Beedie v. Associated Bank Illinois, NA
Filing
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ORDER & OPINION entered by Judge Joe Billy McDade on 6/21/2011. Defendant's Motion to Dismiss Plaintiff's Complaint [d/e 7] is GRANTED and Plaintiff's Complaint [d/e 1] is DISMISSED WITHOUT PREJUDICE because Plaintiff has failed to adequately plead either actual knowledge or bad faith on the part of Defendant, and his claims are therefore barred by the Illinois Fiduciary Obligations Act. IT IS SO ORDERED. Civil Case Terminated. (RK, ilcd)
E-FILED
Tuesday, 21 June, 2011 03:29:43 PM
Clerk, U.S. District Court, ILCD
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF ILLINOIS
PEORIA DIVISION
JAMES F. BEEDIE, in his official
capacity as trustee of THE PALUMBO
CHILDREN’S TRUST,
)
)
)
)
Plaintiff,
)
)
v.
)
)
ASSOCIATED BANK ILLINOIS, N.A., )
doing business as ASSOCIATED BANK, )
)
Defendant.
)
)
Case No. 10-cv-1351
ORDER & OPINION
Before the Court is Defendant’s Motion to Dismiss Plaintiff’s Complaint (Doc.
1-1) and Memorandum in Support (Doc. 7), filed on December 6, 2010. Plaintiff
timely filed a Response to Defendant’s Motion to Dismiss (Doc. 9). For the following
reasons, Defendant’s Motion to Dismiss is GRANTED.
BACKGROUND1
William Joseph Palumbo and Sue Frances Palumbo created the Palumbo
Children’s Trust (the Trust) on December 22, 1984, for the benefit of their children.
(Doc. 1-1 ¶ 8). At the time of the execution of the Trust Agreement and at all times
thereafter, the Palumbos had a single child, their daughter Mia Anne Palumbo.
(Doc. 1-1 ¶ 9).
Mia is presently 31 years of age and handicapped with severe
epilepsy that cannot be controlled through medicine. (Doc. 1-1 ¶ 9). She experiences
Pursuant to the applicable standard of review, all facts discussed herein are taken
from the Complaint and assumed true for the purposes of this motion.
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seizures on a daily basis and routinely drops to the ground. (Doc. 1-1 ¶ 9). She has
health care givers in her home that attend to her daily needs and protect her from
physical harm resulting from her seizures and dropping episodes. (Doc. 1-1 ¶ 9).
Proceeds from the Trust are and were intended to pay for Mia’s costly and lifelong
medical care. (Doc. 1-1 ¶ 10).
John Haeffele and Julianne Haeffele became co-trustees2 and opened a
checking account with First Financial Bank, now Associated Bank,3 in the Trust’s
name on March 31, 1998. (Doc. 1-1 ¶ 14). Mr. and Mrs. Haeffele also had a personal
checking account with this bank. (Doc. 1-1 ¶ 19). Associated Bank allowed John
Haeffele to draw checks in his name from the Trust account and deposit them into
his personal account. (Doc. 1-1 ¶¶ 23-24). He did so on at least 186 occasions,
drawing funds from the Trust in the amount of $280,145.00. (Doc. 1-1 ¶ 26). Upon
information and belief, Associated Bank allowed John Haeffele to take an additional
$161,168.00 bringing the total to 441,313.00.4 (Doc. 1-1 ¶¶ 27-28).
Plaintiff, James F. Beedie, in his official capacity as trustee of the Palumbo
Children’s Trust, now brings this suit against Defendant, Associated Bank Illinois,
N.A., under the Uniform Commercial Code as adopted by Illinois Law.5 Plaintiff
At the time the Trust Agreement was executed in 1984, Robert B. Bailey was
appointed as Trustee. Mr. Bailey was succeeded by James R. Peterson, who served
as Trustee until 1998, when John and Julianne Haeffele were appointed as
successor co-trustees. (Doc. 1-1 ¶11).
3 At some point Associated bank acquired First Financial Bank. The entity will be
referred to as Associated Bank for the remainder of this Order and Opinion.
4 This Court recently sentenced John Haeffele in the criminal matter arising out of
his actions.
5 Defendant removed this case to federal court pursuant to 28 U.S.C. § 1332. (Doc. 1
¶ 4). Defendant contends that the matter is between citizens of separate states and
that the amount in controversy exceeds $75,000. (Doc. ¶ 5-6).
2
2
states claims for payment of unauthorized checks pursuant to 810 ILCS 5/4-401;
conversion of instruments pursuant to 810 ILCS 5/3-420; claim to proceeds of
instruments pursuant to 810 ILCS 5/3-306; and violation of Illinois Fiduciary
Obligations Act (IFOA), 760 ILCS 65/1 et seq. Defendant believes it is shielded from
all of Plaintiff’s claims by the IFOA and therefore seeks to have them dismissed
pursuant to Federal Rule of Civil Procedure 12(b)(6). (Doc. 7).
Plaintiff has
responded that the IFOA does not shield Defendant from liability because 1) the
checks drawn by John Haeffele were not properly authorized; and 2) Defendant
acted in bad faith. (Doc. 9).
LEGAL STANDARD
In ruling on Rule 12(b)(6) motions, a court must construe the complaint in
light most favorable to the plaintiff. Tamayo v. Blagojevich, 526 F.3d 1074, 1081
(7th Cir. 2008). To survive a motion to dismiss under 12(b)(6), factual allegations
must raise a right to relief above the speculative level.
Bell Atlantic Corp v.
Twombly, 550 U.S. 554 (2007). In other words, the complaint must describe the
claim in sufficient detail to give the defendant “fair notice of what the ... claim is
and the grounds upon which it rests.” Hughes v. City of Peoria, 2011 WL 284350, at
*2 (C.D. Ill. January 24, 2011).
Conclusory allegations are “not entitled to be
assumed true.” Id. A complaint must state sufficient factual matter, accepted as
true, to “state a claim that is plausible on its face.” Ashcroft v. Iqbal, 129 S. Ct.
1937, 1949 (2009). A claim has facial plausibility when the plaintiff pleads factual
content that allows the court to draw a reasonable inference that defendant is liable
for the misconduct alleged. Id.
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DISCUSSION
Plaintiff alleges the following facts in his Complaint: John Haeffele and
Julianne Haeffele were appointed as co-trustees of the Palumbo Children’s Trust in
1998 and served as such until July 2009. (Doc. 1-1 ¶ 11). On March 31, 1998, John
and Julianne Haeffele opened a checking account with Associated Bank in Peoria,
Illinois on behalf of the Trust. (Doc. 1-1 ¶ 14). At the time the Trust checking
account was opened, Associated Bank required John Haeffele to present the Trust
documents to it and he did. (Doc. 1-1 ¶ 15). Pursuant to Colorado law, which was
controlling according to the terms of the Trust Agreement, all checks drawn on the
Trust checking account required the signature of both co-trustees in order to be
properly authorized. (Doc 1-1 ¶ 18).
At all relevant times the Haeffeles also maintained a personal checking
account with Associated Bank, a mortgage loan with Associated Bank, and another
personal loan6 from Associated Bank. (Doc. 1-1 ¶¶ 19-21). After he was appointed
co-trustee, John Haeffele began selling off Trust assets and depositing proceeds into
the Trust’s Associated Bank Account. (Doc. 1-1 ¶ 22). John Haeffele wrote checks to
himself drawn on the Trust checking account and deposited the checks into his and
Julianne Haeffele’s personal checking account with Associated Bank. (Doc. 1-1 ¶¶
23-24). Periodically, John Haeffele would receive cash at the time of these deposits.
(Doc. 1-1 ¶¶ 24). Once deposited, the Haeffeles made use of those funds for personal
expenses unrelated to the Trust. (Doc. 1-1 ¶ 25). Between August 2002 and July
2009, John Haeffele wrote checks to himself on at least 186 occasions totaling
6
The purpose for this loan is unknown at this time. (Doc. 1-1 ¶ 21).
4
$280,145.00 and it is believed he did the same from 1999 through 2001 for an
additional $161,168.00, for a total of $441,313.00. (Doc. 1-1 ¶¶ 26-28).
Upon
information and belief, John and/or Julianne Haeffele on multiple occasions wrote
checks to Associated Bank for their mortgage payments after having deposited a
check to their personal checking account that was drawn on the Trust account. (Doc.
1-1 ¶¶ 29). John and Julianne Haeffele were removed as co-trustees in July of
2009. (Doc. 1-1 ¶ 30).
I.
The Fiduciary Obligations Act
Defendant’s Motion Dismiss all counts of the Complaint is premised upon the
contention that the Illinois Fiduciary Obligations Act (IFOA) governs the
assignment of liability when a bank deals with a fiduciary acting in his fiduciary
capacity, as the Haeffeles are said to have been doing in the Complaint. See 760
ILCS 65/1 et seq. “A person who in good faith pays or transfers to a fiduciary any
money or other property which the fiduciary as such is authorized to receive, is not
responsible for the proper application thereof by the fiduciary . . . .” 760 ILCS 65/2.
Section 9 of the statute goes on to include this protection against liability for a bank
acting without actual knowledge of the fiduciary’s breach of his duties:
Notwithstanding any other law, if a fiduciary
makes a deposit in a bank to his personal credit of checks
drawn by him upon an account in his own name as a
fiduciary, or of checks payable to him as fiduciary, or of
checks drawn by him upon an account in the name of his
principal if he is empowered to draw checks thereon, or of
checks payable to his principal and indorsed by him, if he
is empowered to indorse such checks, or if he otherwise
makes a deposit of funds held by him as fiduciary, the
bank receiving such deposit is not bound to inquire
whether the fiduciary is committing thereby a breach of
his obligation as fiduciary; and the bank is authorized to
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pay the amount of the deposit or any part thereof upon
the personal check of the fiduciary without being liable to
the principal, unless the bank receives the deposit or pays
the check with actual knowledge that the fiduciary is
committing a breach of his obligation as fiduciary in
making such deposit or in drawing such check, or with
knowledge of such facts that its action in receiving the
deposit or paying the check amounts to bad faith. 760
ILCS 65/9.
As observed by the District Judge in Crawford v. LaSalle Bank, N.A., 2010
WL 320299, at *6 (N.D. Ill. Jan. 21, 2010), “[t]he purpose of the IOFA is to facilitate
banking and financial transactions and to shift the burden of employing honest
fiduciaries to the principal and away from the banking institution.” The statute is
meant to limit liability to “relatively uncommon cases in which the person who
deals with the fiduciary knows all the relevant facts.” Id. The IFOA thus relieves
banks of negligence liability and provides a defense for banks accused by principals
of improper dealings with fiduciaries. Id.
Section 9 of the IFOA has been
interpreted to have a preclusive effect thereby preempting other state law and
establishing a total defense to banks for all claims arising from a bank’s honest
interactions with fiduciaries. See Johnson v. Citizens National Bank of Decatur, 334
N.E.2d 295, 299-300 (Ill. App. Ct. 1995). Simply put, under Illinois law the IFOA
provides a blanket defense to suit, exculpating banks from liability any time its
provisions apply. Crawford Supply Group, 2010 WL 320299 at *9.
By its terms, the IFOA will bar Plaintiff’s claims unless Plaintiff can show
actual knowledge or bad faith on the part of Defendant. See id. at *6. Factual
allegations must create the inference that any representative of Defendant had
actual knowledge of the Haeffeles’ malfeasance or that Defendant acted in bad faith
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in its dealings with the Haeffeles. See id. Also, behavior on the part of Defendant
that is so obvious or suspicious that it suggests Defendant colluded with the
Haeffeles or otherwise acted unreasonably so as to assume liability for the
Haeffeles’ wrongdoing could amount to actual knowledge or bad faith. See id.
Accordingly, in deciding the Motion to Dismiss the Court is only required to
decide if the Complaint alleges sufficient facts to show that defendant had actual
knowledge of the Haffeles’ malfeasance or had acted in bad faith in its dealings with
them.
A.
Insufficient Allegations of Actual Knowledge
The Illinois Courts have defined “actual knowledge” as an “awareness at the
moment of the transaction that its fiduciary is defrauding the principal” and as
“having express factual information that funds are being used for private purposes
that violate the fiduciary relationship.” Id. at *6.
In the case at bar, Plaintiff alleges that Defendant had sufficient knowledge
to know that the Haeffeles were not just “fiduciaries,” but that they were cotrustees.
Plaintiff alleges that John and Julianne Haeffele opened a checking
account together at Defendant’s bank with an account owner’s name of “Palumbo
Children’s Trust.” (Doc. 9 at 5). Plaintiff further states that John Haeffele provided
Associated Bank’s Deposit Agreement which indicated that the Haeffeles were
acting as “fiduciaries” under the Trust Agreement provided to Associated Bank.
(Doc. 9 at 5). Plaintiff’s contention is that it would be unreasonable for Defendant
to not understand that the Haeffeles were co-trustees and view them as only
“fiduciaries.” (Doc. 9 at 5). What Defendant “should have known” is not what
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matters, however. What matters under the IFOA is what Defendant actually knew.
Id. at *7. The Trust Agreement (attached as to the Complaint as Exhibit A) does
not mention the Haeffeles as co-trustees or even trustees for that matter. (Doc. 1-1
Exhibit A). Plaintiff also alleges that John Haeffele was not authorized to indorse
checks himself pursuant to Colorado Law. (Doc. 9 at 3-4). However, if Defendant
did not know that the Haeffeles were co-trustees, Defendant had no reason to
require both John and Julianne Haeffele to sign checks drawn on the Trust account.
Plaintiff has not pled enough facts to show that Defendant actually knew that the
Haeffeles were co-trustees.
The Complaint is also void of any allegations that
Defendant knew or was legally obligated to ascertain the requirements of Colorado
Law.
Illinois courts have consistently held that the deposit or transfer of money by
a fiduciary into his personal accounts does not, without more, give rise to the
inference that a bank had actual knowledge of wrongdoing or bad faith. Id. “Mere
suspicious circumstances are not enough to require the bank to inquire into
fiduciary’s actions.” Id. There are “many legitimate reasons why an agent and
principal might engage in odd checking practices.” Id. Likewise, there are many
legitimate reasons why a fiduciary might frequently move large sums of money on
behalf of the principal. Id.
Plaintiff alleges that on multiple accounts over a long period of time, John
Haeffele was allowed to move large sums of money from the Trust account to his
personal account (Doc. 9 at 8). Plaintiff would like this Court to find that these
numerous transactions involving a substantial amount of money would put
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Defendant on notice that John Haeffele was in violation of his fiduciary obligation.
However, this is not enough. Plaintiff offers no basis for inferring that Defendant
had “express factual information” or “actual awareness at the moment of the
transactions” that the Haffeles were defrauding Plaintiffs. Id. at *8. Accordingly,
this Court finds that Plaintiff has failed to adequately allege that Associated Bank
had actual knowledge of the Haeffeles’ malfeasance.
B.
Insufficient Allegations of Bad Faith
Illinois courts have fleshed out the definition of bad faith by explaining that
it includes situations “where the bank suspects the fiduciary is acting improperly
and deliberately refrains from investigating in order that the bank may avoid
knowledge that the fiduciary is acting improperly.” Crawford Supply Group, 2010
WL 320299 at *8. When determining whether bad faith exists, courts consider
whether it is “commercially unjustifiable for the payee to disregard and refuse to
learn facts readily available.” Appley v. West, 832 F.2d 1021, 1031 (7th Cir. 1987).
At some point obvious circumstances become so cogent that it is “bad faith” to
remain passive. Id.
In the case at bar, Plaintiff alleges: 1) the Haeffeles opened an account at
Associated Bank in the name of the Trust, they presented the Trust documents to
Associated Bank when the account was opened and Associated Bank’s Deposit
Agreement labels the Haeffele’s as “fiduciaries” of the Palumbo Children’s Trust; 2)
the Haeffeles maintained their personal checking account and home mortgage with
Associated Bank; 3) on information and belief, that in association with the home
mortgage, Defendant possessed the Haeffeles’ income tax returns and other
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financial information; and 4) that John and/or Julianne Haeffele would pay their
mortgage at Associated Bank immediately after John Haffele deposited funds from
the Trust checking account into the Haeffeles’ personal account. (Doc. 9 at 10-11).
It is not enough to establish bad faith that the bank could have discovered
fraudulent activity merely because it had access to the fiduciary’s financial
information and handled other accounts for the fiduciary. Mikrut v. First Bank of
Oak Park, 832 N.E.2d 376, 385-86 (Ill. App. Ct. 2005). Plaintiff has not pled enough
facts to show that Defendant suspected the Haeffeles were acting improperly, nor
has Plaintiff pled enough facts to show that Defendant deliberately refrained from
investigating the Haffeles behavior. Plaintiff only pleads that Defendant should
have or could have known based on the Haeffeles’ activity and accounts they had
with Defendant.
Plaintiff first relies on the 7th Circuit’s ruling in Appley for the contention
that he has pled sufficient facts to withstand a motion to dismiss. (Doc. 9 at 8-9).
Plaintiff argues that based upon his allegations, “there is a legal theory on which
the plaintiff can possibly recover,” and the plaintiff “should be given the opportunity
to proceed with discovery and to test his evidence before the trier of fact. Appley,
832 F.2d at 1031. However as, the Crawford Supply Group court noted, Appley
predates the Supreme Court’s decisions in Twombly and Iqbal, and therefore does
not rescue the Complaint. See Crawford Supply Group, 2010 WL 320299 at *8. A
“formulatic recitation” of the law is not enough to withstand a motion to dismiss. Id.
Plaintiff must allege some factual content to support an inference that Associated
Bank is liable for misconduct. Id.
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Plaintiff also relies on the findings of the First District Appellate Court of
Illinois in Falk v. Northern Trust Co., 763 N.E.2d 380 (Ill. App. Ct. 2001) where the
plaintiff sufficiently alleged bad faith by the bank by alleging: 1) a number of
changes and irregularities in the plaintiff’s account activity over a four year period;
2) the bank’s acceptance of an unsigned check drawn on the plaintiff’s account for
payment of the assistant’s personal credit line; and 3) its knowledge of the
assistant’s tax returns and other personal information, which was obtained by the
bank in extending loans and personal credit to the assistant. (Doc. 9 at 9-10).
However, in Falk the fact that the bank accepted checks drawn on the principal’s
account in payment of the fiduciary’s personal debts owed to the bank was critical to
finding bad faith. 763 N.E.2d at 387; see also Crawford Supply Group 2010 WL
320299 at *8. Plaintiff has not alleged this fact in the instant proceeding.
Further, the Complaint provides no basis for an inference that Associated
Bank either suspected the Haeffeles of impropriety or “deliberately refrained from
investigating” them. See id. at *9.
Plaintiff does not allege that any employee of
Associated Bank had a relationship with the Haeffeles. See id. Plaintiff does not
allege that Associated Bank gave the Haeffeles any preferential treatment or
assistance. See id. Finally, Plaintiff does not allege that Associated Bank derived
any benefit as a result of the Haeffeles’ behavior. See id. Accordingly, the Court
finds that Plaintiff has failed to plead sufficient facts to establish that Defendant
has acted in bad faith.
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CONCLUSION
For the foregoing reasons Defendant’s Motion to Dismiss Plaintiff’s
Complaint (Doc. 7) is GRANTED and Plaintiff’s Complaint (Doc. 1-1) is
DISMISSED WITHOUT PREJUDICE because Plaintiff has failed to adequately
plead either actual knowledge or bad faith on the part of Defendant, and his claims
are therefore barred by the Illinois Fiduciary Obligations Act. IT IS SO ORDERED.
Entered this 21st day of June, 2011.
s/ Joe B. McDade
JOE BILLY McDADE
United States Senior District Judge
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