HAMMES, and others, Appellants, v. FIRST NATIONAL BANK & TRUST COMPANY OF RACINE, and another, Respondents.
No. 75-481
Supreme Court of Wisconsin
Argued May 31, 1977. Decided July 1, 1977.
79 Wis. 2d 355 | 255 N. W. 2d 555
DAY, J.
For the respondents there was a joint brief by Hand & Quinn of Racine; L. William Staudenmaier and Cook & Franke, S. C. of Milwaukee; and Glenn R. Coates, Robert H. Bichler and Thompson & Coates, Ltd. of Racine, and oral argument by L. William Staudenmaier of Milwaukee, and Robert H. Bichler of Racine.
The action alleges breach of fiduciary duty and negligence by the defendants in their capacity as trustees. The precipitating event leading to this lawsuit was the sale by plaintiffs, on the advice of defendants, of certain
Defendant First National Bank and Trust Company of Racine (hereinafter bank) was the co-trustee of the testamentary trusts just mentioned until May 7, 1971. The bank was also trustee of the term trusts. Defendant George J. Kuehnl, an attorney-at-law, was a co-executor and a co-trustee of the four testamentary trusts under the will.
The major events leading up to this litigation are as follows: By agreement dated March 14, 1966 plaintiffs agreed to sell to ISE their inherited shares of ISE stock for an aggregate amount of $700,000. The agreement provided for prior review and approval by the probate court and was found to be in the best interests of the trust beneficiaries and approved by the probate court of Racine county April 1, 1966.
On March 28, 1966 the probate court of Racine county issued orders formally discharging defendant Kuehnl as trustee of the testamentary trusts.2 Kuehnl‘s resignation was prompted by the anticipated sale of the stock to ISE.
The orders said in part,
“(T)he resignation of George J. Kuehnl, as Individual Trustee of said trust be and it is hereby accepted, and he is hereby discharged as such Trustee, and released of all obligations and liability as said trustee.”
“Petition having been filed for the acceptance of the resignation of George J. Kuehnl, as Individual Trustee, and his release and discharge as such trustee from all obligations and liabilities of any nature whatsoever, as such trustee; and for an order appointing as successor trustee, without bond, . . . and the issuance to him of Letters of Trust.
“The undersigned, being all of the persons interested in the above proceeding, and over the age of 21 years, and fully competent, hereby enter appearance, and waive any and all notice of the above proceeding, and consent to an immediate hearing without notice and to the granting of the prayer of said Petition.”
On April 1, 1966 the probate court issued orders with respect to each testamentary trust approving the sale of ISE stock. The orders followed a hearing, held the same day, at which the propriety of the sale was discussed. The orders approving the sale said in part,
“(T)he sale of the trust(s‘) interest in said shares and/or voting trust certificates is in the best interests of the trust beneficiar(ies) and is in accordance with the well established principles of trust management and administration.
“. . . (T)he said Contract (of sale) of March 14, 1966 is fair and equitable and it is in the best interests of the beneficiar(ies) of the trust(s) to approve said Contract.”
It is not disputed that during his tenure as co-trustee of the testamentary trusts defendant Kuehnl was simultaneously corporate secretary of and counsel for ISE. Plaintiffs allege Kuehnl was actively engaged in all of these roles during the negotiations for the sale, transmission by ISE of the offer to purchase, and acceptance of the offer which culminated in the contract of sale.
According to the affidavit of George E. Shoup, a vice president in charge of administration of ISE, Kuehnl first conveyed to ISE the idea that it should offer to purchase plaintiffs’ stock. Kuehnl also was a participant in an ISE internal management committee which formulated the price per share which ISE would offer the plaintiffs, according to Shoup. ISE discussions concerning the offer to purchase took place as early as February 25, 1966. James D. Beckett, vice president in charge of the trust department at the defendant bank, testified Kuehnl acted as a “go-between” the bank, the trustees and ISE.
There are also allegations, raised by deposition testimony, that defendant bank, prior to the April, 1966 sale, was aware that those ISE stock interests which were the subject of the sale were, subsequent to that sale, to be
Kuehnl left ISE in late 1966 and was required to sell his shares back to ISE at that time.
Deposition testimony of Alice Foster, a trust officer at defendant bank, would if believed by the finder of fact, also establish that no negotiations were conducted between the bank and ISE concerning the price at which plaintiffs’ stock should be sold.
When Quinten A. Hammes, Sr., died, an independent investment analyst was hired to determine the fair market value of ISE stock for death tax purposes. There is deposition testimony that prior to the sale defendant bank had in its possession an updated version of the stock valuation formula. This updated version, based on ISE records as of December 31, 1965, put a valuation on ISE stock at approximately fifty dollars per share more than what ISE had offered.
Defendants, by their affidavits and other proof in support of a motion for summary judgment, establish the circumstances previously mentioned leading to the probate court orders discharging Kuehnl and approving the sale of stock. Kuehnl states in his affidavit that his recommendation to sell the stock was in the best interests of the plaintiffs. It is pointed out that plaintiffs held a minority nonvoting interest in a closely held, single prod-
The trial court granted summary judgment for the defendants on the basis of the affidavits and other proof which were submitted. It decided this action was barred, on the principles of res judicata, by the Racine county probate court‘s orders of March 28, 1966 discharging defendant Kuehnl as trustee and subsequent orders of April 1, 1966 approving the sale.
Matters determined in a probate or trust proceeding are binding upon the parties provided the issues between the parties are raised and litigated, and assuming there is an identity of the parties, subject matter and cause of action between the two proceedings. Bischoff v. First Wisconsin Trust Co., 30 Wis.2d 583, 588, 141 N.W.2d 188 (1966); Rahr v. Wittmann, 147 Wis. 195, 202, 132 N.W. 1107 (1911). A final adjudication is conclusive in a subsequent action between the same parties not only as to all matters which were litigated, but also as to all matters which might have been litigated in the former proceedings. Werner v. Riemer, 255 Wis. 385, 403, 39 N.W.2d 457, 39 N.W.2d 917 (1949); Laundry v. Schott, 54 Wis.2d 723, 725, 196 N.W.2d 692 (1972).4 But the res judicata effect of a county court order is dependent upon competent jurisdiction and an absence of fraud. Shaughnessy v. Ohio Casualty Ins. Co., 66 Wis.2d 280, 283-284, 224 N.W.2d 198 (1974), citing Meyer v. Barth, 97 Wis. 352, 72 N.W. 748 (1897). 3 MacDonald, Wisconsin Probate Law And Practice, sec. 18.140, p. 72 (7th ed. 1973) (hereinafter “MacDonald“).
In probate, the county court is a court having only such jurisdiction as is conferred upon it by statute. In Matter of Estate of Corey, 73 Wis.2d 644, 647, 245 N.W.2d 902 (1976); Gerlach v. Thiem, 58 Wis.2d 113, 117, 205 N.W.2d 779 (1973).5
Action was brought in circuit court against both the bank (and its trust officers) and the corporation alleging the bank was negligent and derelict in connection with the sale. Appeal was from an order of the circuit court denying defendants’ motion to dismiss for lack of jurisdiction. This court affirmed holding the circuit court had jurisdiction and the probate court did not. In discussing the limited jurisdiction of the probate court, it was said at 58 Wis.2d 118:
”Will of Reinke (1951), 259 Wis. 398, 403, 48 N.W.2d 613, points out that a county court in probate is a court of limited jurisdiction and, when acting within its probate jurisdiction, is confined to those matters which are incidental to its probate jurisdiction. Will of Reinke cites Estate of George, supra, page 264, for the proposition
“““Merely because the estate of a decedent has interests of various kinds, that fact does not operate to extend the jurisdiction of that court to cases involving all of those interests.““”
”Will of Reinke, at page 404, recognizes the doctrine that:
“‘. . . in determining whether or not in a particular case the county court in probate has jurisdiction of certain matters, consideration must always be given to its function, which is “as has been said by this court, to administer and distribute estates and exercise such other powers as may be expressly conferred upon it by the legislature.“‘”
“The nature of the action should be emphasized. This is an action for damages for an alleged tort. The plaintiffs do not contend that the sale in the probate court was void, and they are not attempting to invoke the equitable power of the probate court to set aside the stock transfer. Rather, they acknowledge the fact of that transfer and are seeking, not a reconveyance, but the damages that resulted from the sale.
“The present controversy, where the plaintiffs are affirming the sale of the stock and are suing only for negligence and a tortious misrepresentation, is not within the jurisdiction of the probate court as conferred by the statutes.” 58 Wis.2d 119-120.
The plaintiffs in the instant action similarly plead causes of action sounding in tort for breach of fiduciary duties and negligence. As in Gerlach, they do not seek to set the stock sale aside, but rather claim money damages.7
But citation to Gerlach cannot end our inquiry. Gerlach expressly declined to consider the question whether an executor‘s discharge in county court constituted a bar to circuit court proceedings because the issue was not raised in the pleadings as an affirmative defense.
Another substantial policy is involved when the county court affirmatively discharges the executor, or here the trustee, of liability. That is the necessity of according probate court orders the weight and finality which are necessary to efficiently put an end to litigation and to allow parties to adjust their affairs with the expectation that the discharge orders have finally settled their respective rights and liabilities. An order discharging a trustee of liability will, of course, mean little if the beneficiary can nevertheless seek to impose financial liability in circuit court at a later date.
But the policy of finality does not apply when the discharge is obtained through the withholding of material facts which a party is under an affirmative duty to disclose.
In Dick & Reuteman Co. v. Doherty Realty Co., 16 Wis.2d 342, 114 N.W.2d 475, 478 (1962) this court said,
“It is a fundamental principle of the law of trusts that the trustee is under a duty of undivided loyalty to the beneficiaries of the trust. (citations omitted). This duty of loyalty is violated where the trustee purchases an in-
terest in the subject matter of the trust.” (citations omitted).
The court quoted with approval Magruder v. Drury, 235 U.S. 106, 119 (1914):
“It is a well settled rule that a trustee can make no profit out of his trust. The rule in such cases springs from his duty to protect the interests of the estate, and not to permit his personal interest to in any wise conflict with his duty in that respect. The intention is to provide against any possible selfish interest exercising an influence which can interfere with the faithful discharge of the duty which is given in a fiduciary capacity.” 114 N.W.2d at 479.
The trustee‘s duty to protect the interests of the trust beneficiaries does not cease until his discharge is formal and complete. Even during the hearing on discharge the duty to affirmatively represent these interests by disclosing relevant information remains, and the breach of this duty leaves the discharge open to attack.
In Will of Cosgrove, 236 Wis. 554, 295 N.W. 784 (1941) the trustee bank invested trust funds in mortgages which, on final account, were not paid off. The bank petitioned for and received settlement of the account by the county court. None of the beneficiaries’ heirs appeared at the hearing though they did have notice. It was later discovered that the mortgages ran to the bank in its own name and that the bank assigned the mortgage to the trust without procuring court approval to sell the trust its own securities. The bank‘s failure to disclose its own interest in the securities was held to be a constructive fraud upon the court and subject to attack.
“But although the inclusion of the two mortgages was improper because of the bank‘s dealing as trustee with itself, it still follows, as said in connection with the two matters previously discussed, that the inclusion was only
erroneous and remediable only by appeal. It cannot be reached now unless some fraud was practiced upon the court that led to the inclusion. “We are of opinion that the withholding of the fact of self-dealing from the court constitutes such fraud. ‘The trustee in dealing with the beneficiary on the trustee‘s own account is under a duty to the beneficiary . . . to communicate to him all material facts in connection with the transaction which the trustee knows or should know.’ 1 Restatement, Trusts, § 170 (2).” 236 Wis. at 564.
Also see, Laun v. Kipp, 155 Wis. 347, 372, 145 N.W. 183 (1914); Will of Pettee, 266 Wis. 347, 354-355, 63 N.W.2d 715 (1954); In re Estate of Boots, 73 Wis.2d 207, 243 N.W.2d 225 (1976); In Matter of Estate of Kennedy, 74 Wis.2d 413, 420, 247 N.W.2d 75 (1976).
Plaintiffs also call to the court‘s attention the case of Liberty Title & Trust Co. v. Plews, 6 N.J. 28, 77 A.2d 219 (1950) which is an accurate summary of the trustee‘s affirmative duty to make full disclosure. At 77 A.2d 224 it is said,
“We recognize that ‘It is a doctrine of universal acceptation that the judgment of a competent court acting within its jurisdiction is conclusive upon parties and privies as to all matters adjudged upon which the parties were of right entitled to be heard’ and that this general rule applies to decrees settling accounts . . . But the courts have recognized exceptions to this rule in cases where there is fraud or mistake, . . . A trustee, as a fiduciary, is under a duty of make full and complete disclosure of all transactions in relation to his trust. He is permitted neither to conceal nor to misrepresent, and if he fails in his duty to disclose the true facts so as to give notice to interested parties of any illegal or improper investments, it amounts to fraud such as will permit a decree approving his account to be open. ‘If the trustee has been guilty of fraud by way of concealment or misrepresentation in presenting his account and procuring the approval of the court, the settlement may be opened.’ 4 Bogert, Trusts and Trustees (1935) 2844.”
The procedure for examining affidavits and other proof on a motion for summary judgment is well defined.
“Summary judgment is a drastic remedy that should not be granted where material evidentiary facts are in dispute, or, where reasonable inferences can be drawn from undisputed facts that would lead to alternative and opposite results. The summary-judgment procedure initially requires an examination of the pleadings to determine whether a cause of action has been stated and whether material issues of fact are presented. However, the allegations of the pleadings may not be considered as evidence or other proof on a disposition of the motion. Assuming a cause of action and the existence of factual issues, an examination is then made of the moving party‘s (defendant‘s) affidavits and other proof to determine whether a prima facie defense has been established. If the moving party has made a prima facie case for summary judgment, an examination is then made of the opposing party‘s affidavit and other proof to determine whether there exists disputed material facts, or undisputed material facts from which reasonable alternative inferences may be drawn, sufficient to entitle the opposing party to a trial. The summary judgment procedure is not a trial on affidavits.” Ricchio v. Oberst, 76 Wis.2d 545, 551, 251 N.W.2d 781 (1977); citing Marshall v. Miles, 54 Wis.2d 155, 160-161, 194 N.W.2d 630 (1972).
Plaintiffs’ affidavit and other proof raise the issues, inter alia, whether Kuehnl, while he was trustee, initiated the discussions with ISE to purchase the stock; whether he participated in the ISE internal management committee which formulated the price contained in the offer ultimately made to himself as co-trustee; whether he used due care in arriving at a valuation of the stock which would maximize the trust beneficiaries’ position; and whether, at the time these events took place, Kuehnl stood to profit personally by the sale through an ISE employee stock purchase plan. Plaintiffs have similarly raised issues concerning the alleged desire of the co-trustee bank to obtain ISE business and lack of due care in negotiating on behalf of the plaintiffs in the sale of the stock. Plaintiffs have also adequately raised the threshold issue of whether there was a failure on the part of the trustees to affirmatively disclose these alleged facts, constituting a fraud on the court,9 prior to their discharges.
Defendants’ affidavits and other proof, tending to show that the sale was in fact in the best interests of the plaintiffs are defensive in nature and not dispositive on a motion for summary judgment.
By the Court.—Judgments reversed and cause remanded for further proceedings not inconsistent with this opinion.
The plaintiffs, although they contend otherwise, are clearly bringing a collateral attack against both orders of the probate court. Before any liability in tort may be imposed upon defendant Kuehnl, the plaintiffs must prove that the orders of the probate court discharging and releasing him of all obligations and liability and approving the sale of the stock were procured by a fraud upon the court. If the plaintiffs’ assertions of self-dealing and failure to disclose pertinent facts on the part of the co-trustees are subsequently borne out, the orders of the probate court were both necessarily obtained by virtue of a fraud perpetrated upon the probate court.
A judgment or order of a competent court tainted by the perpetration of actual or constructive fraud upon the court in its procurement is open to either direct or collateral attack. In re Estate of Boots, 73 Wis.2d 207, 215, 216, 243 N.W.2d 225 (1976); Sinnott v. Porter, 57 Wis.2d 462, 466, 204 N.W.2d 449 (1973); Kriesel v. Kriesel, 35 Wis.2d 134, 138, 139, 150 N.W.2d 416 (1967); Zrimsek v. American Automobile Ins. Co., 8 Wis.2d 1, 3, 98 N.W.2d 383 (1959); Estate of Penney, 225 Wis. 455, 471, 274 N.W. 247 (1937).
While a direct attack should be initiated in the court which entered the initial judgment or order, a collateral attack based upon actual or constructive fraud upon the court may be brought in a different court.1
It is reemphasized that it is incumbent upon the plaintiffs to first prove actual fraudulent practices conducted by the co-trustees in the procurement of the orders of the probate court before the plaintiffs may succeed on their cause of action.
I am authorized to state that Mr. Justice ROBERT W. HANSEN joins in this concurring opinion.