Virginia Commerce Bank v. Buckingham et al
MEMORANDUM OPINION. Signed by Judge Roger W. Titus on 3/13/2018. (Titus, Roger) (c/m 3/13/2018)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
DAVID BUCKINGHAM, et al.,
Case No. RWT 13-cv-3227
This is a case about a bank behaving badly. Virginia Commerce Bank (“VCB”), later
merged into Plaintiff United Bank (“United Bank”), made substantial loans to Defendants’
father, John D. Buckingham, Sr. (“John”) and John’s company, Sun Control Systems, Inc.
(“SCS”). In May of 2009, after the borrowers defaulted, VCB entered into a Forbearance
Agreement with John and others that ultimately did not help. During that time, John was
diagnosed with dementia and became incompetent. VCB knew of John’s incapacity, and its
lawyer even advised it to avoid dealings with John because of his incapacity.
Nevertheless, in a desperate effort to recover the millions of dollars that otherwise might
be lost, VCB “negotiated”1 a Second Amended Forbearance Agreement (“Second Amendment”),
which assigned to VCB as additional collateral a security interest in certain life insurance
policies. VCB had Thomas Buckingham (“Thomas”), one of John’s sons and the then-acting
president of SCS, obtain John’s signature to the Second Amendment and to the assignment of the
life insurance policies to VCB. Thomas did so, but forged some of John’s signatures to complete
John was ostensibly a party to the Second Amended Forbearance Agreement, but, due to his incompetence, he was
incapable of “negotiating” anything.
In state court litigation related to this case, Judge Joseph A. Dugan, of the Circuit Court
for Montgomery County, Maryland, found the Second Amendment void because of VCB’s
misconduct in negotiating with a man it knew to lack capacity and in acquiring forged signatures.
Judge Dugan’s findings prevented VCB from directly obtaining the money it had attempted to
recover through the purported assignments in the Second Amendment. Now, United Bank,
VCB’s successor by merger, attempts to recover that same money through the legal gymnastics
of this lawsuit. The laws of equity, however, prevent United Bank from collecting money with
hands made unclean by the grossly inequitable conduct of its predecessor. For that reason, as
well as for reasons under applicable law, the Court will grant Defendants’ Motions for Summary
Judgment and deny United Bank’s Motion for Summary Judgment.
This opinion brings to an end an almost six-year dispute over the rights to the proceeds of
eight life insurance policies covering John’s life. Having been rebuffed by the Circuit Court for
Montgomery County in its wrongful efforts to reach the policies through a transaction with a
borrower known to be incompetent, United Bank now seeks to obtain the same result by
challenging certain transactions executed by Defendant David T. Buckingham (“David”), one of
John’s sons, in his capacity as John’s guardian.
The Insurance Policies
The insurance policies can be categorized into three groups. The first group contains two
policies that John purchased from Northwestern Mutual and for which he paid the premiums
directly (collectively, the “JDB policies”). ECF No. 120-1 at 5. The second group contains four
policies that SCS purchased from Northwestern Mutual as an employment benefit for John. Id.
at 4–5. As the owner of these policies, and pursuant to an Ownership Agreement between John,
SCS, and Northwestern Mutual, SCS paid the policy premiums, but John designated the
beneficiaries. Id. at 5; ECF No. 120-5. When John died, SCS would recover up to the amount of
premiums paid, and John’s designated beneficiary would receive the rest (collectively, the “split
dollar policies”). ECF No. 120-5. The third group contains two policies that SCS purchased
from John Hancock Life Insurance Company, also as an employee benefit for John and for which
it paid the policy premiums on John’s behalf. ECF No. 120-1 at 5. Pursuant to an agreement
between SCS and John, SCS would recover the premiums that it paid from the policies’ death
benefits, and the beneficiary designated by John would recover the remaining balance
(collectively, the “John Hancock policies”). Id.; ECF No. 120-15 at 2–3.
John’s Dementia and SCS’s Decline
John’s initial diagnosis of dementia came in 2008, which was confirmed as
frontotemporal dementia in 2009. ECF No. 120-1 at 5; ECF No. 120-11 at 18. Despite his
diagnosis, John was never removed or replaced on the board of SCS. ECF No. 120-1 at 5.
While John battled dementia, SCS’s business struggled. Id. at 6. By 2009, SCS was in default
on debts it owed to VCB. Id. VCB had loaned SCS money, sometimes requiring John and
Elizabeth Buckingham (“Betty”), John’s wife, to guarantee the loans. Id. VCB had also loaned
John and Betty money in their personal capacities through a home equity line of credit. Id. In
May 2009, SCS and VCB entered into a Forbearance Agreement pursuant to which VCB agreed
not to enforce certain security interests and to loan SCS additional money if SCS met a specified
schedule of payments. Id. at 6–7; ECF No. 120-18 at 3. John, Betty, and Thomas, who was
SCS’s acting president, were also parties to the Forbearance Agreement. ECF No. 120-1 at 7.
SCS’s economic condition did not improve, and by early 2010, it had defaulted on the
Forbearance Agreement. Id.; ECF No. 120-18 at 4; ECF No. 141-22.
The Second Amended Forbearance Agreement
In June 2010, while John was battling dementia, VCB prepared a Second Amended
Forbearance Agreement with SCS. ECF No. 120-1 at 7; ECF No. 120-17 (Second Amendment
to Forbearance Agreement). By that time, VCB had lost more than $5 million in just principal
on the loans provided to SCS and John, making its current loss over $8 million including accrued
interest, cost, and fees. Hr’g Tr. 3:13:00–13:35 (Nov. 27, 2017). When the company finally
effectively went out of business, the only potential assets that were of any value were the
disputed life insurance policies. Id. 3:13:50–14:13. As stated by United Bank at the summary
judgment hearing, the policies collectively had a “value of several million dollars” upon John’s
death. Id. 3:14:15–14:25.
The Second Amendment assigned a security interest in the JDB and split dollar policies,
including the death benefits under those policies, to VCB. ECF No. 120-1 at 8; ECF No. 120-17
at 9. When it was executed, however, VCB knew of John’s dementia. ECF No. 120-11 at 28–
41. VCB had been told by David and Thomas, as well as through medical reports shared with
VCB, that John was suffering from very serious dementia and had only months to live. Id.
Additionally, VCB’s own experience with John’s diminished capacity had led it to refuse to
communicate with John. Id. VCB’s outside counsel even recommended that it ask for John to
undergo a medical evaluation to determine his competency. Id. However, VCB elected not to
follow this advice. Id. When the Second Amendment was executed, VCB’s counsel did not
communicate with John and Betty regarding the transaction. Id. at 8. Instead, VCB asked
Thomas to collect the necessary signatures, which he did. Id. Some of those signatures for John,
however, were found by Judge Dugan to have been forged. Id. at 41.
Petition for Guardianship of John
In August 2010, two months after the Second Amendment was executed, Betty filed a
petition for guardianship of her husband. ECF No. 120-1 at 6. In October 2010, the Circuit
Court for Montgomery County appointed David guardian of his father’s property and
co-guardian, with Betty, of his father’s person. ECF No. 120-2. In December 2010, the order
was amended to make Betty the temporary guardian of John’s person and David the temporary
guardian of his father’s property. ECF No. 120-3. In January 2011, the court issued a final order
appointing David guardian of his father’s property and co-guardian, with Betty, of his father’s
person. ECF No. 120-4.2
David did not learn of the Second Amendment until February 2011. ECF No. 120-1 at 6.
In March 2011, David changed the beneficiary designations of the eight life insurance policies
from Betty, or his father’s estate in one instance and a prospective testamentary trust in another,
to a newly created John D. Buckingham Life Insurance Trust (“JDB Life Insurance Trust”) for
the purpose of funding the support and care of John and Betty. Id. at 8–9; ECF No. 141-12.
Betty was the primary beneficiary of the JDB Life Insurance Trust, and the Buckingham children
were made contingent beneficiaries who would receive the remaining balance of the trust after
the death of both parents. ECF No. 120-1 at 9.
United Bank claims that SCS retained the power to change the policy beneficiaries,
despite the status of the John Hancock policies as split dollar policies, and that John’s
designation of his wife, Betty, as the secondary beneficiary was done in John’s capacity as
president of SCS. ECF No. 141-1 at 4. As such, United Bank argues that SCS was the alternate
beneficiary of the split dollar and John Hancock policies and John’s estate was the alternate
beneficiary of the JDB policies.
Id. at 3–4. Therefore, it contends, but for David’s actions
The final order incorrectly states the date as January 13, 2010, instead of January 13, 2011. ECF No. 120-4.
changing the beneficiary designations, SCS and John’s estate would have been the beneficiaries
of the policies at John’s death, and thus the proceeds were diverted away from SCS’s and John’s
creditors. Hr’g Tr. 4:14:25-4:15:10 (Nov. 27, 2017); see also ECF No. 141-1 at 29.
The John Hancock Policies and the Osprey Trust
As the cost of managing John’s illness increased, David prepared an application for
accelerated death benefits on the John Hancock policies, “to provide funds for his mother’s
support and meet the extraordinary cost of John’s care.” ECF No. 120-1 at 9. Eventually, an
agreement was made between SCS (which had stopped paying the premiums on the John
Hancock policies) and David to sell the policies to John, through David as guardian. Id. at 9–10.
In November 2011, David created the Osprey Trust, which was empowered to seek accelerated
death benefits on the John Hancock policies. Id. at 10. The directors of SCS—John, acting
through David as his guardian, Betty, and Thomas—voted to sell the John Hancock policies to
the Osprey Trust for $110,000, the value determined by John Hancock pursuant to an IRS
formula. Id.; ECF No. 120-7. When the sale was complete, David paid the overdue premiums to
reinstate the policies and restore the death benefits. ECF No. 120-1 at 10. David then, as John’s
guardian and trustee of the Osprey Trust, requested accelerated death benefits.
continued, in his role as Osprey Trust trustee, to pay the policy premiums as they became due for
the remainder of John’s life. Id.
The JDB and Split Dollar Policies and the Blue Heron Trust
On December 7, 2011, Betty unexpectedly died before John. Id. Because the JDB Life
Insurance Trust had been established to provide funds for Betty’s support in the expectation that
John would predecease her, David, acting as John’s guardian, changed the beneficiary of the
JDB and split dollar policies from the now-outdated JDB Life Insurance Trust to the
newly-created Blue Heron Trust. Id.; ECF No. 141-12.
The Montgomery County Litigation
During 2011, after finding out about the Second Amendment, David decided to challenge
the validity of the assignments of the JDB and the split dollar policies based on John’s mental
incompetency. ECF No. 120-1 at 11. In May 2012, David, as John’s guardian, filed suit against
VCB in the Circuit Court for Montgomery County seeking a declaratory judgment voiding the
Second Amendment. Id. A five-day bench trial took place in November 2013. Id.
Ultimately Judge Dugan found that (1) VCB had been told in early 2010 that John was
suffering from advanced dementia, (2) VCB’s counsel had suggested that VCB ask John to
undergo a medical examination before signing any legal documents, and (3) VCB ignored its
counsel’s advice and obtained John’s signature on the Second Amendment. ECF No. 120-11
at 38–41; ECF No. 120-12. Based on this evidence and expert testimony from physicians who
examined John in 2009 and 2010, Judge Dugan held that by May 2010 John was not able to
understand legal documents, was not mentally or legally competent, and that VCB had been
aware of John’s incapacity in advance of the Second Amendment transaction. ECF No. 120-11
at 38–41; ECF No. 120-12 at 3–5. Judge Dugan also found, and VCB did not dispute, that some
of John’s signatures had been forged on the Second Amendment. ECF No. 120-11 at 42;
ECF No. 120-12 at 3–4. Accordingly, Judge Dugan declared the Second Amended Forbearance
Agreement void. ECF No. 120-11 at 41; ECF No. 120-12 at 3–5. As such, the assignments of
the JDB and split dollar policies to VCB were void.3 ECF No. 120-12 at 3–4.
The Circuit Court denied United Bank’s motion for reconsideration or a new trial. Buckingham, et al. v. Va.
Commerce Bank, N.A., et al., No. 363481-V (Md. Cir. Ct.), Dkt. No. 270. United Bank filed an appeal,
Dkt. No. 289, which is pending in the Court of Special Appeals of Maryland and is scheduled for argument on
April 11, 2018.
Payment of the Death Benefits Under the Policies
On October 17, 2012, John died. ECF No. 120-1 at 12. Northwestern Mutual paid the
death benefits on the split dollar policies to the Blue Heron Trust, in accordance with the
Ownership Agreements, and paid the death benefits of the JDB policies, totaling $1,036,453.14,
into the registry of the Circuit Court.4 Id.; ECF No. 120-14. Amounts received as accelerated
death benefits on the two John Hancock policies were repaid by deduction from the death
benefits in accordance with the policy terms. ECF No. 120-1 at 12. All amounts borrowed
against the cash value of the split dollar policies by SCS were repaid by deduction from the death
benefits in accordance with the ownership agreements. Id.; ECF No. 120-14. Because SCS had
borrowed more on the split dollar policies than it had paid in premiums, there were no proceeds
to be paid to VCB from SCS’s ownership of the split dollar policies. ECF No. 120-14.
2. Procedural History
On October 30, 2013, VCB filed the original Complaint in this case against David,
individually and in his capacity as trustee of the Osprey Trust and the Blue Heron Trust, Susan
Buckingham (“Susan”), David’s sister, individually and as personal representative of John’s
estate, and Richard Buckingham, David’s brother, individually and as personal representative of
John’s estate (collectively, the “Defendants”).5 ECF No. 1. On August 18, 2017, United Bank,
as VCB’s successor by merger, filed a Second Amended Complaint (“SAC”). ECF No. 126.
The SAC contains eight counts: (1) Count I alleges a violation of the Maryland Uniform
Fraudulent Conveyance Act (“MUFCA”), Md. Code Ann., Com. Law, §§ 15-201, et seq., for the
transfer of ownership and beneficiary interest in the John Hancock policies; (2) Counts II–V
The Circuit Court ordered that the money remain in the Court Registry until further court order because of the
pending litigation in this Court. ECF No. 120-12 at 5.
Richard filed for Chapter 7 Bankruptcy on August 5, 2013, and this Court issued an Order staying proceedings
against him individually on November 27, 2013. ECF No. 6.
allege violations of the MUFCA for changes in the beneficiary designations of all of the policies;
(3) Count VI alleges self-dealing by David regarding all of the policies; and (4) Counts VII and
VIII seek declaratory judgment that David’s creation of the Osprey Trust and Blue Heron Trust
was invalid and the transfers of the policy interests to those trusts were void ab initio. Id.
On July 31, 2017 and September 8, 2017, David and Susan filed Motions for Summary
Judgment (ECF Nos. 120, 121, 137) that are now before this Court for decision.
September 29, 2017, United Bank filed its Response to Defendants’ Motions for Summary
Judgment and its own Motion for Summary Judgment. ECF No. 141. Defendants filed their
Response to United Bank’s Motion for Summary Judgment and their Reply to United Bank’s
Response to their Motions for Summary Judgment on October 13, 2017. ECF No. 144. United
Bank filed its Reply to Defendants’ Opposition to its Motion for Summary Judgment on
October 27, 2017.
ECF No. 146.
A hearing on all pending motions was held on
November 27, 2017.
3. Standard of Review
Summary judgment is proper under Federal Rule of Civil Procedure 56(a) if there is no
genuine dispute over any material facts, and the moving party is entitled to judgment as a matter
of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); Francis v. Booz, Allen & Hamilton,
Inc., 452 F.3d 299, 302 (4th Cir. 2006). A dispute of material fact is genuine if the evidence
would allow the trier of fact to return a verdict for the nonmoving party. Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 248 (1986). The court may only rely on facts supported in the record,
not assertions made in the pleadings. Felty v. Grave-Humphreys Co., 818 F.2d 1126, 1128
(4th Cir. 1987). Moreover, the court must view all facts and make all reasonable inferences in
the light most favorable to the nonmoving party. Matsuhita Elec. Indus. Co. Ltd. v. Zenith Radio
Corp., 475 U.S. 574, 587 (1986). The nonmoving party must present more than a “mere
scintilla” of evidence to demonstrate a genuine issue of material fact that would preclude
summary judgment. Anderson, 477 U.S. at 252.
4. Unclean Hands Doctrine
This case provides a prime example of what the unclean hands doctrine is intended to
prevent. United Bank is attempting to assert a right to the proceeds of the life insurance policies
that it failed to secure through the now voided assignments in the Second Amendment. That
failure was the result of the grossly inequitable conduct of its predecessor, VCB. This Court
cannot now permit United Bank to accomplish through another route that which it tried and
failed to do through unsavory means.
By “den[ying] relief to those guilty of unlawful or inequitable conduct with respect to the
matter for which relief is sought,” the unclean hands doctrine “prevent[s] the court from assisting
in fraud or other inequitable conduct . . . .” Turner v. Turner, 809 A.2d 18, 58 (Md. Ct. Spec.
App. 2002) (citation omitted).
Although the unclean hands doctrine originated in equity,
Maryland courts now apply the doctrine to actions at law, including statutory claims. Smith v.
Cessna Aircraft Co., 124 F.R.D. 103, 106 (D. Md. 1989); Manown v. Adams, 598 A.2d 821, 825
(Md. Ct. Spec. App. 1991), vacated on other grounds, 615 A.2d 611 (Md. 1992). The Court
generally has “broad discretion in determining whether and how to apply” the doctrine, but there
must be a sufficient “nexus between the misconduct and the transaction” at issue to justify
application. Mona v. Mona Elec. Group, Inc., 934 A.2d 450, 476–77 (Md. Ct. Spec. App. 2007)
(quoting Smith, 124 F.R.D. at 107; Turner, 809 A.2d at 58) (holding sufficient nexus between
plaintiff’s representations in tax forms guaranteeing advances made to defendant and subsequent
denial of personal responsibility for the same advances because both related to the advances).
The focus of the doctrine is “not that the plaintiff’s hands are dirty, but that [the plaintiff]
dirties them in acquiring the right [the plaintiff] now asserts.” Id. at 477 (internal quotation
marks and citations omitted). A court may grant a motion for summary judgment based on the
unclean hands doctrine “if there is no material dispute of fact that plaintiff’s misconduct is
directly related to the relief now sought by the plaintiff.” Sky Angel U.S., LLC v. Discovery
Comm’ns, LLC, 95 F. Supp. 3d 860, 880–81 (D. Md. 2015) (citing Hicks v. Gilbert, 762 A.2d
986, 989 (Md. Ct. Spec. App. 2000)).
United Bank argues that application of the unclean hands doctrine is inappropriate
because there is no sufficient nexus between the impropriety found by the Circuit Court and the
transactions at issue here.
ECF No. 141-1 at 32.
United Bank asserts that the Second
Amendment, if it had been determined valid, would have provided to VCB the status of a
secured creditor, but it is not now asserting its right to the proceeds as a secured creditor, but
only as an unsecured creditor. Id. Any misconduct on VCB’s part that led to the invalidation of
the Second Amendment, it argues, has nothing to do with the claims it makes here as an
unsecured creditor. Id.
United Bank asserts that the doctrine should only be applied when the alleged improper
conduct is the source of the claim in the second case. For this proposition, United Bank cites to
Schneider v. Schneider, 624 A.2d 1319, 1325 (Md. Ct. Spec. App. 1993), in which the court
found that the plaintiff’s perjury was the source of her equitable claim in the subsequent case
against the defendant, and thus the trial court was within its discretion in applying the doctrine.
That case is inapplicable, however, because it was reversed by the Court of Appeals of Maryland
based on that court’s finding that application of the unclean hands doctrine was inappropriate.
Schneider v. Schneider, 644 A.2d 510, 514–15 (Md. 1994). The Court of Appeals held that the
more appropriate doctrine that the lower court should have applied under the circumstances was
in pari delicto (where fault is mutual), and thus it reversed on those grounds and made no
determination related to the unclean hands doctrine. Id. at 514–15, 518. United Bank does not
provide any other authority in support of its argument.
The more helpful and relevant case, cited by Defendants, is Mona v. Mona Electric
Group, Inc., 934 A.2d 450 (Md. Ct. Spec. App. 2007). In that case, the Court of Special Appeals
of Maryland affirmed the lower court’s application of the unclean hands doctrine where the
plaintiff, a minority shareholder, sued Mona Electric Group to recover money deducted by the
company from a dividend payment. Mona, 934 A.2d at 478. The plaintiff had prevailed at trial
based on his testimony denying that he had made any personal guarantees of repayment for
advances paid by Mona Electric Group, which the dividend deduction had been intended to
recoup. Id. However, the plaintiff admitted that he had deducted the amount of the advance on
his taxes by representing that he had personally guaranteed repayment.
proceedings, the trial court sua sponte determined that the unclean hands doctrine should apply
because the prior conduct and the present relief both concerned the advances. Id. What was
important was that the plaintiff was trying to achieve a particular result—avoidance of liability to
repay the advances—based on his misconduct.
Accordingly, the trial court reduced the
plaintiff’s recovery by the amounts advanced. Id.
The “nexus between the misconduct and the transaction” in Mona was that they both
concerned the amounts advanced. Here, the nexus between the misconduct and the transaction is
that they both concern the proceeds of the disputed life insurance policies. In Mona, as here, the
plaintiffs tried to collect the disputed money through inequitable conduct. The fact that United
Bank is now asserting its claim to the money as an unsecured creditor (and is thus not using the
rights the Second Amendment would have provided to it had it not been invalidated) does not
alter the analysis. There is no material dispute of fact that the subject matter and the result
desired are the same now as they were in 2011. The very reason United Bank initiated this
lawsuit is because the Second Amendment was deemed void by the Circuit Court, and thus VCB
could not reach the disputed insurance policies. This Court cannot ignore VCB’s previous
inequitable conduct in its effort to reach the same insurance proceeds and now allow its
successor by merger, United Bank, to recover as to the same subject matter in the wake of that
misconduct. By way of protecting its judicial integrity, the Court will therefore apply the
unclean hands doctrine to bar United Bank’s recovery in this case. Accordingly, the Court will
grant summary judgment for Defendants on all counts. However, even if the unclean hands
doctrine did not apply in this case, Defendants would still prevail under applicable law.
5. Counts I–V: Maryland Uniform Fraudulent Conveyance Act
A. Fair Consideration for the Sale of the John Hancock Policies
Count I of the SAC alleges that David violated the MUFCA with respect to the John
Hancock policies by changing the beneficiary designations of the policies and by transferring the
ownership of the policies from SCS to himself as trustee of the Osprey Trust.
ECF No. 126,
¶ 40. David asserts that Defendants are entitled to summary judgment as to Count I because,
notwithstanding SCS’s insolvency at the time of the transaction, the purchase of the John
Hancock policies by the Osprey Trust was done for fair consideration and thus is not a fraudulent
conveyance as a matter of law. ECF No. 120-1 at 17.
Under the MUFCA,
Every conveyance made and every obligation incurred by a person who is or will
be rendered insolvent by it is fraudulent as to creditors without regard to his actual
intent, if the conveyance is made or the obligation is incurred without a fair
Md. Code Ann., Com. Law § 15-204 (West 2017). “Fair consideration” is provided in exchange
for property or an obligation if:
(1) In exchange for the property or obligation, as a fair equivalent for it and in
good faith, property is conveyed or an antecedent debt is satisfied; or
(2) The property or obligation is received in good faith to secure a present
advance or antecedent debt in an amount not disproportionately small as
compared to the value of the property or obligation obtained.
Id. § 15-203.
As of 2008, the John Hancock policies were made split-dollar policies: SCS was named
the primary beneficiary of death benefits to the extent of premiums it paid, and Betty was the
beneficiary to receive the remaining balance of death benefits. ECF No. 120-15. Accordingly,
at the time before the policies were sold in October 2011, United Bank would have been entitled
to $280,000—presumably the amount SCS paid in premiums, although that amount alleged in
the SAC is not substantiated by evidence in the record. See ECF No. 126, ¶ 42. David asserts
that the $110,000 price paid for the policies to SCS was fair consideration because the “policies
had long overdue premiums, negative surrender value, and were in danger of lapsing and
becoming worthless.” ECF No. 144 at 6. SCS had declared bankruptcy in December 2010 and
had no funds from which to pay the policy premiums. Id.
United Bank contends that it would have permitted SCS to pay the premiums pursuant to
a Consent Order for use of cash collateral in the bankruptcy case. ECF 141-1 at 25 (citing
ECF No. 141-30 (Consent Order)). Yet, as David points out, the Consent Order says nothing
about paying insurance premiums and, regardless, the Consent Order was set to expire no later
than March 2011. Id.; see also ECF No. 141-30, ¶ 11. Furthermore, documents from John
Hancock show that SCS had stopped paying the policy premiums before December 2010 and
that both policies had a $0.00 surrender value as of March 2010. ECF No. 141-11. Additionally,
David argues, because it was difficult for all the parties to determine the policies’ fair market
value, it was reasonable to adopt the calculation done by John Hancock, a neutral third party,
based on an IRS-approved formula that was used to determine the valuation of the policies as
they would be valued as a gift or estate tax. ECF No. 144 at 8.
United Bank asserts that because the Osprey Trust, upon obtaining ownership of the
policies, received in return for the $110,000 “the right to draw down immediately in cash one
half of each policy’s total death benefit, which totaled $750,000,” the fair market value for the
policies was significantly closer to $750,000. ECF No. 141-1 at 28. In support it provides a
letter to David from John Hancock explaining the amount of reduced death benefits of the two
policies, which comes out to be about $709,000. ECF No. 141-24. United Bank also cites to a
Tax Court case for support that “[t]he nearer the insured approaches death, which is the event of
collectability, the nearer its value approaches the face amount for which [the policy] was issued.”
Pritchard v. Comm’r of Internal Revenue, 4 T.C. 204, 208 (1944) (finding cash surrender value
inadequate as measure of policy worth where policy’s value would be received in shorter time
than mortality tables predicted).
There is no dispositive authority as to how fair consideration is determined under specific
circumstances. Therefore, under the circumstances here—SCS had not been paying the policies’
premiums, SCS was insolvent, and the policies had a cash surrender value of $0.00—the Court
agrees with Defendants’ analysis and finds that the $110,000 was a “fair equivalent” for the John
Hancock policies. Accordingly, even if the unclean hands doctrine does not apply in this case,
the Court will grant summary judgment for Defendants as to Count I because the transfer of
ownership of the John Hancock policies did not violate the MUFCA.
B. Definition of “Conveyance” Under the MUFCA
United Bank alleges in Counts II–V of the SAC that David violated the MUFCA by
changing the beneficiary designations on each of the policies for the purpose of removing those
policies from John’s and SCS’s estates and thus from VCB’s reach as a creditor. ECF No. 126,
¶¶ 49–74. The Court, however, need not examine each of the transactions to determine if they
were indeed fraudulent under the statute because a change of the designated beneficiary of a life
insurance policy does not constitute a “conveyance” under the MUFCA.
Under the MUFCA, a “conveyance” is defined as “includ[ing] every payment of money,
assignment, release, transfer, lease, mortgage, or pledge of tangible or intangible property, and
also the creation of any lien or incumbrance.” Md. Code Ann., Com. Law § 15-201(c) (West
2017). Thus, the relevant inquiry is whether a life insurance policy beneficiary designation
creates a property interest under the MUFCA. No Maryland court has addressed that specific
question. The Court of Appeals of Maryland has held in other contexts, however, that the status
as a beneficiary of a life insurance policy creates only a mere expectancy, not a property interest.
In Wooddy v. Wooddy, 265 A.2d 467, 473 (Md. 1970), the Court of Appeals rejected a claim by a
former wife that her children were entitled to a constructive trust over certain life insurance
policies taken out by her former husband. The court held that
the fact that [the former husband] may have at one time designated the children as
beneficiaries or intended the policies to be used for [the children’s] education
does not, standing alone, create rights which may be asserted by the children or in
their behalf to require him to keep the policies in force or to prevent him from
changing the beneficiary he had designated.
Wooddy, 265 A.2d at 473. Similarly, the Court of Appeals in Durst v. Durst, 193 A.2d 26, 28
(Md. 1963), a case involving a former wife’s claims to proceeds of her former husband’s life
insurance policy, stated that
[w]e have uniformly held that where the right by the insured to change the
beneficiary named in a life insurance policy is reserved, the beneficiary has no
vested or indefeasible interest under the policy during the lifetime of the insured’s
death, but only a revocable expectancy contingent upon being the beneficiary at
the time of the insured’s death.
Accordingly, the court rejected the wife’s argument that her status as beneficiary should be
maintained. Durst, 193 A.2d at 28.
The Court of Special Appeals of Maryland reiterated this approach in East v.
PaineWebber, Inc., 748 A.2d 1082 (Md. Ct. Spec. App. 2000). In that case, a former wife
contested whether she had waived her rights to receive proceeds of her former husband’s IRA
(which the former wife assumed that she had been the designated beneficiary at the time of the
former husband’s death) under a property settlement agreement in which the former wife
quitclaimed any interest she had in the former husband’s property. East, 748 A.2d at 1087–88.
The court held that she had not waived her rights because, at the time she executed the
agreement, she had no property interest in the IRA. Id. at 1088. “To be sure,” the court
explained, “she had an expectancy, but an expectancy is not a property interest. It is a mere hope
or wish.” Id.
Although these cases were not decided under the MUFCA, other state courts have applied
the same principle to the question of fraudulent conveyances, both in jurisdictions that have
adopted the Uniform Fraudulent Conveyance Act or its successor, see, e.g., Wornick v. Gaffney,
544 F.3d 486, 492 n.3 (2d Cir. 2008) (“beneficiary holds only an inchoate interest in an
insurance policy, merely changing a beneficiary cannot be considered a conveyance of property
capable of being fraudulent”); First Wis. Nat’l Bank of Milwaukee v. Roehling, 269 N.W. 677,
680 (Wis. 1936) (“[t]he Uniform Fraudulent Conveyance Act evidences no intent to protect the
creditors against the loss by transfer of an interest so speculative, so remote, and so completely
within the power of the insured to destroy”), and jurisdictions that have not adopted the uniform
statute, see, e.g., Weber v. Lincoln Nat’l Life Ins. Co., No. 2:13CV31, 2013 WL 5530257, at *8
(E.D. Va. Oct. 2, 2013) (benefits of unmatured life insurance policy are not property under
Virginia’s non-uniform fraudulent conveyance statute); Mahood v. Maynard, 171 S.E. 884, 884
(W.V. 1933) (beneficiary interest in proceeds of life insurance policy is a future contingency
under state common law).
David urges the Court to extend Maryland’s precedent that a beneficiary designation is
only an expectancy, and not a property interest, to the context of the MUFCA, as other states
have done. Accordingly, he argues that changes in the beneficiary designations of all eight life
insurance policies done before John’s death were not conveyances under the statute because they
did not involve a property interest.
United Bank, for its part, argues that at the time of the changes, the then-existing
beneficiaries, and thus United Bank as a creditor, had more than a mere expectancy.
ECF No. 141-1 at 22.
It asserts that upon the declaration of John’s incompetence, the
beneficiary designations under the split-dollar and JDB policies became fixed because “John was
divested of the ability to change them (by virtue of being declared incompetent), and David did
not have the ability to change them (at least without court approval).” Id. at 22–23. Therefore, it
argues, because SCS was the alternate beneficiary in the event that the original beneficiary,
Betty, predeceased John, which is what happened, SCS would have been the beneficiary of these
policies at the time of John’s death. Id. Accordingly, United Bank, as SCS’s creditor, asserts
that it was entitled to the proceeds which would have been part of SCS’s and John’s estates. Id.
Assuming that David had proper authority to make the beneficiary designation changes
and SCS would have been the proper beneficiary at the time of John’s death, United Bank’s
argument falls flat. It first relies upon a decision of the United States Bankruptcy Court for the
District of Columbia that, explicitly rejecting the contrary holding of other courts, stated “that a
change in beneficiary is subject to a fraudulent conveyance action by any creditor who would
have had an interest in the proceeds but for the transfer.” In re Wolensky’s Ltd. P’ship, 163 B.R.
615, 627 (Bankr. D.D.C. 1993). In In re Wolensky, the Bankruptcy Court held that an insurance
policy is still an asset to which a creditor is entitled, even though it is contingent and perhaps of
nominal value. Id. Because the debtor was the original beneficiary under the policy, the
Bankruptcy Court ruled that the creditors would have been entitled to the proceeds had the
designation not been changed. Id. These conclusions, however, were all dicta because the court
ultimately held the change in beneficiary was invalid for other reasons and thus did not need to
make a holding regarding whether the change, if valid, would have been a fraudulent
conveyance. Id. 627–29. Furthermore, the District of Columbia had not adopted the Uniform
Fraudulent Conveyance Act or its successor at the time of the decision, and opinions of the
United States Bankruptcy Court for the District of Columbia are not, in any event, binding on
United Bank also cites to another Bankruptcy Court case, this one from the Western
District of Pennsylvania, that held that under the Pennsylvania Fraudulent Conveyance Act the
definition of “conveyance,” which is the same definition under the MUFCA, includes a change
of a beneficiary designation. In re John Hatton, Inc., 104 B.R. 705, 707–08 (Bankr. W.D. Pa.
1989) (holding debtor’s change of beneficiary designation on life insurance policy from himself
to wife after being diagnosed with lung cancer was a fraudulent conveyance). This case,
however, is contrary to Maryland precedent, and that of other sister states, that insurance
beneficiary interests are mere expectancies.
The only Fourth Circuit case cited by United Bank is Navassa Guano Co. v. Cockfield,
253 F. 883 (4th Cir. 1918). In that case, the Fourth Circuit found a change in an insurance
beneficiary designation a fraudulent conveyance under the Statute of Elizabeth, the MUFCA’s
early precursor statute, where the insured changed the beneficiary knowing death was imminent.
Navassa, 253 F. at 886. The age of that case, which involved a South Carolina transaction, limits
its influence as does Maryland’s later development of its legal precedent regarding life insurance
benefits as mere expectancies, and not property interests.
Although the Court of Appeals of Maryland has not yet weighed in on this specific issue,
the state’s precedent and its sister courts’ influence strongly cut in favor of extending the courts’
treatment of the right to a life insurance benefit as a mere expectancy, and not a property interest,
to the context of the MUFCA. Accordingly, even if the unclean hands doctrine does not apply in
this case, the Court will grant summary judgment in favor of Defendants as to Counts II–V
because it concludes that a change in a life insurance beneficiary designation is not a
“conveyance” under the MUFCA, and thus the statute is not applicable.
6. Count VI: Self-Dealing
Count VI of the SAC claims that David, as John’s guardian, breached the fiduciary duty
he owed to SCS’s creditors and the creditors of John’s future estate. ECF No. 126, ¶¶ 75–79.
David asserts that the Defendants are entitled to summary judgment on this count because, under
Maryland law, corporate directors only owe fiduciary duties to the corporation and, in very
limited circumstances, its shareholders. ECF No. 120-1 at 25–26.
It is settled law in Maryland that a corporate officer only owes a fiduciary duty to the
corporation regarding management of the corporation’s affairs. See Md. Code Ann., Corps. &
Ass’ns § 2-405.1(g); George Wasserman & Janice Wasserman Goldsten Family, LLC v. Kay,
14 A.3d 1193, 1206 (Md. Ct. Spec. App. 2011). In the limited circumstances of cases affecting
fundamental shareholder rights, a corporate officer may owe a fiduciary duty to a shareholder.
Kay, 14 A.3d at 1207. But, as the Court of Appeals of Maryland has plainly stated, a corporate
officer does not owe a fiduciary duty to creditors.
Waller v. Waller, 49 A.2d 449, 452
(Md. 1946) (“When directors commit a breach of trust, they are liable to the corporation, not to
its creditors or stockholders.”); see also Danielewicz v. Arnold, 769 A.2d 274, 283 (Md. Ct.
Spec. App. 2011) (holding that this principle is “well-settled law”). Therefore, because VCB
was a creditor of SCS’s and John’s estates—not a shareholder of SCS—there is no premise on
which United Bank can assert a breach of fiduciary duty by David, in his capacity as John’s
guardian, regarding the actions taken as a SCS corporate director.
United Bank argues that the above well-settled law is only true when the corporation is
solvent. ECF No. 141-1 at 30 (citing Pritchard v. Myers, 197 A. 620, 625–26 (Md. 1938)
(“Should, however, the corporation be insolvent and contemplating the liquidation of its affairs,
its directors become bound as trustees for all the creditors and stockholders, and must so use,
conserve, and apply the corporate property.”)). If a corporate director breaches a duty under
those circumstances, United Bank asserts that creditors may sue so long as the creditors “allege
and show that they have suffered loss by reason of the wrongs complained of, and that the
corporation or receiver has failed or refused to take the proper steps for the redress of the
wrong.” Id. at 30–31 (quoting Pritchard, 197 A. at 626). Given this, United Bank argues that it
is at least a dispute of a material fact whether, given SCS’s poor economic position at the time of
the transfers, David, while acting as a corporate director in his capacity as John’s guardian, owed
a fiduciary duty to VCB. ECF No. 141-1 at 31.
Pritchard’s applicability, however, is much narrower than suggested by United Bank. In
that case, the insolvent corporation was in receivership as established through official equity
proceedings, and the receiver had refused to initiate action against the corporation’s directors for
the benefit of its depositors and creditors. Pritchard, 197 A. at 622, 626. Although SCS did go
through bankruptcy, the analogy fails because the creditors here cannot show that at the time of
insolvency “the corporation or receiver ha[d] failed or refused to take the proper steps for the
redress of the wrong,” which would be a necessary showing for the case to move forward, even
assuming a cause of action by a creditor exists. Accordingly, United Bank cannot challenge
David’s conduct in his role as John’s guardian as a violation of a fiduciary duty owed to VCB.
As such, the Court will grant summary judgment in favor of Defendants as to Count VI.
7. Counts VII and VIII: Standing to Challenge David’s Authority as John’s Guardian
Count VII of the SAC seeks a declaratory judgment that the changes in life insurance
beneficiary designations made by David, in his capacity as John’s guardian, were void ab initio
because David lacked the authority to create the trusts that were ultimately designated as
beneficiaries. ECF No 126, ¶¶ 80–90. Count VIII seeks declaratory judgment that the transfer
of ownership of the John Hancock policies was void ab initio because David lacked authority to
create the Osprey Trust, which bought the policies, and to cast John’s vote as director of SCS.
Id. ¶¶ 91–98.
Both allegations fail because United Bank lacks standing to challenge the
Under the federal Declaratory Judgment Act, “any court of the United States, upon the
filing of an appropriate pleading, may declare the rights and other legal relations of any
interested party seeking such declaration, whether or not further relief is or could be sought.”
28 U.S.C. § 2201(a) (2012). In the Fourth Circuit, two conditions must be met for a court to
have jurisdiction to issue a declaratory judgment:
“First, the dispute must be a ‘case or
controversy’ within the confines of Article III of the United States Constitution—the
Second, the trial court, in its discretion, must be satisfied that
declaratory relief is appropriate—the ‘prudential’ inquiry.” White v. Nat’l Union Fire Ins. Co.,
913 F.2d 165, 167 (4th Cir. 1990).
David argues that United Bank lacks standing to challenge his authority as John’s
guardian because it had no justiciable interest in the guardianship proceeding and thus did not
suffer any injury-in-fact, an Article III standing requirement, from any alleged unauthorized
action taken by David. ECF No. 137-1 at 5. Under Maryland law, a guardian only owes duties
to his ward and “interested persons” as defined under the guardianship statute. Md. Code Ann.,
Est. & Trusts § 13-216(a) (West 2017). Because United Bank’s status as creditor does not
qualify it as an “interested person” in John’s guardianship, David asserts, it was not harmed by
any alleged unauthorized conduct taken by David in his capacity as John’s guardian. Id. Finally,
David argues that United Bank was not a party to any of the transactions in which his authority is
challenged, and thus did not suffer an injury as a result of those transactions. Id.
United Bank, however, argues that its ability to challenge David’s authority stems from
its request for declaratory judgment, and not from an interest in John’s guardianship. To make
its point, United Bank cites to White v. National Union Fire Insurance Co., 913 F.2d 165
(4th Cir. 1990). In that case, the Fourth Circuit upheld the district court’s exercise of jurisdiction
in issuing declaratory relief as to the amount of uninsured motorist insurance coverage available
to the plaintiff under her employer’s insurance policy to cover an accident in which she was
acting within the scope of her employment. White, 913 F.2d at 165. The court found that the
jurisdictional requirements were met because the judgment provided plaintiff with guidance as to
the amount of uninsured motorist insurance coverage available to her if she were to obtain a
judgment against the other driver. Id. at 168. In that case, the plaintiff was not a party to the
insurance contract at issue, but the court still found declaratory judgment appropriate. United
Bank argues that the Court should follow the Fourth Circuit’s example in that case and find that
declaratory judgment for United Bank, as a third party, is appropriate where, as here, a
declaratory judgment would allegedly provide conclusive relief by resolving the continuing
dispute. ECF No. 146 at 3.
In making the above argument, United Bank contends that it is not seeking declaratory
judgment as an “interested party” in John’s guardianship, as David claims, but is “challenging
David’s actions as an individual who intended to hinder, delay and defraud Plaintiff by
wrongfully using his guardian status to accomplish a wrongful purpose.” Id. at 2. Furthermore,
United Bank asserts it has standing “to request that the Court enforce the equitable maxim that
equity will not allow a statute to be used as a cloak for fraud.” Id. at 2 n.2 (citing Citizens Nat’l
Bank v. Leffler, 228 Md. 262, 270 (1962)).
United Bank, however, fails to contend with the fact that declaratory judgment is only a
procedural remedy, and does not create any substantive rights. Aetna Life Ins. Co v. Haworth,
300 U.S. 227, 240 (1937). This means that a party is not entitled to a declaratory judgment on an
issue for which he is not entitled to substantive relief. Here, United Bank is not entitled to
substantive relief by challenging David’s authorization for his conduct as John’s guardian.
Md. Code Ann., Est. & Trusts § 13-216(a) (“If the [guardian’s] exercise of a power is improper,
the guardian is liable for breach of his fiduciary duty to the minor or disabled person or to
interested persons . . . .”). This does not leave United Bank without recourse because it has
asserted its claims under the MUFCA, which provides a mechanism for United Bank to
challenge David’s alleged conduct “as an individual who intended to hinder, delay or defraud
Plaintiff . . . .” But, declaratory judgment does not allow United Bank to challenge that conduct
under a premise of unauthorized guardianship action because it would not be able to do so under
substantive Maryland law. Accordingly, the Court will grant summary judgment for Defendants
on Counts VII and VIII because United Bank lacks proper standing to challenge the disputed
transactions based on the scope of David’s authority as John’s guardian.
The bad behavior of United Bank’s predecessor sunk its ship in the Circuit Court for
Montgomery County. That behavior is fatal to its efforts in this Court, and its soiled hands
preclude any recovery here as well. United Bank’s interesting legal theories are not sufficient to
raise its sunken ship because they are wrong as a matter of law. Thus, even with clean hands, its
ship will remain at the bottom of the legal ocean.
Accordingly, Defendants’ Motions for Summary Judgment (ECF Nos. 120, 121, 137)
will be GRANTED and Plaintiff’s Motion for Summary Judgment (ECF No. 141) will be
DENIED. A separate order will follow.
Date: March 13, 2018
ROGER W. TITUS
UNITED STATES DISTRICT JUDGE
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