## Facts

- A. Gray Magness died in 1980, leaving a will that created a marital trust and a residuary trust.
- The residuary trust provided income to the widow, Anne M. Magness, for life, with the remainder to be divided among the decedent’s six daughters, including Susane E. Stegemeier and Diane E. Mulrooney.
- Donald L. Magness (the decedent’s brother) served as trustee; Anne and an attorney served as co-administrators c.t.a. of the estate with power to sell estate real estate.
- A principal asset intended to fund the residuary trust consisted of numerous lots and acreage in the Harmony Crest development.
- In response to financial problems at Magness Construction Company, Anne and Donald formed and owned Magness Builders, Inc.
- Over several years, Harmony Crest real estate was conveyed using the estate’s power of sale to Magness Builders in a series of transactions; Magness Builders developed and sold homes to third parties.
- The remaindermen plaintiffs alleged they were not informed of the sales, did not consent, and that the transactions were self-interested sales of trust/estate property to an entity owned by fiduciaries.
- The Court of Chancery found no breach, treated the transactions under corporate fiduciary concepts, and placed the burden on plaintiffs to show unfair pricing; it also suggested remaindermen lacked standing because the widow was the income beneficiary.

## Issues

1. Whether fiduciaries breached duties of loyalty by selling property destined for the residuary trust to a corporation they owned.
2. Whether the governing standard was traditional trust law (strict loyalty) rather than corporate fiduciary principles.
3. Whether, once self-dealing was shown, fiduciaries bore the burden to prove the fairness of the transactions, including fair market value.
4. Whether remaindermen had standing to challenge alleged depletion or mismanagement of the residuary trust corpus.
5. Whether participation by a disinterested co-administrator in the conveyances eliminated or cured the conflicted fiduciaries’ breach.

## Decision

- The Delaware Supreme Court reversed the Court of Chancery in part and remanded for further proceedings.
- The Court held that trust law applied and that the challenged conveyances constituted breaches of fiduciary duty by conflicted fiduciaries who caused property to be sold to a corporation they owned.
- The Court held that the breaches were not cured by the participation of a disinterested co-administrator who joined in the deeds.
- The Court held the trial court misallocated the burden of persuasion; fiduciaries, not beneficiaries, had to prove the fairness of self-interested transactions.
- The case was remanded for determination, under the proper trust-law standards, whether defendants proved the lots were sold for fair market value.

## Legal Principles

- A trustee’s duty of loyalty is governed by traditional trust law; it is stricter than standards often applied to conflicted corporate transactions.
- A sale of trust property by a fiduciary to an entity the fiduciary owns or controls is presumptively improper and voidable at the beneficiaries’ option absent valid authorization or informed consent.
- Once a beneficiary shows self-dealing, the burden shifts to the fiduciary to prove the transaction was entirely fair, including that the price reflected fair market value.
- Approval or participation by a disinterested co-fiduciary does not, by itself, cleanse a conflicted fiduciary’s self-interested transaction.
- Remaindermen have an equitable interest in the trust corpus and may challenge fiduciary conduct that threatens or diminishes that interest.

## Conclusion

The Delaware Supreme Court required application of strict trust-law loyalty rules to fiduciary sales of property to an entity the fiduciaries owned, held the transactions voidable for self-dealing, and reassigned to the fiduciaries the burden to prove that the sales were fair, remanding for a fair-market-value determination under the correct standard.


Stegemeier v. Magness, 728 A.2d 557 (Del. 1999)