Hamilton v. Mercantile Bank of Cedar Rapids

Julie McDaniel Hamilton’s will established a trust naming Hamilton’s sister, Virginia Haberstick (plaintiff), the lifetime beneficiary, and City National Bank (City) the trustee. The trust property was a 1982 real estate installment contract in which Hamilton was the seller of three multifamily dwellings for $190,000 total. The trustee was to pay Haberstick monthly the greater of either the trust net income or $1,000. When Hamilton died in 1985, the properties were in good condition. After the buyer defaulted, City executed another contract with Thomas Trosky for $110,000 with monthly payments of $1,115.45. Beforehand, City did not inquire into Trosky’s background or inspect the properties, which were deteriorating. Trosky failed to maintain the properties, and housing inspectors issued numerous citations, eventually declaring the properties inhabitable. In 1993 City’s assets were purchased by another bank, which was purchased in 1994 by Mercantile Bank (Mercantile) (defendant), a bank holding more than $48 million in assets and part of a 21-bank holding company. No one addressed the housing inspectors’ notices, and one building burned down. Trosky failed to insure the property, and the trustee did nothing. Trosky also failed to pay taxes, and Mercantile only redeemed two properties, losing the third at a tax sale. Haberstick was not notified. Mercantile and its predecessors filed annual court reports claiming no changes to the trust assets, and the trustee’s fees increased more than fivefold. Trosky only intermittently paid monthly installments. Mercantile finally forfeited Trosky’s contract in 1995, selling the property for $35,000 and paying Haberstick the $5,000 remaining after liens and expenses. Haberstick sued Mercantile for breach of fiduciary duty, among other things. Haberstick presented expert-witness testimony valuing the property between $134,000 and $204,000 with income potential of $4,000 per month. A jury awarded Haberstick $276,000 in compensatory damages and $750,000 in punitive damages. Mercantile appealed, conceding liability for breach of fiduciary duty but arguing that the damages award was too large. Mercantile argued that compensatory damages should be limited to $1,000 per month based on the Trosky contract and that punitive damages were inappropriate.