Chi. Police Sergeants' Ass'n v. Pallohusky

2019 IL App (1st) 181194

128 N.E.3d 436

431 Ill.Dec. 766

CHICAGO POLICE SERGEANTS' ASSOCIATION, POLICEMEN'S BENEVOLENT & PROTECTIVE ASSOCIATION, UNIT 156A, Plaintiff-Appellee,

v.John PALLOHUSKY, Defendant,

(The John Pallohusky Trust, Third-Party Respondent-Appellant).

No. 1-18-1194

Appellate Court of Illinois, First District, FIRST DIVISION.

Filed March 29, 2019

James E. Thompson, of Gottreich Grace & Thompson, of Chicago, for appellant.

John F. Stimson, of Law Offices of John F. Stimson, Ltd., of Skokie, for appellee.

PRESIDING JUSTICE MIKVA delivered the judgment of the court, with opinion.

¶ 1 This case concerns the legal status of residential property purportedly conveyed to the John Pallohusky Trust (Trust) through the will of Mr. Pallohusky's late wife, Mary O'Toole, for her husband's benefit. Mr. Pallohusky is the former president of the Chicago Police Sergeants' Association Policemen's Benevolent & Protective Association, Unit 156A (Association). After Mr. Pallohusky pled guilty to embezzling funds from the Association, the Association obtained a judgment against him and initiated collection proceedings by filing a citation to discover assets against the Trust, among other things. The circuit court ultimately granted the Association's motion for a turnover order, finding that the Trust was invalid under the merger doctrine because Mr. Pallohusky was both its sole trustee and its sole beneficiary. We agree and affirm the decision of the circuit court.

¶ 2 I. BACKGROUND

¶ 3 We detailed much of the factual background of this ongoing effort by the Association to collect on its $ 690,215.17 judgment against Mr. Pallohusky in our prior decision, Chicago Police Sergeants' Ass'n v. Pallohusky , 2017 IL App (1st) 162822, ¶¶ 1-4, 416 Ill.Dec. 838, 86 N.E.3d 1123. That case was an appeal from a turnover order for a survivor annuity paid to Mr. Pallohusky from his late wife's pension, in which we reversed the circuit court because we found that the annuity was exempt from collection proceedings. We repeat the facts here only to the extent they are necessary to the understanding of this appeal.

¶ 4 The Association sued Mr. Pallohusky on June 7, 2010. Mary O'Toole executed her last will and testament on July 6, 2010, the day before she died. Section one of the will devised personal property to various family members, including Mr. Pallohusky. Section two of the will gave "the residue of [her] estate * * * to the trustee of the Trust for the benefit of [her] Husband, John Pallohusky (John Pallohusky Trust)." The residue of Ms. O'Toole's estate consisted of a single-family home located at 5123 North Mobile Avenue, Chicago, Illinois (Mobile Property), which she alone purchased and owned in its entirety before her death. Section four named Mr. Pallohusky as executor of Ms. O'Toole's estate.

¶ 5 Sections seven through eleven of Ms. O'Toole's will set forth the Trust provisions. In section seven, Ms. O'Toole named Mr. Pallohusky as trustee of the Trust, and if he "refuse[d] or otherwise cease[d] to act as trustee," she named first Eleanor Kobit and then Chase Bank as successor trustees. Section eight, subpart (C) stated "[a]ny trustee named herein may resign by giving thirty (30) days written notice to the successor trustee enumerated" in section seven.

¶ 6 Section nine of the will directed how the trust property was to be used:

"(1) The trustee shall pay net income of the Trust as the trustee, in his judgment, may from time to time deem necessary, advisable or expedient for the expenses of the beneficiary, for his health (including rehabilitation for any disorder mental or physical), maintenance, education and reasonable comfort and best interests. The balance of the said net income, if any, shall be accumulated by the trustee and from time to time added to the principal of the Trust. If in the judgment of the trustee such income shall be insufficient for expenses of the beneficiary for his health (including rehabilitation for any disorder mental or physical), maintenance, education and reasonable comfort and best interests, the trustee may pay to or apply for the benefit of the beneficiary such amounts from the principal of the Trust.

(2) The assets of the Trust, including the residential property are for the benefit of the beneficiary (John Pallohusky) for his lifetime. If at any time the Trustee determines that the assets of the Trust should be sold, for his health (including rehabilitation for any disorder mental or physical), maintenance, education and reasonable comfort and best interests the proceeds from the sale shall be included in the Trust."

¶ 7 Section ten stated that "[u]pon the death of the beneficiary (John Pallohusky) the Trust is terminated and the assets of the trust (after paying all Trust indebtedness) shall be distributed per capita to my heirs who survive the beneficiary."

¶ 8 Section eleven vested the named trustee with certain "powers and discretions," including the power "[t]o sell at public or private sale, contract to sell, grant options to buy, convey, exchange, [or] transfer any real or personal property of the trust." Section eleven also allowed the trustee "[t]o cause any securities or other property, real or personal belonging to be held or registered in the name of the Trustee."

¶ 9 On April 17, 2012, Mr. Pallohusky pled guilty to embezzling over $ 1 million from the Association. On July 30, 2013, the Association obtained a judgment in its favor against Mr. Pallohusky in the amount of $ 690,215.17, based on his embezzlement of funds from the Association. On September 18, 2014, Ms. O'Toole's sister, Eleanor Kobit, replaced Mr. Pallohusky as executor of Ms. O'Toole's estate. On February 23, 2015, Mr. Pallohusky resigned as trustee of the Trust and was replaced by Ms. Kobit. In her capacity as executor, Ms. Kobit executed a deed on May 7, 2015, purporting to transfer the Mobile Property to the Trust. That deed was recorded on June 11, 2015.

¶ 10 As part of its ongoing effort to collect on its judgment against Mr. Pallohusky, the Association served a third-party citation to discover assets on the Trust on September 8, 2015. On November 24, 2015, the circuit court entered an order dismissing the citation, but set a briefing schedule on the "oral motion of [the Association] for the turnover of title" to the Mobile Property, and set the matter for a hearing.

¶ 11 During the evidentiary hearing on March 29, 2017, the circuit court heard the testimony of Michael Goldberg—the attorney and certified public accountant who drafted Ms. O'Toole's will—along with the testimony of two of her sisters, Ms. Kobit and Kathlyn O'Toole. This testimony largely addressed Ms. O'Toole's intent in modifying a prior will and her wishes with respect to the Mobile Property. The Association objected to various parts of this testimony on relevance, hearsay, and foundational grounds—objections the circuit court took under advisement with the motion for turnover. The Association also argued that all of this extrinsic evidence was unnecessary because Ms. O'Toole's intent to create a sham trust was clear and unambiguous from the document itself.

¶ 12 On May 9, 2018, the circuit court entered its memorandum decision and judgment. The court found that the Trust was invalid and ordered that the Mobile Property could be sold to satisfy the Association's judgment against Mr. Pallohusky. The circuit court noted that "[i]t does seem as if [Ms. O'Toole] wanted to protect the Mobile Property from outside creditor[s], and so created the trust that Goldberg drafted in [her will]." The court found that "not all parties to the trust had the intention of creating a valid trust" because Mr. Pallohusky "waited from July 7, 2010 until February 23, 2015 to resign his interest as trustee." During that time, he "had been vested with title of trustee and the sole beneficiary," and therefore "the trust was terminated by merger." The court found that Mr. Pallohusky "waited unreasonably too long to resign his interest as sole beneficiary or trustee * * * to avoid the merger doctrine." This appeal followed.

¶ 13 II. JURISDICTION

¶ 14 The Trust timely filed its notice of appeal on June 6, 2018, challenging the circuit court's memorandum decision and judgment of May 9, 2018. We have jurisdiction under Illinois Supreme Court Rule 301 (eff. Feb. 1, 1994) and Rule 303 (eff. July 1, 2017), governing appeals from final judgments entered by the circuit court in civil cases.

¶ 15 III. ANALYSIS

¶ 16 Section 2-1402 of the Code of Civil Procedure (Code) ( 735 ILCS 5/2-1402 (West 2016) ) allows a judgment creditor, like the Association, to initiate a proceeding to discover assets owned by a judgment debtor and to "compel[ ] the application of non-exempt assets or income discovered toward the payment of the amount due under the judgment." A circuit court furthermore has "broad powers to compel parties to satisfy a judgment with discovered assets." Wells Fargo Bank Minnesota, NA v. Envirobusiness, Inc. , 2014 IL App (1st) 133575, ¶ 13, 387 Ill.Dec. 243, 22 N.E.3d 125.

¶ 17 The Trust's claim that the Mobile Property is protected from a turnover under this statute rests on section 2-1403 of the Code, which bars a court from ordering "the satisfaction of a judgment out of any property held in trust for the judgment debtor if such trust has, in good faith, been created by, or the fund so held in trust has proceeded from, a person other than the judgment debtor." 735 ILCS 5/2-1403 (West 2016). The Trust claims this protection because "Mary * * * established the trust effective upon her death" for the benefit of her husband—who did not own the Mobile Property—and "[n]o evidence was adduced that [she] acted in bad faith in executing her will and establishing the Trust."

¶ 18 The Trust asks us to reverse the circuit court's order turning over title of the Mobile Property to the Association on two alternative grounds: (1) the legal and equitable interests in the property did not merge...