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THORNBROOK INTERNATIONAL, INC. v. RIVERCROSS FOUNDATION

July 6, 2004.

THORNBROOK INTERNATIONAL, INC., Plaintiff,
v.
RIVERCROSS FOUNDATION; DAVID P. MAHANY; WALTER MASLOWSKI; and MARJORIE RAWLS ROBERTS, P.C., Defendants.



The opinion of the court was delivered by: MATHEW KENNELLY, District Judge

MEMORANDUM OPINION AND ORDER

In August 2001, plaintiff Thornbrook International, Inc., a Canadian corporation, entered into a trust agreement with defendant Rivercross Foundation, a Nevada corporation headquartered in Winnetka, Illinois, by which it deposited $5 million with Rivercross. The funds were to be held in trust, invested only in specified types of safe instruments "on a non-depletion basis," kept free and clear of liens and encumbrances, and returned on demand Between July and September 2002, Thornbrook asked for the return of various sums, and by October 5, 2002 it had revoked the trust in its entirety. But as of January 2003, only $1,000,000 of the trust res had been returned. According to Thornbrook, Rivercross and its principals Walter Maslowski and David Mahany gave phony justifications for their failure to return the funds.

Thornbrook was fleeced, though it remains to be determined who was wielding the shears. It filed suit in February 2003, claiming that Rivercross had breached the trust agreement as well as its fiduciary duty, had converted Thornbrook's property, and had committed fraud, and that Mahany and Maslowski had assisted in these defalcations. Thornbrook also sued Marjorie Rawls Roberts, P.C. ("Roberts"), a U.S. Virgin Islands-based attorney who had signed an agreement to act as "trust protector," for breach of contract.

  Shortly after filing suit, Rivercross, Mahany and Maslowski entered into an agreed preliminary injunction order. In the order, they represented that the trust property was being held at banking institutions. The order barred them from encumbering or using the trust property and also from transferring it, except to a particular Bank of Montreal account for the purpose of returning the property to Thornbrook. See Order of March 3, 2003.

  When Thornbrook did not get its money back following entry of the agreed preliminary injunction order, it moved to hold the defendants in contempt. In support of the motion, Thornbrook stated it had learned the funds were being held in an account at Credit Suisse Privatebank under the name Geryline Participation Corporation and were "blocked" from withdrawal; Rivercross was claiming it had transferred control over the funds to an unaffiliated individual; and the defendants had not told that individual, Geryline, or Credit Suisse of the preliminary injunction and had failed to provide Thornbrook any bank statements for the Credit Suisse account. After holding an evidentiary hearing, the Court declined to hold the defendants in contempt because the "block" had predated the injunction, and there was no indication that the defendants had done anything following entry of the injunction to further encumber the res.

  The Court thereafter modified the preliminary injunction to require the defendants to pay the remaining amount then due, $3,485,000,*fn1 into the Court's registry. Defendants failed to do so, and the Court later entered a finding of contempt against Rivercross, Mahany and Maslowski and imposed a daily-increasing fine to attempt to coerce compliance. The fine likewise has not been paid. And the so-called "block" on the funds, which defendant Maslowski had testified was to expire in December 2003, See Aug. 15, 2003 Tr. at 51-52, evidently still exists, as defendants claim to be unable to access the trust property. The somewhat shadowy characters with whom Maslowski and Mahany claim to have dealt evidently continue to put them off, and the defendants claim they are unable to comply with the Court's order to deposit the remaining amount of the trust res.

  The case has generated three summary judgment motions, two of which the Court deals with in this ruling. Thornbrook has moved for summary judgment as to liability on its claims against Rivercross, Mahany and Maslowski for breach of contract and breach of fiduciary duty, and on its claim against Roberts for breach of her contractual obligations as trust protector. Roberts has moved for summary judgment on the breach of contract claim against her. Both of these motions are ripe for ruling. Rivercross, Mahany and Maslowski have separately moved for summary judgment as to various aspects of the damages claimed by Thornbrook. That motion is still being briefed and will be ruled on at a later date.

  Discussion

  Summary judgment is proper when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). In deciding a motion for summary judgment, the Court views the facts in the light most favorable to the non-moving party and draws reasonable inferences in that party's favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). A. Facts

  Thornbrook entered into a Revocable Grantor Trust agreement with Rivercross on August 17, 2001, naming Thornbrook as the settlor and sole beneficiary of the trust, and Rivercross as the trustee. The trust agreement required Rivercross to act in a fiduciary capacity vis-a-vis the trust property and obligated it to safeguard the property and keep Thornbrook aware of any material changes that might occur. Thornbrook LR 56.1 Submission ("Thornbrook Facts"), Ex. 5 (Trust Agr.) ¶ 1. The agreement required Rivercross to maintain the property in demand deposit or custodial accounts at banks or financial institutions rated A or better by Standard & Poor's or Moody's, keep the trust assets free and clear of liens, claims, and encumbrances of any kind, and hold the assets in cash or certain specified types of cash equivalents. Id. ¶ 4. Rivercross agreed to hold the trust property "in safe keeping . . . on a `non-depletion' basis" and to hold interest or investment income for disbursement to Thornbrook. Id. ¶ 4.10. The trust agreement also provided as follows:
Return of Trust Res (Principal). Upon expiration of this Contract, as defined herein, or upon demand of the Settlor in accordance with the terms of this trust, the Trustee shall return 100% of the Trust Res (Principal) to the Settlor as sole Beneficiary.
Id. ¶ 4.18. The agreement was made revocable by Thornbrook upon 30 days written notice once 90 days had passed from the agreement's execution. Id. ¶ 7.5.

  Paragraph 5 of the trust agreement was entitled "Trust Protector." It provided for the trustee, with the approval of the beneficiary, to appoint a licensed attorney "with the requisite knowledge and experience to advise on matters of trust and tax law." Id. ¶¶ 5.1, 5.2. The trust protector's duties were described as follows: A. Ensure Trustee complies with trust provisions and answer, on behalf of Settlor and Beneficiaries, all Trustee's questions regarding the interpretation or execution of this Contract;

 
B. Oversee the appointment of a successor trustee under provision 4.17 above;
C. By appraised [sic] of any changes in the laws which might effect [sic] the status or integrity of the Trust as an independent entity, the tax consequences of disbursements, the consequences which result from an increase to the corpus due to investments, and any such other factors affecting the administration of the Trust or its corpus;
D. Serve as mediator between Trustee and the Beneficiaries for any grievances, misunderstandings, or any alleged abuse of the Trust estate by Trustee. At any time when disputes among the Trust Protector, Trustee and the Beneficiaries remain unresolved for a period of thirty (30) calendar days, the Trust Protector may appoint as arbitrator an independent legal counsel expert in trust law, and whose decision shall be final and binding.
Id. ¶ 5.4. The agreement provided for the trust protector to be compensated for its services. Id. ¶ 5.5. Attached to the trust agreement was a signed "Trust Protector Contract" between Rivercross and Roberts under which Roberts agreed, among other things, "to use the best of [her] knowledge and abilities to protect the integrity of the trust document and the relationships established thereunder" and to use her best efforts "to advise on matters of counsel" at the rate of $250 per hour. Id., Ex. B2.

  On April 24, 2001, after Roberts was first approached by Mahany about serving as a "trust protector" for Rivercross,*fn2 she sent Mahany a letter expressing her understanding that her duties "as Trust Protector, as per the Trust Protector Contract signed by me on April 9, 2001 and all future Trust Protector contracts, will be limited to rendering legal research or advice, advising on matters of counsel, and keeping and maintaining a specialized database or information on the subject of Trusts." Thornbrook Facts, Ex. 27 (letter of April 24, 2001). The letter also stated that "[p]ursuant to trust provision 5.4(A), to ensure the trustees' compliance with the terms of the trust [Rivercross] and the Trust Protector will utilize the following process," including advance submission to Roberts of investment contract summaries and contact information for principals of the trust, submission of executed copies of investment contracts and quarterly reports identifying assets held in trust and trust bank accounts, and permission to the trust protector to request an audit at any time. Id. Finally, the letter stated that the trust protector "will have no responsibility for any investment contracts or bank accounts executed or maintained by [Rivercross] that have not been disclosed to the Trust Protector." Id. (emphasis in original).

  Neither the April 24, 2001 letter nor its terms were referenced in Thornbrook's trust agreement or in Roberts' trust protector contract regarding the Thornbrook trust, and Thornbrook was unaware of the letter's terms or Roberts' purported understanding of her obligations. Thornbrook Facts ¶ 94; Roberts LR 56.1 Response ("Roberts Resp.") ¶ 94. The parties dispute whether the letter limits Roberts' responsibilities under the trust protector contract and trust agreement ¶ 5.4(a).

  About a month after the trust agreement was executed, Rivercross and Thornbrook executed a "Letter of Understanding." Thornbrook Facts, Ex. 8. Roberts was not a party to this agreement. The letter of understanding expressed the parties' intent to hold the trust property at LGT Bank in Liechtenstein, in a particular account held by "Private Fiduciary Trust Reg." Id., p. 1. Maslowski was to be the "principal" for the account, and he and Laura Turner (a Thornbrook representative) were identified as co-signers. Id. The letter identified the "conditions" of the account as follows: "blocked and free of liens claims or encumbrances." Id. If the Court correctly understands the second page of the letter of understanding, it appears to contemplate an "intended best efforts" yield of 100% over a one month period, though it does not explain how such a miraculous return might be attained, other than to identify a "facility" (an investment vehicle?) called "RVC SPV 30/100."*fn3 Id. As compensation, Rivercross would receive 5% of the yield, with 10% going to the unnamed "funds manager" and the rest to Thornbrook. Id., p. 2. The letter of understanding stated that "[i]n the event that the funds manager should not realize the intended best efforts yield then the asset shall be withdrawn on or before the above stated settlement date [October 30, 2001] and returned in full" to the trust. Id., p. 2. The letter stated that no amendments would be effective unless and until executed by both Thornbrook and Rivercross. Id.

  The funds were not returned to Thornbrook at the end of October 2001 as contemplated by the letter of understanding. Rivercross was not responsive to Thornbrook's inquiries, and in February 2002 Thornbrook started to tape record its representatives' conversations with Rivercross. Roberts LR 56.1 Submission ("Roberts Facts") ¶ 55; Thornbrook LR 56.1 Response ("Thornbrook Resp.") ¶ 55. In March 2002, Thornbrook was told its funds had been "blocked" for a one year period starting in February 2002. Roberts Facts ¶ 56; Thornbrook Resp. ¶ 56.

  At some point after September 2001 — evidently in January or February 2002 — Maslowski moved the trust funds from LGT Bank to an account at Privatebank IHAG Zurich held in the name of Geryline Participation Corp.,*fn4 and later to an account held by Geryline at Credit Suisse Private Bank. Thornbrook Facts ¶ 43 & cited references; Rivercross, et al. LR 56.1 Response ("Rivercross Resp.") ¶ 43. Rivercross did not obtain Thornbrook's consent to move the funds and did not advise Thornbrook of the transfer. Thornbrook Facts ¶ 45; Rivercross Resp. ¶ 45.

  Thornbrook sent Rivercross written notifications of partial revocations of the trust as follows:
Date sent Date effective Amount
7/23/02 8/22/02 $250,000
8/23/02 9/22/02 $550,000
9/3/02 10/3/02 $2,150,000
9/5/02 10/5/02 $2,050,000
  Thornbrook Facts ¶¶ 28-31; Rivercross Resp. ¶¶ 28-31. The parties agree that as of October 5, 2002, the trust agreement was revoked by Thornbrook in its entirety and that pursuant to these revocations, Rivercross was required to return 100% of the trust principal of $5,000,000 to Thornbrook. Thornbrook Facts ¶¶ 32-33; Rivercross Resp. ¶¶ 32-33. It did not do so. By the end of January 2003, Rivercross had returned only about $1,000,000, Thornbrook Facts ¶ 34; Rivercross Resp. ¶ 34, and Thornbrook filed suit in mid-February 2003. The following is a list of the payments that Rivercross has made, the last two of which came after the lawsuit was filed:

  Date of payment Amount

  7/25/02 ...


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