Anderson v. Financial Matters, Inc.
| Decision Date | 07 November 1996 |
| Docket Number | No. 2-95-1444,2-95-1444 |
| Citation | 285 Ill.App.3d 123,672 N.E.2d 1261 |
| Parties | , 220 Ill.Dec. 249 Richard G. ANDERSON et al., as Individuals and as Trustees Under the Richard and Ann Anderson Charitable Trust, Plaintiffs-Appellants, v. FINANCIAL MATTERS, INC., et al., Defendants-Appellees. |
| Court | United States Appellate Court of Illinois |
Thomas P. Ward, Marc L. Fogelberg, Antonia S. Pritchard, McBride, Baker & Coles, Chicago, James S. Tukesbrey, Law Office of James S. Tukesbrey, Waukegan, for Ann T. Anderson, Richard G. Anderson and Richard & Ann Anderson Charitable Trust.
Phillip M. Goldberg, Coffield, Ungaretti & Harris, Chicago, for Financial Matters, Inc. and Alan M. Misale.
Stephen C. Voris, Tara A. Moran, Burke, Warren & MacKay, P.C., Chicago, for Shirley A. McKinney and Thomas James Associates, Inc.
Plaintiffs Richard G. Anderson and Ann T. Anderson appeal three orders of the circuit court of Lake County. The first order, entered on October 13, 1993, granted defendants Thomas James Associates, Inc. (Thomas James), and Shirley A. McKinney's motion to stay the judicial proceedings and to compel arbitration. The second order, entered on May 18, 1995, entered judgment in favor of Thomas James and McKinney based on an earlier arbitration award. The third order, entered on October 17, 1995, granted the motion for summary judgment of defendants Financial Matters, Inc. (Financial Matters), and Alan M. Misale.
The following brief summary of the facts is taken from the record. On June 16, 1993, plaintiffs filed a complaint against Financial The complaint alleged the following facts common to all counts. Misale has known plaintiffs since the 1980s when he was a salesman for plaintiffs' insurance agent. Early in 1992, Misale, who at this time was employed by Financial Matters, proposed that plaintiffs change their retirement and estate plan. Misale proposed that plaintiffs sell their stock in R.R. Donnelley & Sons (Donnelley stock). A substantial portion of the proceeds of this sale would be donated to a charitable remainder unit trust (CRUT). The CRUT would then purchase other securities which would generate a substantially higher income than the dividends plaintiffs received from the Donnelley stock. The income earned by these securities would be paid to plaintiffs on a current basis until they died, it would equal 10% of the fair market value of the CRUT, and it would average at least $75,000 per year through 2003. When plaintiffs died, the remaining assets in the CRUT would fund a charitable foundation. The beneficiary of this charitable foundation apparently was plaintiffs' son.
[220 Ill.Dec. 252] Matters, Misale, Thomas James, McKinney, and Equitable Life Insurance Company of America (Equitable). The complaint contained six counts.
After further investigation, Misale proposed a slightly modified plan. This plan would create a wealth replacement trust, which in turn would purchase a life insurance policy on Mrs. Anderson and was payable to plaintiffs' son on her death. The plan would also create the CRUT. The CRUT, which would still be funded by the proceeds of the sale of the Donnelley stock, would invest in debt securities. One-half of these securities would consist of zero-coupon United States Treasury bonds, which would have a maturity value in 2003 equal to the value of the Donnelley stock originally donated to the CRUT. The remaining securities would consist of securities that were paying and would continue to pay a current yield greater than 10% of the fair market value of the CRUT's assets. This yield would be paid to plaintiffs.
In connection with the purchase of these latter securities, Misale introduced plaintiffs to McKinney, a registered broker at Thomas James, a securities brokerage firm. McKinney recommended the purchase of income-only stripped mortgage backed securities certificates (I/O FNMA Strips). I/O FNMA Strips are not government bonds. They are derivatives based on specified pools of mortgage loans held by the Federal National Mortgage Association MA.
From April through June 1992, McKinney and Misale made several representations regarding the I/O FNMA Strips. McKinney and Misale generally represented that investment in I/O FNMA Strips would produce an income for plaintiffs in excess of 10% of the value of the CRUT. This representation was based on the assumption that the I/O monthly payments made to the FNMA pool would not decline by more than 1% each month.
In reliance on these representations, plaintiffs established the CRUT, which they funded with the Donnelley stock. At this time, the stock had a market value in excess of $750,000. Upon Misale's recommendation, the Donnelley stock was sold and the proceeds invested by the CRUT. The sum of $329,000 was invested in zero-coupon United States Treasury bonds that, if held to the maturity date in 2003, would return a single payment of $750,000. The sum of $425,000 was invested in I/O FNMA Strips in interest trust 29-2. Plaintiffs also purchased a life insurance policy on Mrs. Anderson. Although plaintiffs purchased the securities through Thomas James, the purchases were cleared through RAF Financial Corporation (RFC), Thomas James' clearing agent.
According to plaintiffs, Misale and McKinney intentionally or recklessly misrepresented or omitted to state, inter alia, that the I/O monthly payments made to the FNMA pool had been declining at a rate much greater than 1% per month for many months before June 1992. The decline had in fact exceeded 4.5% per month in each of March, April, and May 1992. In January or February 1993, plaintiffs discovered that the I/O FNMA Strips had an apparent market value of approximately one-half of the amount that they paid for them. In March 1993 plaintiffs liquidated interest trust 29-2 for a significant loss.
Based on these allegations, count I of plaintiffs' complaint alleged violations of section 12 of the Illinois Securities Law of 1953 (815 ILCS 5/12 (West 1994)); count II alleged common-law fraud; count III alleged gross violation of trust and confidence; count IV alleged a breach of contract of the life insurance policy; count V alleged promissory estoppel; and count VI alleged an implied right of recovery under the life insurance policy. Counts I, II, and III were alleged against Financial Matters, Misale, Thomas James, and McKinney, jointly and severally.
On August 20, 1993, Thomas James and McKinney filed a motion to stay the judicial proceedings and to compel arbitration of the claims asserted against them in plaintiffs' complaint. According to the motion, plaintiffs had signed a document entitled "clearing account agreement." Paragraph 10 of the agreement, entitled "Arbitration," provided that all controversies which may arise between plaintiffs and RFC and "the broker or the broker's employees" shall be determined by arbitration. It also stated:
Based on this agreement, Thomas James and McKinney argued that plaintiffs were required to submit their claims against them to arbitration under the Federal Arbitration Act (9 U.S.C. § 1 et seq. (1988)). On October 13, 1993, the trial court entered an order granting the motion. The order further provided that the claims against Thomas James and McKinney were dismissed and that it retained personal jurisdiction over them solely for the purpose of enforcing an arbitration award that may thereafter be awarded.
On February 28, 1994, plaintiffs filed their first amended complaint. As with the original complaint, this complaint contained six counts; each count's allegations mirrored those contained in the original complaint.
On November 17, 1993, plaintiffs filed a statement of claim (NASD claim) against Thomas James and McKinney with the National Association of Securities Dealers (NASD). The NASD claim had three counts, which were essentially identical to the first three counts of plaintiffs' original complaint and first amended complaint. The only significant difference was that the only named defendants in the NASD claim were Thomas James and McKinney.
On October 6, 1994, plaintiffs filed a second amended complaint. The complaint contained three counts. These counts were essentially identical to the first three counts of the original complaint and first amended complaint. Like the first three counts in the earlier complaints, all three counts in this complaint were directed against Financial Matters, Misale, Thomas James, and McKinney, jointly and severally. Equitable was not named as a defendant. For purposes of convenience, we will refer to the second amended complaint simply as "the complaint."
From January 11 to 13, 1995, and February 28, 1995, the NASD arbitration panel (NASD panel) conducted a hearing on plaintiffs' NASD claim. At the beginning of the hearing the NASD panel stated that all issues in the NASD claim were being put to the panel. Testimony was heard from nine witnesses, including, inter alia, plaintiffs, plaintiffs' expert witness, Misale, McKinney, and defendants' expert witnesses. At the end of the hearing, plaintiffs' counsel stated On April 7, 1995, the NASD panel issued a final written decision. The decision stated that, after considering the pleadings, the testimony, and the evidence...
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