Himel v. Continental Illinois Nat. Bank and Trust Co. of Chicago

• Decision Date: 27 April 1979
• Docket Number: No. 78-1593,78-1593
• Citation: 596 F.2d 205
• Parties: Chester M. HIMEL et al., Plaintiffs-Appellants, v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 205

596 F.2d 205

Chester M. HIMEL et al., Plaintiffs-Appellants, v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF

CHICAGO, Defendant-Appellee.

No. 78-1593.

United States Court of Appeals, Seventh Circuit.

Argued Jan. 23, 1979.

Decided March 14, 1979.

Rehearing and Rehearing En Banc Denied April 27, 1979.

Richard F. Watt, Chicago, Ill., for plaintiffs-appellants.

James E. Honkisz, Mayer, Brown & Platt, Chicago, Ill., for defendant-appellee.

Before FAIRCHILD, Chief Judge, MARKEY, Chief Judge, ^* and BAUER, Circuit Judge.

MARKEY, Chief Judge.

The decision of the District Court for the Northern District of Illinois, 430 F.Supp. 651 (N.D.Ill.1977), granting partial summary judgment in this trust management case, on the basis of res judicata, is Reversed.

Background

In 1925, Antonio Mora established a testamentary trust, covering substantially all his estate, with this investment clause:

It is my desire that my Trustee keep my trust estate so invested as to produce the highest possible income consistent with reasonable security, and to that end, I direct that my Trustee invest the funds of said trust estate, as they are paid in, from time to time, in notes secured by mortgages or trust deeds which shall be first liens on improved property in Cook County, or on improved farms within what is commonly called the "Corn Belt", that is, the States of Illinois and Iowa and Southern Minnesota, or in high grand (Sic ) bonds. It is my desire that insofar as is reasonably possible, all investment of said trust funds be made in securities bearing at least five percent (5%) interest.

Antonio died in 1928. In 1929, defendant Continental Illinois National Bank and Trust Co. (Bank), assumed the trusteeship.

On Antonio's death, the trust income was divided between his daughters, Angela and Mary. On Angela's death in 1941, Mary received all the income, and on Mary's death in 1968, her sons Robert, Chester, and William each received one-fourth of the trust corpus, and her daughter Mora received the income from the remaining one-fourth.

In 1928, Antonio's estate was valued at approximately $400,000. By 1961, its value had decreased to $335,000. In February of 1961, Mary, as income beneficiary, and her children, as contingent remaindermen, filed a petition in the Superior Court of Cook County, Illinois, seeking modification of the investment clause. ¹ Robert Himel and a Bank vice president testified, and the court found, that the Bank was limited in its investments by the restrictions in the quoted investment clause, that Antonio "did not foresee and could not have foreseen the investment conditions of the present time," and that continued adherence to the terms of the trust would frustrate "the testator's primary intention, that the trust produce the highest possible income with reasonable security . . ." Accordingly, the court authorized the Bank to invest the trust corpus in accordance with the "Prudent Man Act," Ill.Rev.Stat. ch. 148, § 32, as requested in the petition.

Mary, as the only income beneficiary, received regular financial reports from the Bank. After Mary's death in 1968, Chester and Mora, aware of the trust's poor performance, obtained information from the Bank which, they allege, led them to conclude that the Bank had mismanaged the trust estate and breached its fiduciary duty to all the beneficiaries. In June 1972, Chester, ² William, and Mora (plaintiffs) brought this suit against the Bank, alleging it had:

(1) charged to the trust estate excessive and otherwise unwarranted fees as trustee;

(2) failed to adhere to the will's directions concerning the investment of the trust estate, and retained and purchased securities and other investments as trustee which were prohibited by the will;

(3) retained and purchased securities and other investments as trustee which were prohibited by law generally, and otherwise failed to adhere to the law governing the investment of trust funds (4) engaged in the purchase, retention, or sale of securities and other investments as trustee in circumstances constituting unlawful self-dealing and conflicts of interest on the Bank's part;

(5) purchased, retained, or sold securities and other investments as trustee which it knew or in the exercise of proper care would have known (a) should not have been purchased or retained because of their absolute or relatively low quality or because of the nature of the risks attached to them, or (b) should not have been sold because of their absolute or relatively high quality;

(6) generally managed the affairs of the trust in a careless, negligent and incompetent manner, e. g., by paying thousands of dollars in excessive federal income tax;

(7) generally managed the affairs of the trust in a manner so as to benefit the Bank rather than the beneficiaries;

(8) refused to make available to plaintiffs documents pertaining to the trust.

Plaintiffs seek an accounting, compensatory and punitive damages, reimbursement of fees and costs, and removal of the Bank as trustee of the remaining portion of the trust.

The Bank moved for partial summary judgment pursuant to Fed.R.Civ.P. 56. ³ In its memorandum opinion granting the Bank's motion, the district court stated, 430 F.Supp. at 654:

In the present action, plaintiff's complaint arises out of the various investment decisions made by Continental in its administration of the Mora trust, including those investment decisions made prior to 1961. However, the prior 1961 litigation between these parties also arose out of Continental's pre-1961 investment decisions. Under Illinois law, in an action for reformation of a restrictive investment provision in a trust, the trust beneficiaries must allege and establish that the investment decisions made by the trustee, being limited in scope by the terms of the trust, have caused the decline in the value of the trust corpus and that such a decline in value would continue unless the trustee was allowed to invest more liberally. See Stephens v. Collison, 274 Ill. 389, 113 N.E. 691 (1916); Curtiss v. Brown, 29 Ill. 201 (1862); G. Bogert, The Law of Trusts & Trustees § 562, at 143-45 (1960); J. Pomeroy, Equity Jurisprudence § 1062, at 170-76 (1941). See also Northern Trust Co. v. Thompson, 336 Ill. 137, 157, 168 N.E. 116, 124 (1929); Thorne v. Continental Nat'l Bank & Trust Co., 18 Ill.App.2d 163, 173-74, 151 N.E.2d 398, 403-04 (1958). Thus, the gravamen of plaintiffs' complaint in 1961 was that Continental's investments, restricted by the terms of the trust, were causing the trust injury, the same factual situation giving rise to the present action. Plaintiffs, in 1961, sought reformation as a remedy and this decision bars plaintiffs under res judicata principles from relitigating in this suit the cause of loss to plaintiffs prior to 1961 from Continental's investment decisions.

The district court also stated that consideration of the doctrine of judicial estoppel, raised by the Bank, was unnecessary, although the Bank's position (that judicial estoppel was a bar) was supported by Chicago, S.S. & S.B.R.R. v. Fleming, 109 F.2d 419 (7th Cir. 1940). 430 F.Supp. at 655 n.1.

Plaintiffs moved for reconsideration, submitting affidavits in support of their assertion that there were unresolved issues of material fact. The district court denied the motion, citing the absence of any allegations or evidence that the Bank "actively concealed information from the trust beneficiaries."

Issues

The dispositive issue is whether the Bank is entitled to judgment as a matter of law on its motion, i. e., whether: (1) res judicata

applies to events prior to 1961, or (2) judicial estoppel applies to events prior to 1961.

OPINION

1. Res judicata does not apply to events prior to 1961

As the district court correctly stated, "the . . . primary test for determining if two suits are premised on the same cause of action is whether both suits arise out of the same basic factual situation." 430 F.Supp. at 653. Lambert v. Conrad, 536 F.2d 1183, 1186 (7th Cir. 1976). Because both suits were motivated by the relatively poor investment results, or performance, of the trust, the district court concluded that they arose out of the same factual situation. 430 F.Supp. at 654. That analysis, however, confuses cause with effect. Though both suits were directed at an effect, i. e., poor performance of the trust, they arise out of independent factual situations alleged to be the Cause of that effect. Thus the two suits are premised on different causes of action arising out of different events occurring prior to 1961.

The first suit was founded on the investment clause as the cause, under prevailing economic conditions, of the trust's failure to produce the highest possible income with reasonable security. Under Illinois case law, a court will direct revision in the instructions of the settlor only where the trustee, under existing or anticipated circumstances, could not manage the trust so as to carry out the plain intentions of the settlor. Stephens v. Collison, 274 Ill. at 395, 113 N.E. at 694. A trustee's misconduct in managing the trust is not involved in a determination of whether the settlor's instructions should be modified. Therefore, if Mary and her children had been aware of the Bank's alleged misconduct and had proved it, that fact would not have affected the court's grant or denial of the specific relief requested in the earlier suit.

The present suit is founded on alleged management misconduct of the Bank, i. e., breach of its fiduciary duty. ⁴ Unlike the situation in the earlier suit, the presence of changed economic conditions would neither support plaintiffs' request for relief, ⁵ nor provide the Bank with a defense ⁶ in the present suit. Thus, the facts (the investment clause restrictions) giving rise to the first suit are not the same as the facts (alleged misconduct) giving rise to the present suit.

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