624 N.E.2d 899 (Ill.App. 4 Dist. 1993), 4-93-0007, Smith v. First Nat. Bank of Danville

Docket Nº:4-93-0007.
Citation:624 N.E.2d 899, 254 Ill.App.3d 251, 191 Ill.Dec. 711
Party Name:Judith K. SMITH, Plaintiff and Counterdefendant-Appellee, v. FIRST NATIONAL BANK OF DANVILLE, Individually, and as Trustee, Defendant (First National Bank of Danville, Counterplaintiff-Appellant; Possum Trot, Ltd., et al., Counterdefendants).
Case Date:December 09, 1993
Court:Court of Appeals of Illinois
 
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Page 899

624 N.E.2d 899 (Ill.App. 4 Dist. 1993)

254 Ill.App.3d 251, 191 Ill.Dec. 711

Judith K. SMITH, Plaintiff and Counterdefendant-Appellee,

v.

FIRST NATIONAL BANK OF DANVILLE, Individually, and as Trustee, Defendant (First National Bank of Danville, Counterplaintiff-Appellant; Possum Trot, Ltd., et al., Counterdefendants).

No. 4-93-0007.

Court of Appeals of Illinois, Fourth District.

December 9, 1993

Argued Oct. 20, 1993.

Rehearing Denied Jan. 13, 1994.

Page 900

[Copyrighted Material Omitted]

Page 901

[Copyrighted Material Omitted]

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[191 Ill.Dec. 714] [254 Ill.App.3d 253] Jonathan G. Bunge (argued), Angela Marsh (argued), Keck, Mahin & Cate, Chicago, Timothy O. Smith, Smith & Kagawa, Danville, for appellant.

Karen L. Kendall, Heyl, Royster, Voelker & Allen, Peoria, James C. Kearns (argued), Urbana, for appellee.

OPINION

KNECHT, Justice.

Defendant, the First National Bank of Danville (the Bank), appeals from a judgment in favor of Judy Smith setting aside two promissory notes executed by Judy. We affirm.

  1. FACTS

    1. Background

      The Bank has been involved with Judy's family for several generations. It was the trustee of a trust settled by Judy's grandfather as well as of a trust settled by Judy's mother. The Bank began lending money to Judy in the 1960's. In 1970, Judy inherited farmland from her grandparents' estate and hired the Bank to manage the property. In 1972 the Bank recommended Judy place the farmland in trust, referring her to attorney Carroll Snyder. Snyder drafted the documents creating the trust. Although referred to during the proceedings as a land trust, the trust was actually a revocable inter vivos conventional trust which had land as the res. The Bank was named, and agreed to serve, as trustee of the trust.

      During this period, Judy lived in Arizona, but would occasionally visit the Bank to arrange for loans. The loans were structured to provide for repayment of the indebtedness out of the trust income. In arranging the loans, Judy dealt primarily with Al Schreshuhn, the president and chief executive officer of the Bank. Eventually the loans to Judy were of such magnitude the payments were significantly reducing the amount of income Judy received from the trust. Accordingly, in 1981, Judy agreed to the sale of 80 acres of the farmland and used [254 Ill.App.3d 254] the proceeds to reduce her indebtedness to the Bank to approximately $94,000.

      Judy testified Schreshuhn advised her from time to time regarding the extent of her assets and whether she should seek employment. The Bank also prepared tax returns on her behalf for several years. At the end of June 1983, Judy visited the Bank to arrange for a car loan. At this time Schreshuhn suggested Judy purchase the Possum Trot Tavern, move back to Illinois, and become the "Miss Kitty of Danville." This was the first time Schreshuhn had advised Judy to make an investment.

    2. The Possum Trot Transaction

      The Possum Trot Tavern was purchased by Wilfred and Paula Smith (no relation to Judy) in 1977. The Bank lent $92,000 to the Smiths for the purchase of the Possum Trot. The Possum Trot generated inadequate income to make the payments to the Bank. In May 1983, the Bank initiated foreclosure proceedings. By 1983 the Smiths' indebtedness to the Bank was $170,000. The Smiths filed for relief under the Federal bankruptcy code (see 11 U.S.C. § 101 et seq. (1988)).

      At this time Schreshuhn and Julian Fruhling began to approach customers of the Bank to determine whether they would be interested in purchasing the Possum Trot. Some customers were approached when they came into the Bank on other business, while others were approached on the street. Melvin Price was asked if he was interested in purchasing the Possum Trot and was told the Bank would "sell it cheap" because the Bank did not wish to be in the tavern business. Price was not interested. Schreshuhn asked Marion Wright, an attorney, if he would be interested in purchasing the Possum Trot for $65,000 to $85,000. When Wright told Schreshuhn he was not interested, Schreshuhn asked if Wright thought Charlie or Craig Green might be interested. Charlie Green testified Schreshuhn asked him if he and Craig would be interested in purchasing the Possum Trot for $85,000. Green was not interested.

      Page 903

      [191 Ill.Dec. 715] As of June 1983, all attempts to interest individuals in the purchase of the Possum Trot had been unsuccessful and the Bank did not know the names of any prospective purchasers. At this time Judy visited the Bank to obtain a car loan and Schreshuhn suggested to her she purchase the Possum Trot. Judy testified Schreshuhn advised her to buy the Possum Trot and she believed he was advising her in accordance with her best interests.

      After leaving the Bank, Judy drove back to her home in Arizona. Immediately upon her return a series of telephone calls occurred. [254 Ill.App.3d 255] Fruhling called Judy stating he heard from Schreshuhn she was interested in purchasing the Possum Trot. Judy told him she had just returned home and had not had a chance to think it over. Fruhling instructed Judy to think about purchasing the property and to call him back. Paula Smith also contacted Judy, stating she heard Judy was interested in purchasing the Possum Trot and the Smiths were asking $250,000. Judy informed Schreshuhn of this conversation; Schreshuhn told her $250,000 was "a lot of money" and advised Judy against discussing the purchase of the Possum Trot with anyone. When James Yoho, the Smiths' attorney called, Judy told him she could not discuss matters with him.

      On July 18, 1983, Schreshuhn and Fruhling called Judy. Judy was told she had to "move" if she was interested in purchasing the Possum Trot because there were other individuals interested in purchasing it. They told Judy she could purchase the Possum Trot for $200,000. Judy thought the Bank was offering the Possum Trot to her, even though others were interested because Schreshuhn thought she was "special," and such an investment would be in her best interests. She also thought the Bank was offering her a good deal because the Smiths had represented the sale price as $250,000. Accordingly, Judy agreed to purchase the Possum Trot for $200,000. Fruhling told Judy to send a Mailgram offering to buy the Possum Trot. Fruhling dictated the Mailgram to Judy, which she wrote down, verbatim, and sent to Schreshuhn at the Bank. Fruhling told Judy they would take $5,000 out of her trust account for earnest money.

      The Bank did not tell Judy the Smiths had been unable to successfully operate the Possum Trot and the Possum Trot had generated inadequate income, preventing them from repaying their indebtedness. The Bank also did not tell Judy the Smiths were in bankruptcy and she might get a better deal going through the bankruptcy court. The Bank also did not inform Judy it had been unable to sell the Possum Trot to others for $65,000 to $85,000. Finally, the Bank did not tell Judy it was not acting in her best interests; rather, the Bank was requesting a purchase price which would prevent it from incurring a loss on the loans made to the Smiths.

      In reality, on July 18, 1983, there were no other interested buyers. A memorandum written by Fruhling to the board of directors stated the Bank would "come out whole" by selling the Possum Trot for $200,000 if the other lien holder would take a $10,000 pay down on the amount owed to it. On July 19, 1983, the Bank, at a previously scheduled hearing, requested a receiver be appointed to sell the Possum[254 Ill.App.3d 256] Trot; Judy's Mailgram was represented to the court as a letter of intent.

      The Bank contacted Judy and informed her she should return to Illinois and begin the process of setting up a corporation and taking care of other matters regarding the Possum Trot. The Bank referred and introduced Judy to Charles Hall, the law partner of one of the members of the Bank's board of directors and one of the Bank's attorneys. Neither the Bank nor Hall advised Judy of any conflict of interest. Hall set up a corporation for Judy and submitted Judy's bid to the bankruptcy court. Hall did not advise Judy regarding the purchase of the Possum Trot. Neither the Bank nor Hall told Judy the property she was purchasing had been appraised at less than $130,000.

      The sale of the Possum Trot to Judy was approved by the bankruptcy court. The sale price was ultimately reduced to $190,000

      Page 904

      [191 Ill.Dec. 716] due to the removal of equipment valued at $12,500 from the premises. The Bank lent Judy the entire purchase price. Of the $190,000, $37,227.93 was paid to other creditors of the Smiths and $152,772.15 was retained by the Bank in satisfaction of the Smiths' debt. The Bank loaned Judy an additional $252,664.90 for repairs and renovations. The loans were secured by a mortgage on the Possum Trot and an assignment of Judy's beneficial interest in the inter vivos trust.

      Judy opened the Possum Trot on March 17, 1984. Judy managed the restaurant and worked daily from 7 or 7:30 a.m. until 10 to 12 midnight. Judy wore many hats at the restaurant, working as hostess, waitress, bartender, and doing cleaning and maintenance work. In 1984 through 1987, Judy received no salary. By 1986 all of her trust income was being used to repay the indebtedness to the Bank, so Judy began to draw a salary in 1987. Judy received a salary of $15,000 in 1987, $15,600 in 1988 and $5,700 in 1989.

      Judy experienced cash flow problems during the entire time she operated the Possum Trot. In 1986, when she stopped receiving her trust income, Judy consulted with the Bank regarding her financial problems. The Bank told Judy she could either sell her farmland, sell the Possum Trot, or borrow $400,000 to pay off her indebtedness to the...

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