Merchants Nat. Bank of Aurora v. Frazier

• Decision Date: 14 June 1946
• Docket Number: Gen. No. 10068.
• Citation: 67 N.E.2d 611,329 Ill.App. 191
• Parties: MERCHANTS NAT. BANK OF AURORA v. FRAZIER et al.
• Court: United States Appellate Court of Illinois

329 Ill.App. 191

67 N.E.2d 611

MERCHANTS NAT. BANK OF AURORA

v.FRAZIER et al.

Gen. No. 10068.

Appellate Court of Illinois, Second District.

June 14, 1946.

Appeal from Circuit Court, Kane County; Charles A. O'Connor, Judge.

Suit by the Merchants National Bank of Aurora, a corporation, against Walter S. Frazier, since deceased, and others for an order directing it to deliver securities and cash, held under a written escrow agreement, to defendants or to some person for them to be designated by the court, and for a decree that plaintiff had fully complied as escrow agent with the terms of the escrow agreement, and to have plaintiff relieved of any further responsibility or liability under the escrow agreement, wherein defendants filed a counterclaim charging mismanagement by plaintiff of alleged trust fund with consequent loss to trust estate. From a decree dismissing the complaint for want of equity and ordering plaintiff to pay defendants for loss suffered by trust estate, the plaintiff appeals.

Decree affirmed in part and reversed in part, and cause remanded with directions to modify decree in accordance with opinion.Newhall & Givler, of Aurora, for appellant.

Fred A. Gariepy and Gariepy & Gariepy, all of Chicago, and J. Emil Brunnemeyer, of Aurora, for appellees.

DOVE, Justice.

On July 14, 1941, Merchants National Bank of Aurora, appellant, filed a complaint in the circuit court of Kane County against appellees, and Walter S. Frazier, since deceased, alleging that it held as escrow agent, under a written escrow agreement, certain described securities and cash belonging to appellees, which they refused to accept, and asking an order directing appellant to deliver the securities and cash to appellees, or to some person for them to be designated by the court, and decreeing that the plaintiff had fully complied with all the terms of the escrow agreement, and that it be relieved from any further responsibility or liability thereunder. The defendants answered the complaint and filed a counterclaim, alleging the creation of a trust under the escrow agreement and the assumption by the bank of trust duties and a fiduciary relationship as to the investment of $18,000 of the funds received by it. The counterclaim charged mismanagement of the trust fund with a consequent loss to the trust estate, and sought relief. Issues were joined, the cause was referred to the master, objections to his report, standing as exceptions, were overruled, and a decree was entered dismissing the complaint for want of equity, and ordering appellant to pay appellees the sum of $21,447.87 and costs of suit, and to pay the guardian ad litem for the two minor defendants a fee of $1116 to be taxed as costs. The cause is here on the bank's appeal from the decree.

The record shows that on March 29, 1924, a written contract for the sale of certain premises in the City of Aurora was executed by Walter S. Frazier, Philip Frazier, Helen F. Heinley, their respective spouses, and Anna Frazier, unmarried, as vendors, George B. Kingsley as vendee, and appellant bank as escrow agent. The purchase price of the property was $80,000, payable to the escrow agent, with an initial payment of $10,000, the balance due in installments, the final payment of $40,000 due April 1, 1934, with privilege of prepayment. All payments thereunder, up to the final $40,000 payment were to be distributed by appellant, less its reasonable charges, one-half to Walter S. Frazier, and one-fourth each to Philip Frazier and Helen P. Heinley. By the terms of the will of Anna Frazier's father, the premises were charged with the payment to her of $700 per annum during her lifetime. This was released to the vendee by the contract, with a provision for restoration thereof in case of his default. This contract contained the following provision:

‘When and if the said final forty thousand dollars ($40,000.00) payment shall be made by Vendee the Escrow Agent is directed to segregate, retain and invest such portion thereof as will produce a net income of seven hundred dollars ($700.00) annually, which sum shall be paid to Anna Frazier during her life. At her death the principal sum so directed to be retained shall be distributed by the Escrow Agent less its reasonable charges, one-half to Walter S. Frazier and one-quarter each to Philip Frazier and Helen F. Heinley as above.’

On June 29, 1928, appellant wrote each of the vendors that the vendee would pay the balance of the purchase price on July 6, 1928 and would expect delivery of his deed, stating that ‘Under the terms of the escrow agreement, we will be required to retain out of the money which Mr. Kingsley pays to us an amount sufficient to insure an annual income of $700.00 to Miss Anna Frazier for the term of her lifetime. The remainder of the funds will be distributable as soon as received.’ The letter also stated that the bank had undertaken to underwrite a 6% first mortgage on the property for $70,000 upon delivery of the deed, and suggested investment in the notes by the vendors from their shares of the funds; and also suggested that the bank held other mortgages and securities which it would be very pleased to have an opportunity to submit for their consideration.

Under date of July 2, 1928, appellant made the $70,000 loan to Mr. Kingsley, secured by a trust deed on the property, in which the bank was named as trustee About $51,000 had been spent on the property in repairs and improvements, and the total income was about $1,000 per month. On July 6, 1928, the vendee paid appellant the balance of the unpaid purchase price, $63,000, with accrued interest from April 1st, aggregating $63,994.19, and received his deed. Of this amount appellant retained $18,000, shown on its statement of distribution on July 7, 1920 to each of the vendors as: ‘Withheld by Merchants National Bank, Trustee for Anna Frazier, $18,000.’ Appellant also retained $50.00 ‘as escrow agent April 1 to July 6, and closing fee,’ and distributed the balance of the funds in accordance with the terms of the contract. The statement of distribution was accompanied by a letter advising the vendors that appellant had retained $18,000 as the annuity fund; that it was their custom under a trust calling for a definite annual income to hold such an amount as would produce such income at 4%; that at the ‘present’ time the fund would net approximately 5 1/2%; and that at the end of each year the surplus income over the $700 requirement would be distributed to them, and that upon the death of Anna Frazier the entire fund as then constituted would be paid out to them.

On the same day, appellant opened an account in its trust department, under the heading: ‘Trust No. 154. Anna Frazier Trust Under Agreement.’ The first entry in the account reads: ‘July 7, 1928-Rec'd. from Mn. Bank Escrow Agent initial principal $18,466.68.’ The $466.68 was money the bank had on hand to the credit of Anna Frazier from principal payments into the escrow. On the same day the account was debited with $8,006.58 on account of appellant's purchase from itself of $8,000 face value and accrued interest of the Kingsley notes. This and other investments by appellant from the fund will be discussed later.

From July 7, 1928, to May 20, 1942, appellant rendered the vendors annual statements of the receipts, disbursements, and investments from the fund. Each of the statements was captioned either as ‘Statement of the Merchants National Bank of Aurora, as Trustees for Anna Frazier,’ or ‘Annual Statement of Merchants National Bank of Aurora as Trustee Under Agreement for Anna Frazier.’ After appellant was called on by appellees to account, it issued its statement for the period ending May 20, 1942, omitting any reference to the trust, and merely referring to the ‘Anna Frazier account.’ None of the statements, except that of July 27, 1929, disclosed from whom the bank purchased securities for the account. The vendors took no action respecting any of these statements. The $700 per annum was paid to Anna Frazier by appellant during her lifetime, and she died on August 7, 1936. Helen F. Heinley died in December, 1939, leaving her husband and two minor children surviving, and they were made parties defendant to the complaint. Walter S. Frazier died during the pendency of the suit and on December 8, 1944, the administrator with the will annexed of his estate was substituted as a defendant and counterclaimant.

The record shows that with the exception of the Kingsley notes purchased by appellant from itself, all the securities with which the decree surcharges appellant, purchased by it from the $18,000 fund, were purchased from the bank's affiliate, the Merchants National Investment Company, a corporation organized in 1931 to take over the investment and loan business of the bank. Seven of the bank's directors were subscribers to the capital stock of the Investment Company, in substantial amounts. Five of its directors were directors of the bank, and its office adjoined the trust department of the bank on the second floor of the bank building. Some of its stockholders were stockholders in the bank, and the trust officer of the bank was president of the Investment Company. In 1933, the Investment Company moved to other quarters in the city, and later to the Kingsley building. In 1937 its corporate name was changed to ‘Aurora Investment Company,’ under which name it was still doing business at the time of the trial. All of the surcharged securities had largely declined in value.

The basis of the decree is as follows: Principal amount of improper investments, $19,728.06, interest thereon at 5% from date of the decree, $8,525.32 aggregating $19,253.38, less $2,482.50 interest thereon, received and distributed, leaving a net balance of $16,770.88. To this was added $3,053.49, cash in appellant's hands on May 20, 1942, and the principal of the Felz note of $1390.00 collected by appellant during the course of...