United Bank v. Buckingham

301 F.Supp.3d 561

UNITED BANK, Plaintiff,

v.David BUCKINGHAM, et al., Defendants.

Case No. RWT 13–cv–3227

United States District Court, D. Maryland.

Signed March 13, 2018

James R. Schroll, Jennifer O. Schiffer, William F. Krebs, Bean Kinney and Korman P.C., Arlington, for Plaintiff.

Richard Buckingham, Bethesda, MD, Pro Se,

Kenneth S. Nankin, Nankin and Verma PLLC, Kenneth R. West, Abrams and West PC, Bethesda, MD, D. Jack Blum, Charles R. Claxton, Paley, Rothman, Goldstein, Rosenberg, Eig & Cooper, Chtd., Bethesda, MD, for Defendants.

MEMORANDUM OPINION

ROGER W. TITUS, UNITED STATES DISTRICT JUDGE

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 the transaction.

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.

1. Factual Background

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 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...