Giagnorio v. Emmett C. Torkelson Trust

No. 2--96--1415

_________________________________________________________________

IN THE

APPELLATE COURT OF ILLINOIS

SECOND DISTRICT
_________________________________________________________________

PAMELA GIAGNORIO, ) Appeal from the Circuit Court
) of Du Page County.
Plaintiff-Appellant, )
)
v. ) No. 95--MR--0354
)
EMMETT C. TORKELSON TRUST; )
JOAN M. TORKELSON; and )
JAMES TORKELSON, ) Honorable
) Bonnie M. Wheaton,
Defendants-Appellees. ) Judge, Presiding.
_________________________________________________________________

JUSTICE RATHJE delivered the opinion of the court:

Plaintiff, Pamela Giagnorio (Pamela), brought this action,
alleging that defendant, Joan Torkelson (Joan), breached her
fiduciary duties as trustee of the Emmett C. Torkelson Trust
(Trust), dated January 27, 1989. Specifically, Pamela alleged that
the sale of the Trust corpus by Joan to defendant, James Torkelson
(James), breached Joan's duty to Pamela, a contingent beneficiary
of the Trust. Pamela's complaint was dismissed, and she was given
leave to file an amended complaint. After extensive briefing and
argument, the trial court dismissed Pamela's amended complaint with
prejudice, citing Bracken v. Block, 204 Ill. App. 3d 23 (1990).
This timely appeal followed.
On appeal, Pamela generally argues that the trial court erred
in finding her amended complaint did not set forth facts stating a
recognized and viable cause of action and that said complaint, at
the very least, raised genuine issues of material fact surrounding
the subject transaction and the discharge of the trustee's duties,
so as to preclude judgment in defendants' favor as a matter of law.
The record at bar reveals the following relevant facts. On
January 27, 1989, Emmett C. Torkelson (Emmett), established the
subject Trust to hold his interest in a business called Alu-Bra
Foundry, Inc. (Alu-Bra). At the time the Trust was created, Emmett
C. Torkelson was married to Joan Torkelson. Among their children
were the plaintiff, Pamela Giagnorio, and one of the defendants,
James Torkelson. Both Pamela and James are contingent
beneficiaries of the Trust. The Trust's corpus consisted of all
of Alu-Bra's outstanding shares, which totalled 3,333 shares. The
Trust instrument designated Emmett's wife, Joan, and his daughter,
Pamela, as co-trustees upon Emmett's death. Pursuant to the Trust
instrument, either Joan or Pamela could act alone as trustee after
the death, resignation, or disability of the other.
Further, the Trust instrument provided that, upon Emmett's
death, the balance of the Trust shall be set aside as a separate
Trust, known as the "Family Trust." The trustee was directed to
pay income from the Family Trust to Joan in installments during her
lifetime or to use the Trust's principal as "necessary or
advisable" for Joan's "health, maintenance and reasonable comfort."
The Trust instrument also provided the following formula for
a trust (marital trust) to be created for Joan's benefit upon
Emmett's death:
"If JOAN M. TORKELSON, herein referred to as 'my wife'
survives me, the trustee as of my death shall set aside out of
the trust estate as a separate trust for her benefit a
fraction of the trust property of which (i) the numerator is
the smallest amount which, if allowed as a federal estate tax
marital deduction, would result in the least possible federal
estate tax payable by reason of my death, and (ii) the
denominator is the federal estate tax value of the assets
included in my gross estate which became (or the proceeds,
investments or reinvestments of which became) trust property."
The Trust instrument further states that all of Emmett's
children, with the exception of Candace M. Torkelson, will receive
equal shares of the Family Trust "including any amounts added
thereto from the Marital Trust" upon Joan's death, should she
survive him. Descendants of any deceased children were to receive
the deceased child's share per stirpes.
The Trust instrument granted to the trustee(s) broad
discretionary powers, which included the trustee's right to retain
Trust property, to invest the corpus, to lease Trust property, and
to perform any other acts necessary for the proper administration
of the Trust.
The Trust instrument also permitted the trustee to retain any
ownership in the Trust corpus, namely, Alu-Bra. In addition to the
ability to retain the ownership interest, the trustee was given
broad discretion in making business decisions on behalf of Alu-Bra.
At some point not disclosed by the record or the parties'
briefs, Emmett died. On February 10, 1991, Pamela resigned as co-
trustee of the Trust, leaving Joan as the sole trustee. On
February 22, 1995, in her capacity as the sole trustee of the
trust, Joan entered into a stock purchase agreement (Agreement)
with James, a contingent beneficiary of the Trust. Under this
Agreement, Joan agreed to sell to James all the 3,333 shares of
Alu-Bra in the Trust for $400,000, plus 8% interest per year to be
paid in quarterly installments to Joan. James further agreed to
execute a promissory note (Note) to pay the final purchase price on
January 1, 2025. To secure the Note, James agreed to purchase two
life insurance policies on Joan's life in the total amount of
$437,993. In the event of Joan's death, James agreed to pay off
the Note with the proceeds of these policies.
James also agreed not to borrow against the policies' cash
value without Joan's permission, and, under no circumstances, was
James to borrow any amount that would reduce the policies' cash
value below $400,000. James further acknowledged pending zoning
and building code disputes between Alu-Bra and the Village of
Bensenville.
The Note was executed at the same time as the Agreement. The
Note required James to make weekly interest payments to Joan of
$615.38. The Note further provided for a final payment of
$400,615.38 on February 22, 2025, or sooner, if James defaulted on
the Note. The Note was secured by the two life insurance policies.
It further provided that Joan had the right to accelerate the Note
and demand full payment in the event of a default by James.
Additionally, the Note was payable in full upon Joan's death.
James also executed a pledge and escrow agreement (Escrow
Agreement) between Joan's law firm and himself. The Escrow
Agreement provided that all the certificates for the 3,333 shares
of Alu-Bra stock would be held in escrow by Joan's law firm pending
the Note's payment. However, James retained the right to receive
any income from the shares and the right to vote the Alu-Bra
shares.
On June 1, 1995, Pamela filed her complaint, which generally
alleged that there were significant deficiencies in the Agreement
and that Joan had breached her fiduciary duties as sole trustee.
Pamela sought to have the Agreement revoked and to have Joan
removed as trustee. Thereafter, defendants filed a motion for
dismissal pursuant to section 2--615 of the Code of Civil Procedure
(735 ILCS 5/2--615 (West 1994)), and Pamela filed a response to
said motion. The trial court granted the motion to dismiss but
permitted Pamela to file an amended complaint.
The amended complaint alleged, inter alia, that Joan agreed to
sell the Trust corpus for $400,000; that the value of the land
owned by Alu-Bra was appraised at $290,000; that the company was
valued by Bretel, Davey and Associates to be worth $500,000 on
December 31, 1992; that, based upon all appraisals, the value of
Alu-Bra ranged from a low of $665,000 to $790,000; that all
appraised values were substantially higher than the agreed purchase
price; that the Note executed by Joan and James required no cash
down payment; that the Note is deficient in that it only allows for
the entry of a judgment for any amounts due as of the date of a
default as well as interest and attorney fees; that the Note does
not allow for the recovery of the stock should James become
insolvent, thus leaving the Trust and beneficiaries unprotected in
the event of such a default; that the acceptance of the Note in the
full amount was a breach of fiduciary duty owed the beneficiaries
by Joan; that the pledge and escrow agreement regarding the Alu-Bra
shares is merely a resort to the terms of the Uniform Commercial
Code; that the pledge and escrow agreement does not provide
adequate security to protect the Trust's and beneficiaries'
interests; and that the Agreement requires James to purchase and
maintain certain life insurance policies insuring the life of Joan.
Further, the amended complaint sought the revocation of the
Agreement and the removal of Joan as trustee. In their motion to
dismiss made pursuant to section 2--615, defendants maintained that
the ordinary fiduciary duty owed to the beneficiaries at common law
was distinguishable from the duty owed beneficiaries of a trust
administered by the primary beneficiary acting as trustee; that the
Trust granted Joan broad discretionary powers; and that the
Agreement did not breach any fiduciary duties that Joan might owe
the contingent beneficiaries.
After Pamela filed her response to defendants' motions and
defendants filed their reply to Pamela's response, the motions were
argued before the trial court on March 7, 1996. In its memorandum
opinion and order dated April 29, 1996, the trial court stated in
relevant part:
"The Court finds that the case of Bracken v. Block, 204
Ill. App. 3d 23, 561 N.E.2d 1273, is controlling. In the case
at bar, as in Bracken, the Trustee under a testamentary scheme
was given broad powers to deal with the corpus of the trust.
In addition, JOAN was given broad powers to fund the Marital
and Family Trusts. In light of the familial relationship of
all the parties, the potential conflict was inherently
sanctioned by the document establishing the trust. Similarly,
the broad grant of powers and the status of JOAN as both
Trustee and Beneficiary of the trust obviates any claim that
the Trustee is required to answer to the contingent
beneficiaries for her decisions with regard to trust
property."
Subsequently, the trial court denied Pamela's motion for a
rehearing, and this timely appeal followed.
Initially, we address defendants' argument that Pamela lacks
standing as a contingent beneficiary. James cites Schlosser v.
Schlosser, 247 Ill. App. 3d 1044 (1993), in support of this
contention. In contrast, Pamela maintains that the relevant case
law holds that she has standing to pursue this action. She further
contends that defendants never raised this issue in their initial
motion to dismiss Pamela's original complaint or in their motion
for "involuntary dismissal" of Pamela's amended complaint.
We initially conclude that the issue of standing was
sufficiently raised by defendants before the trial court to
preclude the waiver of this contention.
Of the cases cited by the parties, we find Pamela's to be most
convincing in this matter.
In Barnhart v. Barnhart, 415 Ill. 303, 323 (1953), our supreme
court wrote:
"We believe the better rule to be that while a contingent
remainderman should not be denied the right to bring an action
against the trustees regardless of circumstances and merely
because his interest is remote and contingent, nevertheless,
the scope of the right should be limited to that which is
necessary to protect his possible eventual interest, i.e., the
protection and preservation of the trust res. It should be
afforded only where waste, mismanagement or dissipation of
assets appear or can be shown. We hold, therefore, that the
final paragraph of the decree was correct."
A couple of years later, the supreme court further outlined
its position on the right of a contingent remainderman to pursue
actions against a trustee in the case of Burrows v. Palmer, 5 Ill. 2d 434 (1955).
"In the recent case of Barnhart v. Barnhart, 415 Ill. 303, we stated that a contingent beneficiary should not be
denied the right to bring an action against the trustees
merely because his interest is remote and contingent, but that
he should have the right to such relief as is necessary to
protect his possible eventual interest, i.e., protect and
preserve the trust res. A trustee owes the same fiduciary
duty to a contingent beneficiary as to one with a vested
interest in so far as necessary for the protection of the
contingent beneficiary's rights in the trust property."
Burrows, 5 Ill. 2d at 440.
In the instant appeal, Pamela is indirectly identified as
beneficiary of the Trust in the document's fifth clause, section
two. Accordingly, she has an interest in the Trust property,
despite the fact that said interest is contingent and may not vest
in possession. Further, in her amended complaint, she has alleged
actions by Joan that, if substantiated, clearly endanger her
interest in the Trust. Under these circumstances, we conclude that
Pamela is entitled to pursue this cause of action. In so finding,
we have determined that the case on which defendants primarily
rely, Schlosser v. Schlosser, 247 Ill. App. 3d 1044 (1993), is
factually dissimilar to the instant appeal and, thus, is not
controlling.
Schlosser dealt primarily with the issue of whether the
beneficiaries of a prior trust and will, since revoked, had
standing to challenge a subsequent trust. In contrast, the instant
appeal involves a situation in which a contingent beneficiary of a
current trust has challenged the propriety of action made by the
trustee regarding the entire trust corpus.
We now turn to Pamela's sole argument, namely, that her
amended complaint properly stated a cause of action and that she
was entitled to inquire into the alleged breach of Joan's fiduciary
duties. She describes the alleged breaches of Joan's fiduciary
duties thusly: (1) failing to exercise reasonable business acumen
and judgment in the sale of the business held under trust; (2)
taking actions that violate the "prudent investor rule" (760 ILCS
5/5 (West 1994)); (3) breaching her obligation to act impartially
toward all beneficiaries; and (4) engaging in a familial conflict
of interest.
Pamela further contends that the case relied upon by the trial
court and, in large part, by defendants does not address the
primary element of her amended complaint, namely, that Joan dealt
with the Trust's property for the benefit of only one beneficiary
over the interests of all other beneficiaries, thus, violating the
prudent investor rule.
In response, defendants maintain that the trial court was
correct in finding that Bracken v. Block, 204 Ill. App. 3d 23
(1990), was controlling. Defendants further contend that the Trust
instrument granted Joan broad powers and that Joan was authorized
but not required to retain an ownership interest in Alu-Bra.
Defendants also argue that there was nothing amiss in the sale of
the Trust's shares to James.
Initially, we note that the question presented by a section 2-
-615 motion to dismiss is whether sufficient facts are contained in
the pleadings which, if proved, would entitle plaintiff to relief.
Kolegas v. Heftel Broadcasting Corp., 154 Ill. 2d 1, 9 (1992). In
making this determination, the court is to interpret the
complaint's allegations in the light most favorable to the
plaintiff. Kolegas, 154 Ill. 2d at 9.
When a motion to dismiss is reviewed, all well-pleaded facts
alleged in the complaint are taken as true, and the test for
determining the propriety of granting the motion to dismiss is
whether it appears that no set of facts may be proved which would
entitle plaintiff to recover from defendant. Wheeler v.
Caterpillar Tractor Co., 108 Ill. 2d 502, 505-06 (1985). The
granting of a motion to dismiss for the failure to state a cause of
action is within the sound discretion of the trial court. Evers v.
Edward Hospital Ass'n, 247 Ill. App. 3d 717, 724 (1993).
Generally, a trustee owes a fiduciary duty to a trust's
beneficiaries and is obligated to carry out the trust according to
its terms and to act with the highest degrees of fidelity and
utmost good faith. Dick v. Peoples Mid-Illinois Corp., 242 Ill.
App. 3d 297 (1993). Further a trustee owes a fiduciary duty to
serve the interest of the beneficiaries with total loyalty,
excluding all self-interest, and is prohibited from dealing with
the trust's property for her individual benefit. Dick, 242 Ill.
App. 3d at 303-04.
As noted above, the trial court relied principally upon
Bracken v. Block, 204 Ill. App. 3d 23 (1990), in concluding that
the amended complaint did not state a cause of action.
In Bracken, John and Alice Leahy, brother and sister, lived
together and held all their property in common. Bracken, 204 Ill.
App. 3d at 25. John died in 1968, leaving all his property in
trust to Alice as trustee for the benefit of the same Alice Leahy.
Bracken, 204 Ill. App. 3d at 25. John's will provided that the
trustee was to pay all the trust's income to Alice as long as she
lived. Bracken, 204 Ill. App. 3d at 25. The will specifically
stated:
" 'The Trustee shall also pay to my said sister as much of the
principal of my Trust Estate as she in her sole judgment deems
necessary or advisable to assure her care, comfort, support,
maintenance and medical attention.' " Bracken, 204 Ill. App.
3d at 25.
The will granted the trustee broad powers to deal with the
trust property. Further, the will provided that, at Alice's death,
the principal of the trust was to be distributed to assorted
charitable organizations, with the exception that John's one-half
interest in the Leahy home was to go to plaintiff, Urban Bracken.
Bracken, 204 Ill. App. 3d at 25. Alice owned the other one-half of
the interest in the house, which was to pass to the beneficiaries
of her will, Dr. George Block and Mary Block. Bracken, 204 Ill.
App. 3d at 25. In the 1970s, Alice's income from the trust's
assets was insufficient for her support and care. Bracken, 204
Ill. App. 3d at 25. In her capacity as trustee, Alice sold the
undivided one-half interest in the subject home to herself
individually for one-half the appraised value of the home, $17,500.
Bracken, 204 Ill. App. 3d at 25. The sale's proceeds were put into
the trust and used for Alice's benefit. Bracken, 204 Ill. App. 3d
at 25. Upon Alice's death in 1987, the house was sold for $70,000.
Before the trial court, Bracken argued that, as a holder of
the remainder interest under John's will, he was entitled to one-
half of the proceeds of the house's sale. The trial court granted
defendant's motion for summary judgment.
The Bracken court concluded that Alice's sale of the trust's
one-half interest in the house to herself was a proper exercise of
her discretion as trustee under John's will. Accordingly, it
affirmed the trial court's granting of defendant's motion for
summary judgment.
In so holding, the Bracken court found applicable the
exception to the general rule that a trustee may not put herself in
a position where her interests may conflict with the interests of
the trust property. This exception applies when the trust
instrument contemplates, creates, and expressly sanctions the
conflict of interest.
The Bracken court stated:
"John Leahy made his sister Alice both trustee and the
primary beneficiary of the trust, and as trustee she was given
broad powers to invade the principal, to sell the trust
property, and to do all other acts as she judged necessary or
desirable to carry out the purposes of the trust. When the
only asset remaining in the trust was a one-half interest in
the home where Alice resided, the sale of that interest was
judged necessary in order to apply the proceeds of the trust
purpose, i.e., to pay the living expenses of Alice." Bracken,
204 Ill. App. 3d at 26.
Bracken contended on appeal that Alice could have left the
real property in the trust and continued to live in the home
instead of selling it to herself. Bracken, 204 Ill. App. 3d at 26.
The Bracken court conceded that Bracken's point was valid.
However, the Bracken court concluded that Alice's decision, under
the circumstances, was equally valid.
Bracken further argued that John's will did not directly
authorize Alice to engage in self-dealing to the detriment of a
beneficiary of the trust. The Bracken court noted that John's will
evidenced his primary intent to provide for Alice's support. It
further noted that the evidence showed that trust income was used
by Alice for her support, rather than her own property. The
Bracken court concluded that Alice was not required to consume her
own assets prior to exercising her power to invade the trust's
principal and that her sale of the trust's one-half interest in the
subject home was a proper exercise of her discretion as trustee
under John's will.
The factual scenario presented in Bracken bears little
resemblance to that found in the instant appeal. For example,
Bracken asserted that Alice had engaged in improper self-dealing.
In the case before us, there is no such allegation that Joan acted
improperly in her own self-interest. Further, unlike the appeal at
bar, Bracken did not involve the sale of trust property to only one
of the contingent beneficiaries. Nor did Bracken involve
allegations of actions taken by the trustee that left the interests
of certain contingent beneficiaries unprotected.
As noted above, Bracken stands, in part, for the proposition
that where the trust instrument contemplates, creates, and
expressly sanctions conflicts of interest between the trustee's
interests and those of the trust property the conflict may be
allowed to exist. Assuming arguendo that the allegations of the
subject amended complaint involve any such conflicts of interest
between Joan's interests and those of the Trust's property, the
trial court properly relied on Bracken.
However, as indicated above, the primary thrust of the amended
complaint deals with allegations that Joan's decision to sell the
Alu-Bra shares to John violated the prudent investor rule and left
the other contingent beneficiaries without adequate protection
should John default on the Agreement. Bracken did not involve such
issues and, thus, is not controlling in regard to them.
Accordingly, we find no basis to support the trial court's
conclusion that the amended complaint does not set forth sufficient
allegations to state a cause of action regarding a number of
Pamela's contentions. For example, Pamela alleges that Joan
failed to exercise reasonable business acumen in selling the Alu-
Bra shares and also that Joan violated the prudent investor rule in
making the sale. Specifically, she avers that the sale price of
$400,000 is substantially less than the appraised value of the Alu-
Bra stock and that the land owned by Alu-Bra was estimated at
between $665,000 and $790,000.
Moreover, Pamela alleges that the Note does not allow for the
recovery of the stock if James becomes insolvent and that the life
insurance policies taken out by James to secure the purchase of
Alu-Bra stock name James as the beneficiary and, thus, does not
provide adequate security for the beneficiaries of the Trust.
Taking these well-pleaded facts as true for purposes of this
appeal and interpreting them in the light most favorable to Pamela,
we find they set forth a cause of action against the defendants
based upon (1) Joan's failure to exercise reasonable business
acumen in selling the Trust's corpus to James; and (2) a violation
of the prudent investor rule, which provides in pertinent part:
"A trustee administering a trust has a duty to invest and
manage the trust assets as follows:
(1) The trustee has a duty to invest and manage
trust assets as a prudent investor would considering the
purposes, terms, distribution requirements, and other
circumstances of the trust. This standard requires the
exercise of reasonable care, skill, and caution and is to
be applied to investments not in isolation, but in the
context of the trust portfolio as a whole and as a part
of an overall investment strategy that should incorporate
risk and return objectives reasonably suitable to the
trust.
(2) No specific investment or course of action is,
taken alone, prudent or imprudent. The trustee may
invest in every kind of property and type of investment,
subject to this Section. The trustee's investment
decisions and actions are to be judged in terms of the
trustee's reasonable business judgment regarding the
anticipated effect on the trust portfolio as a whole
under the facts and circumstances prevailing at the time
of the decision or action. The prudent investor rule is
a test of conduct and not of resulting performance." 760
ILCS 5/5(a)(1), (a)(2) (West 1994).
Also, Pamela avers that the subject sale of shares represents
the breach of Joan's obligation to act impartially toward all
beneficiaries. Specifically, she alleges that, in addition to the
unreasonably low purchase price, James was permitted to make the
purchase of the entire corpus of the Trust with no money down and
that he is only required to make interest payments until
February 22, 2025, at which time the full payment was due. On
their face, these facts indicate a possible failure of Joan to act
impartially towards all of the Trust's beneficiaries.
Finally, Pamela alleges that Joan improperly engaged in a
familial conflict of interest. Specifically, her amended complaint
avers that "[Joan] will be required, on a continuing basis to
supervise, monitor, and collect under the stock purchase agreement
and as such [is] in conflict due to the familial relationship." Of
those issues that Pamela argues are raised in the amended
complaint, this is the least "fleshed out." On its own, this
allegation would probably not be sufficient to withstand a section
2--615 motion. However, in this context, in which we have
determined there are a number of substantiated causes of action,
this allegation of Joan's engaging in a familial conflict of
interest is sufficient.
The amended complaint has raised serious and, as of yet,
unanswered questions with respect to the sale of the Trust's corpus
to James. Clearly, it is erroneous to terminate the litigation at
this stage of the proceedings.
The judgment of the circuit court of Du Page County is
reversed, and this cause is remanded for proceedings consistent
with this opinion.
Reversed and remanded with directions.
DOYLE and HUTCHINSON, JJ., concur.