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The Richard W. Mccarthy Trust v. Illinois Casualty Company

February 24, 2011

THE RICHARD W. MCCARTHY TRUST
DATED SEPTEMBER 2, 2004, AS OF THE 14TH JUDICIAL CIRCUIT, AMENDED, AND THE ESTATE OF RICHARD MCCARTHY, PLAINTIFFS-APPELLEES,
v.
ILLINOIS CASUALTY COMPANY, A MUTUAL INSURANCE COMPANY, DEFENDANT-APPELLANT (JOHN R. KLOCKAU, AN INDIVIDUAL, ) AND ALLEN MESSER, AN INDIVIDUAL, DEFENDANTS.



Appeal from the Circuit Court Rock Island County, Illinois No. 09-L-80 Honorable Mark A. Vandewiele, Judge, Presiding.

The opinion of the court was delivered by: Presiding Justice Carter

PRESIDING JUSTICE CARTER delivered the judgment of the court, with opinion. Justice O'Brien concurred in the judgment and opinion.

Justice McDade specially concurred, with opinion.

OPINION

Plaintiff, the Richard W. McCarthy Trust (the trust), brought suit against defendant, Illinois Casualty Company (the company), seeking, among other things, to have the trial court order the company to specifically perform its obligation under certain surplus notes, held by the trust, to file an application with the Illinois Department of Insurance for approval to redeem the surplus notes.*fn1 The trial court granted the trust's partial motion for summary judgment on count VII of the complaint for specific performance.*fn2 The company filed an interlocutory appeal to challenge the trial court's ruling. We affirm the trial court.

FACTS

Richard W. McCarthy was an attorney and a member of the board of directors of the company. The company is now a mutual insurance company but was previously an inter-insurance exchange and its affairs were managed by an attorney-in-fact known as Blackhawk, Incorporated. McCarthy was a shareholder in Blackhawk. In or around 2003, the company decided to purchase Blackhawk. The company entered into a stock purchase agreement with McCarthy and the other shareholders to purchase all of the outstanding shares of Blackhawk.

During the negotiations on the matter, in January of 2004, the president of the company at the time, John Klockau, sent McCarthy a letter. Of relevance to this appeal, the January 2004 letter stated, in pertinent part, as follows:

"Pursuant to a stock purchase agreement to purchase your shares of stock of Blackhawk, Incorporated, you will receive Convertible Subordinated Guaranty Fund Notes. Paragraph 13. of that Note prohibits assignment without the written consent of [the company].

This letter is intended to provided you with that consent of assignment of the Notes, in whole or in part, subject to the terms and conditions stated herein.

1. Assignment to Richard W. McCarthy Living Trust (or similar estate planning tool) is approved. For this assignment, the assignee will be entitled to the benefits of Paragraph 14. of the Note, thus allowing your Trustee/Successor Trustee to request for redemption of the Note which will then require [the company] to make application for permission to redeem to the Illinois Department of Insurance.

2. Assignment to John S. Callas is approved. For this assignment, the assignee will not be entitled to the benefits of Paragraph 14. of the Note." McCarthy subsequently entered into the stock purchase agreement with the company. Pursuant to that agreement, in February and July of 2004, the company issued four surplus notes (the notes) to McCarthy in exchange for McCarthy's Blackhawk stock and other cash consideration. The total principal amount of the notes was $1.6 million, which was to be paid back over a 30-year period at certain fixed rates of interest. Of relevance to this appeal, the notes provided, in pertinent part, as follows:

"1. No part of the principal or interest hereof shall be paid or payable except after prior authorization for payment thereof by the Director of Insurance of the State of Illinois. The Company's obligation to pay is subordinate to the insurance claims of policyholders of the Company in accordance with the terms of Section 56 of the Illinois Insurance Code.

3. No payment of accrued interest or repayment of the principal amount hereof shall be made or authorized in whole or in part if such payment or repayment would reduce the capital and surplus of the Company to less than the sum of 18.5 million dollars ($18,500,000). No part of the obligation to pay principal or accrued interest may be offset or subject to recoupment with respect to any liability owed to the Company. No agreement or interest securing this note, whether existing on the date hereof or subsequently entered into, applies to the obligation of the Company under this note.

6. Repayment of the principal hereof and payment of the interest hereon shall be and is hereby subordinated to the prior payment of, or provision for, all general liabilities of the Company and the claims of the policyholders and the creditors of the Company, but shall rank superior to the claim, interest and equity of the shares or shareholders of the Company ***.

13. This note may not be assigned without the written consent of the Company.

14. In the event of the death of the owner who is also original holder of this Note, the Company agrees upon request of the deceased Note holder's estate to make timely application to the Director of Insurance of the State of Illinois for approval to retire the unpaid principal and pay the accrued interest to the estate of the deceased Note owner, subject to the other terms and conditions of this Note.

16. The terms hereof may be amended, modified and altered from time to time by the mutual agreement of the parties subject to the prior approval thereof by the Director of Insurance of the State of Illinois."[*fn3 ]

In September of 2004, McCarthy created a living trust. McCarthy was the initial trustee of the trust and John S. Callas, who was McCarthy's law partner and also a member of the company's board of directors, was successor trustee of the trust. In November of 2005, McCarthy sent the company a letter requesting a change in the ownership designation of the notes. The letter provided, in pertinent part, as follows:

"In connection with my estate plan, I have established a revocable living trust, and I am hereby requesting TRANSFER and do hereby ASSIGN, all of my right, title and interest in [the notes] currently titled in my ...


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