Masi v. Ford City Bank and Trust Co.
| Decision Date | 23 January 1986 |
| Docket Number | No. 84-2185,84-2185 |
| Citation | 779 F.2d 397 |
| Parties | , RICO Bus.Disp.Guide 6146, 6 Employee Benefits Ca 2821 Joseph C. MASI, Plaintiff-Appellant, v. FORD CITY BANK AND TRUST COMPANY, an Illinois Bank and Trust Company, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Albert Koretzky, DiMonte & Lizak, Chicago, Ill., for plaintiff-appellant.
Larry R. Chulock, Schwartz & Freedman, Chicago, Ill., for defendant-appellee.
Before COFFEY and FLAUM, Circuit Judges, and WRIGHT, Senior Circuit Judge. *
Plaintiff Joseph C. Masi appeals the district court's dismissal of his federal cause of action based on section 1962(a) 1 of the Racketeering Influenced and Corrupt Organizations Act ("RICO") 18 U.S.C. Sec. 1961-68 (1970) and that court's denial of his prayer for punitive damages for a breach of fiduciary duty. We reverse the district court's finding on RICO and remand for further findings on the issue of punitive damages.
On October 7, 1980, the plaintiff, Joseph C. Masi ("Masi"), opened an Individual Retirement Account ("IRA") with the defendant Ford City Bank and Trust Company (the "Bank") in Chicago, Illinois. On that date Masi deposited $11,587.39 in the IRA account. Several months later, on March 25, 1981 Masi signed a guaranty for a loan made by the Bank to Michael A. Schwartz for $19,452.96. Masi guaranteed repayment to the extent of $10,000. After repaying $6,484.32 Michael D. Schwartz defaulted on the loan Masi had guaranteed, leaving an unpaid balance of $12,968.64. In June, 1982, the Bank withdrew $11,208.31 of the funds in Masi's IRA to pay off the guaranty obligation.
Masi brought a three count action in the United States District Court, Northern District of Illinois, Eastern Division, on the basis of the Bank's alleged wrongful conversion of the funds in Masi's IRA. Count I alleged that the Bank breached its fiduciary duties as trustee of the account. Count II alleged that the Bank violated the terms of the loan guaranty agreement entered into by Masi. Count III asserted a federal cause of action based on section 1962(a) of RICO alleging that the Bank utilized the funds it withdrew to operate its own banking enterprise.
In the district court the Bank moved to dismiss all three counts of Masi's complaint for failure to state claims upon which relief may be granted pursuant to Fed.R.Civ.P. 12(b)(6). The court denied the Bank's motion to dismiss Counts I and II, granted the Bank's motion to dismiss Count III, and sua sponte granted Masi a summary judgment. In addition, the district court, without explanation, denied Masi's request for punitive damages and attorney's fees. The court found that the IRA agreement itself was sufficient to create a trust relationship and that the Bank breached its attendant fiduciary duties. 2 The district court also held that every RICO action requires the existence of a "person" separate from an "enterprise" and that the Bank cannot be both the person and the enterprise required by 18 U.S.C. Sec. 1962(a). It is these findings that the plaintiff appeals.
As a federal court exercising diversity jurisdiction, the district court carefully reviewed and applied Illinois law in determining whether a fiduciary relationship was established when Masi opened his IRA at the Bank. Erie Railroad Company v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). The district court held that under Illinois law an IRA is a "special deposit" created by an express agreement or other circumstances that impliedly create a trust between the depositor and the Bank. First National Bank of Blue Island v. Estate of Philp, 106 Ill.App.3d 360, 62 Ill.Dec. 433, 436 N.E.2d 15 (1982) (). Instead of creating the relationship of debtor and creditor, depositing money in an IRA in the state of Illinois creates a bailment. Mid-City v. Mar Building Corp., 33 Ill.App.3d 1083, 339 N.E.2d 497 (1975). This relationship is protected in Illinois and cannot be reached in satisfaction of a depositor's general indebtedness. Thus, the district court found, and neither party appeals, that the Bank breached its fiduciary duties under the IRA agreement by using the funds in the IRA to satisfy plaintiff's obligation under the loan guaranty.
But the issue before this court is whether that breach is of sufficient magnitude and malignant character to compel punitive damages. We too look to Illinois state law for guidance on when punitive damages should be allowed. In Kelsay v. Motorola, Inc., 74 Ill.2d 172, 186, 23 Ill.Dec. 559, 384 N.E.2d 353 (1978) the Illinois Supreme Court stated:
It has long been established in this state that punitive or exemplary damages may be awarded when torts are committed with fraud, actual malice, deliberate violence or oppression, or when the defendant acts willfully, or with such gross negligence as to indicate a wanton disregard of the rights of others (Consolidated Coal Co. v. Haenni (1893), 146 Ill. 614, 35 N.E. 162). Where punitive damages may be assessed, they are allowed in the nature of punishment and as a warning and example to deter the defendant and others from committing like offenses in the future. (Eshelman v. Rawalt (1921), 298 Ill. 192, 197, 131 N.E. 675.) And, while the measurement of punitive damages is a jury question, the preliminary question of whether the facts of a particular case justify the imposition of punitive damages is properly one of law. Knierim v. Izzo (1961), 22 Ill.2d 73, 87, 174 N.E.2d 157.
In Allabastro v. Cummins, 90 Ill.App.3d 394, 45 Ill.Dec. 753, 413 N.E.2d 86 (Ill.App.1980) the court applied the Kelsay logic to find punitive damages appropriate when a corporation breached a fiduciary duty it owed to a group of customers. Allabastro, like the case before us, was primarily based on breach of a contract, but the court found that exemplary damages were proper since the breach of the fiduciary relationship constituted a separate and independent tort. Allabastro, 45 Ill.Dec. at 756, 413 N.E.2d, at 89.
Similarily, in Glass v. Burkett, 64 Ill.App.3d 676, 21 Ill.Dec. 494, 381 N.E.2d 821 (1978), the court approved punitive damages against a defendant who breached a fiduciary relationship with the plaintiff in that case. In Glass, the court made clear that in making its determination of whether, and how much, punitive damages should be awarded the burden rests on the defendant to rebut a presumption of fraud.
Where a fiduciary relationship exists at the time of a transaction whereby the dominant party appears to gain, the transaction is deemed presumptively fraudulent but such presumption is not conclusive and may be rebutted by clear and convincing proof that the dominant party has exercised good faith and has not betrayed the confidence reposed in him. (Jones v. Washington (1952), 412 Ill. 436, 107 N.E.2d 672).
Glass v. Burkett, 21 Ill.Dec. at 497, 381 N.E.2d at 824.
In this case, after a thorough analysis of the relevant state law, the district court denied punitive damages and attorney fees without an explanation or an evidentiary hearing. Masi was not given an opportunity to demonstrate that the Bank acted willfully, or with such gross negligence, that it wantonly disregarded his rights, and the Bank was not given an opportunity to rebut the presumption that it tortiously defrauded Masi of the money he entrusted in the IRA. See Kelsay, supra, 23 Ill.Dec. at 559, 384 N.E.2d at 353. Therefore, in light of Illinois precedent, we remand to the district court for a more full hearing on the issue of exemplary damages.
In addition, we remand for a determination of attorney's fees because of the special nature of this "special deposit." IRAs are "special" not only in the semantic categorization of the Illinois courts, but also by the language of federal law. Section 408 of the Internal Revenue Code (26 U.S.C. Sec. 408) is part of the Employee Retirement Income Security Act ("ERISA"), which provides, in part:
For purposes of this section, the term 'Individual Retirement Account' means a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries but only if the written governing instrument creating the trust meets the following requirements: ....
26 U.S.C. Sec. 408(a). This section establishes seven requirements for inclusion in the trust instrument before it can qualify as an IRA trust, including that the "interest of an individual in the balance of his account is nonforfeitable." 26 U.S.C. Sec. 408(a)(4). The clarity of this language is convincing, if not compelling. One must recognize that IRAs are not regular savings accounts. They clearly are special deposits that constitute a trust relationship wherein the Bank owes a fiduciary duty to the depositor. To the extent that the district court believes that exemplary damages and attorney's fees may enhance this, and similar, institutions' awareness of their peculiar responsibilities, they should be most seriously considered.
Furthermore, in a case such as this one, where the district court found that the Bank had "clearly breached the express terms of the IRA agreement by forfeiting the funds in the IRA to pay off the balance of the defaulted loan," the plaintiff should usually not have to bear litigating costs that might equal the very corpus of the trust. We therefore remand for findings on this issue. 3
Count III of Masi's complaint was based on subsection 1962(a) of the RICO statute and alleged a pattern of racketeering activity based on...
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