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11/07/96 RICHARD G. ANDERSON AND ANN T. ANDERSON v.

November 7, 1996

RICHARD G. ANDERSON AND ANN T. ANDERSON, INDIV. AND AS TRUSTEES UNDER THE RICHARD AND ANN ANDERSON CHARITABLE TRUST, PLAINTIFFS-APPELLANTS,
v.
FINANCIAL MATTERS, INC., ALAN M. MISALE, INDIV., THOMAS JAMES ASSOCIATES, INC., AND SHIRLEY A. MCKINNEY, INDIV., DEFENDANTS-APPELLEES.



Appeal from the Circuit Court of Lake County. No. 93--L--796. Honorable William D. Block, Judge, Presiding. This Opinion Substituted on Denial of Rehearing for Withdrawn Opinion of September 25, 1996, Previously

Released for Publication December 17, 1996.

The Honorable Justice Bowman delivered the opinion of the court: Inglis and Doyle, JJ., concur.

The opinion of the court was delivered by: Bowman

JUSTICE BOWMAN delivered the opinion of the court:

Plaintiffs Richard G. Anderson and Ann T. Anderson appeal three orders of the circuit court of Lake County. The first order, entered on October 13, 1993, granted defendants Thomas James Associates, Inc. (Thomas James), and Shirley A. McKinney's motion to stay the judicial proceedings and to compel arbitration. The second order, entered on May 18, 1995, entered judgment in favor of Thomas James and McKinney based on an earlier arbitration award. The third order, entered on October 17, 1995, granted the motion for summary judgment of defendants Financial Matters, Inc. (Financial Matters), and Alan M. Misale.

BACKGROUND

The following brief summary of the facts is taken from the record. On June 16, 1993, plaintiffs filed a complaint against Financial Matters, Misale, Thomas James, McKinney, and Equitable Life Insurance Company of America (Equitable). The complaint contained six counts.

The complaint alleged the following facts common to all counts. Misale has known plaintiffs since the 1980s when he was a salesman for plaintiffs' insurance agent. Early in 1992, Misale, who at this time was employed by Financial Matters, proposed that plaintiffs change their retirement and estate plan. Misale proposed that plaintiffs sell their stock in R.R. Donnelley & Sons (Donnelley stock). A substantial portion of the proceeds of this sale would be donated to a charitable remainder unit trust (CRUT). The CRUT would then purchase other securities which would generate a substantially higher income than the dividends plaintiffs received from the Donnelley stock. The income earned by these securities would be paid to plaintiffs on a current basis until they died, it would equal 10% of the fair market value of the CRUT, and it would average at least $75,000 per year through 2003. When plaintiffs died, the remaining assets in the CRUT would fund a charitable foundation. The beneficiary of this charitable foundation apparently was plaintiffs' son.

After further investigation, Misale proposed a slightly modified plan. This plan would create a wealth replacement trust, which in turn would purchase a life insurance policy on Mrs. Anderson and was payable to plaintiffs' son on her death. The plan would also create the CRUT. The CRUT, which would still be funded by the proceeds of the sale of the Donnelley stock, would invest in debt securities. One-half of these securities would consist of zero-coupon United States Treasury bonds, which would have a maturity value in 2003 equal to the value of the Donnelley stock originally donated to the CRUT. The remaining securities would consist of securities that were paying and would continue to pay a current yield greater than 10% of the fair market value of the CRUT's assets. This yield would be paid to plaintiffs.

In connection with the purchase of these latter securities, Misale introduced plaintiffs to McKinney, a registered broker at Thomas James, a securities brokerage firm. McKinney recommended the purchase of income-only stripped mortgage backed securities certificates (I/O FNMA Strips). I/O FNMA Strips are not government bonds. They are derivatives based on specified pools of mortgage loans held by the Federal National Mortgage Association (FNMA).

From April through June 1992, McKinney and Misale made several representations regarding the I/O FNMA Strips. McKinney and Misale generally represented that investment in I/O FNMA Strips would produce an income for plaintiffs in excess of 10% of the value of the CRUT. This representation was based on the assumption that the I/O monthly payments made to the FNMA pool would not decline by more than 1% each month.

In reliance on these representations, plaintiffs established the CRUT, which they funded with the Donnelley stock. At this time, the stock had a market value in excess of $750,000. Upon Misale's recommendation, the Donnelley stock was sold and the proceeds invested by the CRUT. The sum of $329,000 was invested in zero-coupon United States Treasury bonds that, if held to the maturity date in 2003, would return a single payment of $750,000. The sum of $425,000 was invested in I/O FNMA Strips in interest trust 29-2. Plaintiffs also purchased a life insurance policy on Mrs. Anderson. Although plaintiffs purchased the securities through Thomas James, the purchases were cleared through RAF Financial Corporation (RFC), Thomas James' clearing agent.

According to plaintiffs, Misale and McKinney intentionally or recklessly misrepresented or omitted to state, inter alia, that the I/O monthly payments made to the FNMA pool had been declining at a rate much greater than 1% per month for many months before June 1992. The decline had in fact exceeded 4.5% per month in each of March, April, and May 1992. In January or February 1993, plaintiffs discovered that the I/O FNMA Strips had an apparent market value of approximately one-half of the amount that they paid for them. In March 1993 plaintiffs liquidated interest trust 29-2 for a significant loss.

Based on these allegations, count I of plaintiffs' complaint alleged violations of section 12 of the Illinois Securities Law of 1953 (815 ILCS 5/12 (West 1994)); count II alleged common-law fraud; count III alleged gross violation of trust and confidence; count IV alleged a breach of contract of the life insurance policy; count V alleged promissory estoppel; and count VI alleged an implied right of recovery under the life insurance policy. Counts I, II, and III were alleged against Financial Matters, Misale, Thomas James, and McKinney, jointly and severally.

On August 20, 1993, Thomas James and McKinney filed a motion to stay the judicial proceedings and to compel arbitration of the claims asserted against them in plaintiffs' complaint. According to the motion, plaintiffs had signed a document entitled "clearing account agreement." Paragraph 10 of the agreement, entitled "Arbitration," provided that all controversies which may arise between plaintiffs and RFC and "the broker or the broker's employees" shall be determined by arbitration. It also stated:

"ANY ARBITRATION UNDER THIS AGREEMENT SHALL BE CONDUCTED PURSUANT TO THE FEDERAL ARBITRATION ACT AND THE LAWS OF THE STATE DESIGNATED IN PARAGRAPH 7 [Colorado] HEREOF, BEFORE AN ARBITRATION FACILITY PROVIDED BY THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. ('NASD') ***.

THE AWARD IN SUCH ARBITRATION PROCEEDING SHALL BE FINAL, AND JUDGMENT UPON THE AWARD RENDERED MAY BE ENTERED IN ANY COURT, STATE OR FEDERAL, HAVING JURISDICTION. THE CONTROVERSIES AND DISPUTES WHICH ARE THE SUBJECT OF THIS ARBITRATION AGREEMENT INCLUDE, BUT ARE NOT LIMITED TO, DISPUTES UNDER FEDERAL AND STATE LAWS, INCLUDING SECURITIES LAWS, AND DISPUTES UNDER COMMON LAW."

Based on this agreement, Thomas James and McKinney argued that plaintiffs were required to submit their claims against them to arbitration under the Federal Arbitration Act (9 U.S.C. ยง 1 et seq. (1988)). On October 13, 1993, the trial court entered an order granting the motion. The order further provided that the claims against Thomas James and McKinney were dismissed and that it retained personal jurisdiction over them solely for the purpose of enforcing an arbitration award that may thereafter be awarded.

On February 28, 1994, plaintiffs filed their first amended complaint. As with the original complaint, this complaint contained six counts; each count's allegations ...


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