United States District Court, D. Maryland
W. TITUS UNITED STATES DISTRICT JUDGE
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
in a desperate effort to recover the millions of dollars that
otherwise might be lost, VCB
“negotiated” 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.
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
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.
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.
Dementia and SCS's Decline
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.
Second Amended Forbearance Agreement
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.
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.
for Guardianship of John
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.
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.
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.
John Hancock Policies and the Osprey Trust
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. Id. He 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.
JDB and Split Dollar Policies and the Blue Heron Trust
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.
Montgomery County Litigation
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.
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. ECF No. 120-12 at
of the Death Benefits Under the Policies
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.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 ...