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Bank One, N.A. v. Borse

July 08, 2004

BANK ONE, N.A., AS TRUSTEE OF THE ANTON G. BORSE AMENDED AND RESTATED DECLARATION OF TRUST, PLAINTIFF AND COUNTERDEFENDANT-APPELLEE,
v.
GARY BORSE, GAIL ROACH, MARY BORSE, MARK BORSE, LAURIE BORSE, NANCY BETH, AND BETTE BORSE, DEFENDANTS,
(SUSAN CLONTZ, DEFENDANT AND COUNTERPLAINTIFF-APPELLANT).



Appeal from the Circuit Court of Du Page County. Nos. 97-CH-1048 & 99-L-1288. Honorable Robert E. Byrne and Edward R. Duncan, Jr., Judges, Presiding.

The opinion of the court was delivered by: Justice Hutchinson

PUBLISHED

Following a bench trial, the trial court entered judgment in favor of plaintiff, Bank One, N.A. (Bank One), on defendant Susan Clontz's counterclaim alleging breach of fiduciary duty. In her counterclaim, Clontz alleged that Bank One breached its fiduciary duty as the trustee of the Anton G. Borse Amended and Restated Declaration of Trust (the trust). Clontz alleged that Bank One failed to properly manage the assets of the trust and failed to deal fairly with all of the trust's beneficiaries. On appeal, Clontz contends that (1) the trial court abused its discretion in refusing to extend the discovery cutoff date; (2) the trial court erred in striking her written demand for a jury trial; (3) the trial court's finding that Bank One did not breach its fiduciary duty as trustee was against the manifest weight of the evidence; and (4) the trial court abused its discretion in awarding attorney fees. We affirm.

I. Factual and Procedural Background

On January 7, 1994, Anton G. Borse (decedent) executed the trust, naming Clontz and his other seven children as beneficiaries. Upon decedent's death on February 1, 1994, the trust appointed Bank One as trustee. The trust called for the establishment of three separate trusts: (1) the "Borse Industries Trust," which was to hold 100% of the stock of Borse Industries, Inc., a plastics molding company founded by decedent; (2) the "Borse Leased Real Estate Trust," which was to hold title to all of the trust's real property that was leased to Borse Industries; and (3) the "Family Trust," which was to hold the remainder of decedent's assets. The trust provisions required that, upon decedent's death, the trustee pay all resulting estate and inheritance taxes from the "principal of the trust estate." The trust further provided that the trustee could not pay the estate and inheritance taxes using the stock of Borse Industries or "the real estate which is leased to [Borse Industries]."

On November 28, 1994, Bank One filed a federal estate tax return on behalf of decedent's estate. The return reported a gross estate of $16,083,920. The two largest assets of the estate were Borse Industries, valued at $4,100,000, and the real estate leased to Borse Industries, which was valued at $4,880,000. The Family Trust was valued at negative $2,652,506, as the estate's unpaid tax liabilities exceeded the assets of the Family Trust. The estate's federal tax liability was $6,193,728. The available cash assets were insufficient to pay all of the estate taxes. Bank One paid $2,500,000 of the estate tax and obtained an extension for the payment of the remaining balance of the tax.

Pursuant to the directives of the trust, Bank One oversaw the management of Borse Industries between the date of decedent's death in 1994 and the ultimate sale of the business in 1997. The trust directed Bank One to vote the shares of Borse Industries to elect the same six-member board of directors that was in place at the time of decedent's death. These directors included two of decedent's sons, Gary Borse and Mark Borse, and decedent's son-in-law, Brian Beth. The other directors were Robert Tylutki, Joseph Nuzzo, and the company's general counsel, Edmund P. Boland. Boland was decedent's personal attorney and he also drafted the trust. Bank One retained Boland as counsel for the trustee. Bank One voted the shares of the company to retain each of the six directors. The trust further provided that Bank One could choose a seventh director at its discretion. Bank One did not exercise this power of appointment until 1996, when it appointed William Welnhofer to serve as the seventh director.

During Bank One's oversight of Borse Industries, sales increased at an annual rate of 7.4%. During this same time, however, net operating income declined from $1.4 million in 1993 to $456,000 in 1995. In 1996, Bank One retained the consulting firm of Starshak & Associates (Starshak) to determine the reason for the decrease in the company's profitability. Starshak produced a written report and made several recommendations for improving the management of the company. Bank One acted on some, but not all, of the recommendations. Following Bank One's assumption of the trusteeship in 1994, Borse Industries applied for a commercial loan from Bank One's loan department. After performing its own inquiry into the company's finances, Bank One's loan department declined to extend Borse Industries a loan.

In 1997, with the unanimous approval of the directors, Bank One sold Borse Industries to Madison Capital Partners for $7.8 million. At the time of the sale, each of the six original directors received "golden parachutes." Gary Borse, Mark Borse, and Brian Beth each received $300,000, and Edmund Boland, Joseph Nuzzo, and Robert Tylutki each received $50,000. The golden parachutes were paid pursuant to a resolution of the board of directors ratified by decedent prior to his death. Receipt of each director's payment was contingent upon the individual director remaining with Borse Industries until such time as the company was sold by Bank One.

The net cash proceeds from the sale of Borse Industries, after all closing adjustments, was approximately $4,500,000. As the trust's provisions prohibited the payment of the estate taxes from the sale of Borse Industries stock, Bank One sought consent from the trust beneficiaries to use the proceeds from the sale to pay the unpaid taxes. Clontz refused to consent and also objected to the trustee's accountings.

On October 8, 1997, Bank One filed a chancery action seeking a construction of the trust's provisions regarding payment of the estate taxes and approval of Bank One's accountings. On December 10, 1998, the trial court entered an order allowing Bank One to pay the outstanding federal estate taxes from the proceeds of the sale of Borse Industries. The trial court also permitted Bank One to pay the $1,105,701.01 in interest charges that had accumulated on the outstanding taxes. In permitting these payments, the trial court reserved for later determination the issue of the proper allocation of these payments among the three separate trusts.

Clontz subsequently filed a complaint against Bank One in the law division, alleging breach of fiduciary duty. As amended, the complaint alleged that Bank One breached its fiduciary obligations to the beneficiaries in that Bank One (1) failed to exercise reasonable business judgment in the operation and sale of Borse Industries; (2) failed to fully inform itself of the business dealings, management, and financial status of Borse Industries; (3) failed to timely appoint a seventh director, as required under the trust; (4) failed to take timely corrective action once it discovered that Borse Industries had been mismanaged; (5) failed to remove the board of directors and permitted the payment of the golden parachutes; (6) failed to remove Boland as attorney for the trust despite his status as a director of Borse Industries and a recipient of a golden parachute; (7) violated the "prudent investor rule" (760 ILCS 5/5 (West 1998)) by failing to sell Borse Industries immediately following decedent's death; (8) failed to distribute the income and profits of Borse Industries to the trust beneficiaries; (9) failed to file an action to construe the trust's provisions governing the payment of estate taxes immediately following decedent's death; (10) filed the estate tax return, knowing that its reported valuation of Borse Industries was substantially undervalued; and (11) failed to amend the federal estate tax return to reduce the amount of the gross estate by the golden parachutes that had yet to be paid to the directors. Clontz requested the trial court to order Bank One to pay her damages as compensation for the diminution of her share of the trust assets resulting from Bank One's breach of fiduciary duty. She also requested the trial court to order Bank One to return its trustee and attorney fees. Clontz's complaint was accompanied by a written jury demand.

At the onset of Clontz's case, the trial court entered a scheduling order setting April 30, 1999, as the deadline for the completion of all fact discovery. On Clontz's motion, the trial court extended this deadline to June 18, 1999. On July 21, 1999, Clontz moved again for an extension of the discovery deadline. In her motion, Clontz argued that she had been unable to take any depositions due to Bank One's delay in responding to her production requests. Clontz further explained that she recently had to retain new counsel after her prior counsel withdrew as a result of a conflict. The trial court denied the motion, explaining, "There has got to be a day, Rule 219. Otherwise any discovery order I enter would have no significance at all." The trial court also denied Clontz's two other requests to reopen discovery.

Bank One subsequently moved to strike Clontz's jury demand. Bank One argued that Clontz's claim alleging breach of fiduciary duty was an equitable action despite her request for money damages. Bank One argued that the Illinois Constitution does not provide the right to a jury trial in equitable proceedings. On October 4, 2001, ...


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