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Carondelet Savings & Loan Association v. Citizens Savings & Loan Association

August 3, 1979


Appeal from the United States District Court for the Eastern District of Illinois, East St. Louis Division. Nos. 73-298-E and 73-302-E -- James L. Foreman, Judge.

Author: Cummings

Before CUMMINGS, Circuit Judge, PECK, Senior Judge,*fn* and PELL, Circuit Judge.

CUMMINGS, Circuit Judge. On October 14, 1965, defendant Citizens Savings & Loan Association (Citizens) sold plaintiff Carondelet Savings & Loan Association (Carondelet) a 35% interest in a certain loan and the parties entered into a loan participation agreement which provided that Citizens was to service the loan. Citizens foreclosed on the real estate securing the loan in May 1973 and at the same time Carondelet sued Citizens for breach of fiduciary obligation and breach of contract.*fn1 Claiming that Citizens should have foreclosed sooner and should not have agreed to certain modifications of the loan, Carondelet sought damages of $431, 597.81*fn2 or, in the alternative, rescission of the purchase and the participation agreement.*fn3

After a full trial, Judge Foreman held that the plaintiff had failed to establish any breach of fiduciary obligation or breach of contract and entered judgment for the defendant. We affirm.


During the summer of 1965, Cherry Realty, Inc., a Delaware corporation doing business in Illinois, negotiated with Citizens for a loan for the construction of the Pyramids Dormitory, a student dormitory in Carbondale, Illinois. Based in part on an appraisal indicating that the building would be worth $2 million, Citizens agreed to loan $1.4 million with interest at 6 1/4 for 20 years. Carondelet agreed to purchase a 35% interest in the loand, and Bohemian Savings & Loan Association (Bohemian) agreed to purchase another 35% interest. Bohemian, like Carondelet, is a Missouri corporation, but it is not involved in this lawsuit. Citizens retained the remaining 30% interest in the loan.

On September 23, 1965, Citizens executed the agreed-upon loan to Cherry Realty, Inc. and took back a promissory note and a mortgage on the dormitory. On October 1, 1965, Cherry Realty, Inc. conveyed the property to Rawlings Dormitory Trust, an Illinois land trust. On October 14, 1965, Carondelet purchased its 35% interest in the loan and entered into a participation agreement that provided for Citizens to service the loan,*fn4 retaining a fee of 1/4 of 1% for doing so. On September 1, 1966, Rawlings Dormitory Trust merged with another Illinois land trust to form Investors Land Trust (Investors). Subsequently, on February 12, 1968, Cherry Realty, Inc. was dissolved and on February 27, 1968, the shares representing beneficial interests in the newly created Investors Land Trust were registered with the Illinois Secretary of State.

Apparently the loan presented no problems until December 10, 1969, at which time the manager of the property*fn5 requested a modification of the loan terms because of a drastic downturn in the demand for student dormitory space.*fn6 The manager asked for an advance of ten months' interest payments, to be held by Citizens and applied to monthly payments as they became due and for an extension of the loan term from 20 to 25 years. This request also applied to a number of dormitories held by Investors to which Citizens had made loans. Citizens held a 50% interest in the loans on these other dormitories, and Carondelet was not involved in them.

In response to the loan modification request, Citizens called a meeting of the loan participants. Although Bohemian apparently did not object, Carondelet objected to the advance or any modification in terms and advocated foreclosure. Citizens concluded that the loan should be modified, but because of Carondelet's resistance to making an advance, the payment schedule was instead modified effective February 27, 1970, to reduce the monthly payments of $10,233 to $8,443. The loan again became delinquent in the summer of 1971, when payments for the months of July, August and September were missed. In October 1971, Citizens loaned $120,000 to Investors in return for a second mortgage on Washington Square, a dormitory which was held by the trust. Washington Square Dormitory was then under a contract of sale to the University. The proceeds of this loan were used to bring the payments on the Pyramids Dormitory up to date and to convert some of the rooms in Pyramids into efficiency apartments.*fn7

Even more serious problems were encountered with the loan in early 1972. Carondelet objected to any further modification but did not attend meetings of the loan participants to determine a course of action. *citizens and Bohemian agreed to grant a moratorium of all payments on the loan for the 8 months from April 1, 1972, until December 1, 1972, to reduce the monthly payments further to $7,875, and to segregate the income from Pyramids from the other income of Investors.*fn8 Nevertheless, the December 1972 payment was not made and soon thereafter Citizens proceeded to foreclose.

Carondelet then brought this action, alleging, as indicated, that Citizens' granting of the modifications and refusal to foreclose earlier constituted a breach of fiduciary obligation or a breach of the loan participation agreement. Carondelet sought damages in the face amount of its participation interest on the theory that its interest had been converted by Citizens. In the alternative, it sought to rescind the purchase and the participation agreement. The district court held that there had been no breach by Citizens of either the fiduciary relationship or of the contract. We agree.

Judge Foreman acknowledged that Citizens was a dominant fiduciary, but concluded that under Illinois law the burden of proving breach of fiduciary duty shifts to the defendant only after the plaintiff has demonstrated both the defendant's dominance and that the defendant benefitted at the expense of the plaintiff. The court concluded that Carondelet had demonstrated neither that Citizens profited from its fiduciary relationship nor that Citizens had breached the duty of care to which a fiduciary is held.

On appeal, Carondelet urges that Judge Foreman erred in not shifting the burden of proof to Citizens. The cases cited in support of this argument recognize that the burden of proof shifts "wherein the dominant party is profited." Boryca v. Parry, 24 Ill.2d 320, 327 (1962). Thus the question becomes whether Judge Foreman erred in concluding that Carondelet had failed to show that Citizens benefitted from the relationship. Carondelet first suggests that the 1/4 of 1% service fee retained by Citizens constitutes such a benefit. However, such a fee, freely negotiated between commercial lenders, is not a benefit of the sort that shifts the burden of proof to the defendant. Brown v. Commercial National Bank of Peoria, 42 Ill.2d 365, 369 (1969). There ...

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