Ill. State Bar Ass'n Mut. Ins. Co. v. Leighton Legal Grp., LLC

2018 IL App (4th) 170548

103 N.E.3d 1087

ILLINOIS STATE BAR ASSOCIATION MUTUAL INSURANCE COMPANY, Plaintiff–Appellant,

v.LEIGHTON LEGAL GROUP, LLC, an Illinois Limited Liability Company; G. Timothy Leighton; Carol M. McClure; and Cynthia S. McClure, Defendants–Appellees.

NO. 4–17–0548

Appellate Court of Illinois, Fourth District.

FILED May 22, 2018

Pretzel & Stouffer, Chtrd., of Chicago (Robert Marc Chemers, Peter G. Syregelas, and Philip G. Brandt, of counsel), for appellant.

Amelia S. Buragas, of Kelly Law Offices, P.C., of Bloomington, for appellees Leighton Legal Group, LLC, and G. Timothy Leighton.

Russell L. Reed, of Hinshaw & Culbertson, LLP, of Springfield, for other appellees.

JUSTICE STEIGMANN delivered the judgment of the court, with opinion.

¶ 1 In August 2016, plaintiffs, Carol M. McClure and Cynthia S. McClure, filed a complaint against G. Timothy Leighton and the Leighton Legal Group, LLC (collectively, the insured); Daniel Sanchuk; DPS Consulting, LLC; and other nominal defendants in the Superior Court for the District of Columbia. The insured was an attorney and cotrustee for a trust of which plaintiffs were the remainder beneficiaries.

¶ 2 The complaint (1) sought a declaratory judgment as to the ownership of the trust property, (2) sought restoration of trust property, (3) sought a constructive trust, (4) requested termination of the trust, (5) alleged self-dealing by the insured, (6) alleged breach of good faith and fair dealing, (7) alleged breach of trust for failure to administer the trust, (8) requested the removal of the trustees, and (9) sought the appointment of a special fiduciary to perform an accounting of trust property. Throughout the complaint, plaintiffs alleged willful conduct by the insured.

¶ 3 In September 2016, the Illinois State Bar Association Mutual Insurance Company (hereinafter, ISBA) filed a complaint for declaratory judgment, contending it had no duty to defend the insured against the aforementioned complaint. ISBA asserted that the insured's actions constituted intentional conduct and was excluded from coverage.

¶ 4 In March 2017, the insured filed a motion for a judgment on the pleadings, arguing that the underlying complaint's allegations fall within, or potentially within, the policy's coverage. In May 2017, ISBA filed a motion for judgment on the pleadings, asserting again it did not owe a duty to defend the insured because his actions as alleged in the underlying complaint were intentional. In June 2017, the trial court concluded that ISBA had a duty to defend under the terms of the policy.

¶ 5 ISBA appeals, arguing that the trial court erred by granting judgment in favor of the insured because "the underlying [c]omplaint clearly alleged intentional conduct which is expressly excluded from coverage under the ISBA Mutual policy." We conclude that the insured's conduct, as alleged in the underlying complaint, is excluded from coverage.

¶ 6 I. BACKGROUND

¶ 7 A. The Underlying Complaint

¶ 8 1. The Joseph McClure Trust

¶ 9 In August 2016, plaintiffs filed the underlying complaint against the insured in the Superior Court for the District of Columbia. The underlying complaint stated that nearly 40 years earlier, Joseph McClure and James Lundberg formed a variety of business entities to co-own real property and conduct business. The complaint noted that Joseph and James acquired valuable real estate within the District of Columbia. In 1992, James died. On July 7, 1995, Joseph executed his last will and testament. On July 11, 1995, Joseph died.

¶ 10 Joseph's will directed that after satisfying specific bequests, the remainder of his property would be sold to establish an irrevocable trust (hereinafter, the Joseph McClure Trust). The Joseph McClure Trust had specific provisions for nomination of trustees, designation of beneficiaries, use of a qualified financial institution to comanage the trust, and instructions for distribution of the trust corpus to the remainder beneficiaries. The will provided that Joseph's brother, Cecil McClure, would be the income beneficiary of the trust. Upon Cecil's death, the trust corpus was to be distributed to the Lundberg Family Education Fund and to Cecil's children. Plaintiffs are Cecil's children.

¶ 11 2. The Cecil Q. McClure Irrevocable Trust

¶ 12 The underlying complaint alleged that, in October 1998, Joseph's estate closed without a complete liquidation of his property. The complaint then alleged that the insured drafted the Cecil O. McClure Irrevocable Trust (hereinafter, the Cecil McClure Trust). The complaint further alleged that in December 1998, the insured attempted to unlawfully "decant" the Joseph McClure Trust by transferring Joseph's property to the Cecil McClure Trust. (Trust decanting refers to the act of "pouring" the principal of an irrevocable trust into a new trust with different terms. See Ferri v. Powell–Ferri , 476 Mass. 651, 72 N.E.3d 541, 546 (2017) ; see also Natalie M. Kuehn et al., Survey of Illinois Law: Trusts and Estates , 39 S. Ill. U. L.J. 647, 657–60 (2015).)

¶ 13 Similar to the Joseph McClure Trust, the Cecil McClure Trust made Cecil the income beneficiary with the Lundberg Family Education Fund and Cecil's children as the remainder beneficiaries. Nevertheless, the Cecil McClure Trust contained key differences such as (1) including an in terrorem clause, (2) eliminating the requirement to use a qualified financial institution as a cotrustee, (3) appointing the insured as a cotrustee, and (4) eliminating the requirement to sell Joseph's property. (An in terrorem clause is a provision in a trust document or a will that invalidates a gift to a beneficiary who unsuccessfully challenges the validity of the testamentary document. See In re Estate of Lanterman , 122 Ill. App. 3d 982, 985, 78 Ill.Dec. 330, 462 N.E.2d 46, 47–48 (1984) ; see also Gerry W. Beyer et al., The Fine Art of Intimidating Disgruntled Beneficiaries With In Terrorem Clauses , 51 SMU L. Rev. 225, 226–27 (1998).)

¶ 14 3. The Allegations of Wrongdoing

¶ 15 In September 2010, Cecil McClure died. The underlying complaint alleged that the insured told the plaintiffs that the remainder beneficiaries would receive quarterly income distributions. Plaintiffs requested the trust corpus be liquidated and the proceeds distributed to the remainder beneficiaries. The complaint asserted that the insured denied this request because the real estate market was poor and because plaintiffs were not entitled to any distribution of trust corpus. Instead, the insured continued to administer the Cecil McClure Trust and give quarterly income distributions.

¶ 16 The underlying complaint alleged that the insured created a self-compensation scheme because the insured (1) included an in terrorem clause, (2) eliminated the requirement to use a qualified financial institution as a cotrustee, and (3) appointed himself as a cotrustee. The underlying complaint further asserted that the insured and others collected excessive fees while managing the trust.

¶ 17 Throughout the underlying complaint, plaintiffs alleged willful conduct by the insured. For example, count IV alleged that the insured "willfully refused to distribute the remaining trust assets." (Emphasis added.) Count V alleged self-dealing by the insured, arguing that he refused to liquidate the trust corpus "in order to perpetuate [his] self-compensation scheme ." (Emphasis added.) Count VI alleged that the insured willfully misinformed the plaintiffs in bad faith that they were not entitled to distribution of the trust corpus. Count VII alleged breach of trust, asserting that the insured "committed breach of trust by willfully disregarding the termination provision of the trust and refusing to distribute the trust assets." (Emphasis added.) Count VIII requested removal of the insured as trustee, arguing that he "willfully committed [a] serious breach of trust in failing to fulfill [his] fiduciary duties." (Emphasis added.)

¶ 18 B. ISBA's Complaint for Declaratory Judgment

¶ 19 In September 2016, ISBA filed a complaint for declaratory judgment against the insured. ISBA conceded that the insured was covered under its professional liability insurance policy but alleged it had no duty to defend him based upon the allegations of the underlying complaint.

¶ 20 1. The Provisions of the ISBA Insurance Policy

¶ 21 ISBA's insurance policy provides coverage for damages and claim expenses arising out of a "wrongful act," which the policy defines as "any actual or alleged negligent act, error, or omission in the rendering of or failure to render professional services." The policy notes that "professional services" includes working "as an administrator, * * * trustee, or any other similar fiduciary activity." However, the policy explicitly excludes from coverage any claim "arising out of any criminal, dishonest, fraudulent or intentional act or omission."

¶ 22 2. ISBA's Claim and the Insured's Answer

¶ 23 ISBA alleged it had no duty to defend because the insured's actions were dishonest, intentional, and fraudulent and therefore excluded from coverage. In November 2016, the insured filed an answer to ISBA's complaint, contending that ISBA had a duty to defend.

¶ 24 C. The Motions for Judgment on the Pleadings

¶ 25 In March 2017, the insured filed a motion for a judgment on the pleadings, noting that an insurer has a duty to defend against an underlying complaint if the "allegations fall within, or potentially within , the policy's coverage." (Emphasis in original.) The insured conceded that this dispute "could be the result of intentional conduct." However, the insured contended that "to the extent that the allegations have any merit, they are much more likely to be the result of mere negligence." Thus, the insured contended ISBA had a duty to defend. In May 2017, ISBA filed a cross-motion for judgment on the pleadings, contending that the insured's actions as alleged in the underlying complaint constituted intentional conduct that was excluded...