APPEAL from the Superior Court of Cook County; the Hon.
RUDOLPH DESORT, Judge, presiding.
MR. JUSTICE HERSHEY DELIVERED THE OPINION OF THE COURT:
Rehearing denied November 15, 1954.
This is an appeal from a decree of the superior court of Cook County invalidating a transfer of trust property to a corporation, ordering that said transfer be set aside and the property reconveyed to the trustee, who was directed to sell the same and distribute the net proceeds among the persons entitled thereto, and ordering two of the trust managers to return $1000 paid them. A freehold being involved, the appeal comes directly to this court.
On July 5, 1951, a complaint in chancery was filed by William M. Wallace and Daniel Anderson, the owners of 25 and 10 units respectively of a total of 1350 units of beneficial interests in the Astrid Building Liquidation Trust, against the Livestock National Bank of Chicago, as trustee, James A. Malooly, George W. Kemp, Jr., John L. Maehler, as trust managers, and the 7906 Carpenter Building Corporation, to enjoin the conveyance of certain trust property consisting of a three-story brick store and apartment building located at Seventy-ninth and Carpenter streets, in Chicago, Illinois. The complaint was amended on September 10, 1951, and prayed that the conveyance of the trust property by the trustee to 7906 Carpenter Building Corporation be set aside, that the trust property be sold at public auction under the direction of the court, that the trust managers return fees they had received, and that 7906 Carpenter Building Corporation, the trustee, and the trust managers make an accounting with respect to the trust property. After the case was at issue and during the trial, John Krafcisin, the owner of five units of beneficial interest in the trust and who had transferred his units for stock in the building corporation, was allowed to intervene, praying the same relief as the original plaintiffs.
A bondholders committee foreclosed a mortgage for $135,000 on the property in question and acquired the property upon such foreclosure for the benefit of the bondholders. On January 14, 1937, a trust agreement was entered into between the bondholders' committee and the Livestock National Bank of Chicago, as trustee, creating the Astrid Building Liquidation Trust No. 11304 for the benefit of the bondholders. This trust agreement provided for the liquidation of the trust assets and the distribution of the net proceeds among the beneficiaries. It was declared in the trust instrument that the interest of the holders of trust certificates of beneficial interest in the trust was personal property and that no holder at any time should have any claim, title or interest, legal or equitable, in or to any of the trust property but only an interest in the net income availed from the proceeds thereof. It provided for three trust managers, who were authorized to direct the affairs of the trust in all things. The defendants, Malooly, Kemp and Maehler were the trust managers. Certificates of beneficial interest, having a face value of $100 each, were delivered to the bondholders in proportion to the value of the bond held by each bondholder. On acceptance of the certificate the holder agreed to accept and be bound by all the terms, conditions and provisions contained in the trust agreement. The trust was to be terminated at such time as the trust managers in their discretion might determine, or by the written direction lodged with the trustee of the holder or holders of the majority of the units of beneficial interest then outstanding. It was provided, however, that the trust property was to be sold and liquidated as soon after the institution of the trust as conditions might permit and the net proceeds distributed to the certificate holders. If not sooner terminated, the trust in any event was to terminate within 15 years from and after the date of its institution. The trustee was given full power to sell the trust property or a part thereof provided, however, that the trustee should not sell or dispose of the trust property prior to the termination of the trust, unless, not less than 20 days prior to such sale or other disposition, the trustee mail to the certificate holders a notice briefly specifying the property to be sold or disposed of and the terms and conditions of such sale or disposition. It was further provided that no sale or other disposition should be made if within 20 days from the date of mailing such notice the holders of 35 per cent or more of the outstanding units should lodge written objections to the sale or disposition with the trustee.
The trustee had not received any offers to purchase the property at its fair value, under the terms of the agreement, prior to June 15, 1951. The termination date of the trust was January 14, 1952, and then the trustee would be compelled to sell the trust property at private or public sale for the best price available. Consequently, the trust managers proposed a plan to preserve the property for the benefit of the certificate holders until such time as an advantageous cash sale could be made, or if no such sale was made, to preserve the property as a continuing income-producing investment for the certificate holders. It was proposed that the trustee exchange the trust property for stock in a corporation within the period of the trust.
The 7906 Carpenter Building Corporation was organized by the trust managers in June of 1951 for the purpose of acquiring the trust property in exchange for all of the stock of the corporation. On June 15, 1951, the trustee sent a letter to all of the certificate holders enclosing a copy of the plan and a proposed amendment to the trust agreement providing that the stock in the corporation received by the trustee as a result of the exchange might be distributed by the trustee pro rata to and among the holders of the certificates of interest rather than be retained by the trustee and be subject to the provisions requiring liquidation of the remaining trust property at the time of termination. Also incorporated in the letter was a statement of the assets and liabilities of the trust, a summary of the earnings of the trust for each of the fiscal years 1937 to 1950, inclusive, a statement of income and expenses of the trust for the same years, cash disbursements per unit by the trustee to the certificate holders for each year, a statement of fees and estimated expenses in connection with the proposed exchange, and an appraisal by John P. Coffey, described as "an agent of McKey & Poague, Inc.," appraising the market value of the property at $167,500 as of May 1, 1951. The trustee further informed the certificate holders that it would be necessary to sell the property at private or public sale for the best price obtainable if the property was not disposed of prior to January 14, 1952. It was also stated that "a number of certificate holders and the trust managers deem it to be best interests of the certificate holders to adopt the plan herein outlined so that the trust property will be preserved for the benefit of the certificate holders until such time as a more advantageous cash sale can be negotiated and if such a sale cannot be negotiated, to preserve the trust property as a continuing income producing investment for the certificate holders, and the foregoing plan is designed for that purpose only." A self-addressed and stamped postcard was enclosed with the letter upon which any certificate holder might evidence either his consent to the plan or his objection thereto. The certificate holders were informed that any written objections or dissents had to be filed within twenty days from the date of the letter. The certificate holders were also informed that if objections were not received from holders of 35 per cent or more or the units of interest within twenty days the trustees would accept such offer and consummate the sale of the trust assets in accordance with the terms of the plan.
After receiving the trustee's letter of June 15, 1951, the plaintiff Wallace on June 20, 1951, made both written and oral demands on the trustee and the majority trust managers, Kemp and Malooly, for access to the list of names and addresses of all of the holders of certificates of beneficial interest in the trust. Wallace advised the trustee and the trust managers that he had available a prospective purchaser who was ready, willing and able to pay $145,000 cash for the property and that such offer would pay out to the certificate holders substantially one hundred cents on the dollar, which was in contrast to the sixty cents on the dollar for which the securities were then selling. He informed them that due to the twenty-day period for objections he did not have time to submit a formal offer from the purchaser, as it would then be too late for the certificate holders to reject the proposed plan. He stated that he desired access to the list of certificate holders for the purpose of informing them that he had available this prospective purchaser and to solicit their vote in objection to the plan submitted by the trust managers. He stated he also wished to inform the certificate holders that as a result of his investigation he had found the plan to be inimical to the best interests of the certificate holders other than the group consisting of the trust managers and their associates, that the trust managers and their attorneys desired to perpetuate themselves in control of the trust property for the purpose of continuing to receive the special benefit derived from the control and management of the trust property, including continued purchase of interests at prices less than fair liquidation value which could be realized by cash sale, and that the appraisal of $167,500 was excessive and made by an appraiser who was actually a member of Kemp's firm. Wallace was denied access to the list of certificate holders and consequently he was unable to present his objections and observations to the other certificate holders.
By July 6, 1951, the holders of less than 35 per cent of the beneficial interests had disapproved of the plan. On that date, which was exactly twenty days after the mailing of the plan to the certificate holders,, the trustee executed its deeds of conveyance of the trust real estate to 7906 Carpenter Building Corporation and delivered all the other assets of the trust to the corporation, in exchange for which the corporation delivered to the trustee 1350 shares of its capital stock, being all the stock authorized and issuable by the corporation. At 10 A.M. on the same day there was a board of directors meeting of the corporation, at which the attorneys for Kemp and Malooly, acting as sole directors, passed resolutions appointing the firm of McKey & Poague, Inc., as managing agent for the property at five per cent of the gross receipts, assuming unpaid debts of the trust which included new fees of $2000 for Kemp and Malooly and $2000 for their attorneys, providing a fee of $150 a year for each of said director attorneys, and making the trustee depositary of corporate funds.
On July 5, 1951, the day before the sale to the corporation was made, Wallace and Anderson filed their original complaint seeking to enjoin the transfer of the property, and if the proposed transfer had been consummated before the issuance of an injunction, to declare the building corporation a constructive trustee of the trust assets so transferred and order a production of a list of the certificate holders, or, in the alternative, that the trustee and the trust managers be ordered to sell the trust assets upon the expiration of the trust on January 14, 1952, under supervision of the court. After the complaint had been amended and answers and replies filed, the cause was referred to a master. Subsequently the court vacated the reference to the master and proceeded to hear and rule upon the cause.
The trial court found that Kemp and Malooly devised the plan to prevent liquidation of the trust and to perpetuate their control of the property and the receipt of benefits therefrom; that Wallace's object in demanding the list of beneficiaries was proper, and the trust managers violated their fiduciary duties in arbitrarily refusing the same; that they violated their fiduciary obligations in obtaining and publicizing the $167,500 appraisal which was excessive by more than $20,000; that they improperly advocated acceptance of the plan; and that they were motivated by their personal interests in advancing the plan and concealed and misrepresented the true facts, relationships and adverse interests.
The court decreed that the transfer of the trust property to the 7906 Carpenter Building Corporation be set aside and the property reconveyed to the trustee, who was directed to sell the same and distribute the proceeds among the persons entitled thereto, and that Kemp and Malooly return $1000 paid them under the resolution of the corporation as reorganization managers' fees.
In accordance with the terms of the trust agreement, the trust managers controlled the actions of the trustee in the management of the trust property. Together with the trustee, the trust managers therefore occupied a fiduciary relationship to the certificate holders, the trust beneficiaries. Courts of equity have refused to set any bounds to the circumstances out of which a fiduciary relation may spring. It includes all legal relations, such as attorney and client, principal and agent, guardian and ward, and the like, and also every case in which a fiduciary relation exists in fact, where confidence is reposed on one side and domination and influence result on the other. (Finn v. Monk, 403 Ill. 167.) Thus occupying positions of trust, the trustee and the trust managers were obligated to act with the highest degree of fidelity and with utmost good faith toward the beneficiaries. White v. Macqueen, 360 Ill. 236.
The trial court found that two trust managers, Kemp and Malooly, were so guilty of breaches of trust as to justify setting aside the conveyance of ...