Hamilton v. Nielsen

• Decision Date: 18 May 1982
• Docket Number: No. 81-1935,81-1935
• Citation: 678 F.2d 709
• Parties: Susan Kemper HAMILTON, Plaintiff-Appellant, v. Arthur C. NIELSEN, Jr., and American National Bank and Trust Company, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 709

678 F.2d 709

Susan Kemper HAMILTON, Plaintiff-Appellant, v. Arthur C. NIELSEN, Jr., and American National Bank and Trust Company, Defendants-Appellees.

No. 81-1935.

United States Court of Appeals Seventh Circuit.

Argued April 2, 1982.

Decided May 18, 1982.

Albert C. Lum, Lum & Ku, Los Angeles, Cal., for plaintiff-appellant.

John E. Angle, Kirkland & Ellis, Chicago, Ill., for defendants-appellees.

Before CUMMINGS, Chief Judge, and CUDAHY and POSNER, Circuit Judges.

POSNER, Circuit Judge.

Milton J. Hamilton died on October 16, 1972, leaving an estate worth about.$2.5 million, consisting mainly (more than 80 percent by value) of common stock in two brokerage insurance companies, Frank B. Hall and Company and Zenith United Corporation. Hamilton's will named American National Bank and Trust Company and Arthur C. Nielsen, Jr. as coexecutors, and directed them to pay federal and state death taxes, cash bequests, and costs of administration, and pay over the residue to a trust to be administered by the bank for the benefit of Hamilton's five children, of whom the plaintiff in this action is one. The executors were appointed on November 9, 1972. The will was probated in the Cook County, Illinois, circuit court, which after approving the executors' final account discharged them on December 20, 1977.

This diversity suit had been filed the day before. It charged the executors with having breached their duty of skillful management of the estate by certain of their investment decisions with respect to the Hall and Zenith United Stock. After a bench trial the district judge concluded that the executors had not breached their duty and entered judgment for them. 513 F.Supp. 204 (N.D.Ill.1981). He also awarded them their attorneys' fees in defending this action, to be paid out of the plaintiff's share of the trust.

We first consider our subject-matter jurisdiction over this suit. Federal courts do not have the power in the exercise of the diversity jurisdiction to probate wills or to interfere with probate proceedings. See, e.g., Rice v. Rice Foundation, 610 F.2d 471, 474-76 (7th Cir. 1979); Blakeney v. Blakeney, 664 F.2d 433, 434 (5th Cir. 1981). The district court did neither here. Although the complaint was filed the day before the probate proceeding ended, the district court was not asked to enjoin or otherwise impede that proceeding, which was completed as scheduled the next day. The suit does not involve the validity or construction of the will or seek to change the distribution of the assets of the estate decreed by the circuit court of Cook County. All it seeks is an award of money damages against the executors personally for their alleged negligence.

Even so, if Illinois had vested exclusive jurisdiction over such actions in probate courts, as Ohio had done in Starr v. Rupp, 421 F.2d 999, 1006 (6th Cir. 1970), it would be arguable that the federal courts were thereby divested of their diversity jurisdiction over such cases. But in fact Illinois has taken the opposite tack. It has abolished separate probate courts and vested the probate jurisdiction in its courts of general jurisdiction, the circuit courts. See Ill.Const. art. 6, § 9; Alfaro v. Meagher, 27 Ill.App.3d 292, 295-96, 326 N.E.2d 545, 548 (1975). The Cook County circuit court has subdivided itself into divisions, one of which is the probate division; but this organizational refinement has no jurisdictional significance. "Since both the probate division and the law division are ... simply divisions of the same constitutional court of general jurisdiction, it follows necessarily that both of these tribunals could have had equal and concurrent subject matter jurisdiction over the matter of the appointment of the administrator" of an estate. 27 Ill.App.3d at 296, 326 N.E.2d at 548-59.

This is not to say, of course, that federal courts can now probate wills in Illinois because the state has abolished its specialized probate courts. Probate remains a peculiarly local function which federal courts are ill equipped to perform. But where probate is finished and the federal court is just being asked to surcharge the executor or administrator for a negligent investment decision, the fact that such cases when brought in state courts in Illinois are brought in its courts of general jurisdiction rather than in courts with a specialized probate jurisdiction means that retention of federal diversity jurisdiction over such cases will not interfere with a state policy of channeling all probate-related matters to specialized courts. Of course the federal court's decision may set a standard of conduct that influences future executors and may, by awarding attorneys' fees to the executors, cut down on the beneficiary's share of the estate. But so long as the federal court is faithfully applying Illinois law its decision will not have a systematically different effect than if the action had been brought in the corresponding state court of general jurisdiction.

So we come to the merits. Since the charges against the estate for taxes and other items were estimated at more than half the value of the estate, the executors knew that they would have to sell much of the common stock-especially the Hall stock which alone accounted for some two-thirds of the estate's value-to pay those charges. (In fact, by the time the estate was closed out almost all of the Hall stock had been sold.) But they faced certain obstacles. Hall was so-called "letter" stock which was not freely salable. And both it and Zenith United were so thinly traded that the sale all at once of a large amount of either stock might have depressed the market price. The number of shares of Hall stock held by the estate equaled the total turnover of the stock in an average day; its holdings of Zenith United were ten times the average daily turnover.

The market value of Hall on the date of Hamilton's death was $26 a share and on the date of appointment of the executors $25. It stayed at this level for the rest of 1972 but began to drop after the first of the year and by January 26, 1973, when the executors made their first (and largest) sale of Hall-almost one-fifth of the estate's total holdings of the stock-the price had dropped to $19. At this time the stock was still unregistered and so could not be sold on the open market. By March, when this cloud was lifted, the market price of Hall stock had plummeted; by the end of the month it was less than $9.50. The executors decided to hold off selling any more for a while. They resumed selling in June, when the price had risen to $12, and sold intermittently until May 1975 at prices ranging from $13 to $18 a share.

The market price of Zenith United stock hovered around $5 a share from Hamilton's death to the end of February 1973. The estate had an option, exercisable in December 1972, to acquire some 9000 additional shares of Zenith United stock at $2.72 a share. The executors exercised the option and acquired these shares, which by the terms of the option could not be sold for two years. In March 1973 the market price of Zenith United began a long and steady decline and on December 15, 1976, the executors sold the entire Zenith United holdings of the estate at $2 a share.

The plaintiff alleges that the executors were negligent in exercising the option to buy additional shares of Zenith United and in failing to sell in 1972, when the price of Hall was still above $20 a share, all the Hall stock that they had to sell to meet the charges on the estate. Late in 1972 a brokerage house expressed serious interest in buying the estate's entire holdings of Hall at a price of one dollar per share under the market. If the executors had sold at this price and had declined to exercise the option to buy additional shares of Zenith United, the estate would have been worth much more on December 20, 1977 (when the estate was closed out), than it was in fact worth on that date.

Under Illinois law, the executor or administrator of an estate "must possess the highest degree of fidelity, and utmost good faith, and the skill that an ordinarily prudent man bestows on his own affairs." E.g., In re Estate of Lindberg, 98 Ill.App.3d 212, 215, 54 Ill.Dec. 258, 424 N.E.2d 1161, 1163 (1981). There is no suggestion that the executors here were deficient in loyalty or good faith; only their skill is questioned.

We can deal quickly with the contention that the executors were negligent to exercise the option on the Zenith United stock. At the time they did so the stock market was booming and the outlook for Zenith United Corporation, according to the reports of securities analysts who were following the stock, was rosy. The market price of the stock would have had to fall by almost 50 percent to make the exercise of the option a losing deal. Of course it did fall by that and more, but this was not foreseen, and on the basis of the facts that the executors knew or reasonably could have known in December 1972 was not likely. And they were taking only a small risk, because the cost of exercising the option, $25,000, was a tiny fraction-roughly one percent-of the total value of the estate at that time.

A more difficult question is presented by the executors' failure to get rid of the Hall stock as quickly as possible. We do not think they dragged their feet in obtaining the various legal clearances they needed to make the stock freely marketable and before then in hunting for potential buyers of restricted stock; but neither did they act with a sense of urgency. Had they set a high priority on selling quickly as much of the stock as necessary to meet the charges on the estate, they probably could have sold it all in 1972, though at a discount from the market price. They did not act with a sense of urgency, because they thought it much more likely that the price of the stock would rise than that it would fall; the same brokerage house that offered to take the stock off their hands...