MEMORANDUM AND ARGUMENT
Defendant STEPHEN KEARNEY has submitted a Response to the Special
Administrator’s Report and a 12 page Memorandum in which he legally concludes that
he was guilty of no breaches of fiduciary duty. STEPHEN KEARNEY subsequently
added a Motion for Summary Judgment, in which he requests the Court to conclude that
there were not severe shortfalls in his conduct as a fiduciary.
I. FIDUCIARY RELATIONSHIP
1. STEPHEN KEARNEY has repeatedly attempted to minimize the scope of his
fiduciary relationship with his mother. See Motion for Partial Summary Judgment and
Response to Motion for Summary Judgment (hereinafter called “Motion and Response”).
2. In spite of unequivocal evidence that STEPHEN KEARNEY assisted
DOLORES KEARNEY in many ways, STEPHEN KEARNEY has repeatedly refused to
acknowledge his role. See the Request to Admit and Response filed on August 4, 2006,
with the Court. See also Response Paragraph II(2), in which he stated that he assisted his
mother in her financial affairs only when she specifically requested that he do so out of
convenience for her or due to her being out of town.
3. The financial records disclosed a commingling of the various checking
accounts. It appears that STEPHEN KEARNEY repeatedly transferred money to and
from his mother’s checking account and the checking account owned by him. Many of
the transactions appear to have been initiated by STEPHEN KEARNEY.
4. The estate plans of DONALD KEARNEY and DOLORES KEARNEY both
had the bulk of their property passing to their children equally. STEPHEN KEARNEY,
as power of attorney agent, was required to follow the estate plans. 755 ILCS 45/2-9.
5. The diversions to himself, directly through the transfers to his checking
account and indirectly through the rent shortfall, were not part of the estate plans.
6. The Illinois State Bar Association and the Chicago Bar Association recognize
that “some persons of advanced age can be quite capable of handling routine financial
matters while needing special legal protection concerning major transactions”. See
Proposed Amended Rule 1.14: Client with Diminished Capacity.
7. STEPHEN KEARNEY served multiple roles as a dominant fiduciary,
including but not limited to Executor, POA Agent, Trustee, and common law fiduciary.
Numerous cases cited below refer only to one or two areas of fiduciary relationships;
since the concepts generally apply to all fiduciary relationships the burden should be on
STEPHEN KEARNEY to appropriately distinguish the applicability of the cases to other
fiduciary positions.
II. DUTY TO ACCOUNT
1. STEPHEN KEARNEY repeatedly stated in his response that his only duty to
respond was to turnover records in his possession from Commerce Bank. That is not an
accurate summation of the law.
2. Even within his alleged limited scope, STEPHEN KEARNEY failed
miserably. He did not even retain full Commerce Bank records for the Certificates of
Deposit transactions that he was involved in. STEPHEN KEARNEY has reluctantly
produced a few selective years of “Journal Records” from his mother well after litigation
commenced.
3. TIMOTHY KEARNEY, DIANNE KEARNEY and counsel were entitled to
review all books and accounts of DOLORES KEARNEY at all times, not just when
STEPHEN KEARNEY decided to produce them. 755 ILCS 5/19-13
4. There is no comprehensive compilation of the Certificates of Deposit. The
compilation had to be re-created by Daniel G. Deneen. This required a meticulous
review of the Commerce Bank records that were produced by STEPHEN KEARNEY.
5. All fiduciary representatives must keep full, complete and accurate accounts
of the fiduciary estate. The following statutes are applicable:
a. Ward’s Estates: 755 ILCS 5/24-11;
b. PPOA: 755 ILCS 45/2-7; and
c. Trusts: 760 ILCS 5/11.
6. A trustee or executor is bound to keep clear, distinct and accurate accounts. If
he does not, all presumptions are against him, and all obscurities and doubts are to be
taken adversely to him. Nonnast v. Northern Trust Co. (1940), 374 Ill. 248, 29 N.E.2d
251.
7. “An administratrix or a trustee is a fiduciary and bound to keep clear, distinct
and accurate records of all dealings with the estate or trust assets put in her possession,
and her failure to do so creates a strong presumption against the propriety of such
dealings. Matter of Estate of Winston (1st. Dist. 1981), 99 Ill.App.3d 278, 54 Ill.Dec.
756, 425 N.E.2d 973.
8. When STEPHEN KEARNEY accepted the role of Power of Attorney agent he
was required to accept the responsibilities. This included the statutory duty to account.
9. As noted in the Motion and Response, all shortcomings in the reporting of the
transfers to himself and the Certificate of Deposit transactions should be assessed against
STEPHEN KEARNEY.
III. PRESUMPTIONS AND BURDEN OF PROOF
1. One hundred and sixty years ago attorney Abraham Lincoln attempted to
exculpate a fiduciary from a breach of fiduciary duty, and was unsuccessful. See Casey v.
Casey (1842), 14 Ill. 112. The law remains stringent to this day when a fiduciary is
involved in a transaction in which the fiduciary benefits.
2. Only a few decades later the Illinois Supreme Court spoke again:
“The doctrine is a familiar one that every presumption is indulged against
the trustee who has personal dealings with the trust. Where the conduct of
the trustee in relation to the trust property is fraudulent in its tendency as
well as in its nature, its consequences, if injurious, are imputed to the
trustee personally, and the estate will be held liable therefore.” White v.
Sherman (1897), 168 Ill. 589, 605.
3. Once the petitioner has shown that a fiduciary relationship exists, the
presumption is that a transaction between the dominant and servient parties which profits
the dominant party is fraudulent. The dominant party then has the burden of proving by
clear and convincing evidence that the transaction was fair and equitable and did not
result from his undue influence over the servient party. Lemp v. Hauptmann (5th Dist.
1988), 170 Ill.App.3d 753, 525 N.E.2d 203; 121 Ill.Dec. 397.
4. When this duty (utmost fidelity and good faith with respect to the
administration of the trust) is breached, the presumption arises that the transaction at
issue was fraudulent. Obermaier v. Obermaier (1st Dist. 1984), 128 Ill.App.3d 602, 470
N.E.2d 1047, 83 Ill.Dec. 627. It is then the trustee's burden to prove, by clear and
convincing evidence, that the transaction was fair and that the trustee did not breach its
duty of loyalty. Curtis v. Fisher (1950), 406 Ill. 102, 92 N.E.2d 327 (1950). NC Illinois
Trust Co. v. First Illini Bankcorp, Inc. (3d Dist. 2001), 323 Ill.App.3d 254; 752 N.E.2d
1167; 256 Ill.Dec. 925.
5. Clear and convincing evidence is that which leaves no reasonable doubt in the
mind of the trier of fact as to the truth of the proposition in question. In re Estate of
Clements (5th Dist. 1987), 152 Ill.App.3d 890, 505 N.E.2d 7.
6. STEPHEN KEARNEY was a fiduciary. STEPHEN KEARNEY dealt with
the property of DOLORES KEARNEY, both in trust and as her agent. For STEPHEN
KEARNEY to evade liability the Court must have no reasonable doubt that STEPHEN
KEARNEY acted fairly, in good faith, and not to his own advantage in dealing with the
property of DOLORES KEARNEY.
IV. FAIR FARM RENT
1. STEPHEN KEARNEY is correct in that his father sanctioned the conflicting
roles of trustee, Power of Attorney agent, and tenant. The Halas case, 209 Ill. App. 3d
333, 568 N.E.2d 170, commented upon recently in the case of Benak v. Duffy, 3-05-0570
(June 2006) discusses situations in which “conflicting interests” are sanctioned. In such a
case, the presumption of fraud is not automatically applied.
2. Accordingly, on the Fair Farm Rent Question, there was no per se violation of
the fiduciary proscription on self-dealing. However, even with a conflict of interest, the
duty to handle the property of the servient party appropriately, and not to take advantage
of the fiduciary relationship remains. The transaction still must be fair. Further, the
fiduciary cannot act with reckless indifference to the situation of the beneficiary.
3. 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. Giagnorio v. Emmett C. Torkelson Trust (2d Dist. 1997), 292
Ill.App.3d 318, 226 Ill.Dec. 693, 686 N.E.2d 42.
4. The fiduciary is liable if he acted dishonestly or in bad faith, or has abused his
discretion. In Halas, the Court found a breach of fiduciary duty.
5.
District Judge Lindley reviewed Illinois law and concluded “A ‘breach of
trust’ has broader meaning than willful and fraudulent acts, and every violation by trustee
of duty which equity lays upon him, whether willful or fraudulent or done through
neglect or arising through oversight or forgetfulness, is ‘breach of trust’.” Grodsky v.
Sipe (E.D.Ill. 1940), 30 F. Supp. 656.
6. As Trustee, STEPHEN KEARNEY could not ignore the financial
circumstances of his mother. His mother appeared to be “land rich and cash poor”, a
common situation for agricultural families. As early as 1996 he was aware of cash flow
problems for his mother. This continued, and on several occasions he “loaned” funds to
his mother.
7.
The cash flow of STEPHEN KEARNEY was such that he needed additional
funds in December and January of 1997-1998 and January of 1999. Not less than
$39,000 was transferred from assets of DOLORES KEARNEY, of which $8000 and
$6000 was repaid. The delay in rent payments could also be considered a “loan”.
8. As Trustee, STEPHEN KEARNEY should have maximized, within
reasonable standards, the income for the trust to assist his mother. As power of attorney
agent, STEPHEN KEARNEY should have conceptually required the Trustee, and the
tenant of his mother’s property, to provide reasonable rent.
9. To fail to maximize the assets of an elderly woman who was going through
money faster than she was bringing it in was an abuse of discretion, at best.
10. Medicaid will pay for nursing home services, but not private care. It was
fortunate for DOLORES KEARNEY that she was not one of the unfortunate elderly
persons who could live somewhat independently with specialized assistance but had to
live in a nursing home since she had no assets and Medicaid would not pay to keep her
out of a nursing home.
11. The attempt to rationalize the rent amount by stating “it was OK with Dad”
fails in that following the death of Donald Kearney, STEPHEN KEARNEY had to make
an independent determination, as the substitute decision-maker for DOLORES
KEARNEY, as to a fair and appropriate rent amount for 1996 and future years.
12. The attempts by STEPHEN KEARNEY to evade liability by stating “it was
OK with Mom” also fail miserably. The Affidavits of the siblings aligned with
STEPHEN KEARNEY do not remedy the situation. Their affidavits do nothing to attain
the level of disclosure, knowledge and approval required for a fiduciary.
13. Justice Cardozo wrote on the subject: “If dual interests are to be served, the
disclosure to be effective must lay bare the truth, without ambiguity, or reservation, in all
its stark significance.” Wendt v. Fischer, 243 N.Y. 439, 443. See also St. Paul Trust Co.
v. Strong, 85 Minn. 1, 11. “Imperfect and incomplete information is insufficient.”
14. The Schallaberger case is inapposite. It appears that the Schallaberger case
involved a disinterested trustee, not a party involved in a situation involving a conflict of
interest.
15. The case of Frazier v. Merchant’s National Bank, 329 Ill. App. 191 (2nd
Dist. 1946) is more to the point. To quote at length (emphasis added):
Appellant was a trustee. In order to bind a cestui que trust by acquiescence
in a breach of trust by the trustee, it must appear that the cestui que trust
knew all the facts, and was apprised of his legal rights, and was under no
disability to assert them. Such proof must be full and satisfactory. The
cestui que trust must be shown, in such case, to have acted freely,
deliberately and advisedly, with the intention of confirming a transaction
which he knew, or might or ought, with reasonable or proper diligence, to
have known to be impeachable. His acquiescence amounts to nothing if
his right to impeach is concealed from him, or if a free disclosure is not
made to him of every circumstance which it is material for him to know.
He cannot be held to have recognized the validity of a particular
investment, unless the question as to such validity appears to have come
before him. The trustee cannot escape the liability merely by informing
the cestui que trust, that he has committed a breach of trust. The
trustee is bound to know what his own duty is, and cannot cast upon the
cestui que trust the obligation of telling him what such duty is.
Imperfect information will be regarded as equivalent to concealment.
16. There is nothing in the record to indicate that DOLORES KEARNEY was
fully aware that she should have been receiving $5,000 additional income each year from
STEPHEN KEARNEY. STEPHEN KEARNEY has admitted that there are no
documents (at least in several categories) to support his position (Special Administrator
Exhibit F-1).
17. The Affidavits’ claim that DOLORES K. KEARNEY made inquiry as to rent
don’t meet the burden of proof for STEPHEN KEARNEY.
18. Further, the inquiry couldn’t have been too “advised”. STEPHEN
KEARNEY and Aunt Helen Kearney determined that $135 was a fair cash rent, which
STEPHEN KEARNEY regularly paid in January of the year.
19. Tom Moyer placed his opinion of fair cash rent at $120-$130 per acre for the
acreage, which TIMOTHY KEARNEY and DIANNE KEARNEY reluctantly appear to
accept. See also Special Administrator’s Exhibit F-4, for “B” ground.
20. STEPHEN KEARNEY has provided insufficient support for his claim that he
is absolved from liability for the deficiency in rent. STEPHEN KEARNEY has failed to
properly substantiate a full disclosure of all facts to his mother, full knowledge by
DOLORES K. KEARNEY of the circumstances, and a freely made, voluntary and
advised decision to subsidize STEPHEN KEARNEY by $5,000.00 or so per year.
21. STEPHEN KEARNEY must not just substantiate the above matters; he
must remove all doubts in the mind of the trier of fact.
22. Would the Estate of DOLORES KEARNEY have a claim against an
independent Trustee if it failed to analyze the financial circumstances of DOLORES
KEARNEY and only charged a tenant $100? Without a doubt, yes.
23. The Motion for Summary Judgment appears to only concern the Trust
property. The Special Administrator, if necessary, will file appropriate pleadings to
allow the Estate of DOLORES KEARNEY to recover rent from STEPHEN KEARNEY
for the Estate instead of the Trust, and to “demand” that the Trustee charge himself
additional rent.
24. The Estate of DOLORES KEARNEY decreased by approximately $5,000 per
year because of the breach of fiduciary duty by STEPHEN KEARNEY. STEPHEN
KEARNEY was recklessly indifferent to this, as he used the extra $5000 to pay his own
bills, in his interest and against the interest of his mother.
V. TRANSFERS OF FUNDS
1. Unlike the farm tenancy matter, there is no sanctioning of gifts under the
Power of Attorney document. The transfers of funds to STEPHEN KEARNEY,
allegedly for his children, are clearly a conflict of interest, with self-dealing being the
species of conflict of interest.
2. “We conclude the facts here require strong evidence to overcome the
presumption of fraud. As more of our population become aged, more will need financial
assistance. Unfortunately, greed and the temptation to benefit oneself will exist.” In Re
Estate of Rybolt, 258 Ill. App.3d 886 (4th Dist. 1994). See also Boyce v. Fernandes, 77
F.3d 946 (7th Cir. 1996).
3. STEPHEN KEARNEY acknowledges that there were numerous transfers of
funds between his account and his mother’s account. There was no comprehensive
documentation of the transfers. Some were loans from STEPHEN KEARNEY to
DOLORES K. KEARNEY, and others went the other way. These transfers were so
common and convoluted that Daniel G. Deneen could only come up with a “close”
number of the net effect of the transfers.
4. In September of 2005 Daniel G. Deneen tendered an accounting he had
prepared showing transfers to and from STEPHEN KEARNEY through the checking
account of DOLORES K. KEARNEY. The accounting appeared to show a net deficit of
approximately $14,000. STEPHEN KEARNEY’s explanation was that this was a gift of
$20,000 and a refund of $6,000. See Report to the Court, Motion and Response.
5. A closer examination of the financial records of DOLORES KEARNEY
showed an additional transfer of $11,000 in December of 1997. The transfer came about
when a Certificate of Deposit was cashed, and the proceeds went directly to the
STEPHEN KEARNEY farm account, bypassing the checking account of DOLORES K.
KEARNEY.
6. Information on this transfer, whether a gift or loan, was not made to Daniel G.
Deneen by STEPHEN KEARNEY or his attorney. A recreation of financial records in
December of 1997 and January of 1998 was necessary to verify that this additional
transfer was in fact result in a decrease in the net worth of DOLORES KEARNEY.
7. If the $11,000 transfer was a gift, why was this transfer not referenced when
STEPHEN KEARNEY communicated the statement that the $20,000 transfer was a gift?
Similarly, there is no explanation as to why there were $8000 transfers to and from the
account of STEPHEN KEARNEY within a month period. $5000 transfers, obviously
loans, took place in 1997.
8. The unreimbursed transfers total $25,000. It appears that the transfers to
DOLORES KEARNEY’s bank account from STEPHEN KEARNEY’s farm account may
have been $4,000 greater prior to December of 1997. At the least, STEPHEN
KEARNEY should be required to reimburse his mother’s estate $21,000.
9. STEPHEN KEARNEY has fallen far short in trying to explain these transfers,
as set forth in the Motion and Response. A statement that “Mom was generous, and these
were gifts to help pay for my child’s education”, without support through objective
parties and documentation, does not meet any burden of proof, much less one of clear and
convincing evidence.
10. It is obvious that there was a great deal of commingling of the funds.
STEPHEN KEARNEY has refused to say what has happened, and has not kept proper
records, so we can only guess. As emphasized, since we can only guess, all presumptions
are against STEPHEN KEARNEY.