IMO: The Estate of Paulina duPont Dean

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IMO: )
THE ESTATE OF ) C.A. No. 7430-ML
PAULINA duPONT DEAN )
MASTER‟S REPORT
Date Submitted: November 12, 2013
Draft Report: February 28, 2014
Exceptions Submitted: May 22, 2014
Final Report: June 30, 2014
Carl D. Neff, Esquire, of FOX ROTHSCHILD LLP, Wilmington, Delaware; Attorney for
Petitioner.
James S. Green, Sr., Esquire and Jared T. Green, Esquire, of SEITZ VAN OGTROP &
GREEN, P.A., Wilmington, Delaware; Attorneys for Respondent.
LEGROW, Master
Two children of an elderly, wealthy woman are engaged in what threatens to be
only the opening act in a legal drama that may yet unfold between them. The questions
presented in this case are relatively simple: first, whether the respondent is entitled to an
accounting from the petitioner, who holds power of attorney for their mother, and second,
whether the attorney-in-fact is required to reimburse the respondent for expenses the
respondent incurred for his children‟s education. Overlaid on those discrete issues are a
complicated family history and the specter of looming disputes regarding transactions the
attorney-in-fact conducted on his mother‟s behalf.
For the reasons that follow, I conclude the respondent is entitled to a forensic
accounting of the transactions the attorney-in-fact conducted on his mother‟s behalf,
beginning on the date the power of attorney was executed. Nothing in the power of
attorney indicated its effectiveness would spring from a future event or contingency, and
the petitioner accepted his position as agent by exercising nearly complete control over
his mother‟s finances after the power of attorney was signed. I further conclude that the
respondent is entitled to reimbursement of educational expenses he incurred consistent
with his mother‟s past pattern of giving, which I attempt to define despite both parties‟
difficulty in articulating a coherent pattern to such reimbursement. What follows is my
post-trial final report.
1
BACKGROUND
These are the facts as I find them after trial. Although Paulina du Pont Dean
(“Paulina”) 1 and her estate are the subject of this case, she did not participate in this
action in any way. Now in her late eighties, Paulina was declared incompetent in 2009 2
and her son testified that her mental acumen has deteriorated steadily since that time.3
The parties to this action are Paulina‟s only two surviving children: William Kemble
Ketcham (“Kem”), who is the petitioner, and J.S. Dean Ketcham (“Dean”), who is the
respondent. Kem has three children, Paulina, Samuel, and Sara, and Dean has four
children, Jacob, Dougal, Reiver, and Idaho.
Kem and Dean are named in Paulina‟s will as the beneficiaries of her residuary
estate.4 Paulina resides in Tortola, BVI. In the late 1990s, Paulina opened two accounts
at Banco Popular in Tortola: an account ending in „919 (the “919 Account”) and an
account ending in „955 (the “955 Account”).5 Kem was a signatory on both accounts
from their creation.6 Paulina used the 955 Account to pay her own expenses, while Kem
used the 919 Account as a “holding account,” which he used to hold larger balances, pay
more significant expenses, fund various investments, and the like. The transactions in the
919 Account form much of the basis for the parties‟ dispute.
1
I use the parties‟ first names for the sake of clarity. No disrespect is intended.
2
Joint Trial Exhibit (hereinafter “JX”) 18.
3
In re Paulina du Pont Dean, C.A. No. 7430-ML (May 13, 2013) (TRIAL TRANSCRIPT)
(hereinafter “Tr.”) at 103-04.
4
Joint Stipulation and Pretrial Order (hereinafter “Pre-Trial Order”) ¶ 2(e).
5
Tr. at 6-7.
6
Id. at 7-8.
2
Although both Kem and Dean reside in the United States, Kem maintains – or
maintained for a period of time – several business operations in Tortola. Among those
businesses is Tortola Home, LLC (“THL”). THL is a now-defunct construction finance
company established in 2003.7 Some documents indicate Paulina “invested” at least $3
million in THL between 2003 and 2008.8 The nature of those investments is not clear.
Although Paulina‟s assistant identified Paulina as one of three “shareholders” of THL,
Kem testified that there were no shares issued in THL, that only he and Paulina had an
interest in the company, that THL “only had debt,” and that nearly all of the debt was
held by Paulina. 9 THL is no longer operating, but it continues to maintain a bank
account, and funds in that account are used to pay Paulina‟s regular living expenses.10
Kem‟s explanation of this process is inconsistent. Although he testified at trial that he
regularly transferred money from Paulina‟s 919 Account to THL‟s account for the
purpose of paying Paulina‟s regular expenses,11 when asked why Paulina‟s expenses were
paid from THL instead of directly from her own accounts, Kem explained “it would go
into the books as basically a reduction of the money that she had contributed.”12 In other
words, THL already owed substantial debt to Paulina, and THL paid Paulina‟s expenses
to reduce that debt, but received additional contributions from Paulina to fund the
payment of expenses. A post-trial affidavit submitted by Kem offered a different
7
JX 14.
8
Id.
9
Tr. at 77-78.
10
Id. at 76-77, 94-95.
11
Id. at 91-92
12
Id. at 94-95.
3
explanation of how Paulina‟s expenses were paid: Kem claimed $1.5 million transferred
from the 919 Account to the 955 Account was for payment of Paulina‟s monthly
expenses, including “payroll, utilities, travel expenses when she traveled, and a live-in
nurse.”13
On October 26, 2004, Paulina executed a durable power of attorney in Delaware,
naming Kem as her attorney-in-fact (the “Power of Attorney”).14 Kem received a copy of
the Power of Attorney shortly thereafter, but claims he did not act as Paulina‟s agent
under the Power of Attorney until she was declared incompetent in 2009. Kem testified
that he had “no reason to have – use a Power of Attorney” before 2009, and he
maintained the document in his safe from 2004 to 2009.15 After she signed the Power of
Attorney, Paulina continued to write and sign checks in her own name and signed her
own tax returns.16 Kem also conceded, however, that very little changed even after he
began “acting” as Paulina‟s attorney-in-fact, except the “four or five times” he signed tax
returns and change of address forms on her behalf “in the last couple years.”17 Kem‟s
control over Paulina‟s funds did not meaningfully change after the Power of Attorney
was executed in 2004, nor did it change after he acknowledges “acting” as Paulina‟s
Power of Attorney in 2009. Kem‟s authority under the Power of Attorney includes
nearly total control over Paulina‟s finances, and – particularly relevant to this case – the
13
Aff. of William Kemble Ketcham in support of Petitioner‟s Post-Trial Reply Br. (hereinafter
“Kem‟s Post-Trial Affidavit”) ¶ 1(j) and Ex. A. Dean‟s motion to strike this affidavit is
addressed below.
14
JX 12; Pre-Trial Order ¶ 2(f).
15
Tr. at 16-17.
16
Id. at 20.
17
Id. at 19-20.
4
power to make gifts out of Paulina‟s property and on her behalf “to one or more of [her]
issue of whatever degree, including gifts to [Kem], in a manner consistent with
[Paulina‟s] past pattern of giving, in [Kem‟s] sole and absolute discretion.”18
In 2008, if not before, Dean began raising questions about his mother‟s financial
affairs. When he was not satisfied with answers he received from Kem, Dean went
directly to his mother and obtained her written permission to receive information about
both the 919 Account and THL.19 Although Kem claims it is mere coincidence, Dean‟s
questions about Paulina‟s affairs were followed closely in time by Kem‟s declaration that
his role in Paulina‟s financial affairs had changed, and now was directed by the Power of
Attorney. The proximity of these events strikes me as unlikely to be coincidental: Dean
obtained Paulina‟s signature to access the 919 Account and THL‟s information on June 9,
2009,20 Paulina was examined by a neurologist on June 11, 2009,21 the neurologist issued
a letter on July 28, 2009, declaring Paulina “disabled and incapacitated to such an extent
that she is unable properly to manage her own financial affairs,”22 and Kem declared on
July 31, 2009 that his “role with regards to [Paulina‟s] financial affairs ha[d] changed …
[and was] now directed by the durable Power of Attorney and [the neurologist‟s]
diagnosis.”23
18
JX 2 at 3, ¶ 27.
19
JX 10; Tr. at 141-44.
20
Id.
21
See JX 18.
22
Id.
23
JX 28.
5
When Dean obtained access to Paulina‟s 919 Account, he noted a number of
transfers from the 919 Account to other Banco Popular accounts, including three
accounts ending in „928 (the “928 Account), „937 (the “937 Account”) and „946 (the
“946 Account”). Dean pressed Kem about those accounts, and understood from Kem‟s
explanation that the accounts belonged to Kem or his wife and were reimbursement for
Kem‟s children‟s educational expenses.24
The parties agree that Paulina‟s past pattern of giving included paying for her
grandchildren‟s educational expenses as a matter of course. They dispute – and struggle
to articulate a coherent position regarding – what that pattern precisely entailed. Paulina
gave her Delaware accountant, William Master, instructions to pay or reimburse bills
Dean or Kem submitted for her grandchildren‟s tuition expenses.25 Dean‟s practice was
to submit education-related bills to Mr. Master, and between 1987 and 2001, Mr. Master
paid on Paulina‟s behalf $527,333.14 toward Dean‟s children‟s education. 26 The bills
Dean submitted comprised invoices he received from the various educational institutions
his children attended. Kem, on the other hand, rarely submitted bills or reimbursement
requests to Mr. Master, and instead wrote checks directly from the 919 Account or
reimbursed himself from the 919 Account.27 Kem did not maintain any records of these
transactions.28 For one period between July 2004 and August 2006, Kem did submit bills
24
Tr. at 146-147.
25
Pre-Trial Order ¶ 2(h); Deposition of William H. Master, CPA (Dec. 11, 2012) (hereinafter
„Master Dep.”) at 9.
26
Pre-Trial Order ¶ 2(j).
27
Tr. at 67-68.
28
Id. at 69.
6
or reimbursement requests to Mr. Master. In that period, Mr. Master paid on Paulina‟s
behalf $146,961.84 toward Kem‟s children‟s education. 29 The bills Kem submitted to
Mr. Master included invoices from several different educational institutions. Those
invoices covered tuition, room and board, medical expenses, technology charges, social
activities, and campus store charges.30
In 2001 or 2002, Dean stopped requesting reimbursement or payment of his
children‟s educational expenses. He moved to Maine in that period, and Dean testified he
made an effort to “remov[e] myself from my former life.” 31 He concluded he could pay
his children‟s educational expenses without assistance, and did just that. 32 It was not
until 2010, when Dean realized Kem continued to receive reimbursement for his
children‟s education, which Dean concluded he should seek reimbursement for past
expenses because every dollar he did not seek in reimbursement was $0.50 that Kem
would receive when Paulina passed away.33
Dean therefore asked Kem, as Paulina‟s attorney-in-fact, to reimburse Dean for
educational expenses he incurred after 2001. Kem refused, citing Dean‟s failure to seek
reimbursement in a “timely” manner, and his failure to provide receipts and invoices for
the expenses listed. Kem asserted that reimbursement of under those circumstances
would be inconsistent with Mrs. Dean‟s past pattern of giving. Dean‟s request for
reimbursement was supported by a spreadsheet he obtained through the Quicken software
29
Pre-Trial Order at 2(i).
30
JX 8; Tr. at 72-73.
31
Tr. at 148.
32
Id. at 148.
33
Id. at 148-49; JX 21.
7
program Dean uses to track his finances. Dean regularly enters his financial information
into Quicken and assigns a category to all expenditures.34 The information is added to
Quicken contemporaneously, backed by Dean‟s bank statements and cancelled checks,
and used to “reconcile” Dean‟s records with his bank‟s records. 35 Dean seeks
reimbursement for expenses he categorized as “education” between September 1, 2001
and March 23, 2011, and offers three alternate sums to which he may be entitled. Dean
contends he is entitled to $651,309.72 if the Court broadly defines Paulina‟s past pattern
of giving to include anything the parties designate as educational expenses, including
travel expenses, computers, licensing fees, and similar items. 36 Alternatively, if I
conclude the scope of Paulina‟s gifting pattern is more narrow, Dean contends he
expended $551,813.73 in tuition, room, and board during the relevant period, or
$421,127.76 if Paulina‟s pattern is limited to payments directly to educational
institutions.37
When the parties could not resolve their dispute regarding reimbursement of
Dean‟s children‟s educational expenses, Kem filed a petition under 10 Del. C. § 6504,
asking this Court to provide instructions regarding reimbursement of the parties‟
educational expenses. Dean then filed a counterclaim seeking, inter alia, an accounting
of all transactions and activities Kem has engaged in as Paulina‟s agent under the Power
34
Tr. at 151-52.
35
Id. at 151-52, 156.
36
JX 5.
37
JX 6, J.S. Dean Ketcham‟s Opening Post-Trial Br. (hereinafter “Dean Opening Br.”) at 7-8, 24
8
of Attorney, and an accounting of all funds Kem paid to or for the benefit of himself or
his family.38 The parties engaged in discovery and this case was tried on May 13, 2013.
ANALYSIS
There presently are two primary disputes between the parties, although the post-
trial briefing foreshadows many other disputes that may arise, depending in part on how
these disputes are resolved. At present, I need only determine (1) whether Kem is
required to account for his transactions on behalf of Paulina and, if so, the appropriate
period for such accounting, and (2) the extent to which Dean is entitled to reimbursement
from Paulina‟s estate for Dean‟s children‟s educational expenses. I also address in this
report ancillary issues related to the parties‟ attorneys‟ fees and three outstanding motions
to strike.
I. KEM IS REQUIRED TO ACCOUNT FOR HIS TRANSACTIONS
ON PAULINA’S BEHALF FROM OCTOBER 26, 2004 THROUGH
THE PRESENT.
Dean argues he is entitled to seek an accounting from Kem for all the transactions
Kem conducted on Paulina‟s behalf after the Power of Attorney was executed in 2004.
Kem argues any accounting this Court orders should begin no earlier than the date
Paulina was declared incompetent, which is the date Kem contends he began acting as
Paulina‟s agent. Kem further argues that no accounting should be ordered by this Court
because he already has prepared an “accounting” identifying all transfers into and out of
Paulina‟s Banco Popular accounts in what Kem contends is the relevant period. Dean
38
JX 24 at 10.
9
dismisses these “accountings” as nearly useless and argues that a forensic accounting is
warranted under the circumstances.
As an initial matter, the parties agree that Dean has standing to seek an accounting
from his mother‟s attorney-in-fact. 39 Under Delaware‟s Durable Personal Powers of
Attorney Act (the “Act”), this Court may compel an agent to “account for transactions
conducted on the principal‟s behalf” under a power of attorney. 40 Kem contends,
however, that he did not conduct any transactions as Paulina‟s agent until she was
declared incompetent on July 28, 2009.
Kem contends that it was his “understanding” that the Power of Attorney was not
effective unless and until Paulina became incompetent. 41 The Power of Attorney,
however, contains no such springing effective date.42 Under the Act, a personal power of
attorney is effective when executed unless the power of attorney specifically provides
that it becomes effective at a future date or upon a future event or contingency. 43 Kem‟s
understanding of the Power of Attorney cannot vary the terms of the document itself.
There is nothing, other than Kem‟s self-serving testimony, to support a conclusion that
Paulina intended the Power of Attorney to be contingent on her incapacity. Although
Kem points out that Paulina continued to sign documents and exercise some control over
her finances after she executed the Power of Attorney, that argument is a non sequitur. A
39
See 12 Del. C. § 49A-116(a)(3), (b)(2); Post-Trial Opening Br. of William Kemble Ketcham
(hereinafter “Kem Opening Br.”) at 17.
40
12 Del. C. § 49A-116(a)(3).
41
Tr. at 15-17.
42
See JX 12.
43
12 Del. C. § 49A-109(a).
10
principal does not divest herself of authority to manage her affairs simply by granting
another the authority also to act on her behalf. The Power of Attorney does not strip
Paulina of powers, but instead grants Kem certain powers and attendant responsibilities.
Although the doctor‟s declaration of Paulina‟s incompetence may have relevance to
Paulina‟s continued ability to manage her own affairs, it is not the source from which
Kem‟s authority as agent springs.
Kem argues, however, that he did not accept his role as Paulina‟s agent until she
was declared incompetent, and therefore he cannot be required to account for transactions
he undertook on her behalf before that time. 44 The Act provides:
Except as otherwise provided in the personal power of attorney, a person
accepts appointment as an agent under a personal power of attorney by
signing the agent's certification (pursuant to § 49A-105(c) of this title) or by
exercising authority or performing duties as an agent or by any other
assertion or conduct indicating acceptance.45
The Power of Attorney was executed before Section 49A-105(c) was adopted, so Kem
did not execute an agent‟s certification under that Section. He concedes, however, that
he received a copy of the Power of Attorney shortly after its execution and maintained a
copy in his safe from 2004 to 2009.
44
Dean argued that, in response to an earlier motion to compel, I held that Kem was required to
account for the period of October 26, 2004 to July 28, 2009, and that the ruling was now law of
the case. See J.S. Dean Ketcham‟s Post-Trial Reply Br. (hereinafter “Dean Reply Br.”) at 9-11.
That argument misconstrues my earlier ruling. In granting Dean‟s motion to compel, I held that
the evidence sought, which included information about Kem‟s transactions on Paulina‟s behalf
between 2004 and 2009, was reasonably calculated to lead to the discovery of admissible
evidence regarding whether Kem was acting as Paulina‟s agent during that period. In re Paulina
du Pont Dean, C.A. No. 7430-ML (May 1, 2013) (TRANSCRIPT) at 28-29. That ruling did not
constitute a determination that Kem was required to account for his activities as agent during that
period. Kem‟s motion to strike this portion of Dean‟s reply brief should be denied as moot,
however, because I have not rested my conclusion on Dean‟s law of the case argument.
45
12 Del. C. § 49A-113.
11
According to Kem, there was “no reason to … use [the] Power of Attorney” until
2009.46 He claims the need arose after Paulina was declared incompetent in 2009, but
concedes that, after 2009, very little changed in his control over Paulina‟s affairs, except
that he executed a few legal documents on her behalf. Indeed, from the time Paulina
gave Kem access to her Banco Popular accounts, Kem has wielded almost unfettered
control over Paulina‟s financial affairs. To an outside observer, Kem‟s access to
Paulina‟s accounts, and his frequent use of those accounts to transact business on her
behalf, is consistent with someone “exercising authority or performing duties as an
agent.” That Kem‟s position as signatory on the Banco Popular accounts allowed him to
assert authority over Paulina‟s financial affairs without showing the Power of Attorney to
anyone does not change the fact that Paulina designated him as her agent – and fiduciary
– in 2004, without any indication that the designation was contingent on a future event,
and Kem continued to exercise authority over her affairs after that date consistent with
acts of an attorney-in-fact. In short, the fact that Kem did not “need” the Power of
Attorney until Dean began asking questions and obtaining access to Paulina‟s financial
records does not mean that Kem did not accept the appointment by regularly acting on
Paulina‟s behalf after she executed the Power of Attorney.
Because Kem became Paulina‟s agent upon execution of the Power of Attorney,
he is obligated to account for transactions conducted on Paulina‟s behalf beginning on
46
Tr. at 17.
12
October 26, 2004.47 Kem asserts he already has provided bank statements for the 919
Account and the 955 Account for July 28, 2009 through trial, and has responded to
Dean‟s questions in discovery and at trial about various transactions. Kem also prepared
two documents summarizing the transactions in those accounts.48 In connection with his
post-trial reply brief, Kem also submitted an affidavit and spreadsheet “detailing the
purpose of transactions constituting approximately $28 million which flowed into or out
of the 919 Account from October 26, 2004 to July 28, 2009.”49
As a preliminary issue, Dean filed a motion to strike Kem‟s affidavit as an
improper attempt to supplement the record after trial. Dean is correct that some, though
not all, of the information contained in Kem‟s affidavit and accompanying exhibits
amounts to new evidence that was not provided in discovery or introduced at trial.
Although Kem argues that this Court should admit the new evidence because Kem
satisfies the factors typically considered by Delaware courts when a party moves to
reopen the trial record, Kem has filed no such motion, and therefore cannot seek that
relief. Motions to strike are not favored in this Court, however, and a more limited
47
In his post-trial reply brief, Kem argued that “Dean‟s request for an [a]ccounting [was] barred
by the statute of limitations and the equitable doctrine of laches,” and that any accounting should
be limited to a period no more than three years before this action was filed. See Post-Trial Reply
Br. of Petitioner William Kemble Ketcham (hereinafter “Kem Reply Br.”) at 11. Dean moved to
strike this portion of Kem‟s brief because Kem did not raise laches or the statute of limitations as
affirmative defenses to Dean‟s counterclaim seeking an accounting. In response to the motion to
strike and at argument, Kem‟s counsel contended that the laches argument was limited to Dean‟s
effort to seek monetary damages for Kem‟s alleged breach of his fiduciary duties as Paulina‟s
agent. See n. 54, supra. Although the post-trial reply brief explicitly states that the laches
defense was directed to Dean‟s request for an accounting, I recommend that the Court deny the
motion to strike because Kem has withdrawn his timeliness defense to the accounting request.
48
JX 19-20.
49
Kem‟s Post-Trial Affidavit ¶ 1 and Ex. A.
13
remedy is appropriate in this case. I recommend that the Court deny the motion to strike,
but refuse to consider the new evidence in Kem‟s affidavit as support for any of Kem‟s
post-trial arguments. In that way, the affidavit will remain part of the record should Dean
need to refer to it in later proceedings, but Kem will not be able to rely on evidence that
he introduced after trial and without a proper motion to reopen the record.
Turning then to the issue at hand, neither the assembled bank statements nor the
accompanying documents prepared by Kem, amount to a proper accounting under the
Act. The documents Kem prepared, and the bank statements on which they were based,
do not even cover the full period of July 28, 2009 through the present,50 and do not cover
the period back to October 2004. For transfers out of those accounts, of which there were
many, the summaries and the bank statements do no more than identify the other
accounts to which funds were transferred, without identifying the purpose of the transfer.
For example, Kem‟s summary of the 919 Account identifies $715,000.20 in transfers to
THL between 2009 and 2011, with no further explanation for the transfer. Although
Kem testified at trial that THL paid Paulina‟s expenses in order to reduce the amount
owed to her, he later claimed that the transfers from the 919 Account to THL were to pay
for Paulina‟s expenses, two contentions that are difficult to reconcile. 51 Further
50
JX 19, which summarizes transactions for the 955 Account, begins on November 6, 2009 and
concludes on January 9, 2012. JX 20, which summarizes transactions for the 919 Account,
begins on January 8, 2010 and concludes on December 28, 2011.
51
Compare Tr. at 95 (Kem testifying THL‟s payment of Paulina‟s expenses “would go in the
books as basically a reduction of the money she had contributed”) with Kem Post-Trial Aff. ¶ 7
(explaining that “money would flow between the „919 account and the THL account to cover
Mrs. Dean‟s living expenses” to relieve Mrs. Dean of the obligation of writing her own checks,
but “at no point did these transactions intend [sic] to reduce the amount owed by THL to Mrs.
Dean.”).
14
confusing matters, Kem‟s post-trial affidavit asserts that $1.5 million in transfers from the
919 Account to the 955 Account between 2004 and 2009 were for payment of Paulina‟s
expenses, including expenses he previously testified were paid through THL.52 Kem‟s
post-trial affidavit also states that Paulina initially invested $2.7 million in THL in
December 2004, but both the timing and amount of that figure contradict previous
representations to Dean and an analysis of Paulina‟s investment in THL prepared by an
accountant in 2012.53 The bank statements and summaries Kem prepared also identify
numerous transfers to Kem‟s personal accounts, with no further explanation for those
transfers and no documentary support.
None of this is intended to conclude that Kem misappropriated or mishandled
Paulina‟s funds. Although Dean‟s post-trial briefs repeatedly strayed into arguments
about whether Kem had acted in accordance with his fiduciary duties as Paulina‟s
agent,54 at argument counsel conceded that the only thing before the Court at this time is
whether Kem is required to account for the transactions he undertook on Paulina‟s behalf.
Although Dean may elect to challenge certain transactions in either a separate action or a
later iteration of this case, any such challenge is premature before an accounting is
52
Compare Tr. at 94-95 (Kem testifying THL paid Paulina‟s monthly expenses like utilities and
payroll) with Kem Post-Trial Aff. ¶ 1(j) (describing $1.5 million in transfers between Paulina‟s
accounts as monthly expenses of approximately $30,000 a month for, among other things,
payroll and utilities).
53
See JX 4 and Kem Post-Trial Aff. Ex. D p. 6-8.
54
See, e.g. Dean Opening Br. at 17-22. Among the issues raised for the first time in Dean‟s
opening post-trial brief was his contention that the initial funding of THL was improper and
should be reversed by this Court at this time. Kem contends the funding of THL is not properly
before the Court. I agree, and Dean‟s counsel seemed to concede as much at post-trial argument.
15
performed. The Act does not limit this Court‟s authority to order an accounting to cases
in which a breach of fiduciary duty has been established.55
Under the circumstances of this case, particularly the amount of money at issue,
the time frame involved, and the parties‟ continued disputes regarding Kem‟s actions
under the Power of Attorney, a formal accounting conducted by a third party is
appropriate, and I recommend that the Court enter an order providing for a forensic
accounting of the transactions at issue. At least initially, the cost of that accounting
should be borne by Paulina‟s estate, without prejudice to a later request to shift the costs
in the event Dean successfully challenges Kem‟s conduct as Paulina‟s attorney-in-fact.
The parties should attempt to select a mutually agreeable, independent accountant to
perform this function.
II. DEAN IS ENTITLED TO REIMBURSEMENT OF EDUCATIONAL
EXPENSES CONSISTENT WITH HIS MOTHER’S PAST PATTERN
OF GIVING.
The parties‟ other dispute centers on Paulina‟s practice of paying her
grandchildren‟s educational expenses, the limits – if any – to that practice, and the extent
to which Dean is entitled to reimbursement from Paulina‟s estate for educational
expenses he paid for his children. Ultimately, the parties ask this Court to define
Paulina‟s “past pattern of giving” as it relates to her grandchildren‟s education, a task
made more difficult by the fact that there is minimal evidence, whether direct or
otherwise, defining Paulina‟s pattern, largely because she provided very little guidance
regarding the parameters of this gifting and the parties have not followed a wholly
55
12 Del. C. § 49A-116(a)(3).
16
consistent practice in requesting reimbursement or payment. Any ex post definition this
Court can provide is little more than rough justice.56
Dean argues that Paulina never articulated any limits to her direction to her
accountant that he should pay her grandchildren‟s educational expenses at Dean‟s or
Kem‟s request, and that therefore there are no limits to Paulina‟s past pattern of giving.
In essence, Dean urges that he and Kem are entitled to reimbursement for any expenses
they classify as educational. Kem, on the other hand, argues that Dean‟s request for
reimbursement is not consistent with Paulina‟s past pattern of giving because (1) the
request is untimely, (2) Dean did not provide sufficient documentation to support his
request, and (3) Dean seeks reimbursement for expenses that are not strictly educational
expenses. Kem also argues that Dean waived his right to seek reimbursement between
2001 and 2009 by intentionally electing not to seek reimbursement during that period.
To the extent Kem criticizes Dean‟s reimbursement request as insufficiently
documented and untimely, those criticisms come with ill-grace given Kem‟s almost
complete failure to provide any documentation of the nature or timing of the educational
expenses he paid from Paulina‟s accounts for his own children. Other than the period
between 2004 and 2006 when he sought payment or reimbursement from Mr. Master,
Kem concedes he regularly paid his children‟s educational expenses directly from
56
“I give you my positions, Don‟t want no oppositions, It‟s rough justice, But you know I‟ll
never break your heart.” Mick Jagger and Keith Richards, Rough Justice, on A Bigger Bang
(Virgin 2005).
17
Paulina‟s account or by transferring money from Paulina‟s account to his own account,
and did not maintain any records regarding those payments.57
The parties agree that the unwavering practice, and the understanding in their
family, was that Paulina would fund her grandchildren‟s education.58 That understanding
is consistent with the instructions Paulina gave her accountant, Mr. Master. 59 Those
instructions never were withdrawn, and Paulina never questioned Kem‟s payments of his
children‟s educational expenses from her account. Dean contends the Court therefore can
conclude that Paulina intended to pay for all aspects of her grandchildren‟s education,
including application fees, travel expenses, licensure, off campus room and board, and
the like.
Although it is difficult to precisely define a pattern Paulina herself never
endeavored to check, I believe Paulina‟s past pattern of giving – defined mostly by the
parties‟ practices in seeking payment or reimbursement – was to pay expenses billed
directly by an educational institution. That conclusion has two redeeming qualities: it is
consistent with Dean‟s practice when he sought reimbursement from Mr. Master between
1987 and 2001, and it has the advantage of being easily verifiable and subject to less
guesswork and dispute. Consistent with Paulina‟s generous nature, however, and her
laissez faire attitude toward the payments, I believe that payment of all charges issued by
an educational institution or program is consistent with Paulina‟s past pattern, even if
those charges are not strictly tuition expenses. Therefore, and consistent with the type of
57
Tr. at 67-69.
58
Id. at 67, 135.
59
Pre-Trial Order ¶ 2(h).
18
expenses Kem submitted to Mr. Master between 2004 and 2006, charges for room and
board, books, activities, application fees, tutoring, and similar services should be paid or
reimbursed, provided they are billed by a educational institution or program. As long as
the program is educational, it makes no difference whether the institution was a trade
school or vocational program, a review course or tutoring service, or whether the student
obtained “credit” toward graduation, because Paulina never articulated any such limits.
Conversely, expenses for off-campus living expenses and for travel would not fall within
this pattern. Dean has not established that Paulina paid for those expenses in the past, or
that the parties understood her instructions to extend to those attenuated expenses. My
reasoning in this regard also turns in part on this category‟s susceptibility to further
disputes: if the parties are entitled to reimbursement for a living expenses “allowance”
they pay their children, it is safe to expect future disputes regarding the reasonableness of
the amounts provided, and charges that one party inflated the amount of the allowance to
improperly withdraw funds from Paulina‟s estate. In contrast, sums billed by an
educational institution or program are less prone to criticism.
Having endeavored to define Paulina‟s past pattern of giving, the question remains
whether Dean may seek reimbursement for such expenses from 2001 forward, despite
having intentionally chosen not to seek such reimbursement in the past. Kem contends
Dean waived his right to seek reimbursement between 2001 and 2009. Waiver is the
“voluntary and intentional relinquishment of a known right.” 60 To establish waiver, Kem
60
Aeroglobal Capital Mgmt. v. Cirrus Indus., Inc., 871 A.2d 428, 444 (Del. 2005) (quoting
Realty Growth Investors v. Council of Unit Owners, 453 A.2d 450, 456 (Del. 1982)).
19
must prove that Dean (1) knew all material facts relating to his right to reimbursement,
and (2) intended to relinquish such rights voluntarily.61 Waiver may be express, or may
be implied by conduct indicating an intent to abandon a known right, but either way the
waiver must be “unequivocal.” 62 Dean unquestionably was aware that he could seek
reimbursement for his children‟s educational expenses, as he did so consistently for a
period of fourteen years. When he stopped seeking payment or reimbursement in 2001,
he candidly testified that he did so intentionally in an effort to distance himself from his
past life and because he felt comfortable enough financially that he could pay the
expenses himself.63 If Paulina‟s willingness to reimburse her grandchildren‟s educational
expenses was a “right” subject to waiver, Dean‟s conscious decision and his testimony
would be sufficient to establish a waiver.
As Dean correctly points out, however, cases in this Court and other courts
addressing the doctrine of waiver consistently refer to the waiver of a “right,” as opposed
to a gift.64 In fact, the parties did not cite, and my independent research did not identify,
61
Prizm Grp., Inc. v. Anderson, 2010 WL 1850792, at *6 (Del. Ch. May 10, 2010).
62
King v. VeriFone Holdings, Inc., 994 A.2d 354, 361 n. 21 (Del. Ch. 2010); DiRienzo v. Steel
Partners Holdings L.P., 2009 WL 4652944, at *4 (Del. Ch. Dec. 8, 2009).
63
Tr. at 148.
64
See, e.g. Roam-Tel Partners v. AT&T Mobility Wireless Ops. Holdings, Inc., 2010 WL
5276991, at *9 (Del. Ch. Dec. 17, 2010) (“„Waiver is the voluntary and intentional
relinquishment of a known right‟ either conferred by statute or secured by contract”);
Commercial Metals Co. v. Pan America Trade and Inv. Corp., 163 A.2d 264, 268 (Del. 1960)
(“A wavier is an intentional relinquishment of a known right”). Although Kem identified cases
discussing waiver as applying to a “requirement or condition,” each such case addressed the
waiver of statutory or contractual rights. See, e.g. Bantum v. New Castle County, 21 A.3d 44, 51
(Del. 2011) (addressing waiver of statutory immunity); Pepsi-Cola Bottling Co. of Asbury Park
v. Pepsico, Inc., 297 A.2d 28, 33 (Del. 1972) (discussing waiver of contractual rights); Klein v.
Am. Luggage Works, 158 A.2d 814, 818 (Del. 1960) (finding no waiver of an alleged contractual
right). Kem also identified cases discussing waiver of a “privilege,” but the use of “privilege” in
20
any case in which a court imposed a waiver defense against the recipient of a gratuitous
gift, at least before the gift became a “right” the recipient was entitled to claim, such as in
the case of a bequest or inheritance. Although Kem points to a secondary source
describing waiver as “a voluntary and intentional relinquishment, surrender, or
abandonment of a known existing legal right, advantage, benefit, claim, or privilege,
which except for such waiver the party would have enjoyed,” 65 the same source later
identifies the existence of a right as an “essential element” to waiver, and clarifies that
“[b]oth waiver and estoppel imply that the subject matter thereof is some legal right
possessed at the time thereof by the person against whom it is asserted. Only a private
right or privilege may be waived. … [A] waiver implies and requires the existence of the
right in question at the time of the alleged waiver; there can be no waiver of a right before
it exists, before a person is in a position to assert it, or after it has been lost.”66 There is
no question that – had Paulina rescinded her offer to pay her grandchildren‟s educational
expenses, neither of her sons could have enforced her gratuitous offer as a contractual
right.
The conclusion that the doctrine of waiver does not apply in the case of an inter
vivos gift stands to reason: there is no “condition or requirement” – as the Delaware
cases sometimes describe the doctrine – or contractual or statutory right that Dean
those cases referred to constitutional or statutory privileges against, for example, self-
incrimination or disclosure of attorney-client communications, rather than a gratuitous privilege
conferred by a gift. See, e.g. Barber v. Page, 390 U.S. 719, 725 (1968) (analyzing waiver of
constitutional right of criminal defendant to confront witnesses against him); Tackett v. State
Farm Fire & Cas. Ins., 653 A.2d 254, 259 (Del. 1995) (discussing waiver of attorney-client
privilege).
65
31 C.J.S. Estoppel and Waiver § 85 (2014).
66
Id. § 96.
21
consciously chose not to enforce. Rather, he elected for a period of time not to accept his
mother‟s gift. Because there is no evidence that Paulina ever rescinded her offer, and no
evidence that she conditioned her gift on a “timely” submission of reimbursement
requests, Dean is entitled to the reimbursement he now seeks.
III. AT THE PRESENT TIME, KEM IS ENTITLED TO PAY HIS
ATTORNEYS’ FEES FROM PAULINA’S ESTATE, SUBJECT TO
DEAN’S RIGHT TO SEEK TO RECOUP THOSE FUNDS FOR THE
ESTATE IN A LATER PROCEEDING
The parties also dispute whether Kem is entitled to pay his attorneys‟ fees from
Paulina‟s estate, and whether Kem should be required to pay Dean‟s attorneys‟ fees
himself, or through Paulina‟s estate. As to Kem‟s fees, an agent is entitled to
reimbursement of expenses “reasonably incurred on behalf of the principal.” 67 The fees
and expenses related to this action fall into two categories: (1) those related to the
question of Dean‟s right to reimbursement for educational expenses, and (2) those related
to Dean‟s request for an accounting. Kem‟s decision to file this action to seek
instructions from the Court regarding payment of educational expenses was reasonable in
light of Dean‟s delay in seeking reimbursement and the uncertainty surrounding Paulina‟s
pattern of giving. Although Kem had an interest in the outcome given his position as a
beneficiary of Paulina‟s estate upon her death, his decision to file this action was not
unreasonable, and in fact benefited Paulina‟s estate because it provided clarity regarding
the proper scope of Paulina‟s gifting related to her grandchildren‟s education. Kem also
paid from the estate his attorneys‟ fees relating to his defense of Dean‟s request for an
67
12 Del. C. § 49A-112(a).
22
accounting. At this point, the record is not sufficiently developed for the Court to
determine whether Kem should reimburse the estate for his attorneys‟ fees associated
with this portion of the proceeding. If Dean ultimately pursues claims against Kem
arising from transactions covered by the accounting, Dean may argue at that time that
Kem should reimburse the estate for legal expenses.
Similarly, Dean‟s argument that Kem engaged in bad faith conduct sufficient to
justify deviating from the American Rule depends almost exclusively on Dean‟s
argument that Kem breached his fiduciary duties to Paulina. 68 That issue will be
determined at another time and on a more complete record. Similarly, Dean‟s argument
that he conferred a benefit on the estate and should have a portion of his fees and costs
paid by the estate is premature, and will be addressed if Dean ultimately succeeds in
obtaining a judgment against Kem.
68
See Dean Reply Br. at 13.
23
CONCLUSION
For the foregoing reasons, I recommend that the Court enter an order requiring
Kem to submit to a forensic accounting for all transactions Kem conducted on Paulina‟s
behalf after the Power of Attorney was executed. I further recommend that the Court
instruct Kem to reimburse Dean, or pay on Dean‟s behalf, educational expenses incurred
after 2001, to the extent such expenses are consistent with the pattern of giving discussed
above. This is my final report and exceptions may be taken in accordance with Rule 144.
Respectfully submitted,
/s/ Abigail M. LeGrow
Master in Chancery
24