Stiles v. Whalen et al
Filing
54
MEMORANDUM Opinion and Order Written by the Honorable Gary Feinerman on 12/20/2013.Mailed notice.(jlj)
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
PATRICIA HARDY STILES, individually and as a
beneficiary under the Edith K. Dahlberg Trust,
Plaintiff,
vs.
EDWARD J. WHALEN,
Defendant.
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13 C 3516
Judge Feinerman
MEMORANDUM OPINION AND ORDER
Patricia Stiles initiated this suit by filing a complaint and then an amended complaint
against the Edith K. Dahlberg Trust, James Hardy in his representative capacity as trustee, and
Edward Whalen in his representative capacity as trustee and also in his individual capacity.
Docs. 1, 13. After questions were raised regarding subject matter jurisdiction and the possible
failure to join necessary and indispensable parties, Doc. 25, Stiles sought and was granted leave
to file a second amended complaint, Doc. 35, which is greatly scaled down in terms of claims
and requests for relief, and which names only Whalen as a defendant, Doc. 36. Whalen has
moved to dismiss under Federal Rules of Civil Procedure 12(b)(1), 12(b)(6), and 12(b)(7). Doc.
37. The motion is denied.
Background
In considering a facial challenge to subject matter jurisdiction under Rule 12(b)(1) or a
motion to dismiss under Rules 12(b)(6) or 12(b)(7), the court assumes the truth of the
complaint’s factual allegations, though not its legal conclusions. See Munson v. Gaetz, 673 F.3d
630, 632 (7th Cir. 2012) (Rule 12(b)(6)); Apex Digital Inc. v. Sears, Roebuck & Co., 572 F.3d
440, 443-44 (7th Cir. 2009) (Rule 12(b)(1)); Davis Cos. v. Emerald Casinos, Inc., 268 F.3d 477,
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479 n.2 (7th Cir. 2001) (Rule 12(b)(7)). The court must also consider “documents attached to
the complaint, documents that are critical to the complaint and referred to in it, and information
that is subject to proper judicial notice,” along with additional facts set forth in the plaintiff’s
brief opposing dismissal, so long as those facts “are consistent with the pleadings.” Geinosky v.
City of Chicago, 675 F.3d 743, 745 n.1 (7th Cir. 2012). The following facts are set forth as
favorably to Stiles as those materials allow. See Gomez v. Randle, 680 F.3d 859, 864 (7th Cir.
2012).
A.
The Trusts and Wills
Stiles’s grandmother, Pauline Kraft, was the beneficiary of and possessed assignment
power over a trust created by her deceased husband (“Kraft Trust”). Doc. 36-2 at 1-14. Kraft’s
will assigned her residuary estate to the Kraft Trust, named two trustees, and instructed them to
make various distributions. Doc. 36-2 at 5-6. Kraft’s will provided that upon the death of her
only child, Edith Dahlberg, the trustees were to “divide the trust estate into equal shares” for
each of Dahlberg’s then-living children. Doc. 36 at ¶ 2; Doc. 36-2 at 5. Dahlberg had three
children: Stiles, Hardy, and Susan Macon. Doc. 36 at ¶¶ 9, 11-12. Dahlberg eventually became
co-trustee of the Kraft Trust, but in 2009 her health had deteriorated and Whalen replaced her.
Id. at ¶ 3; Doc. 36-2 at 16-17.
In the meantime, Dahlberg created the Edith K. Dahlberg Trust (“Dahlberg Trust”), of
which Dahlberg was the beneficiary and named trustee. Doc. 36 at ¶ 4; Doc. 36-3 at 1. Whalen
and Hardy were to become co-trustees upon Dahlberg’s death, Doc. 36 at ¶ 4; Doc. 36-3 at 11,
but Dahlberg relinquished her status as trustee and assigned that power to Whalen and Hardy in
2009. Doc. 36 at ¶ 7; Doc. 36-4 at 13. The trust provided for the following distributions, among
others, to be made upon Dahlberg’s death: $300,000 to each child; $100,000 to the American
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Baptist Assembly, Green Lake Center, of Green Lake, Wisconsin (“Assembly”); and $250,000 to
Lawrence University. Doc. 36 at ¶ 4; Doc. 36-3 at 4. The trust further provided for the
following distributions of real property “[a]s soon as it is practical to do so” after Dahlberg’s
death: Macon was to receive “Kraftwood Lot One and Kraftwood Lot Three”; Hardy was to
receive “Kraftwood Lot Two”; and Stiles was to receive the “Kentucky Horse Farm.” Doc. 36 at
¶ 4; Doc. 36-3 at 5. In the event the properties had unequal market values, the trust provided for
cash payments “so that the total distribution[s] to [the] children … [were] equal.” Doc. 36 at ¶ 4;
Doc. 36-3 at 5.
Dahlberg executed her final will in 2000; Hardy and Whalen were the executors. Doc. 36
at ¶ 6; Doc. 36-4 at 7. The will allocated Dahlberg’s personal property equally among her
children and assigned the residuary estate to the Dahlberg Trust. Doc. 36 at ¶ 6; Doc. 36-4 at 7.
B.
Relevant Events
Dahlberg had “a medical event” in May 2007 that rendered her incapable of managing
her affairs. Doc. 36 at ¶ 20. Prior to May 2007, Dahlberg had named Hardy and Whalen her
attorneys-in-fact in an Illinois Statutory Short Form Power of Attorney for Property form. Id. at
¶ 5; Doc. 36-4 at 1. The power of attorney became “effective on [Dahlberg’s] incapacity to be
determined by written certification of a physician familiar with [her] condition that [she is]
unable to transact ordinary business.” Doc. 36 at ¶ 5 (emphasis omitted); Doc. 36-4 at 2
(emphasis omitted). No physician ever made that determination. Doc. 36 at ¶ 5. Dahlberg
completed a second Illinois Statutory Short Form Power of Attorney for Property form in 2007
after the medical event, Doc. 36 at ¶ 8; Doc. 36-4 at 14, but Stiles alleges that she was not legally
competent to do so. Doc. 36 at ¶ 8.
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After the medical event, Hardy began to control Dahlberg’s funds. Hardy opened an
account in his name, into which he began depositing funds from the Dahlberg Trust that
belonged to Dahlberg. Id. at ¶ 24; Doc. 36-4 at 24-28. Hardy also distributed approximately
$9,000 belonging to either the Dahlberg Trust or Dahlberg to three charities not named in the
trust. Doc. 36 at ¶ 24. Hardy also made interest-free loans from the Dahlberg Trust to Macon
and himself for $144,621.21 and $55,000, respectively. Id. at ¶ 22; Doc. 36-4 at 19-20. Whalen
either was or should have been aware of this conduct. Doc. 36 at ¶ 32.
After Dalhberg died in March 2012, Whalen distributed $300,000 to each of Dahlberg’s
children, minus portions of what the Dahlberg Trust had loaned to Macon and Hardy, although
Macon still owes $94,616.21 on her loan. Doc. 36 at ¶¶ 23, 25; Doc. 36-4 at 22. Whalen intends
to distribute the bequests set forth in the Dahlberg Trust to Lawrence University and the
Assembly; Stiles objects to these distributions on the ground that Lawrence University and the
Assembly already received adequate distributions from the trust after Dahlberg’s incapacitation
but before her death. Doc. 36 at ¶¶ 15-16, 26. With respect to the real property, Whalen
employed unqualified appraisers that undervalued the Kraftwood properties (which had been
bequeathed to Macon and Hardy) and accurately appraised the Kentucky Horse Farm (which had
been bequeathed to Stiles); this had the effect of reducing or eliminating the “true up” money
that would have been due to Stiles under the trust. Id. at ¶¶ 30-31. In addition, Whalen refused
to transfer to her title to the horse farm. Id. at ¶ 34.
Whalen received fees for his work as trustee of the Kraft and Dahlberg Trusts. Id. at
¶ 29. At one point, Whalen sought $400,000 in fees from the Dahlberg Trust, but he “changed”
that calculation after Stiles’s counsel objected. Id. at ¶ 27. Whalen wrongfully received some
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fees before acting as trustee and wrongfully collected fees after his appointment expired, and he
never returned the fees to which he was not entitled. Id. at ¶¶ 29, 33, 44.
Discussion
I.
Rule 12(b)(1) – Subject Matter Jurisdiction
Stiles and Whelan have diverse citizenship and the amount in controversy exceeds
$75,000, so this case falls within the diversity jurisdiction. See 28 U.S.C. § 1332(a). Whalen
contends, however, that the jurisdiction that otherwise would obtain under § 1332(a) is defeated
by the probate exception to federal jurisdiction. Doc. 37 at 4-6. Whalen is incorrect.
As explained in Marshall v. Marshall, 547 U.S. 293 (2006), the probate exception applies
in two situations. First, it “reserves to state probate courts the probate or annulment of a will and
the administration of a decedent’s estate.” Id. at 311. Second, in line with “the general principle
that, when one court is exercising in rem jurisdiction over a res, a second court will not assume
in rem jurisdiction over the same res,” the exception “precludes federal courts from endeavoring
to dispose of property that is in the custody of a state probate court”—that is, from “disturbing or
affecting the possession of property in the custody of a state court.” Id. at 311-12 (internal
quotation marks and alterations omitted). The exception “does not bar federal courts from
adjudicating matters outside of those confines and otherwise within federal jurisdiction.” Id. at
312.
To determine whether the probate exception applies, it is necessary to determine the
nature of Stiles’s claims and of the relief she seeks. See Struck v. Cook Cnty. Pub. Guardian,
508 F.3d 858, 860 (7th Cir. 2007) (in holding that the probate exception did not apply,
explaining that “the plaintiff was not seeking to inject the federal court into the administration of
the estate and wrest a res from the control of another court”); Three Keys Ltd. v. SR Utility Co.,
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540 F.3d 220, 230 (3d Cir. 2008) (in holding that the probate exception applied, explaining that
“not only does Three Keys seek as relief the distribution of probate property, Three Keys also
seeks a determination that its interest in the SR Utility shares and dividends is superior to the
interest of the Estate”); Wisecarver v. Moore, 489 F.3d 747, 751 (6th Cir. 2007) (in holding that
the probate exception applied to some of the plaintiffs’ claims, explaining that “[g]ranting this
relief [a declaration that the will in question was invalid and an order divesting the defendants of
property obtained under the will] is precisely what the probate exception prohibits,” but noting
that the plaintiffs “also seek two forms of relief which would not implicate the probate
exception”). Count I of the second amended complaint alleges that Whalen owed “fiduciary
duties” to Stiles, Dahlberg, and the Dahlberg Trust, and that he “has a duty to account for, and
then repay, the Dahlberg Trust the value of the funds and assets wrongfully distributed from the
Dahlberg Trust or misappropriated funds belonging to [Dahlberg] during the period [Whalen]
was acting in a fiduciary capacity for [Dahlberg], to include any trustee fees wrongfully remitted
to him from the Dahlberg Trust or the Kraft Trust.” Doc. 36 at ¶¶ 38, 40. The final paragraph of
Count I asks the court “to order [Whalen] to account for, and remit to [Stiles], the funds
wrongfully distributed or misappropriated which should be available to her in the Dahlberg Trust
or the Kraft Trust.” Id. at ¶ 41. Count II alleges that Whalen breached his fiduciary duties to
Stiles, as a beneficiary of the Dahlberg Trust and Kraft Trust, in a variety of ways, and as relief
seeks compensatory and punitive damages from Whalen. Id. at ¶¶ 42-46. Count III, which seeks
punitive damages for Whalen’s alleged breach of his fiduciary duties, id. at ¶¶ 47-49, is
duplicative of Count II and will not be discussed further.
Stiles’s claims do not require the court to probate a will or administer an estate, and nor
do they require the court to dispose of property in the custody of a state court; in fact, there are
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no pending probate or other state court proceedings involving the wills or trusts. Id. at ¶ 6. To
the contrary, Stiles brings solely in personam claims against Whalen, alleging that he breached
his fiduciary duty to the trusts, to Dahlberg, and to her, and seeking only an accounting and
damages from Whalen personally. Given the narrow ambit of Stiles’s claims, the probate
exception does not apply. See Gustafson v. zumBrunnen, 546 F.3d 398, 400 (7th Cir. 2008)
(“The suit, though based ultimately on the will, is not within the probate exception to federal
jurisdiction. The judgment sought would just add assets to the decedent’s estate; it would not
reallocate the state’s assets among contending claimants or otherwise interfere with the probate
court’s control over and administration of the estate.”); Jones v. Brennan, 465 F.3d 304, 307-08
(7th Cir. 2006) (“Jones for the most part is complaining simply about the maladministration of
her father’s estate by the Cook County probate court,” which “clearly would violate the probate
exception,” but “she is also accusing the guardians of having mismanaged the state, and as an
heir she many have a claim for breach of fiduciary duty.”); Wisecarver, 489 F.3d at 750-51
(holding that the probate exception did not bar in personam claims alleging that “the defendants
received assets … by misusing the Power of Attorney … in their favor and that Plaintiffs were
damaged as a result”); Evans v. Pearson Enters., Inc., 434 F.3d 839, 847-48 (6th Cir. 2006)
(holding that the probate exception did not apply because the plaintiff’s “claim involves only an
action in personam regarding her revocable trust, an inter vivos trust that is unrelated to any
probate proceedings,” and because she did not “ask[] the federal court to take custody of
property away from state court to determine the rights of interested parties in that property”);
Downey v. Keltz, 2012 WL 280716, at *2 (N.D. Ill. Jan 31, 2012) (“an in rem action in federal
court involving the same res that a state court is exercising jurisdiction over is inappropriate, but
an in personam action in federal court related to the state action may proceed”).
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II.
Rule 12(b)(7) – Failure to Join Necessary and Indispensable Parties under Rule 19
Whalen seeks dismissal under Rule 12(b)(7) because Stiles has not joined in this case all
other beneficiaries of the Dahlberg Trust—Hardy, Macon, the Assembly, and Lawrence
University—whom he asserts are necessary and indispensable parties under Rule 19. Doc. 37 at
2-4. Whalen is incorrect, as the other beneficiaries are not Rule 19 parties.
Analysis under Rule 19 is bifurcated. First, the court determines under Rule 19(a)
whether “a person” (which can be a natural person or an entity) is necessary—or, in the Rule’s
terms, whether the person is “required to be joined if feasible.” Fed. R. Civ. P. 19(a). A person
is necessary if: “(A) in that person’s absence, the court cannot accord complete relief among
existing parties; or (B) that person claims an interest relating to the subject of the action and is so
situated that disposing of the action in the person’s absence may: (i) as a practical matter impair
or impede the person’s ability to protect the interest; or (ii) leave an existing party subject to a
substantial risk of incurring double, multiple, or otherwise inconsistent obligations because of the
interest.” Fed. R. Civ. P. 19(a)(1); see Thomas v. United States, 189 F.3d 662, 667 (7th Cir.
1999). Second, if a person is necessary under Rule 19(a) but cannot be joined, the court must
determine under Rule 19(b) whether the person is indispensable—or, in the Rule’s terms,
“whether, in equity and good conscience, the action should proceed among the existing parties”
without the necessary person “or should be dismissed.” Fed. R. Civ. P. 19(b); see Moore v.
Ashland Oil, Inc., 901 F.2d 1445, 1447 (7th Cir. 1990). Whalen bears the burden of
demonstrating that the other beneficiaries are necessary and indispensable under Rule 19. See
Ilan-Gat Eng’rs, Ltd. v. Antigua Int’l Bank, 659 F.2d 234, 242 (D.C. Cir. 1981); 5C Charles Alan
Wright & Arthur R. Miller, Federal Practice and Procedure § 1359, at 67 (3d ed. 2004) (“The
cases make it clear that the burden is on the party moving under Rule 12(b)(7) to show the nature
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of the unprotected interests of the absent individuals or organizations and the possibility of injury
to them or that the parties before the court will be disadvantaged by their absence.”).
Whalen contends that the other beneficiaries are “necessary” under Rule 19(a) “because
[Stiles], notwithstanding her repeated efforts to disguise her allegations, is still trying to use these
proceedings as an instrument to reduce all of their respective bequests under the Dahlberg Trust
and arrogate those amounts to herself.” Doc. 37 at 2-3. Whalen’s argument is not unreasonable,
as the second amended complaint conceivably could be read as asking the court to require
Whalen to claw back the allegedly improper distributions already made to the other beneficiaries
or to collect interest from Macon and Hardy for the allegedly interest-free loans, to compel
Whalen to make further payments from the Trust to Stiles, or to prohibit Whalen from making
certain future distributions to the other beneficiaries. If the second amended complaint indeed
sought such relief, the other beneficiaries might be necessary parties. See Hansen v. Peoples
Bank of Bloomington, 594 F.2d 1149, 1150 (7th Cir. 1979) (holding that certain beneficiaries
were necessary parties in a case brought to extinguish a trust, reasoning that a “judgment in favor
of termination would not only impair their ability to protect that interest, but might actually
operate to terminate their interest”). But the complaint is better read as a simple in personam
suit, one asking the court to require Whalen to pay damages to Stiles or the Trusts as
reimbursement for the allegedly wrongful payments that he has already made to himself and that
he has already made or allowed to be made to the other beneficiaries. Stiles’s brief confirms that
this is the proper reading of the complaint. Doc. 47 at 12 (“[Unlike] Wech v. Byrne, Goldenberg
& Hamilton, PLLC, 910 F. Supp. 2d 162 (D.D.C. 2012), [where] the plaintiff and the absent
beneficiary both assert[ed] ‘opposing, irreconcilable’ claims to a particular portion of settlement
proceeds paid to the estate, … Stiles’s claim against Whalen … seeks damages only against him.
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She does not seek recovery of a specific part of the Trust corpus.”); id. at 13 (“While Whalen
makes the unsupported statement that Stiles has somehow disguised her claim to ‘redistribute’
bequests as one for breach of fiduciary duty, the [second amended complaint] plainly alleges that
Whalen owed specific duties to Stiles as a beneficiary of the Trust, and that he has breached
those duties. This case is not, as Whalen contends, an effort to redistribute [the trust].”) (internal
quotation marks omitted); id. at 17 (“Stiles seeks an in personam judgment [against] Whalen.”).
Given the nature of the second amended complaint’s claims, the other beneficiaries of the
Dahlberg Trust are not necessary parties under Rule 19(a). See Godfrey v. Kamin, 194 F.R.D.
627, 630 (N.D. Ill. 2000) (“Plaintiffs are not requesting any relief that will augment or deplete
the trust, but are instead suing to recover compensatory damages from former trustees for not
administering the trust in a way that benefitted them and for withholding material information
from them.”) (footnote omitted). And because they are not necessary parties under Rule 19(a),
there is no need to determine whether they are indispensable under Rule 19(b). Consistent with
Stiles’s and the court’s understanding of the second amended complaint as being limited to
seeking damages solely from Whalen and solely for his prior actions or distributions, the court
will not permit any attempt by Stiles to expand this case to encompass any claim that Whalen
would violate his fiduciary duties to her or the Trusts if he were to make particular future
distributions to any of the other beneficiaries. Any such attempt not only could make the other
beneficiaries into Rule 19 parties, but also could bring this case or parts thereof within the
probate exception to federal jurisdiction.
III.
Rule 12(b)(6) – Failure to State a Claim
Finally, Whalen contends that the second amended complaint should be dismissed under
Rule 12(b)(6) for failure to state a claim. Again, he is incorrect.
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Count II alleges that Whalen breached his fiduciary duties as trustee. “Under Illinois law
…, recovery for a breach of fiduciary duty requires proof of three elements: ‘[1] a fiduciary duty
exists, [2] that the fiduciary duty was breached, and [3] that such breach proximately caused the
injury of which the plaintiff complains.’” Gross v. Town of Cicero, 619 F.3d 697, 709 (7th Cir.
2010) (alterations in original) (quoting Neade v. Portes, 739 N.E.2d 496, 502 (Ill. 2000)); see
also Chi. City Bank & Trust Co. v. Lesman, 542 N.E.2d 824, 826 (Ill. 1989) (“A cause of action
for breach of fiduciary duty must set forth allegations … that a fiduciary relationship existed
between the parties, that the trustee owed certain, specific duties to the plaintiff, that the trustee
breached those duties, and, that there were resulting damages.”). Whalen challenges the second
and third elements. Doc. 37 at 7-12.
With respect to the second element, Count II alleges—and it bears repeating that the
allegations are merely allegations, which the court must credit at this stage of the case—that
Whalen breached his fiduciary duties as a trustee by failing to manage the Dahlberg Trust
according to its terms and in Stiles’s best interests, by failing to collect interest on the loans made
to Macon and Hardy, by allowing Hardy to make unauthorized distributions to charities like the
Assembly and Lawrence University, by paying himself excessive fees, by employing an
unqualified appraiser to value the properties, and by misappropriating funds from Dahlberg and
the Dahlberg Trust. Doc. 36 at ¶¶ 21-22, 24, 29, 33, 41-44, 46. These allegations plausibly
assert breaches of the fiduciary duty a trustee owes to a trust and its beneficiaries under Illinois
law. See Restatement (Third) of Trusts § 78 (2007) (“a trustee has a duty to administer the trust
solely in the interest of the beneficiaries”); In re Estate of Muppavarapu, 836 N.E.2d 74, 77 (Ill
App. 2005) (same); Restatement (Third) of Trusts § 76 (“The trustee has a duty to administer the
trust, diligently and in good faith, and in accordance with the terms of the trust and applicable
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law.”); Herlehy v. Marie V. Bistersky Trust Dated May 5, 1989, 942 N.E.2d 23, 39 (Ill. App.
2010) (“A trustee owes a fiduciary duty to a trust’s beneficiaries and is obligated to carry out the
trust according to its terms and to act with the highest degrees of fidelity and utmost good
faith.”) (internal quotation marks omitted); Restatement (Third) of Trusts § 79 (“A trustee has a
duty to administer the trust in a manner that is impartial with respect to the various beneficiaries
of the trust”); S. Ill. Carpenters Welfare Fund v. Carpenters Welfare Fund of Ill., 326 F.3d 919,
923-24 (7th Cir. 2003) (“It is fundamental that when there are two or more beneficiaries of a
trust, the trustee is under a duty to deal impartially with them.”) (internal quotation marks
omitted); Comtrade, Inc. v. First Nat’l Bank of Highland Park, 497 N.E.2d 527, 529 (Ill. App.
1986) (“When there are multiple beneficiaries named in the trust or escrow agreement, a trustee
is under a duty to deal impartially with each of them. It is well settled that when there are
conflicting claims between beneficiaries, a trustee who ignores the demands of one beneficiary in
order to comply with the demands of another will be held accountable for its actions.”) (citation
omitted).
Whalen responds that a section of the trust stating that “[n]o individual trustee shall be
liable for any loss resulting from any act, or failure to act, in good faith,” Doc. 36-3 at 11, shields
him from liability because he acted in good faith. Doc. 37 at 8. Exculpatory clauses in trusts are
generally enforceable. See Metz v. Independent Trust Corp., 994 F.2d 395, 400 (7th Cir. 1993).
The complaint, however, alleges that Whalen intentionally breached his fiduciary obligations,
which is inconsistent with acting in good faith. Doc. 36 at ¶¶ 29-30, 33, 44. The question
whether Whalen performed his duties in good faith presents an issue of fact that cannot be
resolved on a motion to dismiss. See Lorillard Tobacco Co. v. A & E Oil, Inc., 503 F.3d 588,
594 (7th Cir. 2007) (“as a general rule, a party’s state of mind … is a question of fact for the
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factfinder, to be determined after trial”) (internal quotation marks omitted); Alvarado v. Litscher,
267 F.3d 648, 651 (7th Cir. 2001) (holding that a qualified immunity defense is fact-dependent
and thus usually is not an appropriate ground for dismissal); Carter v. Chi. Police Officers, 165
F.3d 1071, 1081 (7th Cir.1998) (“Whether conduct is willful … is ultimately a question of fact
for the jury.”).
Whalen also argues that another exculpatory provision of the trust, one stating that “[n]o
trustee shall be accountable for any act or default of another trustee,” Doc. 36-3 at 13, shields
him from liability for Hardy’s actions. Doc. 37 at 9. But as Whalen concedes, Doc. 37 at 8, a
trustee’s “abuse of discretion” or “bad faith” may overcome this provision. See Metz, 994 F.2d
at 400 (“Although exculpatory provisions do not enjoy special favor in the law, if they are
inserted in a trust instrument they are generally held effective except as to breaches of trust
committed in bad faith or intentionally or with reckless indifference to the interest of the
beneficiary.”) (internal quotation marks omitted) (emphasis and alterations omitted); Carter v.
Cater, 965 N.E.2d 1146, 1153-54 (Ill. App. 2012) (holding that exculpatory clauses do not cover
actions “by the trustee that are outside the bounds of reasonable judgment”). And again, bad
faith is plausible given the complaint’s allegations, meaning that it cannot be said on the
pleadings that the exculpatory clause excused Whalen of his duty “to prevent a co-trustee from
committing a breach of trust.” Restatement (Third) of Trusts § 81; see id. at cmt. e (“A trustee
is not liable for a breach of trust committed by a co-trustee, unless the trustee: (i) participated or
acquiesced in the breach of trust or was involved in concealing it; (ii) improperly delegated
administration of the trust to the co-trustee; or (iii) enabled the co-trustee to commit the breach of
trust by failing to exercise reasonable care, including by failing to make reasonable effort to
enjoin or otherwise prevent the breach of trust.”); Winger v. Chi. City Bank & Trust Co., 67
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N.E.2d 265, 277 (Ill. 1946) (“equity … will not permit one trustee to sit idly by and acquiesce in
the fraudulent actions of another trustee”).
With respect to the third element of Stiles’s fiduciary claim, injury, Whalen’s alleged
breaches of his fiduciary duties plausibly caused damages by reducing the value of the Dahlberg
Trust and Stiles’s share thereof. Many of the alleged violations—the interest-free loans, the
early distributions, Hardy’s personal use of trust funds, and the excessive and undue fees—
directly reduced the Trust’s value. The allegedly unqualified appraiser who allegedly
undervalued the Kraftwood properties reduced Dahlberg’s distribution due to the Trust’s true-up
provision. Doc. 36 at ¶¶ 4, 30; Doc. 36-3 at 5. Given these allegations, the complaint adequately
pleads that Whalen’s conduct damaged Stiles.
Count I requests an accounting. To state an accounting claim, a plaintiff must allege:
“(1) a breach of a fiduciary relationship, (2) a need for discovery, (3) fraud, or (4) the existence
of mutual accounts which are of a complex nature.” Kempner Mobile Electronics, Inc. v.
Southwestern Bell Mobile Sys., 428 F.3d 706, 715 (7th Cir. 2005); see also ABM Marking, Inc. v.
Zanasi Fratelli, S.R.L., 353 F.3d 541, 545 (7th Cir. 2003) (same); Mann v. Kemper Fin. Cos.,
Inc., 618 N.E.2d 317, 327 (Ill. 1992) (same). An accounting plaintiff ordinarily must also allege
that she has no adequate remedy at law, but Illinois law carves an exception for “accounting
action[s] … based upon a breach of fiduciary duty so that a plaintiff may proceed with the
action.” Mann, 618 N.E.2d at 327; see also Kurtz v. Solomon, 656 N.E.2d 184, 192 (Ill. App.
1995); 3Com Corp. v. Electronics Recovery Specialists, Inc., 104 F. Supp. 2d 932, 941 (N.D. Ill.
2000). Because Stiles adequately pleads a fiduciary duty claim, and because the accounting
claim is pleaded in aid of the fiduciary duty claim, the accounting claim may proceed regardless
of whether Stiles has an adequate remedy at law. See Kurtz, 656 N.E.2d at 192; Unichem Corp.
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v. Gurtler, 498 N.E.2d 724, 731 (Ill. App. 1986); Pentech Phamaceuticals, Inc. v. Par
Pharmaceutical, Inc., 2004 WL 2390088, at *5 (N.D. Ill. Oct. 21, 2004); Cafcas v. DeHaan &
Richter, P.C., 699 F. Supp. 679, 684 (N.D. Ill. 1988).
Finally, Whalen argues that the second amended complaint’s request for punitive
damages on the fiduciary duty claim should be stricken. Doc. 37 at 12-14. “Illinois courts have
made clear that punitive damages are available for breaches of fiduciary duty.” LM Ins. Corp. v.
Spaulding Enters Inc., 533 F.3d 542, 551 (7th Cir. 2008); see also Franz v. Calaco Development
Corp., 818 N.E.2d 357, 375 (Ill. App. 2004) (“Punitive damages are available as a matter of law
for a breach of fiduciary duty”). Whalen argues, however, that punitive damages are barred by
735 ILCS 5/2-1115, which provides that “[p]unitive damages not recoverable in healing art and
legal malpractice cases.” Although Whalen is a lawyer, the complaint alleges not that he
committed legal malpractice, but that he breached his fiduciary duties as a trustee. The statute
therefore does not apply here. See Nettleton v. Stogsdill, 899 N.E.2d 1252, 1266 (Ill. App. 2008)
(“actions for legal malpractice and breach of fiduciary duty are conceptually distinct”); Rose v.
MONY Life Ins. Co., 2001 WL 214200, at *4 (N.D. Ill. Mar. 2, 2001) (“it is possible, under
Illinois law, to properly plead a cause of action for malpractice and a separate action for breach
of fiduciary duty”).
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Conclusion
For the foregoing reasons, Whalen’s motion to dismiss is denied. Whalen shall answer
the second amended complaint by January 10, 2014.
December 20, 2013
United States District Judge
16
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