Court Opinion

ID: 3002325
Source: CourtListenerOpinion
Date Created: 2015-09-24 20:27:42.21586+00
Date Added: 2024-06-11T13:22:59.102516
License: Public Domain

In the

United States Court of Appeals
              For the Seventh Circuit

No. 08-1174

JOHN C. W OOLARD ,
                                                 Plaintiff-Appellee,
                                 v.

R OBERT C. W OOLARD ,
                                             Defendant-Appellant.

            Appeal from the United States District Court
       for the Northern District of Illinois, Eastern Division.
      No. 1:05-cv-07280—Martin C. Ashman, Magistrate Judge.

   A RGUED S EPTEMBER 23, 2008—D ECIDED O CTOBER 29, 2008

 Before B AUER, C UDAHY and W ILLIAMS, Circuit Judges.
   B AUER, Circuit Judge. In this diversity action, John C.
Woolard (Plaintiff) sued his uncle Robert C. Woolard
(Defendant) for mismanaging a trust established by Plain-
tiff’s father for which Defendant was the trustee. The
district court granted Plaintiff’s motion for summary
judgment, holding that Defendant breached the ex-
press terms of the trust and also violated his statutory
and fiduciary duties under Illinois. We affirm.
2                                               No. 08-1174

                   I. BACKGROUND
  Plaintiff’s father, John F. Woolard, established the
John C. Woolard Present Interest Trust in 1983 for his
infant son. Plaintiff was the Trust’s sole beneficiary and
Defendant, the settlor’s brother, agreed to serve as
Trustee. The terms of the Trust permitted Defendant to
distribute the income and principal of the Trust for the
sole benefit of Plaintiff. The Trust provided that payment
of income or principal to a minor
    may be applied directly in the sole discretion of the
    Trustee for the benefit of such person or may be made
    to any one or more of the following: (a) directly to
    such beneficiary; (b) to the legally appointed
    guardian . . . of such beneficiary; or (c) to a custodian
    under the Uniform Gifts to Minors Act in any juris-
    diction.
The Trust Agreement allowed Defendant to loan “any part
of the trust property to any person (other than [Plain-
tiff’s father]) or entity upon adequate security and at
current interest rates.”
   Plaintiff’s father initially funded the Trust with $500,
but at one point it contained over $800,000. When Plain-
tiff’s father died in 2002, the value of the Trust was ap-
proximately $18,000. It is uncontested that between 1990
and 2001, Defendant distributed more than $850,000 to
Plaintiff’s father, including over $300,000 in one six-month
period. Defendant kept no record of the purposes for
which the funds were distributed and never requested
or received any receipts from Plaintiff’s father indicating
how the funds were benefitting Plaintiff. Defendant claims
No. 08-1174                                                 3

he believed the distributions were being applied for
Plaintiff’s benefit, but does not deny that he made the
disbursements without any specific knowledge re-
garding how Plaintiff’s father would use the funds.
   The district court held that distributing funds to Plain-
tiff’s father was an express violation of the terms of the
trust. The court also found that Defendant’s failure to
keep any substantive records regarding the purposes of
the distributions violated his duties under the Illinois
Trusts and Trustees Act. Finally, the district court held
that Defendant breached his fiduciary duties by failing to
take reasonable steps to ensure that the Trust’s assets were
used according to the Trust’s purpose and solely for
Plaintiff’s benefit. Because a trustee who breaches the
terms of a trust agreement is personally liable for any
losses that result from the breach, judgment was entered
against Defendant in the amount of the wrongful dis-
tributions plus interest. Grot v. First Bank of Schaumburg,
684 N.E.2d 1016, 1018 (Ill. App. Ct. 1997) (citation omitted).

                     II. DISCUSSION
  On appeal, Defendant argues that the district court
erred in finding the distributions to Plaintiff’s father
violated the terms of the Trust, that the district court
ignored an exculpatory clause in the Trust Agreement
providing for trustee liability only in the case of bad faith,
and that there were adequate records of the Trust activity.
We review a district court’s grant of summary judgment
de novo. Darst v. Interstate Brands Corp., 512 F.3d 903, 907
(7th Cir. 2008) (citations omitted). Summary judgment is
4                                                No. 08-1174

appropriate when there is no genuine issue as to any
material fact and the moving party is entitled to judg-
ment as a matter of law. Fed. R. Civ. P. 56(c). We view the
record in the light most favorable to the non-moving
party and draw all reasonable inferences in that party’s
favor. Darst, 512 F.3d at 907 (citation omitted). Illinois
law governs Defendant’s liability in this diversity action.

    A. Distributions to Plaintiff’s Father
   Defendant first claims that distributing the Trust’s
assets to Plaintiff’s father complied with his duties as
Trustee. Defendant argues that the Trust Agreement
granted him discretion to distribute funds to Plaintiff’s
father and that the Illinois Trusts and Trustees Act en-
dowed him with authority to distribute funds to Plain-
tiff’s father as an adult relative of the minor beneficiary.
Defendant also contends that since Plaintiff’s father had
a legal duty to support his son, it was appropriate to
distribute the funds to Plaintiff’s father and it should be
presumed that Plaintiff benefitted from the funds. Plain-
tiff contends that this case turns simply upon a violation
of the express and exclusive terms of the Trust, which
did not allow for distributions to his father.
  “It is axiomatic that the limits of a trustee’s powers are
determined by the instrument which creates the trust.”
Stuart v. Continental Ill. Nat’l Bank & Trust Co., 369 N.E.2d
1262, 1271 (Ill. 1977) (citations omitted). “When a trustee
fails to administer a trust according to its terms, a breach
of trust results.” Northwestern Mut. Life Ins. Co. v. Wiener,
421 N.E.2d 1002, 1004 (Ill. App. Ct. 1981) (citation omitted).
No. 08-1174                                                     5

“When a trustee breaches a trust agreement, whether
wilfully, negligently, or by oversight, he is liable for any
loss to the estate resulting from the breach and must
place the beneficiaries in the position they would have
held had the breach not occurred.” Grot, 684 N.E.2d at
1018 (citations omitted).
 The Trust Agreement provided that distributions to a
minor
    may be applied directly in the sole discretion of the
    Trustee for the benefit of such person or may be
    made to any one or more of the following: (a) directly
    to such beneficiary; (b) to the legally appointed guard-
    ian . . . of such beneficiary; or (c) to a custodian
    under the Uniform Gifts to Minors Act in any juris-
    diction.
None of the money was distributed directly to Plaintiff
and there was no legally appointed guardian or custodian.
Defendant contends that the district court ignored the
provision allowing distributions to be “applied directly
in the sole discretion of the Trustee for [Plaintiff’s
benefit].” 1 Defendant argues that by giving money to

1
   Defendant repeatedly asserts that the Trust Agreement gave
the trustee discretion and that discretionary decisions by a
trustee should not be overturned absent bad faith, fraud, or an
abuse of discretion. Defendant’s commentary, while true, is
irrelevant. Plaintiff’s complaint, and the district court’s judg-
ment did not regard a discretionary decision; they involved a
breach of the express terms of the Trust. A trustee does not
                                                    (continued...)
6                                                 No. 08-1174

Plaintiff’s father he was directly applying the money for
Plaintiff’s benefit. Defendant’s position is that it was a
direct application of funds for him to give money to
Plaintiff’s father and for Plaintiff’s father to then give that
money (likely without Defendant’s knowledge) to
Colgate University, for example, to pay for Plaintiff’s
college tuition. This proposal cannot be accepted. The
existence of an intermediary makes it impossible to
characterize this two-part transaction as a direct applica-
tion of funds. Defendant cannot find justification for
the distributions within the terms of the Trust Agreement.
  Defendant next contends that the distributions were
permitted by the Illinois Trusts and Trustees Act. The
Act grants a trustee authority
    [t]o distribute income and amounts of principal in such
    one or more of the following ways as the trustee
    believes to be for the best interests of any beneficiary
    who at the time of distribution is under legal disabil-
    ity or in the opinion of the trustee is unable properly
    to manage his affairs because of illness, physical or
    mental disability or any other cause:
        (a) directly to the beneficiary;
        (b) to a duly appointed guardian of the benefi-
            ciary;

1
  (...continued)
have discretion to violate the trust agreement, nor does a
trustee’s interpretation of the trust agreement define the
bounds of permissible conduct.
No. 08-1174                                              7

       (c) to a custodian for the beneficiary under the
           Uniform Transfers to Minors Act;
       (d) to an adult relative of the beneficiary;
       (e) by expending the money or using the property
           directly for the benefit of the beneficiary; and
           the trustee is not required to see to the ap-
           plication of any distribution so made; and
       (f) to a trust, created prior to the time the dis-
           tribution becomes payable, for the sole benefit
           of the beneficiary and those dependent upon
           the beneficiary during his or her lifetime, to
           be administered as a part thereof . . . .
760 ILCS 5/4.20. Defendant focuses on paragraph (d),
allowing distribution to an adult relative of the benefi-
ciary. Were it applicable to this case, paragraph (d) would
provide authority to distribute the Trust’s assets
to Plaintiff’s father while Plaintiff was a minor, and thus
under a legal disability. However, the Trusts Act merely
establishes a set of default rules applicable when not
in conflict with the terms of a trust agreement. The
Act provides:
   A person establishing a trust may specify in the instru-
   ment the rights, powers, duties, limitations and im-
   munities applicable to the trustee, beneficiary and
   others and those provisions where not otherwise
   contrary to law shall control, notwithstanding this
   Act. The provisions of this Act apply to the trust to
   the extent that they are not inconsistent with the
   provisions of the instrument.
760 ILCS 5/3(1).
8                                                 No. 08-1174

  Defendant claims that the terms of the Act are not in
conflict with the terms of the Trust. Defendant is mis-
taken. Comparing the language of the Trust Agreement to
that of the Act only confirms that Plaintiff’s father was not
an authorized distributee of the Trust. The Trust Agree-
ment mirrored paragraphs (a), (b), (c), and (e) of the Trusts
Act, but excluded the option to distribute money to an
adult relative and the option to distribute to a related trust.
These were intentional omissions. Inclusio unius est exclusio
alterius. The Trust Agreement also specifically and
uniquely excluded Plaintiff’s father from receiving loans,
at any interest rate, and despite providing adequate
security. The district court came to the natural and appro-
priate conclusion that “the settlor, Plaintiff’s father, took
pains to protect the Trust’s assets from his own
intermeddling” and his “obvious intent [was] to use the
trust as a preventive barrier against his own financial
management.” The Trust Agreement anticipated and
provided for distributions to, or for the benefit of, minors;
the conflicting provision of the Trusts Act, allowing
distributions to an adult relative, does not apply to this
case.
  Defendant finally argues that it was logical and appro-
priate to give the Trust’s assets to Plaintiff’s father as the
person with the legal duty to support Plaintiff. This
argument does not require serious discussion. Defendant
cannot avoid his specifically enumerated duties and
limitations under the Trust Agreement by pointing to the
common law duty of parents to support their children.
Similarly, it does not matter whether Defendant believed
the money was benefitting Plaintiff and furthering the
No. 08-1174                                                9

intent of the settlor; the Trust Agreement simply did
not allow distributions to Plaintiff’s father.
  Defendant was not authorized to distribute funds to
Plaintiff’s father by the terms of the Trust, by the Illinois
Trusts and Trustees Act, or by any vague common sense
approach. By distributing funds to Plaintiff’s father,
Defendant breached the express terms of the Trust and
the district court appropriately held Defendant liable
for the resulting losses.

  B. Exculpatory Clause
  In his brief, Defendant asserts that the district court
erroneously ignored an exculpatory clause in the Trust
Agreement that limits a trustee’s liability to acts or omis-
sions committed in bad faith. Plaintiff contents that
Defendant waived this provision because it was raised
for the first time on appeal. Plaintiff also asserts that
there is sufficient evidence of bad faith in the record to
hold Defendant liable even assuming the validity of
the exculpatory clause. Finally, Plaintiff argues that the
clause cannot shield Defendant from violations of his
fiduciary duties, which are not imposed by the Trust
Agreement, but by Illinois law.
   Without citation, Defendant vaguely claims, “[t]he
lower court acknowledged the existence of [the exculpa-
tory clause], but so restricted its application as to render
it completely ineffective.” However, there is no evidence
that the district court was made aware of this
exculpatory clause, let alone that it “acknowledged” it.
10                                                     No. 08-1174

Defendant does not identify when he alerted the
district court to the exculpatory clause, or where he
relied on it in his arguments below. 2 Because Defendant
never raised the issue of the exculpatory clause before
the district court, he has waived it for purposes of review.
See Libertyville, 776 F.3d at 737.
  What Defendant did argue before the district court, and
what Defendant wrongly seems to conflate with a dis-
cussion of the exculpatory clause, was that, as a matter
of Illinois common law, “discretionary decisions by
trustees are not to be overturned in the absence of ex-
tenuating circumstances such as bad faith, fraud, or an
abuse of discretion” (citations omitted). The district court
did address this issue by stating that, “the Court disagrees
with defendant’s view of the scope of the powers and
duties of a trustee.” 3 Defendant’s reliance on discretion
is misplaced in this case where distributing money to
Plaintiff’s father was not a decision within the discretion

2
  Defendant’s assertion that it was the district court’s job to give
effect to “the whole document, not just isolated parts,” is
misplaced. “[T]he district court need not investigate the evi-
dence for arguments that might possibly support [Defendant’s]
claim: it was [Defendant’s] responsibility to raise the
argument that it seeks to use now on appeal.” Libertyville Datsun
Sales, Inc. v. Nissan Motor Corp., 776 F.2d 735, 737 (7th Cir. 1985).
3
  The district court found that assuming, for the purpose of
Defendant’s motion for summary judgment, bad faith was
required to hold Defendant liable, there was sufficient evidence
of bad faith for a reasonable jury to find in Plaintiff’s favor,
thereby defeating Defendant’s motion.
No. 08-1174                                                     11

of the Trustee. As the district court explained, even if
Defendant believed the money was being used for Plain-
tiff’s benefit (so that Defendant was arguably acting in
good faith), “the trust agreement did not authorize dis-
tributions to Plaintiff’s father,” entitling Plaintiff to judg-
ment as a matter of law. Having found that Defendant
waived the issue of the exculpatory clause by failing
to raise it below, it is unnecessary to discuss
Plaintiff’s other arguments regarding the insignificance of
this clause.

    C. Adequate Records
   Defendant contends he maintained adequate records
of the Trust activity. Defendant’s main arguments on
appeal are that (1) monthly brokerage statements from
the sole brokerage account used by the Trust log every
transfer in and out of the Trust account; and (2) Plain-
tiff’s father had access to these records on an ongoing
basis and Plaintiff now has copies of all of the monthly
statements.4 Plaintiff contents that the brokerage state

4
  Defendant claims that Plaintiff’s action for an accounting,
which was filed as Count I of Plaintiff’s original complaint, was
“essentially abdicated” by Plaintiff and that “no relief was
granted” on that count because Plaintiff has records of all
transfers into and out of the Trust. In fact, Plaintiff agreed to
dismiss his action for an accounting because it became clear that
there simply are no more records to be had. The action was
dismissed for impossibility, not because the records were
                                                     (continued...)
12                                               No. 08-1174

ments are insufficient records because they do not
indicate the purposes of the distributions as required by
Illinois law.
   The Illinois Trusts and Trustees Act establishes that,
“[e]very trustee at least annually shall furnish to the
beneficiaries . . . a current account showing the receipts,
disbursements and inventory of the trust estate.” 760 ILCS
5/11(a). In Illinois, a beneficiary is entitled “to learn from
his trustee ‘what property came into his hands, what has
passed out, and what remains therein, including all
receipts and disbursements in cash, and the sources
from which they came, to whom paid and for what pur-
pose paid.’ ” McCormick v. McCormick, 455 N.E.2d 103, 109
(Ill. App. Ct. 1983) (citing Wylie v. Bushnell, 115 N.E. 618,
622 (Ill. 1917)). Failing to maintain adequate records is a
significant issue, not only because it constitutes an inde-
pendent cause of action, but also because “[w]here there
has been a negligent failure to keep trust accounts, all
presumptions will be against the trustee upon a settle-
ment; obscurities and doubts being resolved adversely
to him.” First Nat’l Bank & Trust Co. of Racine v. Vill. of
Skokie, 190 F.2d 791, 796 (7th Cir. 1951) (citing Crimp v.
First Union Trust & Sav. Bank, 185 N.E. 179, 183 (Ill. 1933)).
  Defendant’s argument is off target and does not
require lengthy discussion. The district court did not focus
on a lack of access to existing documents, but rather on

4
   (...continued)
complete or because Plaintiff lacked a right to the informa-
tion sought.
No. 08-1174                                              13

the non-existence of documents to which Plaintiff was
entitled. There being no dispute as to the absence of any
record indicating the purposes for the various distribu-
tions, the district court properly found that Defendant
violated his duty under Illinois law to provide adequate
records to Plaintiff as beneficiary of the Trust.

  D. Fiduciary Duty
   Defendant never squarely addresses the district court’s
holding that Defendant breached his fiduciary duties.
Rather, Defendant simply contends that the district court
found a breach of fiduciary duty because it found
Defendant failed to keep adequate records. However, as
is clear from the district court’s opinion, Defendant’s
abdication of his duties as Trustee goes beyond his
failure to keep adequate records. “Trustees have the
obligation to carry out the trust according to its terms, to
use care and diligence in protecting and investing trust
property and to use perfect good faith.” McCormick, 455
N.E.2d at 110 (citation omitted). Defendant made no
serious attempt to ensure that the Trust was carried out
according to its terms. Far from receiving or main-
taining any documentation, Defendant never asked Plain-
tiff’s father for receipts indicating how the funds were
being used. As the district court noted, “it is undisputed
that Defendant did not know with any specificity what
Plaintiff’s father was doing with the Trust’s money” and,
“[e]ven accepting Defendant’s version of events, it
appears that his efforts to ensure that the funds were
being used for Plaintiff’s benefit were limited to [in his
14                                              No. 08-1174

own words] ‘verbal conversations that he had with his
brother about the purpose of various distributions.’ ” It
is particularly telling that Defendant disbursed over
$300,000 to Plaintiff’s father through a series of distribu-
tions in one six-month period when Plaintiff was
seventeen years old. Beyond lacking any documentation
of how this money was actually used, Defendant has
no evidence, even his own testimony, specifically identify-
ing the intended purposes of these distributions.
  “The law requires that a trustee must act in good faith in
the management of all matters relating to the trust, and
employ such vigilance, sagacity and diligence as prudent
men of intelligence ordinarily employ in their own affairs.”
Suffolk v. Leiter, 261 Ill. App. 82 (1931). By having, in his
own words, “no idea what they were doing with the
money,” Defendant was not appropriately vigilant; by
not asking for any verification that the money was being
spent in an appropriate manner, Defendant breached
his obligation to be diligent. It is hard to imagine Defen-
dant would have been so relaxed and disinterested were
his own money involved. Indeed, now that his own
money is involved, Defendant is interested enough to
appeal his case to this Court. Defendant’s demonstrated
lack of concern that the Trust’s assets solely benefitted
Plaintiff, and therefore his lack of concern that the
Trust’s purpose was fulfilled, violated his fiduciary duties.
No. 08-1174                                            15

                  III. CONCLUSION
  For the reasons set forth above, we A FFIRM the district
court’s grant of summary judgment.

                         10-29-08