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Ford City Bank v. Ford City Bank





Appeal from the Circuit Court of Cook County; the Hon. Harold A. Siegan, Judge, presiding.


Rehearing denied November 23, 1982.

Defendant, Thomas Pankow, a beneficiary of an Illinois land trust (identified as Ford City Bank & Trust Co. Trust No. 2399), appeals the trial court's order denying his petition to vacate the court's earlier order approving a sheriff's sale of the trust property to the sole bidder, plaintiff Ford City Bank & Trust Co. (Ford City Bank), which was also the trustee of the subject property. For the reasons hereinafter stated, we reverse the trial court's order denying Pankow's petition and remand the cause to the trial court with directions.

On August 8, 1978, plaintiff, Ford City Bank, conveyed certain unimproved real estate located in Justice, Illinois, to Ford City Bank, as trustee under trust No. 2399. The beneficiaries of this Illinois land trust were Thomas Pankow and other parties not involved in this appeal. The beneficiaries directed their trustee, Ford City Bank, as purchaser, to execute an installment note in the amount of $195,000 payable to Ford City Bank, as seller, together with a trust deed conveying the property to the bank as security for repayment of the loan. The loan was also personally guaranteed by the individual beneficiaries of the trust.

The beneficiaries defaulted and Ford City Bank filed a complaint to foreclose the mortgage. The trial court, with the consent of defendant's attorney, entered a decree of foreclosure and sale which specifically gave Ford City Bank the right to purchase the property at a public sheriff's sale held on October 28, 1980. Neither defendant nor his counsel, who was given notice of the sale, appeared at the sale. The property was sold for $40,000 to Ford City Bank, the only party to submit a bid.

On December 24, 1980, the trial court approved the sheriff's report of sale and distribution and found that there was a remaining deficiency of $153,020.34. No evidence of the property's value was presented to the court. Anthony R. Piazza, a judgment creditor of another beneficiary of trust No. 2399, redeemed the property from the sheriff's sale on January 31, 1981, and received a sheriff's deed on February 26, 1981.

In the course of representing defendant Pankow against Ford City Bank's subsequent action to collect the deficiency, defendant's counsel, on June 5, 1981, obtained from the bank an appraisal dated October 27, 1971, which estimated the market value of the subject property, if improved with four proposed 120-unit apartment buildings, at $500,000. On July 2, 1981, defendant filed a petition to vacate the order approving the sheriff's report of sale and distribution. The petition claimed that the price bid by the bank, $40,000, was grossly inadequate and that neither defendant nor his counsel was aware of the October 27, 1971, appraisal until June 1981. On August 14, 1981, the trial court denied defendant's petition to vacate.

On appeal defendant argues that the trial court erroneously denied his petition to vacate the court's order approving the sheriff's sale of the property. The petition was brought under section 72 of the Civil Practice Act. (Ill. Rev. Stat. 1979, ch. 110, par. 72, now codified as section 2-1401 of the Code of Civil Procedure, Ill. Rev. Stat. 1981, ch. 110, par. 2-1401.) To be entitled to section 72 relief, a petitioner must show a meritorious claim or defense which could not have been discovered through the exercise of reasonable diligence.

• 1 On the basis of the record before us, we have serious doubts regarding defendant's diligence in discovering the asserted inadequacy of the bid. (See Bankers Trust Co. v. Chicago Title & Trust Co. (1980), 89 Ill. App.3d 1014, 1021-22, 412 N.E.2d 660.) However, "[j]ustice and good conscience may require that a judgment be vacated even though there may have been a lack of due diligence." (George F. Mueller & Sons, Inc. v. Ostrowski (1974), 19 Ill. App.3d 973, 979, 313 N.E.2d 684; see also Lutz v. Lutz (1977), 55 Ill. App.3d 967, 970, 371 N.E.2d 348.) We believe that application of these equitable principles is appropriate in the instant case where the record discloses that Ford City Bank, in its capacity as land trustee, breached a fiduciary obligation of loyalty to defendant, one of the beneficiaries of the trust.

• 2 The trustee of an Illinois land trust typically has limited powers and may act only when and as the beneficiary directs. Nevertheless, the trustee has a fiduciary obligation of loyalty to the beneficiary which flows not from the trust instrument itself but from the relationship of trustee and beneficiary. (Home Federal Savings & Loan Association v. Zarkin (1982), 89 Ill.2d 232, 239, 432 N.E.2d 831.) "The essence of this relationship is that the former is charged with equitable duties toward the latter. The law imposes the duty, whether the trust instrument mentions it or not." Home Federal Savings & Loan Association v. Zarkin (1982), 89 Ill.2d 232, 239.

• 3 Under Zarkin the trustee's duty to serve the interests of the beneficiary with complete loyalty, excluding all self-interest, prohibits him from dealing with the trust property for his individual benefit. The purchase by a trustee for his own account of property of his trust constitutes a breach of this duty. (89 Ill.2d 232, 239.) Trustees are prohibited from purchasing trust property because of an inherent conflict of interests; as purchaser, the trustee is naturally interested in acquiring the property at the lowest possible price, while loyalty to the beneficiary dictates that he seek to obtain the highest possible price. To remove the danger created by this conflict of interests, a trustee's purchase of trust property is voidable at the beneficiary's option. (89 Ill.2d 232, 240.) Under Zarkin a trustee may not purchase trust property in a private transaction, or at a public auction or foreclosure or other judicial sale that was brought about by the trustee, or at a sale held on foreclosure of a third party's lien. 89 Ill.2d 232, 240-43.

The rule prohibiting purchases of trust property by their trustees extends to trustees who have become creditors of their beneficiaries. A trustee in that situation "is particularly susceptible to the temptation to prefer its own financial interests over the interests of the beneficiary." Home Federal Savings & Loan Association v. Zarkin (1982), 89 Ill.2d 232, 244.

"[T]rustees who acquire an individual interest in the trust property by becoming creditors — whether by making advances for the benefit of the trust, or by buying an encumbrance on the trust property — may have an equitable lien on the trust for reimbursement, but are not relieved of their fiduciary obligations. [Citations.] The trustee-creditor cannot indemnify himself by treating trust property as his own [citation], nor can he transfer trust property to himself in satisfaction of a debt owed him by the trust. [Citation.]" 89 Ill.2d 232, 243-44.

At oral argument plaintiff's counsel advanced a number of reasons why defendant is not entitled to section 72 relief under Zarkin. In our judgment only ...

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