Delaware Supreme Court Addresses Appropriate Remedy for Breach of Fiduciary Duty

Delaware Supreme Court Addresses Appropriate Remedy for Breach of Fiduciary Duty

Lingo v. Lingo, No. 713, 2009 (Del. Supr., June 10, 2010), read opinion here. The factual background of this Delaware Supreme Court decision involves a faithless fiduciary who abused the Power of Attorney given to her, but the part of the opinion that will be of interest for readers of this blog is the Court's more wide-ranging discussion of the appropriate remedies for a breach of fiduciary duty.

Issue on Appeal

The standard of review applicable to equitable remedies awarded by the Court of Chancery is de novo and the issue on appeal in this case is whether the remedy imposed by the Court of Chancery was appropriate for the breach of fiduciary duty involved. The Supreme Court affirmed the trial court's choice of remedies (which was based on an affirmation of a decision by the Master in Chancery.)

Standard of Review

Delaware's High Court recited the applicable standard of review as follows:

"Whether or not an equitable remedy exists or is applied using the correct standards is an issue of law and reviewed de novo. Determinations of fact and application of those facts to the correct legal standards, however, are reviewed for an abuse of discretion." (See footnote 2),

Factual Background

This dispute has its origin in an estate plan that left property in part to a Trust and in part to the surviving widow who had two children, Dinah and Archie. The original plan envisioned the two children inheriting their mother's estate upon her death. At some point after the father's death, Dinah moved in with her widowed mother, Eleanor, who later revised her will and disinheritied Archie. Eleanor also gave Dinah a Power of Attorney which Dinah abused in order to transfer, illicitly, large amounts of money and property to herself. The trial court ordered Dinah to return the property she converted and ordered an accounting as well as voiding the transactions entered into by the faithless daughter.

Arguments

Archie suggests that a fairer result would be to require Dinah to return all misappropriated funds to the Trust and not to Eleanor. Archie further contends that in addition to restitution, the Vice Chancellor should have imposed equitable forfeiture and decreased Dinah's inheritance by the amount she misappropriated. As the sole beneficiary under the revised Will, Dinah did not object to the remedy.

Analysis

The Court recited the well-established duty of one who holds a Power of Attorney as follows:

A person who signs a power of attorney creates a common law fiduciary relationship. To honor that relationship, the attorney-in-fact must observe the duty of loyalty by acting in the best interest of the principal. Failure to do so may result in a breach of trust.

 The Court explained the goal when attempting to remedy the breach of this duty:

 Generally, should a breach occur, it should be remedied with two objectives in mind: (1) to render whole both the beneficiary and the estate; and, (2) to prevent the trustee from profitting from his wrongful conduct.

Restitution was appropriate in this case for the following reasons explained by the Court:

Delaware courts have long recognized that restitution is the appropriate remedy to meet those objectives and to redress a breach of fiduciary duty where a party is unjustly enriched at the expense of another. Apart from reimbursement, restitution also serves to deprive the wrongdoer of any profits made as a result of his or her conscious, wrongful conduct. 

Equitable Forfeiture

The Court was not convinced that the additional remedy of equitable forfeiture was necessary or appropriate in this case. The Court reasoned that:

Despite the well established remedies of restitution to cure the unfaithful conduct  that occurred here, Archie contends that the Vice Chancellor erroneously failed to modify the Master's ruling and craft a new remedy that would require Dinah to forfeit part of her inheritance. Because equitable forfeiture may disincentivize the disloyal conduct of a fiduciary by preventing him from becoming the ultimate beneficiary of the fruits of his transgressions, under different circumstances Archie's requested remedy might have merit. Here, however, no Delaware precedent exists for using such an extraordinary remedy to rectify the bad behavior of an attorney-in-fact who is also the sole beneficiary under a will. Recognizing the lack of Delaware precedent, Archie claims that persuasive authority exists elsewhere that justifies the relief he seeks [but which the Court declined to follow.](emphasis added).

Moreover, the Court added that:

Because restitution and disgorgement adequately remedy Dinah's faithless conduct without disturbing Eleanor's testamentary intent, the Vice Chancellor did not err by refusing to impose equitable forfeiture. Accordingly, we uphold the remedy crafted by the Master and affirmed by the Vice Chancellor.

Read more Delaware business litigation case summaries and commentary on Delaware Corporate and Commercial Litigation Blog, a blog hosted by Francis G.X. Pileggi, of Fox Rothschild LLP.