Scanlan v. Eisenberg

• Decision Date: 20 January 2012
• Docket Number: No. 11–1657.,11–1657.
• Citation: 669 F.3d 838
• Parties: Mary Bucksbaum SCANLAN, Plaintiff–Appellant, v. Marshall EISENBERG, et al., Defendants–Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

669 F.3d 838

Mary Bucksbaum SCANLAN, Plaintiff–Appellant,

v.Marshall EISENBERG, et al., Defendants–Appellees.

No. 11–1657.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 28, 2011.Decided Jan. 20, 2012.

Frederick J. Sperling (argued), Attorney, Schiff Hardin LLP, Chicago, IL, for Plaintiff–Appellant.

Stephen Novack (argued), Attorney, Novack & Macey LLP, Holly A. Harrison, Attorney, Sidley Austin LLP, Chicago, IL, for Defendants–Appellees.

John c. Martin, Attorney, Chicago, IL, for Amicus Curiae.

Before BAUER, WOOD and TINDER, Circuit Judges.

BAUER, Circuit Judge.

Mary Bucksbaum Scanlan (“Scanlan”) is a current beneficiary of several discretionary trusts. Scanlan brought claims of legal malpractice and breach of fiduciary duty against the trustee and her lawyers. The district court dismissed all of her claims with prejudice and ruled that Scanlan lacked Article III standing because she did not allege facts showing a likelihood that the trusts' corpus were insufficient to pay her discretionary distributions. We reverse and remand.

I. BACKGROUND

A. The Trusts and the Parties

Scanlan was born in 1969 and is the daughter of Martin Bucksbaum. Bucksbaum and his brother developed shopping centers eventually founding General Growth Properties, Inc. (“GGP”), one of the largest traded real estate investment trusts in the United States, with $34 billion in total market capitalization and $3 billion in annual revenues. GGP currently trades around $14 per share ¹ on the New York Stock Exchange under the ticker, GGP.

Beginning when Scanlan was a child, her father and uncle established six trusts (the “Trusts”), naming Scanlan as the primary beneficiary. Each of the Trusts authorizes the corporate trustee, General Trust Company (the “Trustee”), to distribute “all or as much of the net income or principal, or both” of the trust to Scanlan “as the Trustee deems to be necessary for her support” or “in her best interests.” No other person is eligible to receive any distributions from the Trusts during Scanlan's lifetime, and Scanlan's children are contingent remaindermen.

The law firm of Neal, Gerber & Eisenberg, LLP (the “Law Firm”), through two of its partners, Marshall Eisenberg (“Eisenberg”) and Earl Melamed (“Melamed”) generally represented Scanlan throughout her adult life when she needed legal advice. At the same time, they represented both the Trustee and GGP. In addition to his legal representation of GGP, Eisenberg also served as the Secretary of GGP from April 1993 through October 2008; Eisenberg and Melamed both own GGP stock.

Eisenberg and Melamed personally control General Trust Company. For example, Eisenberg is its majority owner, its president, a member of its board of directors, and one of the three members of its Trust Committee. Melamed serves on General Trust Company's board of directors, serves as its Secretary, and is the second member of its Trust Committee.

B. The Stock Purchases

In 2007 and 2008, the Trusts purchased hundreds of millions of dollars of additional GGP stock. These purchases were financed with the proceeds of a loan secured by a pledge of the Trusts' assets. At the time of the purchases, the Trusts were already heavily invested in GGP stock, which constituted over 65% of the Trusts' assets. Eisenberg and Melamed approved the GGP stock purchases in their capacity as officers and directors of the Trustee, and the Law Firm, together with Eisenberg and Melamed, provided legal advice concerning the transaction.

On April 16, 2009, GGP declared bankruptcy. Scanlan's Trusts suffered more than $200 million in losses due to a drop in GGP stock purchased in 2007 and 2008.

C. The Lawsuit

Scanlan brought an action on August 17, 2009, naming the Trustee, the Law firm, Eisenberg, and Melamed as defendants (collectively, the “Defendants” or “Appellees”). On June 30, 2010, Scanlan filed an amended complaint, which added her children as plaintiffs based on their status as contingent beneficiaries of the Trusts. Because her children are minors, Scanlan is suing on their behalf.

In her amended complaint, Scanlan complains that the Trustee's purchases of GGP stock were not made in her best interests, but instead to further (1) her lawyers' own financial interest in retaining GGP as a client; (2) the interests of other members of the Bucksbaum family who managed GGP (whom her lawyers also represented); (3) Eisenberg and Melamed's personal interests as shareholders; and (4) Eisenberg's interest as Secretary of GGP.

Specifically, Scanlan brings claims against the Trustee for breaching its fiduciary duties of loyalty, prudence, and disclosure when it purchased the GGP stock in 2007 and 2008. Scanlan also brings claims against her lawyers for breach of fiduciary duty, legal malpractice, and aiding and abetting the Trustee's breach of its fiduciary duty. Lastly, Scanlan seeks equitable relief, including (1) restoration of the Trusts' corpus; (2) the removal of the Trustee; (3) an accounting and books and records request; (4) modification of the Trusts to provide her with power to remove the Trustee; (5) the disgorgement of attorneys' fees; and (6) punitive damages.

D. Procedural Context

On October 28, 2009, the Defendants filed a Rule 12(b)(1) motion arguing that Scanlan was improperly seeking a direct payment of damages. In her response, Scanlan claimed that she was seeking an order compelling the Defendants to restore the Trusts' corpus. During the argument on the motion, the district court raised, sua sponte, the issue of whether Scanlan might lack Article III standing because she was a discretionary beneficiary. The Trustee's attorney all but made Scanlan's argument for her, first, conceding that Scanlan had standing to seek restoration of the corpus, but then agreeing to take that issue under advisement and re-brief the issue if the district court preferred.

On October 14, 2010, the district court ruled that Scanlan lacked Article III standing and dismissed all of her claims with prejudice. Specifically, the district court held that Scanlan lacked standing unless she could allege “facts showing a likelihood that the corpus of the trusts would ever be insufficient to pay all of her discretionary distributions to which [she] might become entitled during her lifetime.” This appeal followed.

The issue on appeal, then, is a narrow one: whether Scanlan has constitutional standing to assert her claims in federal court. We find that she does and reverse the district court.

II. DISCUSSION

We review a district court's decision to grant a Rule 12(b)(1) motion to dismiss for lack of standing de novo, accepting as true all facts alleged in the well-pleaded complaint and drawing all reasonable inferences in favor of the plaintiff. Family & Children's Ctr., Inc. v. School City of Mishawaka, 13 F.3d 1052, 1057 (7th Cir.1994).

The burden to establish standing is on the party invoking federal jurisdiction—here, Scanlan—and the elements she must show are:

(i) an injury in fact, which is an invasion of a legally protected interest that is concrete and particularized and, thus, actual or imminent, not conjectural or hypothetical; (ii) a causal relationship between the injury and the challenged conduct, such that the injury can be fairly traced to the challenged action of the defendant; and (iii) a likelihood that the injury will be redressed by a favorable decision.

Lee v. City of Chicago, 330 F.3d 456, 468 (7th Cir.2003) (citing Lujan v. Defenders of Wildlife, 504 U.S. 555, 560–61, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992)).

To satisfy the injury-in-fact requirement, Scanlan “must establish that [she] has sustained or is immediately in danger of sustaining some direct injury.” Wis. Right to Life, Inc. v. Schober, 366 F.3d 485, 489 (7th Cir.2004) (quoting Tobin for Governor v. Ill. State Bd. of Elections, 268 F.3d 517, 528 (7th Cir.2001)). “Mere speculation is not enough to establish an injury in fact.” Id.

The district court's standing inquiry, and more specifically, its injury-in-fact analysis, focused primarily on the current value of the Trusts' assets. Having found that Scanlan did not allege any facts indicating that the value of the Trusts' corpus—approximately $800 million—would ever be insufficient to fund any potential “support” and “best interests” payments, the district court concluded that Scanlan did not suffer an injury in fact for purposes of Article III. To put it differently, Scanlan's legally protected interest arising out of her status as a discretionary beneficiary, according to the district court, is limited to her interest in potential discretionary payments made pursuant to the Trusts' instruments. And without an injury to that specific interest, the court concluded, Scanlan has no injury in fact. We disagree with that characterization of Scanlan's interest.

That Scanlan must suffer an invasion of a legally protected interest is a principle of federal law. But the nature and extent of Scanlan's interest as a beneficiary of a discretionary trust, and therefore, whether that interest can form the basis of a federal suit, depend on the law that defines the rights of a discretionary beneficiary. FMC Corp. v. Boesky, 852 F.2d 981, 993 (7th Cir.1988); see also Bochese v. Town of Ponce Inlet, 405 F.3d 964, 981 (11th Cir.2005); Cantrell v. City of Long Beach, 241 F.3d 674, 684 (9th Cir.2001). In this case, that is the law of Illinois. So we look to see whether according to Illinois law a discretionary trust beneficiary has the kind of stake that Article III requires.

So stated, this is an issue that has meager precedent. The Restatements (Third) of Trusts, Section 94, addresses who may bring a suit against a trustee for breach of trust, and therefore, provides some guidance on this topic. See In re Estate of Lieberman, 391 Ill.App.3d 882, 330 Ill.Dec. 893, 909 N.E.2d 915, 922 (2009). Section 94, which is entitled, “Standing to Enforce a Trust,” provides:

A suit against a trustee of a...