Court Opinion

ID: 9708076
Source: CourtListenerOpinion
Date Created: 2023-08-26 02:29:31.980132+00
Date Added: 2024-06-11T18:22:42.023888
License: Public Domain

JUSTICE SIMON, dissenting: “ ‘The relationship *** is fiduciary in character, and imposes upon all the participants the obligation of loyalty *** and of the utmost good faith, fairness and honesty ***.’ ” Ditis v. Ahlvin Construction Co. (1951), 408 Ill. 416, 428. Heinold’s disclosure statement misrepresented the nature of its $1,200 foreign-service fee. Rather than informing its prospective customers that 75% of the foreign-service fee was an additional commission — a kickback to the broker and regional office manager from the London office — Heinold described the fee as necessary to cover expenses such as overseas telephone calls and telexes. Heinold contends, and the majority agrees, that this deception, as a matter of law, fails to breach the fiduciary duty Heinold owed to the plaintiff class purchasers of LCOs. The majority’s rationale for this result is that under the general rule a potential agent does not owe its prospective principal a fiduciary duty, and has no obligation to disclose the terms of its compensation. Because Heinold made the statements regarding the foreign-service fee prior to accepting the terms of the form contract which it prepared and submitted to prospective customers, the majority concludes that no agency relationship existed, and therefore Heinold would have no duty to disclose material information to the plaintiff class. After the agency was established, the majority contends that Heinold, as a matter of law, was under no obligation to disclose the true nature of its foreign-service fee, since the scope of a fiduciary duty does not generally include disclosing the terms of one’s compensation. See Restatement (Second) of Agency sec. 390, comment e (1958). In its subtle manipulation of these general principles, the majority has transformed rules designed to permit fiduciaries to freely negotiate their fees into opportunities for fiduciaries to conceal their interests in transactions and take advantage of those they are serving. My colleagues have become so concerned with the exact point at which the fiduciary duty attaches that they have totally overlooked the fundamental principles governing fiduciary relationships. The appellate court’s conclusion that general rules “cannot be interpreted so as to permit a broker to call a commission by another name at the time of the transaction and subsequently assert that it is a commission, simply part of the broker’s compensation, in order to avoid liability for nondisclosure” (139 Ill. App. 3d 1049, 1055) is well-reasoned. It is, moreover, more consistent with the high standards the law imposes upon and expects of brokers in their dealings with their principals than is the rationale offered in the majority opinion. “[A] spirit of trust and fidelity pervades the entire dealing between broker and customer.” (In re Rosenbaum Grain Corp. (7th Cir. 1939), 103 F.2d 656, 661.) A commodities broker is his customer’s agent with respect to the execution of a transaction and, “as such, as a matter of law, he owes his customer certain fiduciary duties within the realm of the execution of the transaction.” (139 Ill. App. 3d 1049, 1055, citing In re Rosenbaum Grain Corp. (7th Cir. 1939), 103 F.2d 656, 660.) As an agent, the broker has a fiduciary duty to give his customers any information within his knowledge which is relevant to the affairs entrusted to him and which “ ‘the principal would desire to have and which can be communicated without violating a superior duty to a third person.’ ” (Robinson v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (N.D. Ala. 1971), 337 F. Supp. 107, 110-11 (quoting Restatement (Second) of Agency sec. 381 (1958)) aff'd (5th Cir. 1972), 453 F.2d 417.) This is an affirmative duty and the “agent must act in the utmost good faith, making known to his principal all material facts within the agent’s knowledge which in any way affect the transaction or subject matter of the agency.” Penrod v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1979), 68 Ill. App. 3d 75, 80. The majority accurately observes that a fiduciary is required to “act on behalf of the plaintiff class and in its interests, refraining from acting in its own interest without first disclosing those facts which it has reason to believe would be material to investment decisions made by members of the plaintiff class.” (117 Ill. 2d at 77, citing Sawyer Realty Group, Inc. v. Jarvis Corp. (1982), 89 Ill. 2d 379, 385, Moehling v. W. E. O’Neil Construction Co. (1960), 20 Ill. 2d 255, 267-68, and Blanchard v. Lewis (1953), 414 Ill. 515, 524.) At the very least, Heinold owed the plaintiff class a fiduciary obligation when it collected the money, purchased the LCO, and pocketed the nondisclosed commission. The fiduciary relationship does not permit a fiduciary to mislead someone, become his agent, and then allow his principal to labor under the misimpression caused by the fiduciary’s own previous statements. It is immaterial, therefore, that an agent’s misleading statements were made during the “preagency” period and not after the agency was formally established. What information an agent must disclose to fulfill his fiduciary obligation is based on the materiality of the information rather than upon when the information first became relevant — that is, before or after the agency is created. The majority’s interpretation of black-letter legal principles alters the very nature of the inquiry. Rather than allowing the materiality of the information to dictate whether disclosure is necessary, the majority would have a sort of magical time, an arbitrary cutoff, based upon when the contract was accepted govern the determination of whether a fiduciary must disclose his self-interest in the transaction. As the majority concedes, an agent cannot engage in any self-dealing unless the facts are disclosed to the principal. (117 Ill. 2d at 79-80.) Short of radically changing this fundamental principle, no matter when its fee first became relevant, Heinold would be obligated to disclose its own interest — its full commission — provided that such a commission would be material to a customer’s decision to enter into the contract. This court has concluded that a fact is material within the meaning of the Restatement: “ ‘if it is one which the agent should realize would be likely to affect the judgment of the principal in giving his consent to the agent to enter into the particular transaction on the specified terms. Hence, the disclosure must include *** facts which he [the broker] should realize have or are likely to have a bearing upon the desirability of the transaction from the viewpoint of the principal.’ ” (Emphasis added.) (Moehling v. W. E. O’Neill Construction Co. (1960), 20 Ill. 2d 255, 267, quoting Restatement of Agency sec. 390, comment a (1958).) An additional cost of approximately $1,200 (or even $900, as was the charge to the named plaintiff) per transaction would be a material factor in a customer’s decision to enter into a contract which, in the case of the named plaintiff, involved approximately $3,547. Knowing that a major portion of the charge is a brokerage fee rather than an expense of doing business abroad would clearly influence a customer in deciding whether to enter into a transaction in which the broker is so handsomely compensated. The majority’s formalistic conception of a fiduciary duty drains the obligation of its substance. It permits an agent to deceive a prospective customer by partially disclosing information and omitting certain details so that further customer inquiry becomes a slim possibility. Here, the specific information Heinold furnished to the plaintiff left him sanguine and without even a hint that there was additional information he should have inquired about. Heinold’s disclosure statement was misleading in that it was designed to give its prospective customers the impression that they had been given the full picture. There was nothing in the disclosure statement to suggest to customers that they should seek further information or ask some questions. Since the fiduciary obligation contains an affirmative duty to disclose material facts (Moehling v. W. E. O’Neil Construction Co. (1960), 20 Ill. 2d 255, 267), it is useless to remand this case for a trial, as the majority requires, to determine whether the nature of the fee was actually examined by the plaintiffs or whether they asked for additional information concerning the foreign-service fee (117 Ill. 2d at 74-75). It is also unnecessary to remand this cause to determine whether Heinold’s fiduciary duty is of such a special, confidential nature that it falls within the exception to the general rule that one seeking to be an agent is not held to a fiduciary standard when negotiating the terms of its employment (117 Ill. 2d at 79). Although Heinold negotiated its commission prior to becoming an agent, at the time it accepted the extra, nondisclosed commission it was under a fiduciary duty to the plaintiff class. Since this fiduciary obligation demands that one not act in one’s own interest unless material facts are disclosed, as a matter of law Heinold breached its fiduciary duty by concealing its additional commission. But even assuming that under Moehling v. W. E. O’Neil Construction Co. (1960), 20 Ill. 2d 255, one could not conclude as a matter of law that the additional commission would be a material factor in a decision to invest, the circuit court’s decision granting summary judgment in favor of the plaintiff class is still correct. This court has held that “[a]ny disposition of *** funds for a purpose other than as authorized by the plaintiff [is] improper and a violation *** of the [fiduciary] duty which it [the fiduciary] owe[s] ***.” (Janes v. First Federal Savings & Loan (1974), 57 Ill. 2d 398, 408-09.) In Janes this court determined that when an agent supplies his principal with an accounting for the disposition of funds, the agent is held to a fiduciary standard and may use the funds only for the designated purpose. This court reached this result even though there was no express contract regarding the funds at issue in Janes, and despite the fact that the cost of the kickback was not ultimately borne by the plaintiff, as it is in the instant case. 57 Ill. 2d 398, 403-04. As in Janes, Heinold executed a transaction on its principal’s behalf and issued an accounting of the disposition of its customer’s funds through a confirmation statement. That statement showed how much was spent on the foreign-service fee ($900) and how much was paid as a “commission” ($47.50). Because Heinold described its foreign-service fee as covering the cost of doing business abroad rather than as a commission for itself, under Janes Heinold was authorized to disperse the foreign-service fee only for this purpose and not for payment of a commission to itself. The result is the same whether this case is decided under Janes or under the fundamental principle that an agent must disclose its own self-interest in the transaction. Failure to conclude in this case that as a matter of law Heinold breached its fiduciary obligation is unacceptable and inconsistent with the duties of a fiduciary. This decision holds a principal to the terms of a misleading contract while permitting a fiduciary, who knowingly misinformed and misled his principal, to retain the fruits of its falsehood. I regard this as a result inconsistent with the obligations the law places on those acting as fiduciaries. CHIEF JUSTICE CLARK and JUSTICE MILLER join in this dissent.