Appeal from the Circuit Court of Lake County; the Hon.
Terrence J. Brady, Judge, presiding.
JUSTICE LINDBERG DELIVERED THE OPINION OF THE COURT:
Defendant, Northern Trust Company, appeals from a judgment of the circuit court of Lake County entered on a jury verdict in favor of plaintiffs Dale Pirie Cabot, Suzanne Pirie Pattou and Sharon Pirie Sands in the amount of $1,569,778. Defendant raises five issues for review: (1) whether the trial judge erred by instructing the jury that defendant's conduct as an executor should be evaluated under a prudent-investor standard of care; (2) whether the trial court erred by permitting plaintiffs' expert witness to testify about the duties of an executor; (3) whether the trial court erred by denying defendant's motion for a directed verdict and its motion for judgment notwithstanding the verdict when plaintiffs failed to adduce any evidence of imprudence under the correct legal standard; (4) whether the trial court erred by denying defendant leave to amend its answer to plead the defense of failure to mitigate damages and by refusing to instruct the jury on the mitigation of damages issue; and (5) whether the trial court erred by refusing to instruct the jury that it should consider the Pirie will and trust in determining whether defendant fulfilled its fiduciary duties. We agree with defendant that the jury was not instructed properly and, therefore, reverse the judgment and remand this cause for a new trial.
Plaintiffs, as three beneficiaries of the estate of the late John T. Pirie, Jr. (Pirie), brought this action alleging that defendant, as executor of the Pirie estate, breached its fiduciary duty by failing to diversify the estate's common stock holdings. Pirie died on November 10, 1980, and his wife, Ginevra Pirie, died one month later, leaving plaintiffs as the only beneficiaries of the residuary of the estate.
Pirie established his testamentary scheme through a will and a declaration of trust, both dated December 7, 1978. The will conveys the residuary of the estate to the trustee acting under the declaration of trust. The will gives the executor broad powers to invest the assets of the estate before distribution, including the power to invest in common stock.
Apart from several modest specific bequests, Pirie's declaration of trust creates five separate funds. Funds one and two, which created a life estate for Pirie's wife, were to hold the residential real estate and one-half the residuary respectively. The trustee was obligated to manage these funds for the benefit of Pirie's wife during her lifetime. In connection with its management obligation, the trustee was given the general power, according to the language of the declaration of trust, to retain stock "although not of the type, quality or diversification considered proper for trust investments." The executor under the will was not given a similar power, although the will provided that the estate should be administered "as my executor deems proper."
The remaining one-half of the residuary was to be divided equally among funds three, four, and five, each of which was created for the benefit of one of Pirie's daughters. Upon his wife's death, all of the property in funds one and two was to be conveyed in equal shares to funds three, four and five. Because Pirie's wife died very soon after her husband, the estate assets were never retained in the trust, but instead were conveyed from the estate to the trust and then were distributed immediately to the beneficiaries. Defendant was appointed as executor on December 30, 1980, and served in that capacity for more than three years.
By January 26, 1981, Ronald Harkness, a vice-president of defendant, had determined the estate's gross value was $6 million including: (1) 114,150 common shares of Carson Pirie Scott & Company, valued at $2.4 million; (2) 40,955 common shares of Universal Resources Corporation, valued at approximately $1.6 million (as a result of a three-for-two stock split on January 27, 1981, the estate on February 1, 1981, held 61,492 shares of Universal Resources common stock); (3) John Pirie's one-half interest in a home in Lake Forest, valued at approximately $400,000; (4) a house affiliated with a hunting preserve in South Carolina; (5) municipal bonds valued at approximately $520,000; and (6) miscellaneous marketable common stocks held in various corporations. In January 1981, defendant estimated the estate would owe $3 million in Federal and State inheritance taxes and costs of administration.
In planning the estate administration program, Harkness in January 1981 discussed the estate in separate conversations with each beneficiary and her husband, emphasizing the need to liquidate assets of the estate to satisfy tax and debt obligations. Harkness also discussed the options available to raise money to pay these obligations. The sale of the municipal bonds would yield only $500,000 and Harkness told plaintiffs that they could not plan on selling the real estate in time to pay the taxes. According to Harkness, this meant that the estate would have to sell either the Carson stock, the Universal Resources stock, or some combination of both.
Harkness informed plaintiffs that an employee of Universal Resources told him by telephone that the Universal Resources stock held in the estate could not be sold because of a restrictive legend on the shares. Accordingly, plaintiffs agreed that the Carson stock and the municipal bonds would have to be sold to pay taxes. The parties stipulated at trial that "under the federal securities laws, the Universal Resources stock held by the estate of Pirie could have been sold at any time from 1980 to the present upon the filing of Form 144 with the Securities and Exchange Commission."
On February 27, 1981, Harkness sent all three beneficiaries a letter summarizing the assets held by the estate, its tax liabilities and the plan for administering the estate. That letter stated:
"Each of you has indicated to me orally that you approve to [sic] the sale of 84,150 shares of Carson stock by the estate and will wish to sell the 10,000 shares of Carson's to be received by you.
Each of you has also indicated to me that you desire the retention of the 40,995 shares and 5,625 warrants to purchase additional shares of Universal Resources Corp.
The shares of Universal Resources Corp. may [emphasis in original] be restricted shares in that they have not been registered under the Securities Act of 1933 and therefore may not be readily sold as free stock. We doubt this to be the case, however. In addition, Mr. Pirie was a founding shareholder and a member of the Board of Directors. We are reviewing the legal requirements as to sale and also the possibility of a lower than market tax valuation for death tax purposes due to such restriction. We will examine the advisability of exercising the 5,625 Universal Resources Corp. warrants.
We ask that you each confirm your agreement with the proposals set forth above, especially the handling of the Carsons and Universal shares, by signing and returning the enclosed copies of this letter."
Each plaintiff signed and returned a copy of this letter; Dale Pirie Cabot included the following notation on her returned copy.
"I approve except that I have never stated I desire the estate to retain the Universal Resources Corp. shares. I understand the possible legal restrictions on the sale of these shares. On the other hand to the extent these shares can legally be sold or the warrants exercised and the shares so received sold, I do not object if the bank in its fiduciary capacity feels this is the best from the investment standpoint."
Pursuant to this plan, defendant had by the end of March 1981 sold the municipal bonds, the 84,000 shares of Carson stock, and had distributed or sold 10,000 additional shares of Carson stock for each beneficiary. Defendant sold the South Carolina property in April 1981. In consequence, the only significant assets remaining in the estate were the Universal Resources stock, worth approximately $1.7 million, and the estate's interest in the Lake Forest home worth approximately $400,000.
In March 1981, an investment advisor of Sharon Sands spoke with Harkness to express his opinion that Universal Resources stock was not a good investment and on June 24, 1981, Sharon Sands and Dale Cabot sent a letter to defendant's chairman expressing concern about the prudence of holding the stock. In response, Raymond George, defendant's senior vice-president of fiduciary services, communicated by telephone with Sharon Sands and her husband that defendant was prepared to sell the Universal Resources stock if plaintiffs so indicated, preferably in writing. George indicated defendant had retained the Universal Resources shares because the beneficiaries had requested retention and explained that defendant had not taken "an investment portfolio approach" to the stock holding because it had not been asked to do so and because defendant did not know each plaintiff's individual assets or objectives.
In August 1981, Franklin Sands informed George that plaintiffs desired distribution of 5,000 shares each of the Universal Resources stock. In response, Harkness wrote a letter to plaintiffs dated August 25, 1981, informing them of the income tax consequences of the distribution and suggesting three available alternatives: (1) no distribution or sale; (2) distribution of the 15,000 shares with the corresponding income tax consequences; or (3) deferral of the tax consequences by selling the shares and reinvesting the proceeds in defendant's short-term investment fund until after March 1, 1982. Plaintiffs did not respond to this letter, which Harkness interpreted as their collective decision to select the first option.
Through a letter drafted by Charles Cabot, husband of Dale Pirie Cabot and an attorney, which was dated March 15, 1982, plaintiffs asserted that defendant had breached its fiduciary duty by failing to sell the Universal Resources stock and to diversify the estate. Through George, defendant responded to plaintiff's assertions in a letter dated April 26, 1982, in which he attempted to clarify "the background of this situation."
In August 1982, plaintiffs brought this suit against defendant. According to plaintiffs' verified complaint, defendant mismanaged the estate's assets and failed "to protect the estate's portfolio against unnecessary and unreasonable risk by failing to sell shares in Universal Resources and to invest the proceeds in diversified investment vehicles." Plaintiffs claimed damages in the amount of $1.6 million based upon the decline in the market value of the estate's investment in Universal Resources and asserted that "[t]his loss would not have occurred but for defendant's failure to diversify the estate's overconcentration of investment in the common shares and warrants of Universal Resources by selling those shares and warrants and reinvesting the proceeds in other investments which would have spread the portfolio's risk over diverse investment vehicles." Based solely upon these allegations, plaintiffs requested the court to enter an order declaring that defendant owed a fiduciary duty to plaintiffs to properly manage, invest and protect all estate assets and that defendant was liable to plaintiffs in damages because of its failure to diversify the estate's assets.
The complaint contains no allegations that defendant breached its fiduciary duty by failing to monitor the performance of Universal Resources or by failing to anticipate the decline in the stock. The facts in the record indicate that defendant consulted with its own investment analysts and with outside analysts knowledgeable about Universal Resources, and the consensus was that the outlook for Universal Resources stock was positive. At the conclusion of the trial, the jury returned a verdict of $1,569,778 in favor of plaintiffs. Defendant ...