Court Rules Trust Beneficiary May Proceed With Claims Against Trustee For Concealing True Value of Stock in Family Business.

On June 30, 2010, the Illinois Appellate Court ruled that a plaintiff trust beneficiary can proceed with his lawsuit alleging breach of fiduciary duty and fraud against a defendant attorney who served as trustee of an irrevocable family trust based on allegations that the trustee failed to disclose material information concerning the true value of shares owned in the family business and in securing a release from liability from the plaintiff.    The case is Janowiak v. Tiesi, No. 1-09-1273 (Ill. App. 1st Dist.).

In the lawsuit that originally was dismissed, the Plaintiff claimed that his father and brother conspired to force him out of the family business by painting a negative picture of the company’s future and lying about the value of the company stock.  Plaintiff requested the trustee to provide him with the true value of the company’s shares, but the trustee defendant refused.  Claiming a conflict of interest, the trustee drafted and presented a release to plaintiff of the trustee’s liability prior to resigning as trustee without disclosing the value of the company stock.  Plaintiff claimed that the trustee knew his family was trying to squeeze him out of the company and also knew that they were undervaluing the company stock.  Plaintiff alleged that the trustee engaged in fraudulent concealment, thereby negating the validity of the release.  Plaintiff also claimed that the trustee fraudulently induced plaintiff to sign the release.   Plaintiff further maintained that, regardless of whether defendant still owed any fiduciary duties, under contract law, a general release does not operate to bar claims not specified in the document.

As the court noted, “[i]f the effective date of the release was prior to defendant’s actual resignation, or if it was established that defendant drafted and/or negotiated the release prior to his resignation, defendant’s alleged actions presumably would be subject to scrutiny as a fiduciary with the attendant presumption of fraud.  Defendant’s conduct would then be adjudicated under the heightened standard applicable to fiduciaries, thereby shifting the burden of proof.”

“Moreover, even if the release was not drafted or effective until after defendant’s resignation, genuine issues of material fact remain concerning whether there was fraud in the inducement of the release, which could invalidate the release in its entirety.”

Because disputed material issues of fact existed on these critical points, the appellate court held that dismissal of the plaintiff’s complaint was improper.

According to the court, “[i]n order to constitute fraud in the inducement, the defendant must have made a false representation of a material fact knowing or believing it to be false and doing it for the purpose of inducing the plaintiff to act.   Phil Dressler & Associates, Inc. v. Old Oak Brook Inv. Corp., 192 Ill. App. 3d 577, 584, 548 N.E.2d 1343, 1347 (1989). “‘[F]raud also may consist of the intentional omission or concealment of a material fact under circumstances creating an opportunity and duty to speak.’” Thornwood, Inc., 344 Ill. App. 3d at 25, 799 N.E.2d at 765, quoting H.K. Warner v. Lucas, 185 Ill. App. 3d 351, 354, 541 N.E.2d 705, 706 (1989).

“‘In order to prove fraud by the intentional concealment of a material fact, it is necessary to show the existence of a special or fiduciary relationship, which would raise a duty to speak.’”  Thornwood, Inc., 344 Ill. App. 3d at 25, 799 N.E.2d at 765, quoting First Midwest Bank, N.A. v. Sparks, 289 Ill. App. 3d 252, 260, 682 N.E.2d 373, 379 (1997). Significantly, “in a confidential or fiduciary relationship, the dominant party’s silence alone may constitute fraudulent concealment.” Thornwood, Inc., 344 Ill. App. 3d at 25, 799 N.E.2d at 765, quoting Melko v. Dionisio, 219 Ill. App. 3d 1048, 1061, 580 N.E.2d 586, 593 (1991).

It is well settled that a fiduciary relationship exists between trustee and beneficiary as a matter of law.   McCormick v. McCormick, 118 Ill. App. 3d 455, 466, 455 N.E.2d 103, 113  (1983). Under the Fiduciary Obligations Act, a “fiduciary” includes a trustee under any trust.  760 ILCS 65/1(1) (2006).   “Prevailing authorities hold that a release between a trustee and a beneficiary, like all transactions growing out of a fiduciary relationship, is subject to the closest scrutiny.  McCormick, 118 Ill. App. 3d at 466, 455 N.E.2d at 113, citing Pennington v. Jones, 46 Ill. App. 3d 65, 360 N.E.2d 566 (1977).   “Fiduciaries are not prohibited from having direct dealings with their beneficiaries, but such transactions are subject to special scrutiny by the courts, and the burden is on the fiduciary to show that the transaction was fair.” Home Federal Savings & Loan Ass’n of Chicago v. Zarkin, 89 Ill. 2d 232, 245-46, 432 N.E.2d 841, 848 (1982).

In Collins, the court held that important factors in determining whether a particular transaction is fair include a showing by the fiduciary (1) that he has made a free and frank disclosure of all the relevant information which he had; (2) that the consideration was adequate, and (3) that the principal had competent and independent advice before completing the transaction. Collins, 110 Ill. App. 3d at 1038, 443 N.E.2d at 285.

The Court in Janowiak held that “[i]n the instant case . . . the fact that plaintiff had access to corporate records due to his position as a shareholder does not diminish plaintiff’s rightful reliance on the representations made by defendant as his trustee, especially with the attendant high fiduciary duties owed to plaintiff.   Also . . . any examination of the corporate records would not have revealed the fraudulent scheme.  Even assuming plaintiff had obtained the corporate records, as defendant strenuously argues he should have done, the records would not have revealed the fraudulent scheme to undervalue plaintiff’s shares.  The scheme as alleged by plaintiff was revealed only much later after an independent appraisal by plaintiff, utilizing information not contained in the corporate records. Further, any failure to attempt to obtain such information was caused by defendant’s fraudulent conduct in concealing the scheme to defraud him. Instead of alerting plaintiff to the ongoing scheme, defendant merely provided the excuse that he needed permission from plaintiff’s father as settlor to provide the information regarding plaintiff’s shares.”

Moreover, even if there was no fiduciary duty owed at the time of the release, the court held that dismissal on the basis of the release may nevertheless be improper because the release arguably could be ineffective to bar plaintiff’s claims.  “It is well settled that where the releasing party was unaware of other claims, general releases are restricted to the specific claims contained in the release agreement.  Farm Credit Bank, 144 Ill. 2d at 447, 581 N.E.2d at 667. However, where both parties were aware of an additional claim at the time of signing the release, courts have given effect to the general release language of the agreement to release that claim. Farm Credit Bank, 144 Ill. 2d at 447, 581 N.E.2d at 667.  Therefore, a release will not be construed to defeat a valid claim that was not within the contemplation of the parties at the time the agreement was executed, and general words of release are inapplicable to unknown claims.