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Dep't of Mental Health v. Phillips





Appeal from the Circuit Court of Cook County; the Hon. Richard L. Curry, Judge, presiding.


This appeal arises out of an action brought by the Illinois Department of Mental Health and Developmental Disabilities (the Department) against the trustee of a discretionary spendthrift trust. The Department sought reimbursement for the cost of services provided to the trust's beneficiary, a mentally handicapped young adult residing at the Waukegan Developmental Center. On cross-motions for summary judgment, the trial court entered judgment in favor of the Department, holding that the trustee had abused his discretion in failing to reimburse the Department. The trial court further denied the trustee's alternative motion for reformation of the trust and ordered payment from the trust for the services provided at State expense. We reverse and remand for further proceedings.

The record reveals that in February 1974 Sue Phillips established an inter vivos trust for the benefit of her 18-year-old son, Steven. Steven is severely retarded and has required institutional care since birth. He is currently a resident at the Waukegan Developmental Center, having resided there since his 21st birthday in November 1976. Steven's brother, Kevin Phillips, was appointed trustee of the trust.

Pursuant to the terms of the trust, the trustee was given "sole and absolute discretion" to expend the trust's income or corpus "as the trustee deems necessary and advisable for the beneficiary's education (including college or a professional education), maintenance, medical care, support, general welfare and comfortable living." The trust also contains an express spendthrift provision prohibiting the voluntary or involuntary assignment or alienation of the income or corpus to claims of creditors or legal process. The trust further provides that upon Steven's death the trust assets are to be distributed to the then living issue of Steven's father per stirpes. Those remaindermen are presently Steven's two brothers and his two minor nephews.

The trust assets are currently valued at less than $75,000. The trustee has never made any distributions of the trust's principal or income to Steven but has reinvested all the income for Steven's benefit. Steven has no assets or source of income other than his interest in the trust.

In June 1983, the Department initiated this action by filing a petition for service charges against the trustee and Steven. The Department sought reimbursement for the cost of services provided Steven as an in-patient at the Waukegan Developmental Center since 1976. In its petition, the Department alleged that $73,474.40 was due for the period from November 4, 1976, through April 30, 1983, with $948 per month accruing thereafter.

The Department alleged that the trustee's failure to pay the Department was an abuse of discretion and contrary to the terms of the trust and that the trust is part of Steven's "estate" subject to the Department's surcharge pursuant to section 5-105 of the Illinois Mental Health Code. (Ill. Rev. Stat. 1983, ch. 91 1/2, par. 5-105.) The trustee answered the petition, denying that reimbursement should be made and that he abused his discretion. Alternatively, the trustee sought reformation of the trust's language to expressly prohibit use of the trust's assets for reimbursement to the Department for Steven's primary support and to provide that the trust could only be used as supplementary support for Steven's needs other than those provided by public aid.

Because there were no material factual disputes, the parties filed cross-motions for summary judgment and judgment on the pleadings. The trial court denied the trustee's motion and granted the Department's cross-motion for summary judgment, specifically basing its decision on this court's opinion in Department of Mental Health & Developmental Disabilities v. First National Bank (1982), 104 Ill. App.3d 461, 432 N.E.2d 1086. The order granting summary judgment was stayed, however, pending a ruling on the trustee's alternative petition for reformation of the trust.

In support of the alternative petition, the trustee submitted an affidavit by Sue Phillips reaffirming that at the time she established the trust her intent was to provide a source of funds supplementary to public aid. The trial court denied the alternative petition, reasoning as follows:

"The revisions suggested, and I have read them, are not merely those necessary to refine the language of the original trust instrument. The suggested revisions do not clear up ambiguities, because I believe there are no ambiguities in the original document, and the revision does not serve to fill a void in the instructions to the Trustee. On the contrary, these revisions to my view, constitute an entirely new remake of the trust instrument. The revisions constitute a total and complete abandonment of the initially stated trust purpose, and postulate a substitution of an entirely new scheme of things. The revisions totally distort the original trust purpose."

The trial court also expressed some concern in its ruling that the trustee might not be acting in Steven's best interests since the trustee was a potential remainderman of the trust. In a motion for reconsideration, the trustee, on behalf of himself and the other contingent remainderman, offered to waive all remainder interest in the trust in favor of the Department. Further, the trustee proposed that a mutually agreeable third party be substituted to act as trustee of the trust as reformed. The trial court denied the motion for reconsideration, acknowledging that it had misperceived the trustee's motives but still believed "the trust is clear and unambiguous, and that being the case, it must be followed in those terms by the Court."

On appeal, respondents contend that the trial court erred in denying reformation of the trust in a manner consistent with the settlor's intent and necessary to preserve the trust. Respondents argue that the trust was drafted with reference to the then existing law, which would not have given the State a right of reimbursement from a discretionary spendthrift trust; that the settlor's intent was clearly not to reimburse the State but rather to provide a source of funds for Steven in the event he needed additional support or medical care which the State was unable or unwilling to provide; that this court's decision in Department of Mental Health & Developmental Disabilities v. First National Bank (1982), 104 Ill. App.3d 461, 432 N.E.2d 1086, represents an unforeseen change of law which frustrates the settlor's original intent in creating the trust by permitting the State to reach the assets of a discretionary spendthrift trust for reimbursement; and that reformation should therefore be permitted in order to give effect to the settlor's original intent and to preserve the trust. We agree.

• 1 It is well settled in Illinois that the provisions of a trust can be modified in order to carry out the intentions of the settlor if unforeseen events occur which would otherwise frustrate the settlor's purpose. (See Curtiss v. Brown (1862), 29 Ill. 201; American State Bank v. Kupfer (1983), 114 Ill. App.3d 760, 449 N.E.2d 1024.) The power to do so, however, is exercised with great caution and only in extreme cases. (Stough v. Branch (1946), 395 Ill. 544, 70 N.E.2d 585.) The rationale for permitting trust modification was advanced over a century ago by our supreme court in Curtiss, which held:

"Exigencies often arise not contemplated by the party creating the trust, and which, had they been anticipated, would undoubtedly have been provided for, where the aid of the court of chancery must be invoked to grant relief imperatively required; and in such cases the court must, as far as may be, occupy the place of the party creating the trust, and do with the fund what he would have dictated had he anticipated the emergency. * * * From very necessity a power must exist somewhere in the community to grant relief in such ...

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