Delaware trustee accused of diverting funds in $58 million real estate deal

A trustee allegedly diverted investor funds while failing to redeem a $58 million stake in a Houston apartment complex, a Delaware lawsuit claims.

This is the kind of case that makes you look twice at trust structures. A Delaware court has allowed a lawsuit to move ahead that accuses investment trustees of mishandling redemption proceeds in a major real estate deal.

The case, Hayworth Tanglewood IB, LLC v. Hayworth Tanglewood, DST, et al., is in the Court of Chancery of the State of Delaware. Hayworth Tanglewood IB, LLC is suing the parties behind a Delaware statutory trust that acquired a Houston apartment complex called The Hayworth in 2022. The property cost $105.5 million. The plaintiff contributed more than $58 million in equity, and the balance came from a senior mortgage loan secured by the property.

Delaware statutory trusts are a familiar vehicle in real estate investing. Here, the structure was straightforward. Under the trust agreement and a private placement memorandum, the plaintiff initially held 100 percent of the beneficial interests in the trust. As interests were sold to outside investors, the proceeds were meant to be used to redeem the plaintiff’s stake over time.

That is not what happened. The trustees sold more than $37 million of beneficial interests to outside investors. From those sales, they paid roughly $20.1 million in allocated net proceeds to the bridge lender that had financed the plaintiff's capital contribution. But the plaintiff says they never redeemed the corresponding ownership interests as required.

The lawsuit goes further, alleging that the trust’s proceeds were diverted for improper uses to benefit the signatory trustee’s managers and their affiliated entities. In other words, instead of following the redemption framework in the governing documents, the money is alleged to have been used for self-enrichment.

The funding side has its own parallel dispute. The plaintiff’s equity came from a bridge loan. In April 2024, the bridge lender sued in New York, claiming fraudulent misappropriation of syndication proceeds in connection with the broader funding arrangements. After the plaintiff defaulted, the lender exercised its rights and, as of June 30, 2025, became the plaintiff’s manager and controller.

In Delaware, the trustees asked the court to dismiss or pause the case, arguing that the New York action already covered the issues. On January 15, 2026, Senior Magistrate in Chancery Selena E. Molina declined to do so. She found that the New York case focuses on different agreements, while the Delaware action turns on the trust agreement, private placement memorandum, and a related side letter. That was enough for her to let the Delaware action proceed on its own track.

She also refused to throw out the claims at the pleading stage. In her report, she concluded that the plaintiff has stated reasonably conceivable claims for breach of contract, breach of fiduciary duty, breach of the implied covenant of good faith and fair dealing, and for declaratory relief. Among other things, the plaintiff is asking the court to declare that it still owns no less than 60 percent of the beneficial interests in the trust and that disposition fees must be paid to it. It also seeks to block distribution of any sale proceeds from a future sale of The Hayworth.

The property was listed for sale in May 2025, and the complaint refers to multiple “best and final” offers. But an affidavit from the owner and manager of the signatory trustee now says there is no offer currently under consideration and that a sale could be years away.

On the procedural side, the trustees’ lawyers moved to withdraw a week before the scheduled argument on the dismissal motion. The magistrate granted that request and gave the defendants 10 business days to secure new Delaware counsel and answer the complaint. If they do not, the plaintiff can seek further relief. Discovery is set to resume on February 2, 2026.

For investors and advisors who use Delaware statutory trusts and similar structures, this case is a reminder that the real risk is not just the underlying asset, but also how faithfully trustees follow the deal documents when money comes in the door.