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Northern Trust v. Continental Ill. Nat'l Bk.

OPINION FILED OCTOBER 13, 1976.

THE NORTHERN TRUST COMPANY, EXECUTOR OF THE ESTATE OF HARRIET F.B. STUART, DECEASED, COEXECUTOR AND COTRUSTEE UNDER THE LAST WILL AND TESTAMENT OF HAROLD L. STUART, DECEASED, PLAINTIFF-APPELLEE,

v.

CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, COEXECUTOR AND COTRUSTEE UNDER THE LAST WILL AND TESTAMENT OF HAROLD L. STUART, DECEASED, DEFENDANT-APPELLEE. — (ELIZABETH B. STUART, COEXECUTOR AND COTRUSTEE UNDER THE LAST WILL AND TESTAMENT OF HAROLD L. STUART, DECEASED, PLAINTIFF-APPELLANT-APPELLEE; ILLINOIS INSTITUTE OF TECHNOLOGY, PLAINTIFF-APPELLANT; MUSEUM OF SCIENCE AND INDUSTRY, INTERVENOR-APPELLANT; ART INSTITUTE OF CHICAGO, INTERVENOR-APPELLANT; DEPAUL UNIVERSITY ET AL., INTERVENORS-APPELLANTS-APPELLEES; CHICAGO HISTORICAL SOCIETY ET AL., INTERVENORS.)



APPEAL from the Circuit Court of Cook County; the Hon. FRANCIS T. DELANEY, Judge, presiding.

MR. PRESIDING JUSTICE JOHNSON DELIVERED THE OPINION OF THE COURT:

This is an appeal from a judgment order entered in an action brought by plaintiffs against a corporate co-trustee to settle a dispute which arose concerning a trust power to nominate and fund charitable organizations. The judgment, inter alia, approved and adopted a plan of distribution proposed by the corporate trustee which provided for a complete distribution of a charitable trust created pursuant to the will of Harold L. Stuart; approved a $250,000 grant to the Chicago Foundation for Cultural Development; and approved the individual co-trustees' designation of the remaindermen of certain life trusts created by the will. A consideration of this judgment necessitates a full statement of the facts.

Harold L. Stuart, the testator, died on June 30, 1966, leaving a multimillion-dollar estate. He was unmarried and survived by two sisters, Harriet F.B. Stuart and Elizabeth B. Stuart. A will executed by the testator on April 23, 1964, named Continental Illinois National Bank and Trust Company of Chicago (hereinafter Continental or the Bank) and his two sisters as co-executors and co-trustees. Under its terms, life estates were granted to each of the sisters in separate trusts of $1 million each, with the remainders to go to charity according to certain terms. The remainder of the Stuart estate was left in trust to be distributed to qualified charitable organizations. These charities were to be selected by the co-executors and co-trustees within 5 years of the testator's death and their interests were to vest at the end of that period. Accordingly, the trust should have been distributed or designated for distribution by June 29, 1971.

The facts adduced at trial showed that Harold L. Stuart was born in Rhode Island and came to Chicago in 1893 at the age of 14. Although largely self-educated, he obtained some formal education at Lewis Academy (now part of Illinois Institute of Technology), where he studied for five semesters between 1896 and 1900. The Stuart family originally maintained a home in Kenilworth, Illinois; however, since 1921, Stuart had shared a Chicago residence with his sisters, Harriet and Elizabeth, who were also unmarried. The relationship between the three was described as close and harmonious.

The testator, an investment banker of national renown, was the president and sole stockholder of Halsey, Stuart & Co., Inc., an investment banking firm and underwriter of fixed income public utility securities. He was devoted to building the firm to a position of preeminence in the investment banking business and, with relation to this, was interested in building the city of Chicago into a financial center which could compete with New York.

In February 1964, David M. Kennedy, then chairman of Continental, invited Stuart to lunch to discuss the question of a will since he did not have one on file at the Bank. Kennedy asked whether he had a will and told him that it would be very bad for Continental if one of its largest individual shareholders did not have one with the Bank. He then explained the importance of having a will and the problems with intestacy. Various educational, civic and cultural organizations, and other institutions were mentioned as possible charitable recipients. Kennedy discussed his own activities with the Mayor's Committee for Economic and Cultural Development of Chicago and its difficulties in obtaining funds for its programs. Since Stuart was an enthusiastic supporter of Chicago and his business was centered there, Kennedy suggested that he would probably want most of his estate to be distributed in this area. The discussion also explored in detail the subject of providing for the needs of Stuart's sisters. Kennedy then stated that the Bank would recommend a lawyer who would draft the document for him. Stuart in fact had a will which was executed in 1942 but, according to the testimony, it was never mentioned in this conversation. Kennedy testified that he later spoke with the attorney who was drafting the will and asked that co-executors and co-trustees be included and that the necessity for this be explained to the testator.

The vice chairman of the board of Continental, Donald Graham, testified that he had a luncheon meeting with Stuart and another officer of the Bank, Arthur Leonard, prior to the execution of the will. The purpose of this conference was to discuss the proposed will, and to give Stuart another high-level contact at the Bank in addition to Kennedy. Two or three months later, in another luncheon conference, Graham told Stuart that he should consider making gifts during his lifetime so that he would have the satisfaction of knowing to which charities his money was going. Stuart responded that he did not have any particular beneficiaries in mind. A suggestion that he might want to consider making anonymous gifts was answered in the negative.

Edward D. Benninghoven, former head of the business development section of the trust department at Continental, testified that he met with the testator, the Stuart sisters, Arthur Leonard, Kennedy and another vice president on April 23, 1964, the date of the execution of the will. During the course of the meeting, Stuart stated that he had no interest in designating the various tax-exempt organizations to which the money would go. Because he had been pestered for money by so many organizations, he preferred that his executors and trustees consummate that part of the problem after his death, rather than making his own decision with respect to disposition of the funds. Benninghoven testified that nothing was said by the sisters.

The testimony of Elizabeth Stuart was in conflict with that offered by the Bank. She stated that the testator never discussed his will with anyone except his two sisters, his brother Charles (who died in 1963) and Arthur Leonard, who was a good friend. Copies of the will were given to the sisters as soon as it was drafted and they read it many times before its execution. The sisters discussed the "majority clause" in the will with Stuart who explained that they, Harriet and Elizabeth, were the majority because they knew exactly what he wanted. The witness stated that at the time the will was signed, the testator told Leonard that Harriet and she were trained, experienced, and preeminently qualified to be his co-executors and co-trustees. Leonard promised to cooperate in any way with the sisters for the testator's wishes and desires.

Elizabeth's testimony disclosed that, several years before his death, the testator had orally apprised Harriet, Charles, and her of a list of gifts to be made. Then, in repeated conversations with his sisters after execution of the will, Stuart spoke of his interest in leaving money to five specific charitable organizations. First, he wanted to establish a school at the Illinois Institute of Technology and designated three-quarters of his estate to endow the school for a century. Second, a grant was to be made to the Kenilworth Historical Society in memory of the Stuart family. The third nominee was the Society of Cincinnati in Washington, D.C. for the construction of a gallery in his honor. The Art Institute was to receive a gift to build an auditorium for the people of Chicago, regardless of race, color, or creed. Then if any funds were left over, the final recipient was (apparently) either the Chicago Historical Society or the Newberry Library. Elizabeth testified that the testator did not ask where they wanted the money to go and that they did not try to influence him. He never told anyone outside the family about the list because he felt such commitments might hurt his business; should his enterprise fail, no one would have any confidence in him as a result of such promises. Elizabeth also stated that Stuart never had a luncheon alone with Kennedy. Harriet Stuart, who died after this appeal was filed, did not testify at trial.

On August 29, 1966, Continental and the Stuart sisters qualified as trustees. The testimony offered by the Bank showed that a day or so after Stuart's death, M. James Termondt, a Continental vice president, assumed responsibility for administration of the estate. Termondt testified that because of the publicity about the estate and the dispositive provisions of the will, the Bank was inundated with requests from various organizations seeking consideration as possible recipients. When phone calls came in, Termondt instructed the callers to write a general letter indicating that they wished to be considered. Each letter was acknowledged and placed in a file. In order to determine where the testator's charitable interests lie, the Bank reviewed his tax returns and those of Halsey, Stuart & Co., talked with his associates, and studied his papers and records.

Termondt stated that he had the first of some 15 or 20 telephone conversations with Harriet Stuart about 6 or 7 months after Stuart's death. In their discussions, Harriet inquired about such facts as how much money would be available for distribution; why distribution could not be made immediately; why administration could not be expedited and all the problems solved. Both she and Elizabeth were quite concerned about knowing the exact amount of money available. Termondt explained that the Bank did not know what the amount would be because of tax problems and would not know until the litigation was resolved. When Harriet was questioned about the types of requests she and her sister had received and their plans for distribution, she replied that they had things in mind, but would not divulge the details.

Kennedy testified at trial that he had several telephone conversations with Harriet in 1967. In one conversation, he mentioned that the Bank had received a request for contribution from the now defunct Chicago Magazine. This magazine was published by the New Chicago Foundation which had been organized by the Mayor's Committee for Economic and Cultural Development of Chicago whose purpose was to extend the economic and cultural advantages of the city. Kennedy told Harriet that the request, $250,000, was reasonable in view of the total amount of the estate and would meet the criterion that he expected with the testator's interest in Chicago. Harriet gave no reaction to this. The Chicago Magazine was mentioned again in another conversation about 2 months later when Kennedy informed Harriet that the Bank was proposing a grant of $250,000 to it.

On January 16, 1968, Kennedy wrote a memorandum to Clare Furlong, a senior vice president, instructing him to have $250,000 transferred from the Stuart trust to the account of the New Chicago Foundation and to prepare a written authorization for the sisters to sign. The evidence revealed, however, that no document purporting to give written authorization for the gift was ever sent to the sisters, although it was prepared pursuant to his direction. When it was discovered that the New Chicago Foundation, recognized as a civic organization under section 501(c)(4) of the Internal Revenue Code, was not a qualified charitable organization under section 501(c)(3) as required by the will, a bank officer suggested that payment be made to the Chicago Foundation for Cultural Development. This foundation was a legal entity created to receive and disburse charitable gifts to further the purposes of the Committee and had received a ruling from the Internal Revenue Service that it qualified as a section 501(c)(3) organization. On January 26, 1968, a grant of $250,000 was made to the Chicago Foundation for Cultural Development and thereafter was transferred in two separate payments to the New Chicago Foundation.

In February 1967, about 7 months after the testator's death, Harriet Stuart contacted the Illinois Institute of Technology (hereinafter IIT) and spoke with the director of the evening division. Subsequently, Mark W. Bates, then IIT's director of development, was informed that she was interested in obtaining information about the Lewis Institute, one of IIT's predecessor schools, and about IIT's current educational programs. Bates wrote her a letter which detailed this information. In July 1967, Harriet again contacted IIT, seeking additional information. In response, Robert Nelson, vice president of development, wrote that IIT's records showed that the testator had attended Lewis Institute for five semesters between 1896 and 1900. The letter revealed that the sisters "expressed a desire to assist the university while carrying out the philanthropic desires" of the testator.

On September 11, 1967, Nelson met with William Funck, vice president in charge of estate administration at the Bank. In a memorandum to IIT's president dated September 12, 1967, Nelson wrote that he had received two telephone calls from Harriet Stuart who had disclosed a desire to do something for IIT and indicated that "big money" was involved. The memorandum also stated that Funck had been unaware of the phone calls but had said that this might explain what Harriet had in mind when she told him that the sisters had some definite ideas of where they wanted part of the money to go.

Toward the end of May in 1968, Harriet called Mark Bates to inform him that she and her sister were interested in making a substantial grant to IIT from the estate. She requested that he prepare for her review a proposal relative to establishing a school of management at the institute. A few days later, Bates wrote in a memo that Harriet "decided IIT should get the first, and the largest, gift from her brother's estate. She spoke of several million." The memorandum also mentioned that Harriet wanted their discussion to be strictly confidential, and that she had not made her decision known to anyone, not even Continental.

IIT then prepared and submitted to Harriet a proposal requesting $7.5 million to fund a new school of management and finance. The amount of the proposed grant was determined by IIT. Harriet suggested two revisions in the proposal: the word "finance" should be added to the name of the school and the building should be named Stuart Hall. In accordance with these suggestions, a revised proposal for $8.5 million was submitted in August 1968 to Harriet who then contacted Bates and asked him to deliver it to the Bank. Bates left the proposal with Termondt's secretary on August 2. Then, in early September 1968, Bates received another call from Harriet who, according to his memorandum of the call, felt emphatically that the Bank was working against IIT and indicated that she would see to it that IIT was taken care of — even if there was nothing left for anyone else.

Shortly thereafter, Bates met with William Funck and inquired about the status of IIT's proposal. Funck explained that the estate was involved in tax litigation, the resolution of which could not be determined. The total assets of the estate were estimated to be about $20 million, while the tax litigation was thought to involve about $5 or $6 million. On September 5, 1968, Funck wrote to the sisters informing them of the existence of proposals received by the Bank and expressing interest in their other thoughts with regard to distribution.

According to the testimony of Clare Furlong, the senior vice president in charge of the trust department, in the latter part of 1968 he received a call from IIT's general counsel who suggested a meeting between the sisters and the Bank. Furlong invited the sisters to a meeting in his office where he told them that Continental was considering the $8.5 million proposal, but that the total program also had to be considered. If some grants were too large, he explained, others would be excluded. The Bank also wished to determine whether the proposed donees could furnish money as well. Both of the sisters expressed interest in having the institutions themselves contribute funds. The parties discussed the testator's prominence in Chicago, his contribution to making Chicago a financial center, and their mutual desire to have fitting memorials that would reflect his prominence in the community. Furlong testified that he stressed the importance of having a program and the Bank's interest in cooperating with the sisters. He stated that at this time the sisters only had IIT in mind.

In late September, Harriet called Bates to ask if there was any kind of document which could be submitted to the Bank to reinforce the sisters' feelings about the IIT grant. Bates replied in the affirmative and she requested that one be drafted. Bates testified that he and the general counsel for IIT prepared and delivered to the Bank a "Statement of Intent." In this document, dated October 10, 1968, the Stuarts expressed their desire that IIT receive $8.5 million to establish the Harold Leonard Stuart School of Management and Finance in accordance with their proposal. The statement also recited:

"Accordingly, we hereby request, and to the extent we have the right to do so, hereby direct that such a grant, by the estate of Harold Leonard Stuart, to Illinois Institute of Technology, be made as soon as possible, and prior to any other commitments for charitable, educational or religious purposes."

Funck acknowledged receipt of the letter and promised to give it full consideration as soon as he had an opportunity to meet with Kennedy, the Bank's president, who was out of the country at the time. On October 18, 1968, the Bank received another statement signed by the sisters which stated in full:

"We, the undersigned, Harriet F.B. Stuart, and Elizabeth B. Stuart, do hereby state that, on numerous occasions, during the last six months of his life, our late brother, Harold Leonard Stuart, alumnus of Illinois Institute of Technology, did express, to us, his wish and desire that a major share of his estate be made available, to Illinois Institute of Technology, for the establishment of a School of Management and Finance."

On February 19, 1969, Termondt wrote a letter to the sisters which estimated the value of the estate assets to be $20,402,490. Because a deficiency had been assessed by the Internal Revenue Service, thereby increasing the Illinois inheritance tax, the Bank had decided to hold a reserve until a final determination was made. Accordingly, Continental concluded that only approximately $11 million should be considered for distribution at that time. The letter also set forth certain provisions of the will concerning qualified charitable organizations and the so-called "majority clause." Termondt testified that this reference to the will was necessary because he had been unable to discern the intentions of the individual trustees. In prior conversations, he was told only that they would let the Bank know their ideas at the proper time.

Within a few days, Termondt received a call in response to this letter. Harriet informed him that the sisters were going to make the decision independently of the Bank, that they really did not care what the will said, and that the Bank was merely a custodian. Because the sisters had been informed that they constituted the majority of the trustees and therefore could make the decision by themselves, they felt that the Bank had no responsibility in the matter whatsoever. Termondt testified further that for the first time Harriet revealed other intended beneficiaries: the Society of Cincinnati, the Kenilworth Historical Society, and the Genealogical Society in Washington, D.C. The sisters wanted to memorialize their brother in Chicago, where he had earned his money, in the nation's capital, and in Kenilworth where they had lived as children.

On February 27, 1969, the Bank's trust executive committee, a group of senior officers within the trust department who passes on discretionary proposals regarding the selection of charitable recipients, met to discuss the $8.5 million IIT request. Termondt advised the committee that approximately $15 million would be left for distribution, assuming that the tax case was lost, and pointed out that an $8.5 million grant would constitute more than 50 percent of the fund and would be disproportionate to the total amount available when the total plan of the sisters had not been disclosed. He indicated that the Bank should attempt to schedule a meeting with the co-trustees to negotiate an equitable arrangement for the distribution of the funds. The following day, pursuant to a request of the committee, Termondt prepared a memorandum listing the organizations that had contacted the Bank, and identifying the schools that had contact with Stuart during his lifetime.

About March 11, 1969, Termondt and Furlong conferred with certain officials at IIT. They stated that the Bank felt the figures were too high in relation to the overall amount in the estate and expressed interest in seeing whether a school of management could be instituted on a reduced grant. One official indicated that from a financial viewpoint, there were certain items in the proposal that need not be there. Various alternatives such as setting up fellowships, chairs, and scholarships were discussed. Furlong asserted that the Bank did not want to spend over $5 to $5.5 million. The official then said that IIT had $1 million in funds from other sources which could be put into the venture. Subsequently, the parties worked out a proposal for $5 million which was accepted on April 3, 1969.

According to Termondt's testimony, Harriet said, in a later conversation, that she and her sister were pleased and appreciative of the Bank's efforts in finalizing the IIT grant. He then reiterated the Bank's desire to know their areas of interest in order to negotiate a plan of distribution. Harriet advised him that the next grant in their plan was for the Society of Cincinnati and that they were not interested in discussing any thing else until that was completed. She further stated that they were not interested in meeting with the Bank — they were going to make the decision.

In late summer of 1969, Continental concluded that formal trusts would have to be instituted. The testimony revealed that this was not performed initially because the Bank personnel thought it would be possible to fund the charitable requests out of the estate since the same parties were both executors and trustees. However, the tax litigation had made this impossible. The account was therefore transferred to Frank Wright and E.W. Bergstrom in the personal trust division. Wright testified that on September 5, 1969, he sent a letter inviting the sisters to a luncheon or conference at the Bank. In the alternative, Wright suggested that he and Bergstrom visit the sisters at their home. When he called 2 weeks later to ask if they had considered the invitation, Harriet replied that they did not feel it was necessary to come to the Bank; that whatever business was necessary could be transacted either by phone or letter; and that they had their plans and were moving forward with them. Wright testified that he pressed the invitation, noting that less than 2 years remained to complete the program as required by the will. The sisters also refused to have Wright and Bergstrom visit at their home.

Frequent conversations were held between the parties from September 1969 until the end of March in order to carry out the commitments the sisters wanted made to the Society of Cincinnati and the Kenilworth Historical Society. Wright testified that during the course of one such conversation, he again inquired about the sisters' total program so that they could plan a scheme of distribution together. Harriet stated that when the Cincinnati grant was completed, they would talk about the rest. In a subsequent conversation, she told Furlong about a proposed grant of $1 million to the Kenilworth Historical Society.

On December 19, 1969, Furlong wrote a letter to the sisters summarizing the status of negotiations with the Society of Cincinnati and recommending a grant of $500,000 with an additional agreement to match dollar per dollar the amount raised for this purpose, up to $250,000. The letter also mentioned that the time remaining to select the other charitable recipients was about 1 1/2 years and emphasized the importance of making steady progress in the selections. Various organizations which the Bank considered as affording ...


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