Harris Trust and Sav. Bank v. Ellis, 84 C 5148.

• Decision Date: 06 May 1985
• Docket Number: No. 84 C 5148.,84 C 5148.
• Citation: 609 F. Supp. 1118
• Parties: HARRIS TRUST AND SAVINGS BANK, as Executor of the Estate of Mary Ellis, Plaintiff, v. James ELLIS; Moline Consumers Company, an Illinois corporation; First National Bank of Moline, a national banking association; and Duff and Phelps, Inc., an Illinois corporation, Defendants.
• Court: U.S. District Court — Northern District of Illinois

609 F. Supp. 1118

HARRIS TRUST AND SAVINGS BANK, as Executor of the Estate of Mary Ellis, Plaintiff, v. James ELLIS; Moline Consumers Company, an Illinois corporation; First National Bank of Moline, a national banking association; and Duff and Phelps, Inc., an Illinois corporation, Defendants.

No. 84 C 5148.

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

May 6, 1985.

Michael K. Murtaugh, Thomas Doyle, Robert C. Boling, Baker & McKenzie, Chicago, Ill., for plaintiff.

Brian J. Redding, Chadwell & Kayser, Roger Pascal, Schiff, Hardin & Waite, Joseph E. Coughlin, Shelly L. Rice, Lord, Bissell & Brook, Chicago, Ill., for defendants.

MEMORANDUM OPINION AND ORDER

ASPEN, District Judge:

Plaintiff Harris Trust and Savings Bank ("Harris") brings this action as executor of the estate of Mary Ellis against defendants James Ellis, Moline Consumers Company ("Moline Consumers"), the First National Bank of Moline ("the Bank"), and Duff and Phelps, Inc. ("Duff and Phelps") alleging violations of the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq.; the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-68; the Investment Advisers Act, 15 U.S.C. § 80b-1 et seq.; and various state laws.¹ Presently before the Court are motions to dismiss or for summary judgment filed by each of the defendants, as well as a memorandum by defendants questioning the compliance of Harris' counsel with General Rule 39 of the United States District Court for the Northern District of Illinois. For the reasons set forth below, defendants' motions to dismiss and for summary judgment are granted.

FACTS

This case begins with the death in 1968 of Mary Ellis' husband Oscar. Until he died, Oscar played a substantial role in the management of Moline Consumers, which he had founded with Charles Loptien. Oscar's estate included real estate, 6,350 shares of Moline Consumers common stock, and other personal property. Under his will, Oscar's estate was divided into a marital trust for the benefit of his wife Mary and a residuary trust for the benefit of Oscar's children, James and Bette. The will named the Bank as the executor of the estate and trustee of the two trusts.

The marital and residuary trusts were funded in June of 1981. Of the 6,350 shares of Moline Consumers stock, 3,263 were distributed to the marital trust and 3,087 were distributed to the residuary trust.² On June 18, 1981, the Bank (as trustee of the marital trust) agreed to sell the 3,263 shares to Moline Consumers for $884,273.00, or $271.00 each, conditioned upon approval by the Circuit Court for Rock Island County. The Circuit Court gave its approval on September 15, 1981, and the sale was consummated. This 1981 transaction is the primary focus of this case.

Briefly summarized, the amended complaint alleges that the 1981 sale resulted from a complex plan by defendant James Ellis to concentrate control of Moline Consumers in his hands. Harris claims that during the administration of Oscar's estate, James was a Moline Consumers shareholder, was the president of Moline Consumers, was a director of the Bank, controlled substantial deposits at the Bank, and held a beneficial interest in the Moline Consumers stock allocated to the residuary trust. James allegedly used his influence in these positions improperly to exclude other shareholders from control of Moline Consumers. As a result of his and the other defendants' machinations, Harris asserts that James was able to arrange the sale of Moline Consumers stock from the marital trust to the company for $271.00 per share when the fair market value of the shares actually exceeded $1,400.00 each.

Defendants argue that Harris is precluded by the doctrines of res judicata and collateral estoppel from relitigating the material factual allegations of the amended complaint, because they have been resolved already by a long series of final orders of Illinois courts. Defendants also raise specific objections applicable to each of the amended complaint's counts. We turn now to a discussion of the objections relating to the different federal law counts.³

SECURITIES EXCHANGE ACT OF 1934

In Counts I, II and XII, Harris alleges that the defendants violated, or aided and abetted the violation of, Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78(j), and Rule 10b-5 of the Securities Exchange Commission, 17 C.F.R. 240.10b-5.⁴ Defendants argue that these counts must fail as a matter of law because Mary Ellis was not sufficiently involved in any investment decisions for there to be fraud "in connection with" the sale of the Moline Consumers stock allocated to the marital trust. We agree.

In Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 97 S.Ct. 1292, 51 L.Ed.2d 480 (1977), the Supreme Court made it clear that not all breaches of fiduciary duty involving a securities transaction constitute a violation of the federal securities laws. Rather, the Court stated that a claim of fraud and fiduciary breach would state a cause of action under Rule 10b-5 only if the conduct alleged could be fairly viewed as "manipulative or deceptive" within the meaning of section 10(b). Id. at 472-74, 97 S.Ct. at 1300-1301.

The Seventh Circuit applied the holding of Santa Fe to the situation presented by this case, where a trustee allegedly breached its fiduciary duty in connection with a sale of securities owned by the trust, in O'Brien v. Continental Illinois National Bank and Trust Company of Chicago, 593 F.2d 54 (7th Cir.1979). The trustee in O'Brien was vested with sole discretionary power to purchase and sell securities; the plaintiff-beneficiaries, on the other hand, "were not entitled to receive notice of a contemplated purchase or sale, to participate in the investment decision, or to veto that decision when they learned of it." Id. at 58. Their sole recourse against an unsatisfactory securities transaction was to terminate the trust agreement or sue for breach of fiduciary duty.

While not ruling categorically that trust beneficiaries could never be deemed purchasers or sellers of securities, the Seventh Circuit refused to recognize a cause of action under section 10(b) or Rule 10b-5 in O'Brien. Id. at 59. The Court of Appeals centered its analysis on whether the plaintiffs had been "denied information that would or might have been useful to them in deciding whether to purchase or sell securities which they actually did purchase or sell." Id. at 60. Because the plaintiffs had no voice in the investment decision, any nondisclosure related only to whether they should terminate the trust agreement or perhaps initiate some action against the trustee. The Seventh Circuit held that section 10(b) did not apply to that situation: "Information material to the decision whether to terminate the trust or agency agreements is outside the penumbra of § 10(b) as defined in Santa Fe Industries, Inc. v. Green, because such a termination is not a security transaction." Id. In summary, the Court stated

When the trustee or agent alone makes the investment decision to purchase or sell, his failure to disclose information about the purchase or sale to the beneficiary or agent sic does not satisfy the "in connection with" requirement of § 10(b). The enforcement of fiduciary and contractual duties owed by a trustee or agent to the beneficiary or principal is the concern of state law, not the federal securities laws.

Id. at 63.

Defendants argue that O'Brien is indistinguishable from this case. Oscar Ellis' will granted the Bank, as trustee of the marital trust, full power to retain or sell any of the trust property.⁵ The Bank's power to sell Moline Consumers stock was limited only in that James Ellis was designated an adviser with veto power over proposed sales. Mary Ellis had no role in any "matters concerning corporate stocks" — she was to "be adviser as to all other matters" (emphasis added).⁶ Thus, defendants argue, Mary Ellis stood in the same position as the O'Brien plaintiffs, with no investment decisions to make in connection with any security transaction.

Defendants suggest that Mary's remoteness from the actual securities sale is demonstrated further in Harris' amended complaint, which "virtually parrots the language deemed insufficient to state a cause of action in O'Brien":

61. Mary Ellis and those acting in her interest relied upon the misleading and deceptive conduct, misrepresentations, and omissions of material fact, detailed above, in permitting sale of her shares, in foregoing action to alter the management of the trust and its assets, and in allowing the grossly inadequate funding of her trust and sale of her shares.

Defendants claim that the assertion that their allegedly fraudulent conduct might have led Mary Ellis to refrain from interfering in the administration of her trust or altering its management does not plead any closer a connection with a securities sale than was present in O'Brien. Thus, they argue that the securities claims must be dismissed.

Harris argues that this case is not governed by O'Brien but is actually more analogous to a recent Seventh Circuit case, Norris v. Wirtz, 719 F.2d 256 (7th Cir. 1983), cert. denied, ___ U.S. ___, 104 S.Ct. 1713, 80 L.Ed.2d 185 (1984). Indeed, many of the facts in Norris are quite similar to the present case. Plaintiff Norris was a beneficiary of a trust created from her father's estate. Defendant Wirtz was an executor and trustee, and he was charged with self-dealing by arranging securities sales from the estate to his closely held corporations. However, Norris differs from this case in one crucial way: plaintiff Norris' prior approval of the securities sales was required under the will, and the defendants accordingly sought and secured such approval. Id. at 260. As explained above, Oscar Ellis' will provided for approval only by James Ellis.

Harris asserts that there is a material factual dispute concerning Mary Ellis' control over the sale of Moline...