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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE W. CHARLES PARADEE, III, as Successor Trustee of the W. Charles Paradee, Sr. Irrevocable Trust Under Agreement Dated December 28, 1989, And As An Individual, Petitioner, v. ELEANOR CLEMENT PARADEE, as an Individual and as Successor Trustee of the W. Charles Paradee, Sr. Irrevocable Trust Under Agreement Dated December 28, 1989, and WILLIAM J. SMITH, SR. as Successor Trustee of the W. Charles Paradee, Sr. Irrevocable Trust Under Agreement Dated December 28, 1989, Respondents. ) ) ) ) ) ) ) ) ) C.A. No. 4988-VCL ) ) ) ) ) ) ) ) ) ) )

MEMORANDUM OPINION Submitted: August 6, 2010 Decided: October 5, 2010

Beth B. Miller, MORRIS JAMES LLP, Dover, Delaware; Attorneys for Petitioner. Daniel F. Wolcott, Jr., P. Kristen Bennett, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Attorneys for Respondents.

LASTER, Vice Chancellor.

This post-trial decision resolves a dispute over the handling of a trust. Judgment is entered in favor of the petitioners and against the respondents. I. FACTUAL BACKGROUND

The following facts are found after trial. First names are used for clarity and without implying familiarity or intending disrespect. A. The Paradee Family William Charles Paradee, Sr. ("Charles Sr."), and his first wife had two children: W. Charles Paradee, Jr. ("Charles Jr."), and Eleanor Lee Cain. Petitioner W. Charles Paradee, III ("Trey"), is the son of Charles Jr. Charles Sr.'s first wife passed away in 1977. In 1978, Charles Sr. wed respondent Eleanor Clement Paradee ("Eleanor"). Charles Sr. was 71; Eleanor was 54. The marriage strained relationships within the Paradee family, and Charles Jr. reacted vehemently. He resented the relatively rapid remarriage, chafed at the age differential, and bridled at Eleanor's strong personality. Soon after the ceremony, Charles Jr. presented Eleanor with a post-nuptial agreement, which she refused to sign. Their relationship fractured, bitterness ensued, and they came to dislike each other intensely. The conflict between Charles Jr. and Eleanor spread to Paradee Oil Company, the then-prospering family business. Ultimately, father and son parted ways. In 1985, they split off a relatively small portion of the operations for Charles Jr. to run as a separate company, called Paradee Gas Company.

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Both men felt ill-used. Charles Jr. believed Eleanor turned his father against him, and he felt slighted by the small portion of the company he received. Charles Sr. believed his son had betrayed him, and he felt Charles Jr. received far more than he deserved. B. Charles Sr. Creates The Trust. Although Charles Sr. and Charles Jr. were estranged, Charles Sr. and Trey maintained a close and loving relationship. For example, in a heartfelt note written in November 1988, Charles Sr. expressed his love for his grandson, his pride in watching him grow up, and described him as "the one to keep the family tree going." In December 1989, Charles Sr. created the W. Charles Paradee, Sr. Irrevocable Trust Under Agreement Dated December 28, 1989 (the "Trust"). Eugene N. Sterling, a life insurance agent, was appointed initial trustee of the Trust. Sterling generated

significant business from Paradee Oil Company. He handled the company's retirement plan, brokered its health insurance plan, and sold life insurance to numerous employees. Charles Sr. and Eleanor were longtime clients. The Trust was structured to take advantage of an exemption from the generationskipping tax rules, known as the "Gallo exemption," that expired at the end of 1989. The Trust was funded with contributions in the amount of $183,019 from Charles Sr. and $183,000 from Eleanor. Sterling used the funds to purchase a second-to-die insurance policy on the lives of Charles Sr. and Eleanor from Manufacturers Life Insurance Company (the "Policy"). The Policy was issued on February 15, 1990.

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The total initial premium for the Policy was $366,018.47. If the Policy performed as expected, no additional premiums would be required. Due to the single-premium structure of the policy, the death benefit in the first year was $1,744,367. After that, the death benefit was projected to remain at $1,150,700 until 2010, the last date provided in the original illustrations. The undisputed intent of the Trust was to provide insurance proceeds to Trey. To achieve the death benefit it was designed to deliver, the Policy combined a whole life feature and a term life feature. The initial single premium was used to purchase $191,784 in whole life and $593,666 in paid-up additional insurance. Over the projected life of the Policy, these balances would generate internal policy dividends that would be used to further build up the value of the paid-up additional insurance and to pay each year for an amount of term life insurance sufficient to deliver a total death benefit of $1,150,700. As Charles Sr. and Eleanor aged, the cost of the term life insurance would rise. By building up the policy values internally, less term life insurance would be needed in later years, and the Policy would generate sufficient dividends to support it. Trey was born on July 18, 1969. At the time the Trust was formed, Trey was nine years old. No one told him about the Trust or the Policy. Under Article 1 of the Trust, Trey had the power to remove the existing Trustee and appoint himself as Trustee once he turned thirty. But 1999 would come and go without Trey ever learning about the Trust's existence. Trey eventually was notified about the Trust in 2009, when he was forty years old.

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C.

Eleanor Tries to Revoke The Irrevocable Trust. Three years after creating the Trust, by letter dated July 30, 1993, the Paradees

instructed Sterling to revoke it. Although the letter was signed by both Charles Sr. and Eleanor, I find that Eleanor was the driving force behind it. The evidence at trial indicated that Eleanor's influence over the family finances steadily increased during the 1980s, as did her influence over Paradee Oil Company. In 1991, Charles Sr. almost died of heart failure and required quadruple bypass surgery. Although he recovered, he began to slip mentally. I believe Eleanor generally had their financial affairs firmly in hand from that point on. At a minimum, by mid-1993, she was making decisions with respect to the Trust, and the instruction to revoke the Trust in 1993 foreshadowed her repeated efforts to terminate the Trust over the next fifteen years. The July 30, 1993, letter stated: Due to unforeseen circumstances, we wish to terminate the above numbered policy for its cash value. You will recall that this policy is owned by the W. Charles and Eleanor C. Paradee, Irrevocable Trust. Please advise what steps are to be taken to expedite the surrender of this policy, and to revoke the above mentioned Irrevocable Trust and return the cash value to the undersigned. JX 51. Upon receiving the letter, Sterling sent a copy to Joanna Reiver, Esq., the attorney who drafted the Trust. Reiver had represented the Paradees since the late 1970s. Reiver spoke with Eleanor, who said the cash was wanted because of unexpected back taxes on diesel fuel sales by Paradee Oil Company. Eleanor put the total bill at approximately $200,000. A contemporaneous court filing put it at $155,000. Eleanor 4

told Reiver that the Paradees did not want to pay the tax out of their personal funds because it would "ruin their `balance' in terms of income and principal." Sterling was given the same explanation. At the time, the Paradees owned significant assets, enjoyed ample income, and had minimal (if any) debt. In 1988, the Paradees sold the operating assets of Paradee Oil Company for approximately two million dollars. They changed the name of Paradee Oil Company to Silver Corporation, and that entity continued to own the land where the company's service stations were located. Through Silver Corporation, the Paradees leased the land to the acquirers of the business for approximately $180,000 per year. The Paradees also owned approximately a dozen commercial properties in the Dover area, including Moore's Lake Shopping Center and 20-plus acres on Route 13 near the Dover Mall. The properties were unencumbered. Given her significant wealth and her pattern over the ensuing decade and a half of repeatedly attempting to terminate the Policy and extract its value, I do not credit Eleanor's proffered justification about preserving the "balance" of the Paradees' investments. Eleanor simply preferred for selfish reasons to shift the cost of their tax bill to someone else. Although there is no such thing as a free lunch, it is always nicer (all else equal) if someone else pays. Eleanor wanted someone else to pay. For Eleanor, having that someone else be the Trust was doubly sweet. She

despised Charles Jr., and I suspect she had no particular love for his son. Although it would be several years before her animosity towards Trey flowered in its own right, the seeds already were planted. Revoking Trey's Trust to pay the diesel tax would force 5

Charles Jr.'s family to foot the bill. To attribute this unkind motive to Eleanor might seem harsh, but the evidence supports it, and it is sadly consistent with the vindictive and vengeful behavior that Eleanor displayed on other occasions. D. Silver Corporation Borrows From The Trust. Having been notified by Sterling about the Paradees' request, Reiver consulted with Eleanor about alternatives. In substance, Reiver told Eleanor that "irrevocable" meant "irrevocable," and that the Paradees could not access the Policy's cash value by revoking the Trust. Reiver and Eleanor then talked about whether the Trust nevertheless could loan money to the Paradees. Reiver discussed the idea with Sterling. By letter dated September 2, 1993, Sterling responded: Following find a quotation of the values of the Joint Life Insurance policy insuring the Paradees. I can find no reason not to loan out a portion of the [Policy] value. The loan will be deducted at death, therefore the grandson will receive less than the full value of the Joint Life Death Benefit. Assuming that the loan interest is 8% per year, a loan of $200,000 would require an interest payment of $16,000 per year. Assuming a $3,000 per year increase in the $104,065 remainder should pay the interest for 8 years plus [sic]. I want to point out that the interest, if unpaid, could cause the policy to lapse. JX 30. Sterling retained Mark Olson, Esq. to advise him about the loan. In a letter dated October 13, 1993, Olson wrote that "Subparagraph 11 of paragraph A of Article 11 authorizes the trustee to make loans with adequate security and at a reasonable rate of interest." JX 8. He continued: 6

I suggest the following. Any loan to be made by the trust to Mr. or Mrs. Paradee should be made upon terms comparable to those which a commercial bank would offer. This would mean that the loan would be made at prevailing interest rates and would most likely require monthly amortization. In addition, security would be required in an amount at least equal to 125% of the loan (to yield an 80% loan to value ratio). The easiest way to establish this, of course, would be to require the proposed borrower to obtain a loan commitment from a commercial bank. In no case should the trustee make a loan unless the loan payments will be adequate to cover debt service on the policy loan plus the amount required to keep premiums current. Id. With Olson's advice in hand, Sterling obtained a $150,000 loan on the Policy from Manufacturers Life Insurance Company (the "Policy Loan") to fund the Trust's loan to the Paradees (the "Trust Loan"). The Policy Loan charged compound interest at a floating rate set in the first year at 8.75%, subject to change on an annual basis. Sterling asked Reiver to document the Trust Loan. Reiver had one of her law partners take care of it. The resulting promissory note was dated November 18, 1993, and executed by Charles Sr. on behalf of Silver Corporation. Sterling wrote a check dated November 18, 1993, on the Trust's account for $150,000, payable to Charles Sr. and Eleanor. Contrary to Olson's advice about obtaining security equal to 125% of the loan amount, the Trust Loan was unsecured. Contrary to the Policy Loan's floating rate, the Trust Loan's interest rate was fixed. Contrary to the compound interest charged by the Policy Loan, the Trust Loan did not specify whether interest would be simple or

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compound. The respondents maintain it was simple interest. The Policy Loan charged 8.75% interest in the first year. The Trust Loan charged 8%. Although the Trust Loan called for interest to be paid monthly, Sterling made no effort to collect it. Sterling instead established a practice of writing to the Paradees annually and requesting that interest for the year be paid in February. Interest was paid in due course in 1994, 1995, 1996, and 1997. E. Eleanor Tries Twice More To Revoke The Trust. Despite having obtained the $150,000 loan, just one year later Eleanor again instructed Sterling to revoke the Trust and pay out the cash value of the Policy to the Paradees. Eleanor proffered the same justification about diesel taxes as she had the year before. Sterling reminded Eleanor that the Trust was irrevocable. He also admitted that the prior year's loan "was really stretching it." JX 118. On December 12, 1997, Reiver received a telephone call from the Paradees' accountant, Jordan Rosen. Rosen told Reiver that the Paradees wanted to collapse the Policy, take the cash, repay the Note, and invest the balance of the cash for Trey's ultimate benefit. Again, I find that Eleanor was behind the ostensibly joint request, and the evidence shows that at this point, Charles Sr. was failing rapidly. Eleanor called Sterling herself to ask that the Policy be terminated. In February 1998, Eleanor told Sterling that the Paradees could not pay the interest on the Trust Loan. She said they wanted the Policy surrendered for its then-cash value of $155,000 and the proceeds used to make a different investment. Sterling wrote to Olson:

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"I need guidance on what to do. Can I comply with the wishes of the Senior Paradee's [sic] without jeopardizing my position?" JX 52. Olson responded with a letter addressed to Sterling but facially intended to be sent to the Paradees (among other things, it referred to Sterling in the third person). At bottom, Olson advised that Sterling risked personal liability if he agreed to Eleanor's latest request: The trust owned a paid-up policy with a $1.1 million death benefit. If the proceeds of any smaller policy plus the loan to the Paradees (assuming it to be collectible) do not aggregate $1.1 million [sic], the trust beneficiary (W. Charles Paradee, III) could bring an action seeking to hold you personally responsible for the difference. These are obviously very serious problems in which Gene Sterling seems to be stuck in the middle. I advise you strongly against surrendering the existing policy. JX 53. Sterling forwarded Olson's letter to the Paradees, who then paid the interest. On July 1, 1998, Charles Sr. passed away. Under the terms of the Trust Loan, the Trust had the right to recover the principal and interest due at any time after the earlier of the death of Charles Sr. or Eleanor. Sterling made no effort to collect. On July 18, 1999, Trey turned 30. Article 1 Section C of the Trust provided that "after my [Charles Sr.'s] death, and upon reaching age 30, my grandson, W. Charles Paradee III, shall be entitled to serve as trustee hereunder . . . ." Sterling did not notify Trey.

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F.

The Demutualization Of Manufacturers Life Insurance Company On September 24, 1999, Manufacturers Life Insurance Company demutualized

and became Manulife Financial Corporation ("Manulife").

Eligible policyholders,

including the Trust, were entitled to receive either cash or Manulife shares. As a result of the demutualization, the Trust received 6,261 shares of Manulife stock. Because the Policy Loan reduced the cash value of the policy on which the share calculation was based, the Trust received fewer shares than it otherwise would have. Manulife stock later split two-for-one, doubling the number of shares held by the Trust. G. The Anagnos Incident In September 2000, Charles Jr. sold Paradee Gas Company. After the sale, Trey went to work for Merrill Lynch. He became a licensed stock broker in July 2001. An incident that summer caused Eleanor's antipathy towards Trey to erupt into open hostility. On at least three occasions, Eleanor invited Trey to have lunch with her stock broker, John Anagnos. Eleanor thought Anagnos was a highly experienced broker from New York City who only handled high net-worth clients. With Trey having

recently entered the profession, Eleanor wanted him to see a successful broker first-hand. During one lunch, Eleanor praised Anagnos' acumen in selling her a bond that paid a guaranteed return of 14%. Trey was stunned. It was the summer after the dot-com crash. The Federal Reserve was steadily cutting interest rates, and certificates of deposit were paying perhaps five percent. After Anagnos left, Trey asked about the bond. Eleanor reiterated that it paid a guaranteed 14%. Feeling something was not right, Trey asked for the prospectus, which

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Eleanor gave him. It described a speculative investment in an unregistered real estate partnership. The return was not guaranteed, but Eleanor's $100,000 investment had guaranteed (in the colloquial sense) an up-front commission of 10% for Anagnos. His concern heightened, Trey asked to see Eleanor's brokerage statements. Eleanor took him into the dining room, where papers were stacked in piles. With Eleanor's permission, Trey looked through the documents. He immediately spotted several red flags. Most notably, a summary statement that Anagnos provided was not an automatically prepared, standardized statement. It was a homemade document that

Anagnos seemed to have typed up on a word processor. It tracked the total assets in Eleanor's accounts without differentiating between contributions and investment returns. It then compared the percentage growth in the account to purported returns on the "S&P." Trey asked Eleanor if he could have a copy of the statement. She made him a copy on the copier she kept in her basement. Trey took the statement and did some research. He discovered that while the statement listed the "S&P" as down 8.64%, during the period identified the S&P 500 actually rose nearly 11%. He concluded that in any event, the S&P 500 was a misleading comparable for Eleanor's mix of investments. He also discovered that Anagnos became a broker shortly before Trey and worked out of an office in Wilmington. Having done his homework, Trey returned to Eleanor's house and conveyed his concerns. He testified credibly at trial that he was not trying to get access to Eleanor's money; he feared Anagnos was taking advantage of her. Trey also recalled promising his grandfather that he would look out for Eleanor after Charles Sr. died. 11

Eleanor reacted angrily.

She accused Trey of stealing her documents and

meddling in her affairs. She told Trey to leave, which he did. Some time later, Trey returned to Eleanor's house in the hope of having a more measured conversation. Eleanor again became distressed. Trey's subsequent attempts were no more successful. Some months later, still concerned about Eleanor, Trey wrote to Anagnos' supervisor and laid out his findings. He asked the supervisor to "look into these matters and take whatever steps you deem necessary." Trey gave a copy of the letter to Eleanor. After this incident, Eleanor wanted nothing to do with Trey. She was short and curt whenever he called or stopped by, and she made it clear that he was not welcome in her home. In 2003, Trey and Eleanor separately attended a fundraiser at Wild Quail Country Club. Eleanor spent the evening telling her table that Trey was trying to take her money and had hired a team of doctors and lawyers to help him. It was a delusional notion, but Eleanor believed it. Eleanor's lawyer, Reiver, testified that after the Anagnos affair, Eleanor was "distressed" and "very, very concerned" that Trey was trying to gain control over her and her assets. Eleanor's accountant testified that Eleanor "felt very threatened." William J. Smith, Eleanor's longtime handyman and recently adopted son (for estate planning purposes), testified that Eleanor was "very upset" and "thought she had been violated." H. Eleanor Appoints Herself Trustee. During early 2003, Eleanor asked Reiver to contact Sterling. According to

Reiver's notes, Eleanor wanted Reiver to find out the current face value of the Policy, 12

whether it was paid up, and whether there was "[a]nything we can do about it." In an email to her paralegal, Reiver mentioned the existence of the Trust Loan and stated, "I think we can safely assume that if Eleanor, individually, was the borrower, she has no intention of paying it off during her lifetime." Reiver spoke with Sterling and asked him, "Is there any way the policy can lapse?" Sterling responded, "Don't pay the interest." On April 2, 2003, in the midst of the furor over Anagnos, Sterling died. Reiver reviewed the Trust to determine who would become the successor Trustee. She noted that Trey could serve as his own Trustee once he was 30 years old, and she advised Eleanor of that fact. Although Reiver could not recall precisely when she gave that advice, Reiver is a careful and experienced attorney, and I find that she did so when advising Eleanor following Sterling's death and again in 2005 when Eleanor appointed Smith as successor Trustee. On or before April 21, 2003, Eleanor again asked her advisers to look into how she could access the remaining Trust funds, such as through a further loan from the Trust. On April 23, 2003, Eleanor appointed herself Trustee. It is undisputed that Eleanor knew Trey was over 30 at the time. He had turned 30 in 1999, four years earlier. I. The Policy Fails. In 2003, for the first time, Silver Corporation failed to pay the interest due on the Trust Loan. No further payments were made. As a result, on February 15, 2003, $11,026.84 of unpaid interest was capitalized and added to the outstanding Policy Loan balance. On February 15, 2004, $11,732.74 of unpaid interest was capitalized and added to the outstanding Policy Loan balance. On February 15, 2005, $10,847.73 of unpaid 13

interest was capitalized and added to the outstanding Policy Loan balance. On March 15, 2005, an additional $792.60 of unpaid interest was capitalized and added to the outstanding loan balance. With a total outstanding loan balance of $185,203.94, the Policy lapsed. At the time the Policy lapsed, the Trust owned 6,261 shares of Manulife stock with an approximate value of $300,027.12, and it held approximately $20,000 in a savings account, representing the dividends paid on the Manulife shares and interest received on those amounts. The Policy also held the promissory note from Silver Corporation, which owed the Trust $150,000 in principal and a minimum of $22,759.58 in simple interest. Those amounts were due and payable on demand. During this time, Silver Corporation was owned by the W. Charles Paradee Charitable Remainder Annuity Trust. Eleanor was the trustee of the Charitable

Remainder Annuity Trust and its sole income beneficiary. She was the only person with check-writing authority for the Charitable Remainder Annuity Trust. During her years as Trustee, Reiver advised Eleanor that she had a duty to notify Trey about the Trust, was obligated under the Trust to pay income to Trey, and should use Trust assets to maintain the Policy. Eleanor declined to follow Reiver's advice and did none of these things. Eleanor instead discussed with Reiver and Rosen how to collapse the Policy and access its cash value. Reiver testified to Eleanor's motive in allowing the Policy to lapse: "I think that she did not want [Trey] to be in a position where he would be better off on her death, and know about it, and be in control of it." I agree. Eleanor consciously, intentionally, and 14

vengefully refused to take any action to protect or preserve the Policy because she did not want Trey to benefit. J. Smith Becomes Trustee. On July 7, 2005, after the Policy lapsed, Eleanor resigned and appointed Smith as the Trustee. Smith began working for Charles Sr. in the early 1960s as a handyman. He performed general contracting and masonry work. After Charles Sr. remarried, Smith began doing odd jobs for Eleanor around the house. His role evolved into providing general domestic help to the Paradees. He drove them to and from Florida, assisted Eleanor in caring for Charles Sr. when he was ill, and helped Eleanor around the house after Charles Sr. died. On June 8, 2004, for estate planning reasons, Eleanor adopted Smith. After becoming Trustee, Smith initially followed Eleanor's lead and did not inform Trey about the Trust's existence, that he was the sole beneficiary of the Trust, or that he had the right to act as his own Trustee. Smith also continued Eleanor's practice of not distributing the Trust's income to Trey. Unlike Eleanor, who acted knowingly and purposefully as Trustee with the intent to benefit herself and harm Trey, Smith testified credibly that he did not understand his obligations to Trey and regarded the Trust as just another one of Eleanor's accounts. Smith is not financially or legally sophisticated. He is a straightforward and honest workingman whose character would be captured in a rural area like Virginia's Shenandoah Valley by the grammatically challenged phrase, "he's good people." Although Smith certainly is loyal to Eleanor, he exhibits the commendable fealty of a 15

longtime employee who recognized both the virtues and the shortcomings of his employer. I do not believe he acted with avarice, ill-will, or as a co-conspirator in Eleanor's campaign to harm Trey. In 2007, Smith came to understand Trey's interest in the Trust. He told Reiver that he wanted "to do what is right," and he asked for a letter instructing him on what to do. It took Reiver another two years to notify Trey. No one could explain why it took so long. Even recognizing that Reiver sought information from various sources and moved offices twice during that period, her efforts were disappointingly intermittent and tortoise-like. I suspect she knew litigation would result and was not in a hurry to set it in motion. K. Trey Becomes Trustee. On August 18, 2009, Trey received a letter from Reiver informing him about the Trust. Trey promptly exercised his right to become Trustee and demanded that the Trust Loan be paid. On September 30, 2009, Silver Corporation paid the Trust $340,389.04, comprising $150,000 in principal and $190,398.04 in interest. II. LEGAL ANALYSIS

"A violation by a trustee of a duty the trustee owes to a beneficiary is a breach of trust." 12 Del. C.

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