Jefferson Nat. Bank of Miami Beach v. Central Nat. Bank in Chicago, 82-1427

• Decision Date: 25 February 1983
• Docket Number: No. 82-1427,82-1427
• Citation: 700 F.2d 1143
• Parties: JEFFERSON NATIONAL BANK OF MIAMI BEACH, as the Personal Representative of the Estate of Philip Litner, Deceased, Plaintiff-Appellee, v. CENTRAL NATIONAL BANK IN CHICAGO, Defendant and Third-Party Plaintiff-Appellant, v. Jerry LITNER, Third-Party Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1143

700 F.2d 1143

JEFFERSON NATIONAL BANK OF MIAMI BEACH, as the Personal Representative of the Estate of Philip Litner, Deceased, Plaintiff-Appellee, v. CENTRAL NATIONAL BANK IN CHICAGO, Defendant and Third-Party Plaintiff-Appellant, v. Jerry LITNER, Third-Party Defendant-Appellee.

No. 82-1427.

United States Court of Appeals Seventh Circuit.

Argued Sept. 29, 1982.

Decided Feb. 25, 1983.

Francis J. Higgins, Bell, Boyd & Lloyd, Chicago, Ill., for defendant and third-party plaintiff-appellant.

Morris J. Coff, Holleb & Coff, Ltd., Chicago, Ill., for plaintiff-appellee.

Before CUMMINGS, Chief Judge, COFFEY, Circuit Judge, and HILL, Senior District Judge. ^*

COFFEY, Circuit Judge.

This diversity action was brought by the corporate Personal Representative of the Estate of Philip Litner, Jefferson National Bank of Miami Beach, for the benefit of the beneficiaries under the decedent's will. The Personal Representative claims that the defendant corporate Trustee, "Central National Bank in Chicago," breached the fiduciary duty it owed to Mr. Philip Litner by failing to act prudently and conscientiously with the best interest of Philip paramount during the entire period the defendant acted as Trustee of the decedent's revocable inter vivos trust. The Trustee filed a third-party complaint against the decedent's son, Jerry Litner, seeking indemnification from any losses that it might suffer as a result of the Personal Representative's lawsuit. The Trustee maintains that the son wrongfully represented that he had the authority to act as the decedent's agent. Following a jury trial in the district court, verdicts were returned in favor of the Personal Representative and the decedent's son. Actual damages were assessed against the Trustee in the amount of $394,475.40, while punitive damages were denied. We AFFIRM.

FACTS

On August 2, 1968, Philip Litner retired from his post as Chief Executive Officer of a subsidiary of Curtis Electro Corporation ("Curtis"), ¹ resigned as an officer of Curtis and sold all of his Curtis stock to the corporation. Although its common stock was publicly traded, the Curtis Electro Corporation was controlled by members of the Litner family. Philip's brothers and son were not only directors of the corporation but also occupied senior management positions.

Curtis agreed to purchase the stock of Philip Litner for $511,560. At the time of sale, Philip Litner received a cash down payment of $148,352.40 and an unsecured promissory note of $363,207.60 for the remaining balance bearing interest at 5 percent and calling for payment of the principal in three installments: one payment due on January 2, 1969; one on January 2, 1971; and the last payment due January 2, 1972. Curtis made the first installment to Philip Litner, but failed to make the two remaining payments of $127,890 each.

William Purcell, a vice president of plaintiff-appellant "Central National Bank in Chicago" ("Central"), called on Philip Litner shortly after he sold his Curtis stock. At this time, Mr. Purcell, responsible for the development of new trust business for Central, suggested to Philip that he consider establishing a "revocable living trust" for estate planning purposes. ² Philip Litner expressed concerns regarding the administration of the trust and Purcell agreed that the Trustee would consult him (Philip) before making any investment decisions. Mr. Purcell supported this agreement with a statement that the bank would not exercise investment control without Mr. Litner's permission. ³

Philip requested that Central supply Eli Fink (Philip's attorney) with a proposed trust agreement. Mr. Fink and an attorney for Central negotiated the language to be contained in the agreement creating the inter vivos trust and on September 25, 1969, Philip Litner and a representative of Central signed the agreement designating Central as the Trustee of "Philip Litner Trust No. 1." ("Trust"). During his lifetime, Philip was to be the sole beneficiary of the Trust and upon his death new trusts were to be established for the benefit of his wife and children. The initial Trust corpus consisted of Curtis Electro's promissory note of $255,780 and, in addition, other securities valued at approximately $220,000.

From September of 1969 until January of 1971, Central communicated with Philip Litner concerning Trust investments and on one occasion Mr. Litner gave Central written approval of an investment change. Prior to January 17, 1971, there was limited discussion between Central and Philip Litner regarding the Curtis promissory note.

On January 17, 1971, Philip Litner suffered a severe stroke, was hospitalized for several weeks and thereafter was confined to a nursing home for temporary care. The residuals of this stroke were rather severe in that Philip Litner was left partially paralyzed and no longer able to speak. On or about January 25, 1971, Jerry Litner (Philip's son) ⁴ contacted Central and informed the bank that his father had suffered a stroke and was in a coma. The following month, Jerry Litner met with various officers of Central and advised them of his father's disability, reciting that his father could comprehend what was going on about him but was only able to communicate through physical gestures. At this time, Jerry Litner expressed concern about how his father's increased medical, personal and living expenses would be paid. After discussion, an agreement was reached whereby the Trustee would make monthly disbursements to Betty (Philip's wife) and she, in turn, would take care of the expenses.

Because Curtis Electro suffered economic difficulties they were unable to make the January 2, 1971 note payment due to cash flow problems. In lieu thereof, Curtis executed a new two-year promissory note in the amount of $127,890 bearing interest at the prime rate. On or about March 15, 1971, Central, as Trustee, agreed to the substitution of a replacement note for the then due cash payment.

Subsequent to Jerry Litner's advising the Trustee of his father's condition, Central took no action to ascertain on its own the mental condition or competency of Philip Litner. Even though Philip was the sole beneficiary of the Trust, Central never communicated, or attempted to communicate, directly with him about the Trust for several years after his stroke. Instead of consulting with Philip, Trust matters were communicated to Jerry and Betty Litner. Monthly Trust statements were forwarded to Betty Litner and monthly Trust income payments were deposited in her bank account without obtaining Philip's approval. On several occasions between 1971 and 1973, investment recommendations for the Trust were also forwarded to Betty Litner and she indicated her approval of the same on Central's written consent forms.

As Curtis Electro's principal lender, Central entered into a commercial loan agreement which provided Curtis with an unsecured revolving line of credit in the amount of $1,500,000 for general business purposes. It should be noted that Philip Litner was personally aware of the Curtis loan agreement and of Central's position as principal commercial banker of Curtis at the time he designated the bank as Trustee. During the late 1960s and prior to August of 1972, pursuant to the revolving credit agreement, Central made unsecured loans to Curtis, the parent company, without taking collateral or obligating the subsidiaries in any way. The loan agreement with Central prohibited Curtis from pledging, mortgaging, encumbering or otherwise granting any security interest in any of Curtis' properties without the prior written approval of Central.

In 1970, Curtis lost in excess of $700,000 and, thereafter, was unable to meet its financial obligations as its economic well-being continued to deteriorate. At the September, 1971, meeting of the Curtis Board, attended by Jerry Litner and Michael Gaffigan, Curtis director and Central commercial loan officer, the payment of the third installment obligation on the Philip Litner note was discussed. The Curtis directors determined that due to the corporation's severe financial problems the payment could not be made and the Trustees should be contacted to negotiate a modification of the note obligation. Subsequently, Jerry Litner informed Bruce Duff, Central National's account administrator for the Trust, that Central would be contacted by Curtis concerning the company's cash flow problem vis-a-vis the January, 1972 note payment and urged him to "work out an arrangement" with the company.

Prior to being contacted by Curtis, Mr. Duff questioned Mr. Gaffigan regarding Curtis Electro Corporation's relationship with Central's Commercial Lending Department. Duff, the Litner Trust officer, was informed by Gaffigan that Curtis was a "good customer" of the bank and had been since 1968. On or about March 15, 1972, Central, acting as Trustee of the Litner Trust, and Curtis entered into a new repayment agreement and canceled the Curtis notes then held by the Trustee. The new repayment agreement provided for a five-year $255,780 unsecured note bearing an increased interest rate of seven and one-half percent. As a concession to Curtis, the monthly payments on the note were initially set at $2,000 per month and were to be increased during the term of the note.

On August 18, 1972, Central, again acting as Curtis' commercial lender, and Curtis Electro entered into an additional commercial loan agreement whereby, in contrast to the earlier agreements, each of the Curtis subsidiaries gave notes to Central for the entire amount then owed by Curtis, $1,900,000, and the bank obtained a security interest in the equipment of the subsidiaries. To further protect themselves as Curtis' banker, Central obtained a security interest in one hundred percent (100%) of the stock of the Curtis subsidiaries.

Late in June of 1973, Mr. Duff discovered that Curtis was in default on the March 15, 1972 promissory note. On several occasions...