Graham v. Graham ( 2021 )

IN THE SUPREME COURT OF THE STATE OF DELAWARE
SARAH R. GRAHAM, §
§ No. 86, 2020
Plaintiff Below, §
Appellant, § Court Below—Court of
§ Chancery of the State of
v. § Delaware
§
DAVID C. GRAHAM, § C.A. No. 2018-0084
§
Defendant Below, Appellee. §
Submitted: January 8, 2021
Decided: March 5, 2021
Before SEITZ, Chief Justice; VALIHURA and MONTGOMERY-REEVES,
Justices.
ORDER
After consideration of the parties’ briefs and the record on appeal, it appears
to the Court that:
(1) The pro se appellant, Sarah Graham, appeals from a decision of the
Court of Chancery that, among other things, denied Sarah’s1 exceptions to a trust
accounting. The appellee, David Graham, is Sarah’s father and is the trustee of a
trust created by his deceased wife, Sarah’s mother. After careful review of the
parties’ briefs and the record on appeal, we affirm.
1
For clarity, we use first names to refer to the individuals discussed in this dispute between family
members. We intend no disrespect.
Factual Background
(2) Sarah’s mother, Helen F. Graham, was diagnosed with cancer in
September 1999 and died on December 31, 1999. Two draft trust agreements were
prepared for Helen before her death, but she never executed either document. 2 The
terms of the two draft agreements were largely the same. Both documents named
David as the initial successor trustee.3 Both documents provided that, if David
survived Helen, for David’s lifetime the trustee would pay to David “the entire net
income of the Trust Estate” and “so much of the principal of the Trust Estate as the
Trustee, in his sole discretion, shall deem necessary for the health, education,
support, or maintenance of [David].”4 The documents differed in two respects. First,
the earlier draft provided that Sarah and her sister (or the survivor of them), both of
whom were young adults at the time of Helen’s death, would succeed David as
trustee;5 the later draft provided that C. Michael Cawley, III, would succeed David
as trustee.6 Second, the later draft provided David with a power of appointment that
would allow him, upon his death, to appoint the entire balance of the trust estate to
Helen’s issue and their spouses, in such manner and such amounts, and on such
terms, as David determined.7 To the extent that David did not exercise the power of
2
The documents appear in the Appendix to the Answering Brief at B-22-32; B33-43.
3
Id. at B-29; B-41.
4
Id. at B-23; B-34.
5
Id. at B-29.
6
Id. at B-41.
7
Id. at B-34.
2
appointment, the document directed the trustee to divide the balance of the trust
estate per stirpes upon David’s death. The earlier draft did not include the power of
appointment and directed the trustee to divide the balance of the trust estate per
stirpes upon David’s death.
(3) On February 7, 2018, Sarah filed a petition in the Court of Chancery in
which she sought a trust accounting and David’s removal as trustee. The petition
acknowledged the existence of both draft trust agreements and alleged that Helen
had accepted the later draft under Delaware’s oral trust laws.8 It also alleged that, if
David were removed as trustee, Cawley would become the trustee, as provided in
the later draft trust agreement. Although David initially disputed the existence of a
trust, he later conceded that a trust existed under the terms of the later draft
agreement and agreed to provide an accounting.9
8
Title 12, Section 3545 of the Delaware Code—which became effective January 1, 2001, after
Helen’s death—imposed statutory limitations on the oral creation, modification, or revocation of
a trust.
9
In light of David’s concession, the Court of Chancery focused its analysis on the terms of the
later draft. To the extent that Sarah argues on appeal that the court should have applied the terms
of the earlier draft, we find no reversible error. Sarah’s petition asserted that Helen accepted the
later draft under the oral trust laws, and David conceded that a trust existed under the terms of the
later draft. Moreover, the provisions governing income and principal distributions during David’s
lifetime were the same in both drafts, and the differing provisions identifying the trustees to
succeed David are not at issue because of the trial court’s determination that David would not be
removed as trustee.
3
The First Accounting
(4) On April 29, 2019, David filed an accounting covering the period from
the initial funding of the trust through December 31, 2018, and moved for entry of
judgment in his favor. Sarah took exception to the accounting and opposed the
motion. On September 19, 2019, the Court of Chancery issued a letter decision that
denied David’s motion for entry of judgment in his favor and ordered him to
complete a supplemental accounting.10
(5) In the September 2019 decision, the Court of Chancery found that Sarah
was a taker in default of David’s exercise of the power of appointment set forth in
the trust instrument. It therefore held that she had standing to compel an accounting
and to challenge David’s performance of his duties as trustee. The Court of
Chancery then reviewed Sarah’s exceptions to the accounting. First, Sarah
challenged a $100,000 distribution made to David on June 3, 2009 and a $100,000
distribution made to David on March 1, 2010. The court determined that David had
not sufficiently accounted for those distributions and ordered him to provide a
supplemental accounting. Sarah also disputed hundreds of thousands of dollars of
gifts that David claimed to have given to Sarah and her sister. The court determined
that those gifts were not distributed from the trust and therefore concluded that
Sarah’s arguments concerning those gifts were not relevant to the issue of whether
10
Graham v. Graham, 2018-0084-MTZ, Docket Entry No. 73 (Del. Ch. Sept. 19, 2019).
4
David breached his duties as trustee. Finally, the court held that David owed Sarah
a duty to inform her that she was a beneficiary of the trust and that he breached that
duty by not telling her about the trust from the time of the trust’s creation in 1999
until October 2017. The court stated that it would impose a surcharge against David,
in an amount to be determined after the completion of the supplemental accounting.
The Supplemental Accounting
(6) David filed a supplemental accounting on October 18, 2019; Sarah then
filed exceptions. In a letter decision issued on January 30, 2020,11 the Court of
Chancery determined that the supplemental accounting satisfied David’s duty to
account for the two $100,000 distributions. Specifically, the court found that
construction invoices and QuickBooks records showed that David used the
distributions to pay for construction on his primary residence. The court determined
that the trust gave David broad, sole discretion to expend principal for his health,
education, support, or maintenance, and that David acted within that discretion when
distributing the $200,000 for the construction of a home.
(7) With respect to attorneys’ fees, the court held that David was entitled
to have the trust pay the reasonable fees he incurred in the litigation. But the court
concluded that, in light of its determination that the first accounting was insufficient
to demonstrate the propriety of the $200,000 distributions, David himself was
11
Graham v. Graham, 2018-0084-MTZ, Docket Entry No. 78 (Del. Ch. Jan. 30, 2020).
5
required to bear the fees incurred for preparing and submitting the supplemental
accounting. The court also held that the trust would reimburse Sarah’s costs in the
litigation, which benefited the trust by causing a complete accounting.
(8) Next, the court addressed the remedy for David’s breach of his duty to
inform Sarah of the existence of the trust. The court stated that “[w]hile Sarah has
no current right to trust funds (or future right in the absence of an exercise of the
power of appointment in her favor or its default), her right to be informed has its
own significance.”12 The court found that Sarah “suffered no tangible harm” from
the David’s failure to inform her of the trust; it therefore imposed a surcharge on
David of $500 per year for each year from 1999 through 2017, ordering David to
pay Sarah those funds from his own sources and not the trust.13
(9) Finally, the court denied Sarah’s request to remove David as trustee.
The court concluded that, although the initial accounting was insufficient and he
breached his duty to inform, he had guarded the trust corpus and made distributions
within the bounds of his discretion under the trust. The court therefore found that
removal was not necessary to secure the trust against loss or misapplication. 14
12
Id. at 8-9.
13
Id. at 9.
14
Id. at 10 (quoting Massey v. Stout, 1871 WL 2090, at *4 (Del. Ch. Sept. 1, 1871) (“The Court
of Chancery has exercised its power for the removal of trustees appointed by will or deed very
sparingly. The principle maintained is, that there must be a clear necessity for its interference, in
order to secure the trust fund against loss or misapplication.”)). See also McNeil v. McNeil, 798
A.2d 503, 513 (Del. 2002) (“The Court of Chancery has the power to remove a trustee as ancillary
to its duty to see that the trust is administered properly. While that authority should be exercised
6
Issues Raised on Appeal
(10) Sarah has appealed to this court. On appeal, she argues that the Court
of Chancery erred by (i) accepting the accounting based on insufficient evidence;
(ii) imposing an insufficient remedy for David’s failure to inform Sarah of the
existence of the trust; (iii) determining that David did not otherwise breach his duties
as trustee; and (iv) holding that David’s attorneys’ fees, other than those incurred in
preparing the supplemental accounting, could be paid by the trust. We conclude that
none of Sarah’s arguments warrants reversal.
(11) Sarah argues that David provided insufficient documentation to support
the accounting. David was unable to obtain original documents, such as bank
statements, to correspond to every transaction over a twenty-year period. Based on
his presentation of a combination of available statements, QuickBooks records,
invoices, and other information, however, the Court of Chancery concluded that he
had satisfied his burden of proving that the distributions—including the disputed
$200,000 construction distributions—were made for David’s health, education,
support, or maintenance as the lifetime beneficiary of the trust. In the circumstances
of this case, we find no basis for reversal of the Court of Chancery’s conclusions.
sparingly, the court enjoys the discretion to remove a trustee who fails to perform his duties
through more than mere negligence.” (internal quotations and citation omitted)).
7
(12) Sarah asserts that the Court of Chancery imposed an insufficient
remedy for David’s failure to inform Sarah of the existence of the trust.15 She
contends that she and her children lived in an uninhabitable house and endured other
negative circumstances as a result of her unawareness of the trust. The Court of
Chancery has broad discretion to determine the appropriate remedy for a breach of
a trustee’s duties.16 Sarah had no entitlement to any distributions from the trust
during David’s lifetime. Thus, we agree with the Court of Chancery’s conclusion
that she suffered no tangible harm from being unaware of the existence of the trust,
and we find no abuse of discretion in the court’s award to Sarah of $500 for each
year that she remained unaware of the trust.17
(13) Sarah also contends that the Court of Chancery erroneously determined
that David did not otherwise breach his duties as trustee. Many of her arguments
relate to the failure to inform; because the Court of Chancery ruled in Sarah’s favor
on the duty to inform issue, those arguments provide no basis for reversal. Relying
15
David has not appealed the court’s holding that he had a duty to inform Sarah, a taker in default
of the exercise of the power of appointment with no current right to income or principal, of the
existence of the trust. For purposes of this appeal, we therefore assume, as the Court of Chancery
determined, that David owed and breached such a duty.
16
McNeil v. McNeil, 798 A.2d 503, 509 (Del. 2002).
17
Sarah’s challenges to various “gifts” that David claimed to have given her—such as rent-free
use of property that David owned—also do not warrant reversal. Our review of the accounting
confirms that, although David identified these gifts within the accounting paperwork in an attempt
to persuade the court of his generosity to Sarah over the years, the accounting does not reflect that
the gifts constituted disbursements from the trust or otherwise reduced the balance of the trust.
8
on McNeil v. McNeil,18 Sarah argues that David breached his obligation to consider
the interests of future generations when making distributions from the trust. McNeil
resolved claims brought by a current beneficiary of a trust19 and therefore is
distinguishable from the facts of this case, in which Sarah has no current right to
income or principal and David has broad discretion to use the income and principal
for his health, education, support, or maintenance during his lifetime. Sarah’s claim
that David wrongfully invested trust assets in a property that he owned jointly with
his current wife is inconsistent with the facts. The Court of Chancery found, based
upon review of the supplemental accounting, that David distributed funds from the
trust to himself, as permitted by the terms of the trust, and used them to pay for
construction of the home. The court’s conclusions are supported by the record.
(14) Finally, Sarah argues that the Court of Chancery erroneously allowed
David’s attorneys’ fees, other than those incurred in preparing the supplemental
accounting, to be paid by the trust. We review the Court of Chancery’s decision
regarding attorneys’ fees for abuse of discretion.20 Contrary to Sarah’s assertion,
David’s conduct as trustee did not rise to the “extreme” level that warranted fee-
shifting in Paradee v. Paradee.21 In that case, a trustee “repeatedly and consciously
18
798 A.2d 503 (Del. 2002).
19
Id. at 506.
20
In re Unfunded Ins. Trust Agreement of Capaldi, 870 A.2d 493, 496 (Del. 2005).
21
2010 WL 3959604 (Del. Ch. Oct. 5, 2010).
9
sought to harm [a current beneficiary’s] interests and serve her own” and took value
from the trust to which she had no entitlement, at the beneficiary’s expense.22 Here,
David made distributions that were within his discretion and appropriately managed
trust assets. We find no abuse of discretion in the fee award.
NOW, THEREFORE, IT IS ORDERED that the judgment of the Court of
Chancery is AFFIRMED.
BY THE COURT:
/s/ Collins J. Seitz, Jr.
Chief Justice
22
Id. at *16.
10