Thomas P. GordonCounty Executive

Bernard v. PepukayiCounty Attorney

OFFICE OF LAW

OPINION OF THE COUNTY ATTORNEY

January 22, 2016

This is the legal opinion of the County Attorney and the Office of Law concerning theOffice of Finance and certain duties associated therewith.

BACKGROUND

New Castle County is a beneficiary of a residual trust pursuant to a Trust Agreement(hereinafter "Original Trust") dated February 2, 1976 by and between Geoffrey Smith Garstin,(hereinafter "Trustor"), and Wilmington Trust Company, (hereinafter "Trustee" or "WilmingtonTrust"). In December 1978, the Trustee executed a Declaration of Amended Trust (hereinafter"Amended Trust") after receiving approval from the Delaware Court of Chancery. Under theAmended Trust, certain property held under the Original Trust was declared to be distributed asfollows:

(iv) Trustee shall transfer and deliver the balance of the remaining residuary trust,as the same may then be constituted, free from trust, to New Castle County,Delaware, to be held as a memorial to Trustor and Trustor's said wife and theincome to be applied to the care, maintenance, and upkeep of the parks under[New Castle County's] jurisdiction.'

In 1999 Trustee conveyed $3,400,000.00 in U.S. Treasury Disc Bills and $398,387.48 incash to New Castle County from Geoffrey Smith Garstin for Ann NieldsGarstin - ResidualTrust - Charitable Remainder Uni-Trust, as reflected by a receipt dated the same. In May 2001,the County entered into an Investment Agreement with Trustee. The terms of the Agreementprovided for termination by either party at any time upon written notice.

It is presumed the Treasury Disc Bills reached maturation, as the Trustee delivered toNew Castle County $3,402,812.46 in cash on July 6, 2001, reflected by a receipt. These monieswere acknowledged and accepted by New Castle County pursuant to County Council's adoptionof Resolution No. 01-042 (hereinafter "Resolution"), dated May 8, 2001. The Resolution titleread as follows:

1 See Amended Trust, pg. 7 paragraph 2(b)(iv) (emphasis added).87 Reads Way, New Castle, DE 19720 www.nccde.org Phone: 302-395-5130 FAX: 302-395-5150

ACCEPTING A GIFT OF FUNDS LEFT IN TRUSTBY GEOFFREY SMITH GARSTIN

AND ANN NIELDS GARSTINAUTHORIZING THE COUNTY EXECUTIVE

TO MANAGE AND ADMINISTER THE TRUST, ANDAUTHORIZING THE CIDEF FINANCIAL OFFICER

TO DEPOSIT THE FUNDS WITH WILMINGTON TRUST COMPANY

The County labelled the "gift of funds" originating from the Garstin Trust as the "GarstinTrust Portfolio" and/or the "Garstin Trust Fund." Until recently the majority of the "GarstinTrust Portfolio" has been managed by Wilmington Trust. The "Garstin Trust Fund" is a programtitle or line item now within the Department of Special Services. Although these names aregenerally acceptable, their use creates a degree of confusion regarding the underlying assets.

During fall 2015, the Chief Financial Officer believed the purchase of an investment inthe form of a secured note from the Delaware Board of Trade (hereinafter "DBOT") would serveas a wise investment for the Garstin Trust Portfolio. November 20,2015, the Office of Lawadvised the County Executive and Chief Financial Officer that New Castle County has legalauthority to modify the investment asset combination of funds within the Garstin Trust Portfolio.A portion of the Garstin Trust Portfolio was thereafter reallocated to purchase a differentinvestment in the form of a secured promissory note (hereinafter "Note") from DBOT, managedby the Office of Finance. This change of investment occurred November 25, 2015. Prior to thischange, the Garstin Trust Portfolio was allocated to stocks and bonds, managed by WilmingtonTrust. On December 22,2015, a separate County investment portfolio purchased the Note as aninvestment, and the Garstin Trust Portfolio purchased investments identical to its status prior toinitially purchasing the Note.

THE COUNTY DOES NOT OPERATE THE GARSTIN TRUST

The assets in the account held by the County generally referred to as the "Garstin Trust"is not a trust, nor has it ever been a "trust" held by the County. It appears the initial confusionbegan with the title of County Council Resolution No. 01-042.2 Although the Resolutionsatisfied the goal of accepting the Garstin gift in order for the County Executive to manage thegift, the title did not properly reflect the legal status of the gift. The term "trust" has specificlegal significance. County Council could not authorize the County Executive to manage the"Garstin Trust" because Geoffrey Smith Garstin designated Wilmington Trust to manage thedistribution of this property as directed by the Declaration of Trust. In effect, County Councilauthorized the County Executive to manage and administer the assets originating from theGarstin Trust. Also, County Council's Resolution consented to the Chief Financial Officer todepositing the proceeds from the Amended Trust with the former Trustee; and entering into aninvestment management agreement with the former Trustee. The terms of this agreementprovided that either party (New Castle County or former Trustee) could terminate the agreementat any time upon written notice.

2 "Authorizing the County Executive to Manage and Administer the Trust".2

3 Black's Law Dictionary, ro" Edition (Bryan A. Gamer, Editor in Chief).4Id.s Note, §2.6 City of Vista v. Sutro & Co., 52 Cal. App. 4th 401, 409 (Ct. of App., 4th Dist., Div. 1, 1997).7 There has not been a material change in value to any of these applicable assets held by New Castle County. TheCounty Executive along with the Chief Financial Officer have the legal authority to determine what assets theCounty should invest.9 Billey v. North Dakota Stockmen's Association, 579 N.W. 2d 171, 176 (N.D. Supr. 1998). See also People v.Schiek, 14 N.£. 2d, 223, 225 (IL Supr., 1938)("The city council is required to ascertain the amount oftheappropriation for corporate purposes legally made which must be raised by the levy of a tax. In ascertaining thisamount, there is to be taken into consideration the amount of miscellaneous receipts, which, judging from past

3

A PROMISSORY NOTE IS AN INVESTMENT

The County purchased a Promissory Note valued at $3,000,000 from DBOT as aninvestment. An investment is "[a]n expenditure to acquire property or assets to producerevenue.i" A Promissory Note is "[a]n unconditional written promise, signed by the maker, topay absolutely and in any event a certain sum of money either to, or to the order of, the bearer ora designated person.t'" Under the Note purchased from DBOT, the County is to receive 6%interest per annum on the unpaid principal amount and any other amounts payable under theNote.s Interest is to be paid on each consecutive anniversary date of the Note until alloutstanding amounts under the Note are paid in full. All amounts are payable no later thanNovember 25, 2020 or upon New Castle County's receipt of aggregate gross proceeds of$15,000,000. Consequently, and under these circumstances, the Note is a proper investment forthe County.

DELAWARE LAW DESIGNATES WHO MAY INVEST COUNTY FUNDS

9 Del. C. §1371, in part, states "[t]he Office of Finance, managed by the Chief FinancialOfficer, .. may perform the following functions: .. (9) Invest funds deemed by the ChiefFinancial Officer available for temporary investment in such obligations or in such manner as theCounty Executive may authorize .... " The statutory authority of the Chief Financial Officer toinvest funds necessarily includes the power to perform acts incidental to investing funds.

6It

appears to have been the common practice, and consistent with state law, for the Office ofFinance to change the particular assets held within the County's investment portfolios.Consequently, there is nothing legally improper surrounding a chan~e of investment becausestate law empowers the Chief Financial Officer with this discretion.

RESTRICTIONS WITH PUBLIC MONEY

The use of public money, however, is not without restriction. Art. VIII, §8 oftheDelaware Constitution states "[n]o county, city, town or other municipality shall lend its credit orappropriate money to, or assume the debt of, or become a shareholder or joint owner in or withany private corporation or any person or company whatever." The Note purchased as aninvestment does not "lend its credit," "assume any debt of," or "become a shareholder or jointowner" with DBOT. However, there appears to be some confusion whether the purchase of theNote is an "appropriation" as contemplated by the Delaware Constitution.

"By nature, an 'appropriation' is the expenditure of public funds."g Again, an investmentis expenditure to acquire property or assets to produce revenue. 10 No funds associated with the

Attorney

Garstin assets have been spent. But rather, a Note was purchased to generate more certainrevenue in the form of 6% investment return. The principle value of Garstin assets has notchanged. The only change concerned a shift in part of the investment portfolio from WilmingtonTrust to a Promissory Note with DBOT (and subsequently back to Wilmington Trust). A shiftwithin an investment portfolio is not an "appropriation" as intended by the General Assemblybecause such an interpretation would render 9 Del. C. §1371(9) meaningless. The clear languageof the General Assembly in this statutory provision empowers the Chief Financial Officer to"[i]nvest funds [he deems] available for tempor~ investment in such obligations or in suchmanner as the County Executive may authorize." 1 Therefore, the act of changing an investmentcannot be considered an "appropriation."

"If the act in question serves a public purpose, it will be held to be consistent with ArticleVIII, Section 8, of the Delaware Constitution notwithstanding the fact that proceeds or profitmay inure to a private individual.,,13 The General Assembly's enactment of9 Del. C. §1371(9)is the best evidence demonstrating investing funds held by the County serves a public purpose.Specifically relating to Garstin assets, the revenue generated from the Note would have allowedthe County to enjoy more consistent revenue in a volatile investment market. County parks areopen and accessible to the public, and the well maintenance of these parks provides enhancedenjoyment to the public. It is immaterial whether DBOT benefits from the County's investment,so long as the investment is for a public purpose.

CONCLUSION

In conclusion, the County Attorney opines New Castle County's purchase of aPromissory Note from the Delaware Board of Trade on November 25,2015 was legallypermissible. Pursuant to the applicable constitutional and statutory law of this State, the ChiefFinancial Officer held the proper authority to purchase the investment. This authority includedthe ability to subsequently convert the Garstin assets to a status identical to the prior purchase ofthe Promissory Note, which occurred on December 22,2015.

It is so opined on this 220d day of January 2016.

experience, will probably be received. The city council is then authorized to levy a tax for the amount necessary topay corporate expenses, as appropriated for, above the amount received from such miscellaneous sources.").10 Black's Law Dictionary.11 9 Del. C. §1371(9).13 The Fraternal Order of Firemen of Wilmington, Delaware, Inc. v. Shaw et al., 196 A.2d 734, 735 (Del. Supr.,1963); See Also In re Opinion of the Justices of the Supreme Court, 177 A.2d 205, 212 (Del. Supr., 1962); and Tostov, Pennsylvania Nursing Home Loan Agency, 331 A.2d 198, 205 (pA Supr., 1975)("The phrase 'pledge or loan ofcredit' is a term of art referring to these financing devices and was clearly not intended to prohibit other sorts offinancial transactions between the Commonwealth and private citizens or corporations that serve a public purposeand are otherwise lawful.").

4