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CHILDS v. NATIONAL BANK OF AUSTIN

October 27, 1980

DORIS FULLER CHILDS, ELEANOR FULLER PARSON, NATALIE STOCKING, PRISCILLA PARSON AND KATHERINE MARRS, BENEFICIARIES OF THE JUDSON M. FULLER TRUST, PLAINTIFFS,
v.
NATIONAL BANK OF AUSTIN, AN ILLINOIS CORPORATION AND TRUSTEE OF THE JUDSON M. FULLER TRUST; CAREY, FILTER & WHITE, A PARTNERSHIP; ROBERT F. CAREY, AN INDIVIDUAL PARTNER; THOMAS F. CAREY, AN INDIVIDUAL PARTNER; EDWARD M. WHITE, AN INDIVIDUAL PARTNER; EDMUND P. BOLAND, AN INDIVIDUAL PARTNER; ANTHONY CAREY, AN INDIVIDUAL PARTNER; AND PATRICK S. FILTER, AN INDIVIDUAL PARTNER AND CHAIRMAN OF THE BOARD OF THE NATIONAL BANK OF AUSTIN AND THE HARRINGTON AND KING PERFORATING COMPANY, INC., DEFENDANTS.



The opinion of the court was delivered by: Julius J. Hoffman, Senior District Judge.

MEMORANDUM OF DECISION

This is an action brought pursuant to the diversity jurisdiction of the court in which the plaintiffs, certain beneficiaries of the Judson M. Fuller Trust, seek to recover damages and obtain injunctive relief from the defendants, Patrick S. Filter, the law firm of Carey, Filter and White and the National Bank of Austin. The case proceeded to trial before the court sitting without a jury.

The plaintiffs' first amended complaint is in three counts and seeks the removal of the present trustee of the Judson M. Fuller Trust, the National Bank of Austin, and the removal of Patrick S. Filter as Chairman of the Board of the Harrington and King Perforating Company. The amended complaint further seeks the recovery of all fees paid to the Bank as trustee, the recovery of all fees and wages paid to the defendant Filter since 1972 in his capacity as Chairman of the Board and the recovery of all retainer fees paid the defendant law firm since 1972 while the law firm has been on retainer to the corporation as its counsel.

Count I of the amended complaint alleges that the principal of the Judson M. Fuller Trust consists of the controlling portion, 704 shares, of the stock of the Harrington and King Perforating Company. It is asserted that the National Bank of Austin is the present trustee and that it caused one of its directors, Patrick Filter, to be elected Chairman of the Board of the Harrington and King Corporation in 1972. The plaintiffs further allege that the defendant Filter is also the present Chairman of the Board of the trustee Bank and that he has held both positions simultaneously since 1972.

The plaintiffs contend that the election of Filter to the Board of the company was the result of the defendant Bank, which has the sole voting authority over the stock held in trust, voting its shares by proxies issued to Filter and Gordon Steil, president of the corporation, for the election of Filter as Chairman. It is alleged that the Bank and Filter have exercised dominion and control over the stock held by the trust for the purpose of enriching the defendant Filter and the law firm of which he is a partner. The plaintiffs assert that the election of Filter as Chairman through the acts of the Bank as trustee has created a conflict of interest whereby the Bank's duties to the beneficiaries of the trust conflict with those duties owed by Filter to the corporation. The plaintiffs aver that the creation of this conflict constitutes a breach of fiduciary duty by the Bank to the beneficiaries of the Judson M. Fuller Trust.

Count II of the amended complaint alleges that the defendant Filter has assumed control and operation of the Harrington and King Perforating Company for his own personal profit and gain thereby placing himself in a position of conflict of interest. It is asserted that the payment of fees and wages to Filter causes him to personally profit from his fiduciary position and that the trust has suffered a loss.

Count III asserts that the law firm of Carey, Filter and White is on retainer to the Harrington and King Perforating Company. The defendant Filter is alleged to be a partner in the law firm. The plaintiffs aver that the retainer fees have increased yearly since 1972 at the personal request of the defendant Filter in his capacity as Chairman of the Board of the company. The payment of these retainer fees is asserted to be in violation of the defendant Filter's duties to the beneficiaries of the trust.

In summary, the plaintiffs assert that the trustee Bank and Filter are jointly and severally liable for damages resulting from their breach of fiduciary duties and the existing conflict of interest. The plaintiffs assert that the defendant Filter and the law firm are jointly and severally liable for all sums received by the law firm since 1972. Damages are claimed in the amount of $53,621.00 for the retainer fees paid to the law firm; $5,300.00 in director's fees paid to Filter; $77,532.63 in salary paid to Filter in his capacity as Chairman of the Board and trustees fees paid to the Bank in the amount of $4,150.00. The plaintiffs further seek the removal of the Bank as trustee and the removal of Patrick Filter as Chairman of the Board of the Harrington and King Perforating Company.

All defendants deny the substantive allegations of the amended complaint and deny that either a breach of fiduciary duty occurred or that a conflict of interest exists as a result of the actions of the defendants. The defendants Filter and the law firm affirmatively assert that the plaintiffs are barred by the applicable statute of limitations and are further barred from proceeding with this action because they are guilty of laches.

Much of the testimony admitted in this trial was presented pursuant to the stipulation of the parties. The only seriously contested factual issues were the plaintiffs' prior knowledge of the defendant Filter's triple position with the corporation, the exact manner in which Filter obtained the position of Chairman of the Board and certain events involving an alleged attempt by the defendant Filter to sell the corporation to a third party without notice to the beneficiaries of the Judson M. Fuller Trust. As such issues are important but not controlling in this case, the court concludes that the parties have presented the court with a situation in which there is little disagreement as to what the facts are but there is a major dispute as to how the law is to be applied to these facts. The court has endeavored to comply with the wishes of the parties and will now set forth its findings of fact and conclusions of law.

The plaintiffs are current beneficiaries of the Judson M. Fuller Trust. The trust was established by the will of Judson M. Fuller and was dated March 6, 1953. Judson M. Fuller died on February 5, 1963. The terms of the trust instrument provide that the trust be funded with 704 shares of the stock of the Harrington and King Perforating Company. The net income of the trust is to be divided among Judson M. Fuller's four children. In the event of the death of one or more of the children, that child's share is to be distributed to his surviving heirs or by the terms of the child's will.

The 704 shares of stock constitute 67.7% of the total outstanding shares of the Harrington and King Perforating Company. Accordingly, the trust property represents the controlling interest in the company. By Paragraph 4 of the trust instrument, Judson E. Fuller, the son of Judson M. Fuller, is named as co-trustee with the defendant National Bank of Austin. Paragraph 4(a) of the trust instrument empowers Judson E. Fuller, for as long as he should desire, with the sole voting authority over the stock in the trust to be voted in a manner which, in his discretion, is in the best interests of the beneficiaries. Paragraph 4(d) of the trust instrument gives the surviving co-trustee the right to vote the stock in the same manner as given to Judson E. Fuller by Paragraph 4(a).

At the time the trust became effective and continuing until the death of Judson E. Fuller in March, 1972, Judson E. Fuller was president of the Harrington and King Perforating Company and its chief executive officer. Judson E. Fuller was also trustee of the trust with the National Bank of Austin and also a beneficiary of the trust. He also served on the Board of Directors of the National Bank of Austin and was a member of the Bank's trust committee for five years prior to the death of Judson M. Fuller.

Three days following the death of the Chairman of the Board of the Harrington and King Perforating Company, Judson E. Fuller, on March 22, 1972, a special meeting of the Board was convened for the purpose of selecting a new Chairman of the Board. At that meeting, Patrick Filter, who had served as a Board member since 1964, discussed the succession with another Board member, Robert Jorgenson. It was agreed between the two that Ray Zelder should not be Chairman of the Board because of his lack of experience. Patrick Filter requested that Robert Jorgenson nominate him, Filter, to be the new Chairman of the Board. Jorgenson did nominate Filter and his election as ...


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