Gearhart v. Gearhart

• Decision Date: 23 January 2020
• Docket Number: No. 1-19-0042,1-19-0042
• Citation: 2020 IL App (1st) 190042,437 Ill.Dec. 152,143 N.E.3d 1244
• Parties: John GEARHART, Plaintiff-Appellee, v. David GEARHART, Defendant-Appellant.
• Court: United States Appellate Court of Illinois

2020 IL App (1st) 190042

143 N.E.3d 1244

437 Ill.Dec. 152

John GEARHART, Plaintiff-Appellee,

v.David GEARHART, Defendant-Appellant.

No. 1-19-0042

Appellate Court of Illinois, First District, Fourth Division.

Modified opinion filed January 23, 2020

David Gearhart, of Schaumburg, appellant pro se.

John C. Martin and Kathryn C. Nadro, of Sugar Felsenthal Grais & Helsinger LLP, of Chicago, for appellee.

PRESIDING JUSTICE GORDON delivered the judgment of the court, with opinion.

¶ 1 The instant appeal arises from a complaint for declaratory judgment filed by plaintiff John Gearhart against his brother, defendant David Gearhart, who was appointed trustee of their late father's trust. The trial court granted summary judgment in plaintiff's favor on count I of the complaint, finding that plaintiff was entitled to a 25% share of the trust's assets. After a bench trial, the trial court also found in plaintiff's favor on count II of the complaint, finding that defendant had breached his fiduciary duty as trustee. The court further found that this breach was willful and imposed a punitive damages monetary award of $250,000. Defendant appeals, and for the reasons that follow, we affirm the trial court's judgment but vacate a portion of its punitive damages award.

¶ 2 BACKGROUND

¶ 3 I. Trust

¶ 4 On April 30, 1984, Lloyd E. Gearhart (the grantor)¹ established a trust, which provided for a certain distribution of his assets after his death. The grantor had four children: plaintiff, defendant, James Gearhart (also known as Jim), and Susan Tully.² The grantor also had an ex-wife, Marjorie Gearhart, and was married to Dorothy Gearhart at the time of his death.³ Defendant served as trustee of the trust, which was amended twice during the grantor's life.

¶ 5 Under the original trust agreement, the grantor was named as trustee, with the successor trustee taking over upon his death. Article III of the original trust agreement governed the distribution of the trust's assets after the grantor's death. First, paragraph 1 of article III provided that the trustee was to pay such sums as required to fulfill the grantor's obligations to Marjorie pursuant to the judgment for dissolution of their marriage. Next, paragraph 2 of article III provided:

"[T]he trustee may in its discretion pay to or use for the benefit of the Grantor's descendants so much of the income and principal as the Trustee determines to be required, in addition to their respective incomes from all other sources known to the trustee, for their reasonable support, comfort and education, adding any excess income to principal at the discretion of the trustee. The trustee may make payments to, or for the benefit of, one or more of them to the exclusion of one or more of them, and may exhaust the principal. The Grantor's concern is primarily for the support, comfort and education of his descendants, rather than the preservation of principal for distribution upon termination of the trust. After the death of Grantor and after there is no living child of Grantor under the age of twentyone [sic ] years, the trustee shall divide the principal, as then constituted, and any undistributed income, into separate trusts, equal in value, one for each then living child of Grantor and one for the then living descendants, collectively, of each deceased child of Grantor."

Paragraph 2 then set forth a formula for distributions, based on the child's age. In summary, until the child was 25, he or she would be entitled to receive trust income in the trustee's discretion; upon turning 25, the trustee was required to make distributions of trust income to the child at regular intervals. After the child turned 25, he or she would also be entitled to request distributions of trust principal, with certain dollar limitations imposed prior to age 27 and age 30.

¶ 6 The first amendment to the trust agreement, dated May 1, 1995, amended the trust agreement to appoint defendant⁴ trustee after the grantor's death, followed by Susan as successor trustee. The amendment also amended article III of the trust. Specifically, the amendment substituted a new paragraph 1, which now provided that the trustee was to distribute $100,000 to Western Michigan University. Additionally, the amendment substituted a new paragraph 2, which now provided:

"The trustee shall distribute the remaining trust principal and any undistributed trust income to the Grantor's descendants that survive him, per stirpes."

¶ 7 The second amendment to the trust agreement, dated January 2, 2012, was executed shortly before the grantor's January 9, 2012, death and again amended article III of the trust agreement. The second amendment provided that "Article III of the Agreement, as amended by the First Amendment, shall remain in full force and effect, subject to the following modifications." First, the new article III provided for the payment of any obligations owed to Marjorie pursuant to the judgment for dissolution of marriage. Second, the new article III provided instructions for the support of Dorothy, including her continued residence in the marital home, the distribution of $100,000 into a separate trust for the costs associated with the home, and the payment of a monthly sum from the trust's income or principal. Finally, the new article III contained the two paragraphs at issue in the instant litigation:

"3. Notwithstanding any provision of the Trust Agreement or the First Amendment to the contrary, the trustee shall not be obligated to distribute principal, and no child of the Grantor shall have the right to withdraw principal, while any of the foregoing obligations to the Grantor's spouses are outstanding.

4. Notwithstanding any provision of the Trust Agreement or the First Amendment to the contrary, no child of the Grantor shall have the right to withdraw principal, unless such child is the legitimate, inside of wedlock, parent of a living descendant of the Grantor."

The second amendment also provided that the grantor resigned as trustee immediately, with defendant succeeding him as trustee. The second amendment ended by providing that, "[e]xcept as modified by this Second Trust Amendment, I reaffirm and ratify the Trust Agreement and the First Amendment."

¶ 8 II. Complaint

¶ 9 On November 2, 2015, plaintiff filed a two-count complaint for declaratory judgment against defendant. The complaint alleged that the trust's governing instruments provided that the trust's principal was to be distributed to the grantor's four children per stirpes following the satisfaction of other obligations and that defendant had made final distributions to Jim and Susan earlier that year based on the assumption that each of the grantor's children was entitled to an equal share of the trust's assets. However, after making those distributions, defendant's position was that plaintiff was only an income beneficiary of the trust, leaving defendant alone entitled to the remaining trust assets. Accordingly, plaintiff sought a declaratory judgment setting forth the parties' respective rights and ordering defendant to restore any distribution of assets to himself that violated the terms of the trust.

¶ 10 The complaint alleged that defendant was principally responsible for drafting the language of the second amendment and that the grantor died on January 9, 2012, one week after execution of the second amendment, leaving the trust with net assets of over $3 million. The complaint further alleged that, also in 2012, the trust sold the marital home referenced in the second amendment and resolved all further claims of Dorothy to the trust's assets.

¶ 11 The complaint alleged that, between 2012 and 2014, defendant made distributions of the trust's assets to himself and his siblings; as of December 31, 2014, defendant had distributed over $265,000 to Susan, $168,000 to Jim, and $68,000 to plaintiff. Defendant had also distributed over $225,000 to himself, in addition to sums he claimed as investment advisory fees. On March 31, 2015, defendant made a final distribution to Jim of approximately $630,000 in trust assets. According to the complaint, "[c]onsistent with the understanding that each of [the grantor's] children had an equal share in the Trust's principal, the amount distributed to [Jim] reflected (a) twenty-five percent of the Trust's assets (as of February 6, 2015), (b) less an amount reflecting twenty-five percent of Marjorie's future support obligations, (c) plus an amount relative to tax obligations to be incurred by [Jim], (d) plus an amount intended to compensate [Jim] for having received previous distributions that were smaller than the average distributions made to all four of [the grantor's] children."

¶ 12 Similarly, on March 31, 2015, defendant made a final distribution to Susan of approximately $580,000 in trust assets. According to the complaint, "[l]ike the final distribution made to Jim, the distribution made to Susan assumed that each of the four children were residuary beneficiaries of the Trust, reflecting (a) a one-third percentage of the Trust's remaining assets (as of June 10, 2015, following the distribution to Jim), (b) less an amount reflecting twenty-five percent of Marjorie's future support obligations (the same amount deducted from Jim's distribution), (c) plus an amount relating to tax obligations to be incurred by Susan. Unlike the distribution made to Jim, however, the distribution to Susan made no allowance for the fact that distributions previously made to her were larger than those made to other beneficiaries."

¶ 13 The complaint alleged that on July 20, 2015, plaintiff, through counsel, wrote to defendant requesting a statement of all receipts and disbursements made from the trust from the date of the grantor's death. Defendant responded by providing information through December 31, 2014, thereby omitting the final distributions to Jim and Susan. On September 3, 2015, after having learned of the agreements entered with Jim and Susan, plaintiff, through...