Bank One, N.A. v. Borse

Case Date: 07/08/2004
Court: 2nd District Appellate
Docket No: 2-03-0361 Rel

No. 2--03--0361


IN THE

APPELLATE COURT OF ILLINOIS

SECOND DISTRICT
 

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).

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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.



JUSTICE HUTCHINSON delivered the opinion of the court:

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 hercounterclaim, Clontz alleged that Bank One breached its fiduciary duty as the trustee of the AntonG. Borse Amended and Restated Declaration of Trust (the trust). Clontz alleged that Bank Onefailed to properly manage the assets of the trust and failed to deal fairly with all of the trust'sbeneficiaries. On appeal, Clontz contends that (1) the trial court abused its discretion in refusing toextend the discovery cutoff date; (2) the trial court erred in striking her written demand for a jurytrial; (3) the trial court's finding that Bank One did not breach its fiduciary duty as trustee was againstthe manifest weight of the evidence; and (4) the trial court abused its discretion in awarding attorneyfees. We affirm.

I. Factual and Procedural Background

On January 7, 1994, Anton G. Borse (decedent) executed the trust, naming Clontz and hisother seven children as beneficiaries. Upon decedent's death on February 1, 1994, the trust appointedBank One as trustee. The trust called for the establishment of three separate trusts: (1) the "BorseIndustries Trust," which was to hold 100% of the stock of Borse Industries, Inc., a plastics moldingcompany founded by decedent; (2) the "Borse Leased Real Estate Trust," which was to hold title toall of the trust's real property that was leased to Borse Industries; and (3) the "Family Trust," whichwas to hold the remainder of decedent's assets. The trust provisions required that, upon decedent'sdeath, 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 thestock 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'sestate. The return reported a gross estate of $16,083,920. The two largest assets of the estate wereBorse Industries, valued at $4,100,000, and the real estate leased to Borse Industries, which wasvalued at $4,880,000. The Family Trust was valued at negative $2,652,506, as the estate's unpaidtax 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 ofthe tax.

Pursuant to the directives of the trust, Bank One oversaw the management of Borse Industriesbetween the date of decedent's death in 1994 and the ultimate sale of the business in 1997. The trustdirected Bank One to vote the shares of Borse Industries to elect the same six-member board ofdirectors that was in place at the time of decedent's death. These directors included two of decedent'ssons, Gary Borse and Mark Borse, and decedent's son-in-law, Brian Beth. The other directors wereRobert Tylutki, Joseph Nuzzo, and the company's general counsel, Edmund P. Boland. Boland wasdecedent's personal attorney and he also drafted the trust. Bank One retained Boland as counsel forthe trustee. Bank One voted the shares of the company to retain each of the six directors. The trustfurther provided that Bank One could choose a seventh director at its discretion. Bank One did notexercise this power of appointment until 1996, when it appointed William Welnhofer to serve as theseventh 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 $456,000in 1995. In 1996, Bank One retained the consulting firm of Starshak & Associates (Starshak) todetermine the reason for the decrease in the company's profitability. Starshak produced a writtenreport and made several recommendations for improving the management of the company. Bank Oneacted on some, but not all, of the recommendations. Following Bank One's assumption of thetrusteeship 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 declinedto extend Borse Industries a loan.

In 1997, with the unanimous approval of the directors, Bank One sold Borse Industries toMadison Capital Partners for $7.8 million. At the time of the sale, each of the six original directorsreceived "golden parachutes." Gary Borse, Mark Borse, and Brian Beth each received $300,000, andEdmund Boland, Joseph Nuzzo, and Robert Tylutki each received $50,000. The golden parachuteswere 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 BorseIndustries 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, wasapproximately $4,500,000. As the trust's provisions prohibited the payment of the estate taxes fromthe sale of Borse Industries stock, Bank One sought consent from the trust beneficiaries to use theproceeds from the sale to pay the unpaid taxes. Clontz refused to consent and also objected to thetrustee's accountings.

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

Clontz subsequently filed a complaint against Bank One in the law division, alleging breachof fiduciary duty. As amended, the complaint alleged that Bank One breached its fiduciary obligationsto the beneficiaries in that Bank One (1) failed to exercise reasonable business judgment in theoperation 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 BorseIndustries had been mismanaged; (5) failed to remove the board of directors and permitted thepayment of the golden parachutes; (6) failed to remove Boland as attorney for the trust despite hisstatus 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 immediatelyfollowing decedent's death; (8) failed to distribute the income and profits of Borse Industries to thetrust beneficiaries; (9) failed to file an action to construe the trust's provisions governing the paymentof estate taxes immediately following decedent's death; (10) filed the estate tax return, knowing thatits reported valuation of Borse Industries was substantially undervalued; and (11) failed to amend thefederal estate tax return to reduce the amount of the gross estate by the golden parachutes that hadyet to be paid to the directors. Clontz requested the trial court to order Bank One to pay herdamages as compensation for the diminution of her share of the trust assets resulting from Bank One'sbreach of fiduciary duty. She also requested the trial court to order Bank One to return its trusteeand 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 extendedthis deadline to June 18, 1999. On July 21, 1999, Clontz moved again for an extension of thediscovery deadline. In her motion, Clontz argued that she had been unable to take any depositionsdue to Bank One's delay in responding to her production requests. Clontz further explained that sherecently had to retain new counsel after her prior counsel withdrew as a result of a conflict. The trialcourt denied the motion, explaining, "There has got to be a day, Rule 219. Otherwise any discoveryorder I enter would have no significance at all." The trial court also denied Clontz's two otherrequests to reopen discovery.

Bank One subsequently moved to strike Clontz's jury demand. Bank One argued that Clontz'sclaim alleging breach of fiduciary duty was an equitable action despite her request for moneydamages. Bank One argued that the Illinois Constitution does not provide the right to a jury trial inequitable proceedings. On October 4, 2001, following a hearing, the trial court granted Bank One'smotion to strike Clontz's jury demand.

On January 10, 2002, on Clontz's motion, the trial court entered an order consolidating hercomplaint with Bank One's pending action in the chancery division. The trial court's order providedthat Clontz's complaint would be deemed a counterclaim to Bank One's chancery action.

Trial commenced on May 6, 2002. On the first day of trial, Clontz stipulated to thecorrectness of Bank One's accountings and withdrew her objection to using the proceeds from thesale of Borse Industries to pay the estate taxes. As a result of the resolution of these issues, the onlymatter left for trial was Clontz's counterclaim. The trial lasted two weeks and encompassed thetestimony of 21 witnesses. Due to the large amount of testimonial evidence, we will incorporate therelevant evidence within our analysis of each of the contentions raised on appeal.

Following the trial, the trial court found that Bank One had not breached its fiduciary dutyand entered judgment in favor of Bank One on the counterclaim. Specifically, the trial court foundthat Bank One had exercised appropriate judgment in its decision not to pay the remaining balanceof the estate taxes until after the sale of Borse Industries in 1997. The trial court found that BankOne had exercised appropriate business judgment in its oversight and management of Borse Industriesbetween 1994 and 1997. The trial court further found that Bank One had not breached its fiduciaryduty in its administration of the trust or breach its duty to treat the beneficiaries fairly. The trial courtalso found that Bank One did not breach its fiduciary duty through its decision to retain EdmundBoland as the trustee's attorney. Finally, the trial court denied Clontz's request for attorney fees andher request that Bank One be required to reimburse the trust for the attorney fees it incurred in thelitigation. Clontz filed this timely appeal.

II. Analysis

On appeal, Clontz raises four primary contentions. First, Clontz contends that the trial courtabused its discretion in refusing to extend the discovery cutoff date. Second, Clontz contends thatthe trial court erred in striking her jury demand. Third, Clontz contends that the trial court's judgmentin Bank One's favor on her counterclaim was against the manifest weight of the evidence. Finally,Clontz contends that the trial court abused its discretion in permitting trust assets to be used to payBank One's attorney fees and in denying her request that the trust pay her attorney fees. Only the jurydemand issue is addressed in the published portion of this opinion (in section B); our discussion ofthe remaining issues is designated as nonpublishable pursuant to Supreme Court Rule 23 (166 Ill. 2dR. 23).

[Nonpublishable material pursuant to Supreme Court Rule 23 removed here.]

 

B. Right to a Jury Trial

Clontz's next contention on appeal is that the trial court erred in striking her demand for a jurytrial on her counterclaim. Clontz argues that her counterclaim was initially filed in the law divisionof the circuit court and sought money damages from Bank One. Clontz thus argues that hercomplaint sought a legal remedy and that she was entitled to a jury trial pursuant to article I, section13, of the Illinois Constitution (Ill. Const. 1970, art. I,