APPEAL from the Circuit Court of Marshall County; the Hon.
EDWARD E. HAUGENS, Judge, presiding.
MR. JUSTICE HEIPLE DELIVERED THE OPINION OF THE COURT:
Rehearing denied June 29, 1981.
On January 6, 1977, Northwestern Mutual Life Insurance Company (Northwestern), the plaintiff, filed a suit to foreclose its mortgage on a 310-acre farm in Marshall County. The farm was held in trust by the Havana National Bank (Havana Bank), as trustee, and Amelia Wiemer as beneficiary. Mrs. Wiemer's answer, by way of a third-party complaint, sought indemnification from Havana Bank for breach of trust. This latter cause was severed from the foreclosure litigation and is the basis for this appeal. In the third-party action, Mrs. Wiemer, as plaintiff, and Havana Bank, the defendant, filed cross-motions for summary judgment. Mrs. Wiemer appeals the trial court's denial of her motion.
On March 28, 1968, Mr. and Mrs. Wiemer (Mr. Wiemer is now deceased) executed a trust agreement with Havana Bank. The purpose of the trust was consolidation of the Wiemers' debt to Havana Bank and the Herget National Bank of Pekin (Herget Bank), thereby enabling the Wiemers to purchase the Marshall County farm. Under the trust's terms, Havana Bank, as trustee, obtained a $60,000 loan from the Herget Bank and advanced $35,000 of its separate funds to the trust to pay off the purchase contract. Payment of the latter sum was secured by a mortgage to Havana Bank individually. On June 24, 1968, again as trustee, Havana Bank, and the Wiemers, as beneficiaries, executed a mortgage and note to Northwestern for a $70,000 loan to the trust. Havana Bank subordinated its lien to Northwestern's mortgage. The $70,000 loan released the interim debt financing provided by Herget Bank.
As trustee, Havana Bank had a duty to manage the farm and apply its income to pay existing debts. On January 21, 1976, Mrs. Wiemer's attorney sent a letter to Havana Bank requesting termination of the trust. Havana Bank replied that Mrs. Wiemer did not have authority to end the trust in such a manner.
On February 4, 1976, approximately $8,000 was in the trust's account. The mortgage payment of $4,035.50 to Northwestern was due on April 1, 1976. Instead of segregating funds to meet this obligation, Havana Bank, as trustee, paid the entire sum to itself to partially satisfy its second mortgage. Consequently, the Northwestern payment was omitted. Northwestern invoked the mortgage's acceleration clause calling the entire loan due, and the mortgagor, Mrs. Wiemer, defaulted. Eventually, the mortgage was foreclosed. During the subsequent redemption period, Mrs. Wiemer was able to redeem the title to the farm.
Emerging from this factual backdrop is a single issue. Was the trial judge correct in finding the trustee did not breach the trust and ordering summary judgment for Havana Bank? Responding in the negative, we reverse.
A trust relationship existed between Havana Bank and Mrs. Wiemer by virtue of the trust agreement. (Havana National Bank v. Wiemer (1975), 32 Ill. App.3d 578; Wiemer v. Havana National Bank (1978), 67 Ill. App.3d 882.) Ascertaining whether the trust was breached requires scrutiny of the trustee's conduct as well as the written trust agreement creating the trustee's duties. What does the trust say?
Article Six of the trust says:
"The Havana National Bank shall have control of the management, renting, and possession of the property. Trustee shall apply the net income from the property and in the same manner and in the same order as the net proceeds of sale."
Under the power of sale provision of Article Three, the trustee was to apply any sale proceeds:
"* * * of the income producing part of the farm to the first mortgage indebtedness with the excess being applied to said second mortgage indebtedness."
Therefore, in disbursing trust funds, Northwestern's first mortgage enjoyed priority over other debts.
Mrs. Wiemer contends the trustee's payment of $8,000 from the trust to the Havana Bank violated the ...