O'BRIEN v. CONT. ILL. NAT. BANK & TR. CO. OF CHICAGO

• Decision Date: 25 April 1977
• Docket Number: No. 72-C-2251,74-C-2899,73-C-660,73-C-46,73-C-3132 and 73-C-1755.,73-C-772,72-C-2251
• Citation: 431 F. Supp. 292
• Parties: Harold G. O'BRIEN et al. v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, a National Banking Association. CHICAGO HOTEL EMPLOYEES PENSION TRUST FUND v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, a National Banking Association, and Continental Illinois Investment Trust for Employee Benefit Plans, an Illinois Trust. Benjamin LIPSON et al. v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, a National Banking Association. Edward F. BRABEC et al. v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, a National Banking Association. J. J. O'DONNELL, as President of and for and on behalf of the members of the Air Line Pilots Association, International, an unincorporated association, et al. v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, a National Banking Association. Patrick E. GORMAN et al. v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, a National Banking Association. KENCO, INC., an Illinois Corporation, et al. v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, a National Banking Association.
• Court: U.S. District Court — Northern District of Illinois

431 F. Supp. 292

Harold G. O'BRIEN et al. v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, a National Banking Association.

CHICAGO HOTEL EMPLOYEES PENSION TRUST FUND v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, a National Banking Association, and Continental Illinois Investment Trust for Employee Benefit Plans, an Illinois Trust.

Benjamin LIPSON et al. v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, a National Banking Association.

Edward F. BRABEC et al. v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, a National Banking Association.

J. J. O'DONNELL, as President of and for and on behalf of the members of the Air Line Pilots Association, International, an unincorporated association, et al. v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, a National Banking Association.

Patrick E. GORMAN et al. v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, a National Banking Association.

KENCO, INC., an Illinois Corporation, et al. v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, a National Banking Association.

Nos. 72-C-2251, 73-C-46, 73-C-660, 74-C-2899, 73-C-772, 73-C-3132 and 73-C-1755.

United States District Court, N. D. Illinois, E. D.

April 25, 1977.

COPYRIGHT MATERIAL OMITTED

Mayer, Brown & Platt, Chicago, Ill., for defendants.

James S. Gordon, A. Bradley Eben, Jerry Kronenberg, Borovsky, Smetana, Ehrlich & Kronenberg, Chicago, Ill., for plaintiffs in No. 72-C-2251.

James S. Gordon, Chicago, Ill., for plaintiffs in Nos. 73-C-46 and 73-C-660.

James S. Gordon, A. Bradley Eben, Herbert L. Borovsky, Borovsky, Smetana, Ehrlich & Kronenberg, Sherman M. Carmell, Sheldon M. Charone, Chicago, Ill., for plaintiffs in No. 74-C-2899.

Cotton, Watt, Jones, King & Bowlus, Chicago, Ill., for plaintiffs in Nos. 73-C-772 and 73-C-3132.

Pope, Ballard, Shepard & Fowle, Chicago, Ill., for plaintiffs in No. 73-C-1755.

MEMORANDUM OPINION

FLAUM, District Judge:

Before the court is defendant's motion to reconsider Judge McGarr's May 10, 1974 order denying defendant's motion to dismiss plaintiffs' complaints in causes 72 C 2551, 73 C 46, 73 C 660, 73 C 772, and 73 C 3132. Defendant has also moved to dismiss in cases 74 C 2899 and 73 C 1755, which have been consolidated with the aforementioned actions.

The relevant facts are as follows: In all seven cases,¹ plaintiffs are either beneficiaries of trusts, or principals in agency relationships, in which defendant, Continental National Bank and Trust Company of Chicago ("Continental") is the trustee or agent.² All the complaints allege that the trust agreements between the parties are "discretionary" in nature with the trustee given complete discretion in making all investment decisions for the trust res, subject, of course, to a fiduciary's duty of due care. Plaintiffs allege that Continental has committed various violations of the Securities Exchange Act of 1934, § 10(b), 15 U.S.C. § 78j(b), and rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder, as well as violations of state common law. These violations are premised on plaintiffs' allegations that Continental, in administering the different trusts, breached its fiduciary duty as trustee to the beneficiaries/plaintiffs by investing substantial sums of the trusts' funds in securities issued by corporations to which Continental, in its capacity as a commercial lender, had loaned large amounts of money. Plaintiffs contend that Continental, in its capacity as a commercial lender, obtained inside information concerning the aforementioned corporations which indicated that investment in their securities would be unwise. Plaintiffs claim that the purchases and retention for the trusts of securities issued by corporations to which Continental had outstanding loans were improper because they were made:

(1) without disclosure to plaintiffs by Continental of its conflict of interest;

(2) without disclosure of inside information Continental obtained indicating the financial difficulties of the corporations issuing the securities; and

(3) with the knowledge of Continental that the securities were poor risks and with the intention of protecting its own investments in the financially troubled companies.³

Plaintiffs further allege that had they been aware of this material information, and but for defendant's fraudulent scheme, they would have ended their trust arrangements with defendant and not purchased or retained the securities in issue.

In support of its request for dismissal of plaintiffs' complaints, Continental relies primarily on the Supreme Court's decision in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975), and the recent decision in Santa Fe Indus., Inc. v. Green, ___ U.S. ___, 97 S.Ct. 1292, 51 L.Ed.2d 480 (1977). Defendant argues first that, as trust beneficiaries, plaintiffs are not "purchasers or sellers" of securities and therefore lack "standing" to claim that defendant's operation of plaintiffs' trust accounts violated section 10(b) and rule 10b-5.⁴ Second, defendant contends that plaintiffs' complaints merely allege breaches of Continental's fiduciary duty to plaintiffs and that these claims are not cognizable under rule 10b-5. And, since there is no independent subject matter jurisdiction over plaintiffs' state law claims, Continental contends that plaintiffs' complaints must be dismissed in their entirety.

While this court does not agree with defendant's position that Blue Chip Stamps mandates that in all situations a trust beneficiary lacks standing to sue his trustee under rule 10b-5, see James v. Gerber Products Co., 483 F.2d 944 (6th Cir. 1973) (standing granted); Klamberg v. Roth, 425 F.Supp. 440 (S.D.N.Y.1976) (post-Blue Chip Stamps; standing granted), this court is compelled to agree with defendant's contention that Blue Chip Stamps and Green bar plaintiffs from proceeding with their 10b-5 allegations in their complaints. These decisions⁵ place a new gloss on section 10(b) and rule 10b-5 actions requiring the courts to scrutinize with great care the appropriateness of a federal securities law remedy for certain conduct by defendants. The Supreme Court in recent decisions has adopted a more limited approach to section 10(b) and rule 10b-5, and this limited approach leads this court to the conclusion that plaintiffs' allegations fail to state claims for relief under rule 10b-5. Therefore, defendant's motion to reconsider the May 10, 1974 order in this cause and its motion to dismiss plaintiffs' 10b-5 claims must be granted.

In their complaints, plaintiffs raise three types of claims under the federal securities laws: (1) that Continental fraudulently "retained" securities it knew it should have sold; (2) that Continental failed to "disclose" to plaintiffs certain inside information it had obtained and the existence of the conflict of interest defendant faced as trustee and commercial lender prior to Continental's purchase of securities for plaintiffs' accounts;⁶ and (3) that Continental defrauded plaintiffs by purchasing securities for plaintiffs' accounts knowing the securities to be of high risk and unworthy of investment in order to protect defendant's own interests in the corporate issuers of the securities.

First, Blue Chip Stamps has made it clear that plaintiffs may not maintain their 10b-5 claims of fraudulent "retention" of securities since as to these allegations plaintiffs are not the "purchasers or sellers" of securities. In adopting the "purchaser or seller" requirement for 10b-5 actions first enunciated in Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir.), cert. denied, 343 U.S. 956, 72 S.Ct. 1051, 96 L.Ed. 1356 (1952), the Supreme Court delineated three categories of 10b-5 plaintiffs who did not have standing to proceed with their claims. 421 U.S. at 737-38, 95 S.Ct. 1917. The second category consisted of

actual shareholders in the issuer who allege that they decided not to sell their shares because of an unduly rosy representation or a failure to disclose unfavorable material.

Id. Plaintiffs' allegations of fraudulent retention fall within this second category and therefore must be dismissed. See Marsh v. Armada Corp., 533 F.2d 978 (6th Cir. 1976), cert. denied, ___ U.S. ___, 97 S.Ct. 1598, 51 L.Ed.2d 803 (1976); Williams v. Sinclair, 529 F.2d 1383 (9th Cir. 1975).

Second, as to plaintiffs' allegations of "nondisclosure" of material information, plaintiffs have failed to allege that these nondisclosures were in fact "in connection with" or material to their purchases of the securities in issue as required by rule 10b-5. See Superintendent of Ins. of New York v. Bankers Life & Casualty Co., 404 U.S. 6, 12, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971). As plaintiffs admit in their complaints, the trusts established with the defendant are "discretionary" in nature, vesting complete investment decision authority in Continental. Under the trust agreements, Continental was under no obligation to consult with plaintiffs prior to making any investment. While plaintiffs did retain the right to ratify or disapprove defendant's decisions, any information obtained by plaintiffs relative to these decisions to purchase would be ex post the actual purchase and give rise to complaints concerning improper "retention" of securities, claims, as stated previously, plaintiffs cannot raise under rule 10b-5.⁷ Even if the plaintiffs were aware of all the facts, the defendant still could have purchased the securities in issue. Thus, plaintiffs' claims of "nondisclosure" are really "in connection with" plaintiffs' decision to retain or remove Continental as trustee, and have no relation to the plaintiffs becoming the owners of securities.

This result and analysis is in accord with the purpose of rule 10b-5 to insure that all persons making investment decisions have full and accurate information concerning the securities subject to a...