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JACKSON NATL. LIFE INS. CO. v. GOFEN & GLOSSBERG

January 4, 1995

JACKSON NATIONAL LIFE INSURANCE COMPANY, Plaintiff,
v.
GOFEN & GLOSSBERG, INC., BOULEVARD BANK NATIONAL ASSOCIATION and MIDWEST SECURITIES TRUST COMPANY, Defendants.



The opinion of the court was delivered by: MARVIN E. ASPEN

 MARVIN E. ASPEN, District Judge:

 Plaintiff Jackson National Life Insurance Company ("JNL") brings this seven count amended complaint against Gofen & Glossberg ("G&G"), Boulevard Bank National Association ("Boulevard") and the Midwest Securities Trust Company ("MSTC"). *fn1" Presently before this court are numerous motions to dismiss many of the claims and cross-claims asserted by the parties.

 I. Background

 JNL, a large insurance company, had since the mid-1960's engaged G&G as a financial advisor. On January 12, 1984, JNL and Boulevard entered into written Custodian Agreement whereby Boulevard, through itself or its nominee, agreed to hold certain securities on behalf of JNL. This agreement also required Boulevard to notify JNL or G&G of "calls, tenders, maturities, subscription rights, stock dividends, and defaults with respect to principle or interest." Custodian Agreement P 2(e). JNL alleges that during the course of Boulevard's tenure as custodian of JNL's securities, Boulevard made a practice of notifying JNL or G&G of all written notices regarding its securities, regardless of whether such notice was required by the terms of the Custodian Agreement.

 On March 3 and March 11, 1986, JNL, through G&G, made two purchases of 12% Senior Subordinated Debentures issued by MGM Grand Hotels ("12% Debentures"), at a total price of approximately $ 6.5 million. As with many of its other securities, JNL had Boulevard hold these debentures as custodian. Boulevard, in turn, had these debentures held by MSTC pursuant to a Participant's Agreement entered into by Boulevard and MSTC on March 24, 1981.

 On or about March 21, 1986, MGM filed with the Securities and Exchange Commission a prospectus for an exchange offer ("MGM Exchange Offer") with respect to the 12% Debentures. In this prospectus MGM offered to exchange its 12% Debentures for higher yielding secured notes. The MGM Exchange Offer was intended to pacify those who would object to MGM's pending merger with Bally's Grand, Inc., by giving them a higher rate of return and a more secured position. Almost all of the 12% Debenture holders took advantage of the MGM Exchange Offer, with only JNL not participating. JNL alleges that Boulevard, MSTC, or both, had received notice of the MGM Exchange Offer, but had failed to pass along this notice to either G&G or JNL, in contravention of the Custodian Agreement and the Participant's Agreement.

 Although the merger between MGM and Bally's Grand, Inc. was initially successful, the surviving entity was unable to meet its financial obligations and filed for bankruptcy in 1990. As opposed to the secured notes, which retained much of their value, the 12% Debentures became virtually worthless. JNL contends that, had it been notified of the MGM Exchange Offer, it would have exchanged the 12% Debentures for the notes possessing significantly better terms. Because it did not receive such notice, JNL claims that it has been damaged in excess of $ 50,000, representing (1) the difference between the present value of the notes and the now worthless debentures, and (2) the increase in interest that would have been credited to JNL's account had the debentures been exchanged. In addition to the main claims by JNL, G&G has filed cross-claims against Boulevard, and Boulevard and MSTC have cross-claimed each other.

 II. Discussion

 We now address the motions to dismiss that have been filed by the defendants and cross-defendants. A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) should not be granted "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claims which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957); Johnson v. Martin, 943 F.2d 15, 16 (7th Cir. 1991). At this stage in the litigation the claimant's version of the facts are taken as true and all reasonable inferences are construed in its favor. Bane v. Ferguson, 890 F.2d 11, 13 (7th Cir. 1989). However, unsupported conclusions of fact and conclusions of law are not sufficient to withstand a motion to dismiss. Cushing v. City of Chicago, 3 F.3d 1156, 1160-61 n.5 (7th Cir. 1993); Watters v. Harris, 656 F.2d 234, 240 (7th Cir. 1980).

 A. Boulevard's Cross-Claim Against MSTC

 Defendant Boulevard bases its cross-claim against MSTC on the Participant's Agreement between the two parties, as well as on the common law of agency. In essence, Boulevard contends that the Participant's Agreement, along with MSTC rules and regulations incorporated into it, imposed on MSTC an obligation to notify Boulevard of all notices it received regarding securities held by it on Boulevard's behalf." Boulevard's Cross-Claim P 10. Furthermore, Boulevard alleges that because MSTC acted as its agent with regard to JNL's securities, MSTC owed Boulevard a duty to pass along relevant information related to these securities. In sum, Boulevard argues that if it is found liable to JNL, then MSTC is obligated to indemnify it.

 MSTC moves to dismiss the cross-claim, arguing that the Participant's Agreement did not create an obligation on its part to notify Boulevard of the exchange offer from MGM. Rather, MSTC claims that the Participant's Agreement simply outlined the procedures that would be used if MSTC actually did try to notify Boulevard of such information. Indeed, MSTC asserts that the Participant's Agreement expressly negates any obligation on its part to convey correct information, or any information at all, concerning securities held on Boulevard's behalf.

 Ordinarily, at the motion to dismiss stage we are not required to establish the veracity of the claimant's allegations. Bane v. Ferguson, 890 F.2d 11, 13 (7th Cir. 1989). However, since Boulevard's cross-claim sounds in contract, we need not accept its allegations as true if they conflict with the written terms of the Participant's Agreement entered into by MSTC and Boulevard on March 24, 1982. See Graue Mill Dev. Corp. v. Colonial Bank & Trust Co. 927 F.2d 988, 991 (7th Cir. 1991) (terms of written contract prevail over pleadings). We therefore begin our analysis with the Participant's Agreement.

 Questions of contract interpretation raised in this court are governed by state law, Air Line Stewards & Stewardesses Ass'n Local 550 v. American Airlines, Inc., 763 F.2d 875, 877 (7th Cir. 1985), cert denied 474 U.S. 1059, 88 L. Ed. 2d 778, 106 S. Ct. 802 (1986), and the parties do not dispute that Illinois law controls. "Under Illinois law, 'the primary object in construing a contract is to give effect to the intention of the parties.'" Arrow Master, Inc. v. Unique Forming Ltd., 12 F.3d 709, 713 (7th Cir. 1993) (quoting Air Line Stewards). This intention is to be gleaned primarily from the language of the contract. Omnitrus Merging Corp. v. Illinois Tool Works, Inc., 256 Ill. App. 3d 31, 628 N.E.2d 1165, 1168, 195 Ill. Dec. 701 (Ill. App. Ct. 1993). Boulevard's contention that MSTC owed it a duty of notification appears to stem from two sections of the Participant's Agreement which explicitly incorporate MSTC's rules and regulations into the agreement. Participant's Agreement PP 1, 3. In turn, these rules and regulations describe numerous aspect of the relationship between MSTC and its clients. Boulevard first points to Article IV, Rule 4 of the MSTC rules, which states that where MSTC gives a participant notice of reorganization activity, MSTC may set a cut-off date for the exchange or liquidation of securities and may take certain actions on behalf of participants. *fn2" Rule 4 also states that "[MSTC] shall not be liable for its failure to provide any services with respect to any Eligible Security which is undergoing a reorganization where such failure results from an act of God, sabotage or other cause beyond the reasonable control of [MSTC]." MSTC Rules, Art. IV, Rule 4. Boulevard contends that these provisions imposed on MSTC a duty to notify it of exchange offers, and rendered any failure to notify not caused by act of God, sabotage or other cause beyond MSTC's reasonable control actionable. However, the language of Rule 4 does not support Boulevard's interpretation. Rather, the rule merely apprises participants of the procedures MSTC follows when clients wish to act on reorganization activities. Although Rule 4 presupposes that the participant has received notice of the reorganization, it does not require that MSTC give this notice. Moreover, the rule limits MSTC's liability for failing to provide certain services because of act of God, sabotage or other causes outside its reasonable control; it does not impose liability on MSTC where the corporation fails to provide these services because of other reasons. Even if the rule did impose liability, it would not apply to the instant case since notification of reorganization activities is conspicuously absent from the list of services that MSTC promises to provide.

 Boulevard next points to MSTC's Operations Handbook, also incorporated into the Participant's Agreement, which provides that "MSTC/MCC will report all activity for the following types of Reorganizations to participants by a Distribution Notice . . . Acquisitions, Conversions, Distributions, Exchanges . . . ." Operations Handbook, Subject No. 700, at 1. Additionally, in outlining its procedures for handling exchange offers, the Handbook indicates that "the participant will receive notification from MSTC/MCC of an Exchange Offer and the cut-off date." Operations Handbook, Subject No. 702, at 1. The mandatory nature of this language supports Boulevard's averment that MSTC owed it a duty of notification.

 However, MSTC asks us to examine other portions of the Handbook which suggest otherwise. For example, the Handbook also states that "MSTC/MCC cannot guarantee the completeness nor the correctness of the information furnished regarding Reorganizations. Participants will be responsible for maintaining their own records and notification sources, and for comparing MSTC/MCC's Reorganization Notice to those received from various external sources for full details of the Reorganization." Operations Handbook, Subject No. 700, at 2. MSTC would have us read this section as completely absolving it of any responsibility for notifying participants of exchange offers. However, this language only protects MSTC from passing on incorrect or incomplete information. It does not absolve MSTC from liability for claims such as Boulevard's, i.e., that MSTC failed to pass on reorganization information of which it was aware.

 MSTC next directs us to an MST System Administrative Bulletin of November 23, 1984, dealing with the monitoring of reorganizations. The Bulletin states that MSTC will monitor reorganization activities and pass this information on to participants, but it also reiterates the company's disclaimer that it will not always be able to receive information about a particular reorganization. The Bulletin goes on to state that when MSTC receives late information about a reorganization, MSTC will try to notify participants by telephone. Finally, the Bulletin ends with the following paragraph.

 
MSTC again reminds participants to maintain their own information services for full disclosure on reorganization activity. MSTC does not guarantee information on a reorganization of a Midwest-eligible security will be received or passed on to participants, nor does MSTC guarantee the correctness or completeness of the information provided.

 MST System Administrative Bulletin (emphasis added). While MSTC's prior disclaimers dealt only with the transmittal of inaccurate information, this paragraph explicitly covers MSTC's failure to transmit information which it possesses. Because this Administrative Bulletin was incorporated into the Participant's Agreement between MSTC and Boulevard, Participant's Agreement PP 1, 3, its terms are binding on Boulevard. Quite apart from imposing an obligation on MSTC to provide reorganization notices to participants, this Bulletin unambiguously indicates that MSTC did not promise to pass on all information regarding reorganizations to its participants. Nor can Boulevard claim that, despite this language, there was nonetheless an implied obligation to notify it of reorganization activities, since express terms of a contract prevail over implied terms. See Williams v. Jader Fuel Co., Inc., 944 F.2d 1388, 1394 (7th Cir. 1991) ("no obligation can be implied which would be inconsistent with the explicit terms of the contract"), cert. denied, 504 U.S. 957, 119 L. Ed. 2d 228, 112 S. Ct. 2306 (1992); Sol K. Graff & Sons v. Leopold, 92 Ill. App. 3d 769, 416 N.E.2d 275, 278, 48 Ill. Dec. 244 (Ill. App. Ct. 1981). Boulevard's allegation that MSTC owed it a contractual duty of notification is not supported by the written agreement between the parties, and thus cannot be used as a basis for its cross-claim.

 Boulevard also seeks to ground its cross-claim on general principles of agency law, claiming that the Participant's Agreement between the two parties created a principle-agent relationship. *fn3" Specifically, Boulevard relies on two principles of agency law to support its cross-claim: (1) an agent is responsible to its principle for any liability incurred because of a breach of duty, Restatement (Second) of Agency § 401 (1958), and (2) an agent has a duty to inform its principle of information which is relevant to the principle's affairs. Restatement (Second) of Agency § 381 (1958). Combined, these two principles lead Boulevard to conclude that despite the disclaimer in the Administrative Bulletin, MSTC was bound to pass along reorganization information.


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