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NC Illinois Trust Company v. First Illini Bancorp

June 15, 2001

NC ILLINOIS TRUST COMPANY, AS TRUSTEE OF THE JOHN GOLOFSKY TRUST, PLAINTIFF-APPELLEE CROSS-APPELLANT,
v.
FIRST ILLINI BANCORP, INC., AN ILLINOIS BANKING CORPORATION, SUCCESSOR BY MERGER TO FIRST GALESBURG NATIONAL BAND AND TRUST COMPANY, DEFENDANT-APPELLANT AND CROSS-APPELLEE.



Appeal from the Circuit Court for the 10th Judicial Circuit, Peoria County, Illinois No. 90--L--467 Honorable Rebecca R. Steenrod Judge, Presiding

The opinion of the court was delivered by: Justice Breslin

Not Released For Publication

NC ILLINOIS TRUST COMPANY, AS TRUSTEE OF THE JOHN GOLOFSKY TRUST, PLAINTIFF-APPELLEE CROSS-APPELLANT,
v.
FIRST ILLINI BANCORP, INC., AN ILLINOIS BANKING CORPORATION, SUCCESSOR BY MERGER TO FIRST GALESBURG NATIONAL BAND AND TRUST COMPANY, DEFENDANT-APPELLANT AND CROSS-APPELLEE.

Appeal from the Circuit Court for the 10th Judicial Circuit, Peoria County, Illinois No. 90--L--467 Honorable Rebecca R. Steenrod Judge, Presiding

The opinion of the court was delivered by: Justice Breslin

Plaintiff NC Illinois Trust Company (Trustee), as trustee of the John Golofsky trust, filed suit against defendant First Illini Bancorp, Inc. (Bank), alleging that Bank breached its fiduciary duty as the executor of the trust. The jury returned a verdict in favor of Trustee. Bank appealed and Trustee cross-appealed. For the following reasons, we affirm in part and reverse in part.

 FACTS

Bank became the executor of the Golofsky trust after a corporate merger. John Golofsky left a widow, Zoe Golofsky, and a daughter, Marilyn Urena. Each received successive life estates under the trust. Golofsky was also survived by two grandchildren, Jon Urena and Zoe Urena Weiss. Both grandchildren were remainder beneficiaries under the trust. When he died, Golofsky owned one-half of the common stock of Brown Specialty Corporation (Brown Specialty), and Mitchell Rudman owned the other half.

Rudman was designated the "point man" in selling the stock in Brown Specialty. Rudman, Zoe Golofsky, and Bank agreed to sell the stock to Brown-SXTN, a company formed by John Sexton, for $1.6 million. This sale price was approved by the probate court over the objections of the remainder beneficiaries, who believed the price was inadequate. A stock purchase agreement, created by Sexton, was entered into by Bank as executor of the trust and Sexton.

The agreement provided certain warranties that Brown Specialty's financial statements were prepared in accordance with generally accepted accounting principles (GAAP), and that the statements fairly represented the company's financial position. The figures comprising the financial statements were provided by Rudman. Before the agreement was executed, Zoe Urena Weiss' husband, Zeff Weiss, on behalf of the remainder beneficiaries, sent a letter to Bank's trust officer, Lane Smallwood, indicating that the warranties made in the stock purchase agreement were false.

Smallwood consulted with Burrell Barash, an attorney often used by Bank, who recommended that Bank execute the sale agreement. Bank, as executor of the Golofsky estate, received 50% of the sale proceeds which totaled $800,000. Several months later, Brown-SXTN forwarded a letter to Barash alleging that the stock purchase agreement contained misrepresentations in connection with the sale of the Brown Specialty stock. Sexton contended that the misrepresentations inflated the purchase price of Brown Specialty by $420,000. Sexton eventually sued Bank, Rudman and Zoe Golofsky in federal court, alleging that the defendants committed securities violations and breached warranties contained in the agreement.

Bank and Rudman were simultaneously represented by Barash over the objections of the remainder beneficiaries. Zeff Weiss informed Bank that joint representation should not be undertaken because Bank should seek indemnification against Rudman in the event Sexton prevailed at trial. Bank relied upon Barash's advice that it was better to present a united front to avoid harmful finger-pointing. Rather than file suit against Rudman for indemnity, Bank entered into an agreement with Rudman stating that Bank could later seek indemnity against Rudman and Rudman could not assert the statute of limitations as a defense.

The federal jury returned a verdict in favor of Sexton for $200,000 and assessed $50,000 in punitive damages against Rudman. The court did not enter judgment, however, because the issue of attorney fees needed to be resolved. Before resolution, the parties settled the case for $375,000, of which Rudman paid $212,500 and Bank paid $162,500. Zeff Weiss contacted Bank to request that any judgment be paid by Bank and not from estate assets. Still, Bank paid the settlement from estate assets. Bank also paid Barash $29,743 for legal services in its representation of the estate generally, and $50,111 for the defense of the Brown-SXTN case out of estate assets. Bank did so without notifying the beneficiaries of the trust because it believed they would object.

After the federal case was settled, Trustee filed suit against Bank on behalf of the remainder beneficiaries. Count I sought actual damages based on professional negligence and/or breach of fiduciary duty. Count II sought punitive damages based on the same alleged conduct in count I. Bank brought an indemnity action against Rudman in the event Bank was found liable to the beneficiaries.

Bank filed a motion for summary judgment which was granted by the trial court but later reversed by this court in First of America Trust Co. v. First Illini Bancorp, Inc., 289 Ill. App. 3d 276, 685 N.E.2d 351 (1997). On remand, the jury returned a verdict in favor of Trustee, awarding $242,443 in compensatory damages. The jury also awarded Trustee punitive damages in the amount of $1,375,232. The trial court remitted those damages to $450,000. Bank appealed and Trustee cross-appealed.

Additional facts will be set forth below as they become pertinent to the analysis.

ANALYSIS

A. Bank's Appeal

The first issue is whether the trial court erred when it denied Bank's request for judgment notwithstanding the verdict on the basis that Bank satisfied the applicable legal standards for executors by relying upon the advice of outside legal counsel.

A judgment notwithstanding the verdict should be entered only when all the evidence, when viewed in the light most favorable to the opponent, so overwhelmingly favors the movant that no contrary verdict based on the evidence could stand. Pedrick v. Peoria & Eastern R.R. Co., 37 Ill. 2d 494, 229 N.E.2d 504 (1967). We review a trial court's decision to deny a motion for judgment notwithstanding the verdict de novo. Arellano v. SGL Abrasives, 246 Ill. App. 3d 1002, 617 N.E.2d 130 (1993).

Bank claims that the court should have granted its motion for judgment notwithstanding the verdict because it reasonably relied upon the advice of Barash in signing the stock purchase agreement, in allowing Barash to represent both Bank and Rudman, and in using estate assets to satisfy the federal judgment against it. For this proposition, Bank relies upon Jewish Hospital v. Boatmen's National Bank, 261 Ill. App. 3d 750, 633 N.E.2d 1267 (1994).

In Jewish Hospital, the court stated that a bank has a right to hire an attorney to handle the legal affairs of the estate, and the bank has a right to rely on the attorney's advice, unless the bank knowingly chooses incompetent counsel or has some reason to know that the given advice is not sound.

Trustee responds that Bank had reason to know that Barash's advice was not sound. The record supports that argument. Smallwood, head of the trust department at First Illini, was himself an attorney specializing in trusts who acknowledged at trial that he was probably the best qualified attorney in Galesburg in the area of estate and trust administration. It goes without saying then, that Smallwood believed himself to be more qualified than Barash with respect to this matter though he relied entirely upon Barash's advice. Though Smallwood got court approval to sell Golofsky's share of Brown Specialty, the stock purchase agreement contained warranties and misrepresentations which were beyond the boundaries of the court order. The beneficiaries of the Golofsky trust brought this to the attention of Smallwood, but he signed the stock purchase agreement without remedying the errors contained in it.

In addition, Smallwood had independent knowledge that the agreement contained certain warranties that Brown Specialty's financial statements were prepared in accordance with GAAP when, in fact, they were not. Smallwood admitted reviewing a letter from the firm of Landy & Rothbaum which indicated that if GAAP had been used in preparing the financial statements, Brown Specialties' land, building and stock holders' equity would have decreased by $189,859. Smallwood admitted that he did not have ...


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