
Proceedings No Longer Expedited
In relevant part, Rules 144(c) and (d) state:
(c) Exceptions -- Any party may take exception to a final
report or a draft report. Exceptions to a draft report shall be heard by
the Master and shall be addressed in the final report issued by the
Master. . . .
(d) Schedule for taking and briefing exceptions -- Unless
otherwise agreed by the parties or directed by the Master or the Court,
the following schedule shall govern . . .
(1) ln actions that are not summary in nature or in
which the Court has not ordered expedited proceedings, any party
taking exception shall file a notice of exceptions within eleven days of
the date of the report. . . .
(2) In actions that are summary in nature or in which
the Court has ordered expedited proceedings, any party taking
exception shall file a notice of exceptions within three days of the date
of the report. The presiding Chancellor, Vice Chancellor, or Master
shall promptly set a schedule for briefing on the exceptions, taking into
account the need for summary or expedited resolution of the action.2
The Court of Chancery erred when it held that the expedited, three-day
exceptions period of Rule 144(d)(2) governed the Beneficiaries’ Exceptions instead
2 ct. ch. R. 144(¢)-(d).
of the normal eleven-day exceptions period under Rule 144(d)(1) because the record
reflects that Beneficiaries’ remaining money damages claim against Jeff’s interest
in Jeffs Trust was not expedited.3
Jeff s Trust filed its summary judgment motion in November 2013. The Draft
SJ Report was issued in January 2014. The exceptions period for the Draft SJ Report
was stayed by nearly a year until the Draft Post-trial Report was issued in December
2014. The Final SJ Report was not issued until April 2015_fifteen months after the
Draft SJ Report. WTC had resigned as trustee twenty-three months earlier; J eff had
resigned thirteen months earlier.
Jeff’s Trust never argued that expedition was required for exceptions to the
Draft SJ Report or the Final SJ Report. The Beneficiaries’ Exceptions to the Draft
SJ Report were briefed by the Beneficiaries and Jeff’ s Trust on a non-expedited
schedule that was longer than provided in Rule 144(d)(l). ln addition, Jeff’ s Trust’s
exceptions to the Final Merits Report were briefed on a non-expedited schedule.
The record reflects that none of the parties in this litigation believed that the
Beneficiaries’ money damages claims against Jeff' s Trust were expedited until Jeff" s
Trust filed the Strike Motion. The Strike Order disregards the course of conduct by
the Master and the parties to the litigation_including Jeff’s Trust_that the
3 Although the Strike Order mistakenly cited Rule l44(d)(l), the Court of Chancery actually
applied Rule 144(d)(2).
7
resignation and replacement of WTC and J eff as trustees of the Trust had removed
the original justification for expedition. ln light of these undisputed facts, the Court
of Chancery erred in holding that the litigation remained expedited and that Rule
144(d)(2) applied.
We recognize that Rules 144(d)(1) and (d)(2) can arguably be read to create a
binary distinction between “actions that are summary in nature or in which the Court
has ordered expedited proceedings” and “actions” that do not have those qualities
But that reading is not one that is compulsory or sensible. Rather, what the two
subsections attempt to do seems plain. When an entire action involves a summary
proceeding by statute, such as an action under 8 Del. C. § 220, then exceptions must
be taken with alacrity in keeping with the statutory mandate for summary
proceedings And, when an action involves matters that the court itself finds demand
expedited action, any exceptions from a Master’s ruling addressing those matters
must also be made with alacrity.
This reading is not only a common sense interpretation, it is supported by the
language of subsection (d)(2) recognizing that not all summary or expedited matters
are the same and that the degree of expedition should reflect what is at stake. That
language gives the Court of Chancery discretion to set a briefing schedule on
exceptions tailored to the issues before it. It may be that Rules 144(d)(1) and (d)(2)
could be usefully amended to replace the words “in which the Court has ordered
expedited proceedings” with the words “as to issues as to which the Court has
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ordered expedited proceedings But, the only reasonable reading of the Rules as
they stand is the one we have set forth. Even further, if the Rules were to be read
with less flexibility, then it was incumbent of the Court of Chancery to consider
whether the action remained one that was expedited. As the record reflects, it was
clear that the Master and the parties had long ago agreed that the action was no longer
expedited and not orie involving expedited proceedings That error alone requires a
reversal and remand to the Court of Chancery to address the merits of the
Beneficiaries’ Exceptions to the Spendthrift Ruling.
Excusable Neglect
The Strike Order did not address the Beneficiaries’ excusable neglect
argument. ln evaluating excusable neglect, the trial court generally focuses on two
issues: (l) whether a party has demonstrated reasonable diligence; and (2) whether
the opposing party will be improperly prejudiced by an extension4
When a party has missed a scheduling deadline, the trial court may extend the
deadline if the party’s failure to meet it resulted from excusable neglect.5 A finding
of excusable neglect is appropriate when there is a “demonstration of good faith on
4 The Final SJ Report did not significantly differ from the Draft SJ Report. Therefore, the
Beneficiaries’ exceptions to the Final SJ Report are almost identical to the exceptions the
Beneficiaries filed in response to the Draft SJ Report. ln the Court of Chancery, the Trustee
conceded that it would suffer no prejudice if the Motion to Strike was denied.
5 Ct. Ch. R. 6(b).
9
the part of the party seeking an enlargement and some reasonable basis for
noncompliance within the time specified in the rules.”6 Accordingly, excusable
neglect is “neglect which might have been the act of a reasonably prudent person
under the circumstanc:es.”7
The record reflects that the Beneficiaries acted in good faith and with
reasonable justification in filing their exceptions within the period provided in Rule
144(d)(1) for two reasons First, Rule 144 was amended effective January 1, 2015,
and no precedent or commentary on the new Rule existed when the Beneficiaries
filed their exceptions The Beneficiaries reasonably expected that exceptions to a
final report that was issued nearly fourteen months after the draft report would not
be treated on an expedited basis.
Second, the Beneficiaries asserted that they were aware that Rule 144 had
been revised. ln fact, they contended that their counsel confirmed with the Register
in Chancery that the new, eleven-day period under current Rule 144 would apply to
exceptions to the Final SJ Report rather than the seven-day period under old Rule
144.
Because the Court of Chancery did not consider the excusable neglect
argument, it never inquired whether this assertion in a brief supplied by counsel was
6 nolan v. Williams, 707 A.2d 34, 36 (Dei. 1998).
7 Id.
10
factually correct. For present purposes, however, the Trustee accepts the
Beneficiaries’ “intimat[ion] that they relied on the Register in Chancery,”8 but,
nonetheless asserts that this contact with the Register in Chancery is not
consequential.9 In other words, even if the Beneficiaries were advised by the
Register in Chancery to use the eleven-day deadline of new Rule 144(d)(l), the
Trustee contends that advice does not excuse their missing the deadline for the filing
of exceptions to the Final Report.
But, in this Court, the untimely filing of a notice of appeal is a jurisdictional
defect. It can only be excused if the untimely filing is attributable to court
personnel.10
Accordingly, if our Court personnel caused a notice of appeal to be
untimely, the appeal would be accepted.
This rationale applies by analogy to a finding of excusable neglect,
attributable to court personnel, for the untimely filing of exceptions to a Master’s
report in the Court of Chancery, This is an independent reason to reverse the Court
of Chancery’s decision that the Beneficiaries’ notice of exceptions was untimely
filed. It provides an independent, alternative basis for a remand to consider the
merits of the Beneficiaries’ exceptions to the Spendthrift Ruling.11
8 Appellee’s Answering Br. at 12 n.7.
9 ln fairness to the Court of Chancery and the other party, the Beneficiaries should have attached
an affidavit supporting this assertion and identifying when and with whom this conversation with
the Register in Chancery occurred.
10 Bey v. State, 402 A.2d 362 (1979).
11 See Brennan v. Brennan, 901 A.2d 119 (Del. 2006) (TABLE) (reversing decision below where
ll
Conclusion
The Court of Chancery erred by failing to address the Beneficiaries’ two
meritorious arguments that any untimeliness was the result of excusable neglect:
first, the course of conduct by the Master and the parties reasonably led them to
believe the case was no longer expedited; and, second, that Court of Chancery
personnel contributed to their untimely filing.
This matter is remanded to the Court of Chancery to consider the merits of the
Beneficiaries’ exceptions to the Spendthrift Ruling. Jurisdiction is retained to
consider that decision on the exceptions and the other remaining issues on appeal,
following the return from remand. We impose no specific time period for the Court
of Chancery to act, recognizing that this matter involves issues important to the
parties, is no longer expedited, and that briefing before the Court of Chancery should
occur before its ruling, and trusting the Court of Chancery to address the case with
its usual concern for promptness
trial court did not determine whether there had been excusable neglect).
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