IN RE COMMISSIONER OF BANKS AND REAL ESTATE
| Decision Date | 28 December 2001 |
| Citation | 327 Ill. App.3d 441,764 N.E.2d 66,261 Ill.Dec. 775 |
| Parties | In re Possession and Control of the COMMISSIONER OF BANKS AND REAL ESTATE of Independent Trust Corporation, a/k/a Intrust, an Illinois Corporate Fiduciary (The Commissioner of Banks and Real Estate; PriceWaterhouseCoopers, LLP, as Receiver of Independent Trust Corporation, a/k/a Intrust, and Millennium Trust Company, LLC, as Successor Trustee, Appellees; J. Phillip O'Brien, Intrust Account Holder, et al., Parties in Interest, Appellants). |
| Court | United States Appellate Court of Illinois |
Daniel T. Graham, Levin & Funkhouser, Ltd., Chicago, John Talbot Sant, Jr., Armstrong Teasdale LLP, St. Louis, MO, Katherine E. Blumenthal, Cowen, Crowley, Nord & Staub, P.C., Chicago, Kenton E. Knickmeyer, Knickmeyer, Kinsella and Bloch, Nelson L. Mitten, Michael A. Ellenhorn, Reizman Berger, P.C., St. Louis, MO, Charles L. Philbrick, McBride Baker & Coles, Raymond A. Fylstra, Bethany E. Amnions, Kubasiak, Cremieux, Fylstra, Reizen & Rotunno, P.C., Chicago, Seyfarth, Shaw, Fairweather & Gerald, Kenneth Michaels & Associates, P.C., Handler, Thayer & Duggan, D'Ancona & Pflaum, Chicago, Maureen B. Connaughton, Atlanta, GA, Lanphier & KowalkowsM, Ltd., Elmhurst, Doyle & Bolotin, Ltd., Nisen & Elliott, Katten, Muchin & Zavis, Chicago, Ralph Bertacchi Poa, Orland Park, Norman Bard, East Meadow, NY, Arnstein & Lehr, Sidley & Austin, McBride, Baker & Coles, Chicago, Michael McKitrick, Blumfield, Kaplan & Sandweiss, St. Louis, MO, J. William Norton, St. Paul, MN, Handler, Thayer & Duggan, Chicago, Howard Z. Gopman & Associates, Skokie, Paul M. Baught & Associates, Chicago, for Appellants.
Jonathan Silverman, Kirkland & Ellis, Roger P. Flahaven, Assistant Attorney General of Illinois, James E. Ryan, Attorney General of Illinois, Dale Turner, Office of Banks and Real Estate, Chapman & Cutler, Chicago, Krafsur Gordon Mott P.C., El Paso, TX, for Appellees.
Appellants, numerous groups of approximately 1,200 non-cash-asset account holders,1 appeal an order of the circuit court of Cook County allocating a $68.1 million cash shortage from trust funds deposited for investment with Independent Trust Corporation (Intrust). The trial court allocated the shortage among all account holders, even those whose assets were noncash at the time Intrust was placed in receivership because virtually all cash deposited with Intrust, including that used to acquire noncash assets, was commingled in a single, common account. The noncash account holders argue that only the cash account holders should bear the burden of the $68.1 million loss. Appellants also appeal the trial court's order authorizing the receiver to charge its fees and expenses to the individual trust accounts via a levy on the accounts. We disagree with appellants that the trial court erred in allocating the shortage to all account holders. However, we do agree with appellants that the trial court erred in charging all of the receiver's fees and expenses to the individual accounts and remand on this issue.
Intrust was an Illinois corporate fiduciary organized under the Corporate Fiduciary Act (Act) (205 ILCS 620/1-1 et seq. (West 1998)) and was regulated by the Illinois Commissioner of Banks and Real Estate (Commissioner). Intrust served as the custodian for various investment trust assets, including individual retirement accounts (IRAs), qualified benefit plans, Starker trusts, personal trusts, and Illinois land trusts, that its customers (appellants and others who have not appealed) placed in its custody. The assets were managed either by the customers or their investment advisors in a wide variety of investments, including cash, money market funds, stocks, mutual funds, limited partnerships, life insurance policies, tax lien certificates, and promissory notes. Intrust did not exercise discretion in investing assets deposited with it although, according to appellants, Intrust did manage money left in its "cash management program." Those customers who traded in commodity futures contracts and options, who utilized the cash management program, agreed to leave 30% of the principal balance of their accounts on deposit with Intrust in the form of cash as a safety net for margin calls.2
As of April 14, 2000, Intrust had approximately 17,000 customers and acted as custodian for approximately $1.84 billion in assets. Intrust's accounts were extremely active, averaging 200,000 transactions per week. These transactions included both the deposit of cash and noncash assets into trust accounts as well as the purchase and sale of securities and other noncash assets. Because of the volume of transactions conducted, Intrust held large amounts of cash on a daily basis. Intrust held all cash in a single, commingled account designated as its money market cash trust fund (commingled account). The cash of virtually every account holder passed through the commingled account, albeit perhaps only briefly, at some time. Specifically, cash newly deposited with Intrust3 was placed in the commingled account before an account holder's investment instructions were carried out. From there, depending on the account holder's instructions, the cash would remain in the commingled account, be transferred to another depository institution, be transferred to an escrow account at Intercounty Title Company (Intercounty), or used to purchase specific noncash assets. Money was deposited into the commingled account when another depository institution transferred money back to Intrust, when Intercounty transferred money back to Intrust, when a noncash asset was liquidated in connection with a new investment purchase (if another noncash asset was purchased, the money would then again leave the commingled account) or to generate cash to pay custodial fees and investment advisory fees, or when, in an effort to close an account, a noncash asset was liquidated. Most, if not all, purchases and sales of noncash assets required cash or produced cash, which passed through the commingled account. Intrust used computerized accounting software, which, according to PriceWaterhouseCoopers, LLP, the receiver appointed upon commencement of the receivership, was limited and out of date, to keep track of account records. According to the receiver, this software was unable to recreate historical account transactions and account balances on any given day.
From December 1990 through April 23, 1999, Intrust transferred substantial portions of cash from the commingled account to the custody of Intercounty on approximately 41 occasions,4 which in turn, commingled the money it received from Intrust with funds of its own customers. Intrust accounted for the amounts held at Intercounty in the commingled account ledger. Although some of the money transferred to Intercounty was returned to Intrust's custody and deposited into the commingled account, a majority of the funds were never returned.5
The Commissioner directed Intrust to reestablish control over the funds transferred to Intercounty and because Intrust failed to comply, on April 14, 2000, the Commissioner seized control of Intrust pursuant to the Act, by letter appointed PriceWaterhouseCoopers, LLP, as receiver, and commenced an action for dissolution and liquidation of Intrust through receivership in the circuit court of Cook County via a verified complaint.
On April 17, all 17,000 account holders were sent a letter by first class mail informing them that cash was missing from Intrust and that the company was in liquidation. The letter advised account holders that the receiver was undertaking an investigation and would determine how the cash shortage would affect their accounts. It also informed account holders that all accounts were frozen. Lastly, the letter stated that due to the substantial cost of sending written communications to all account holders, such communications would be made with the account statements or account holders could obtain up-to-date information on Intrust's website.
In response to the receiver's motion to set a hearing on the allocation and direct the method of notice to provide to account holders, the trial court entered an order setting a hearing and approving the form of the notice. The order contained identical information as that to be embodied in the notice form and, as such, need not be detailed. Both the order itself and the notice form were posted on Intrust's website. In addition, the receiver mailed the notice, by first class mail, to all 17,000 account holders. The notice stated that the receiver would be filing its recommendation with respect to the proposed allocation by June 23 and that a hearing was set for July 28 following.
According to the notice, at the allocation hearing, the trial court would consider the receiver's recommendation, hear evidence, and issue a determination as to the method of allocation, which determination would be binding upon the accounts holders and may affect their rights to assets in their accounts. The notice advised account holders that the recommendation would be posted on Intrust's website and that those account holders who did not have access to the Internet were to so advise the receiver, in writing, and if they desired a copy of the recommendation, to request a copy from the receiver. The receiver would then mail its recommendation by first class mail to those account holders. Account holders were informed to file any objections to the receiver's recommendation by ...
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