JAMES J. CODUTI, Plaintiff-Appellant, v. WERNER E. HELLWIG et al., Defendants-Appellees.
No. 82-2222
First District (5th Division)
July 20, 1984
October 12, 1984
279
Affirmed.
RIZZI, P.J. and McGILLICUDDY, J., concur.
Pedersen & Houpt, of Chicago (Steven M. Stone and Jonathan B. Gilbert, of counsel), for appellee Hudson Tool & Die Corp.
Katz, Karacic & Helmin, of Chicago (Kenneth A. Helmin and Thomas J. Karacic, of counsel), for appellee Werner E. Hellwig.
PRESIDING JUSTICE MEJDA delivered the opinion of the court:
This is an action by James J. Coduti (Coduti), a minority shareholder of Hudson Tool & Die Corporation (Hudson), a closely held Illinois corporation, seeking dissolution of the corporation and an accounting of allegedly improper benefits received from the corporation by its controlling shareholder and members of the family of and entities controlled by such shareholder.1 The trial court sitting without a jury found for the defendants. Coduti raises the following issues on appeal: (1) whether the trial court erred in refusing to order dissolution of defendant corporation and (2) whether the trial court erred in refusing to order an accounting of the benefits received from defendant corporation by the other defendants. We affirm.
The trial court heard testimony in this matter on 24 separate days and received into evidence more than 150 exhibits, many of which were group exhibits consisting of more than one item. A repetition of all of the testimony would serve only to unduly lengthen this opinion; therefore, testimony will be recounted only insofar as it is necessary to our disposition of the instant issues. However, a brief statement regarding the parties is in order.
Defendant Hudson engaged in the tool and die and metal stamping business and was formed in 1954 by plaintiff Coduti and defendant Werner E. Hellwig (Hellwig). Defendant Kurt Hellwig (Kurt) is Hellwig‘s son and has held an executive position with Hudson since 1979. Defendant Hollywood Perforators, Inc. (Hollywood), is an Illinois corporation controlled by Hellwig and Kurt.2
Hellwig has served as president since its incorporation; his responsibilities have been administrative in nature. Coduti has also served as an officer of Hudson; as an employee of the corporation he is principally responsible for supervising Hudson‘s production facilities. Neither Hellwig nor Coduti has ever accounted to each other for the hours they devote to business. Since the inception of the business it has been Coduti‘s practice to work many hours each week while Hellwig routinely spends long periods of time away from the plant, takes frequent vacations and long weekends, and spends several months each winter in Hawaii.
Salary adjustments for Hellwig and Coduti have over the years been effected without formal board action. In 1977 Hellwig voluntarily reduced his salary by 50% when, in his own judgment, he felt he was unable to continue at his previous level of performance because of personal pressures. He restored his salary to its former amount when he felt he was again working efficiently. The salaries and bonuses were paid to Hellwig and Coduti as follows:
| Hellwig | Coduti | |
| 1974 | $36,200 | $43,900 |
| 1975 | 22,100 | 37,100 |
| 1976 | 15,300 | 55,100 |
| 1977 | 30,900 | 53,200 |
| 1978 | 29,900 | 57,900 |
| 1979 | 18,000 | 65,100 |
| 1980 | 17,100 | 47,100 |
| 1981 | 40,400 | 49,900 |
Hellwig‘s expense account, including country club payments, has been approximately $10,000 per year for the past four years. Coduti has an unlimited expense account and four weeks of vacation pay annually, in addition to 52 weeks of salary. All corporate officers have
Since 1977 there have been a number of disputes between Hellwig and Coduti, culminating in the filing of the instant action wherein Coduti sought injunctive relief, dissolution or liquidation of Hudson, an accounting by certain defendants to Hudson, and imposition of a constructive trust concerning certain shares of Hudson stock owned by Hellwig or a declaratory judgment thereon. The trial court found all issues in favor of defendants and against Coduti, specifically, that there was no evidence of fraud, waste, mismanagement, illegality or oppression to warrant dissolution of the corporation and the liquidation of its assets and, further, that the evidence is insufficient to grant Coduti‘s request for accounting by the various defendants. Coduti appeals.
OPINION
The first issue is whether the trial court erred in refusing to order the dissolution of Hudson. The authority of courts to dissolve a corporation is statutory. (Central Standard Life Insurance Co. v. Davis (1957), 10 Ill. 2d 566, 572, 141 N.E.2d 45). Section 86 of the Illinois Business Corporation Act (
Circuit courts have full power to liquidate the assets and business of a corporation:
(a) in an action by a shareholder when it appears:
***
(3) That the acts of the directors or those in control of the corporation are illegal, oppressive or fraudulent; or
(4) That the corporate assets are being misapplied or wasted.
Where the above factors are positively shown shareholders are entitled to the protection of the law. Our supreme court has cautioned, however, that corporate dissolution is a drastic remedy that must not be lightly invoked. Gidwitz v. Lanzit Corrugated Box Co. (1960), 20 Ill. 2d 208, 220-21, 170 N.E.2d 131.
Plaintiff Coduti contends, generally, that the findings of the trial court are against the manifest weight of the evidence. Our supreme court summarized the principles governing our consideration of this matter as follows:
Concerning the manner of reviewing the findings of the trial court in a bench trial in which the evidence was conflicting, the
court in Schulenburg v. Signatrol, Inc. (1967), 37 Ill. 2d 352, 356, said: Although a trial court‘s holding is always subject to review, this court will not disturb a trial court‘s finding and substitute its own opinion unless the holding of the trial court is manifestly against the weight of the evidence. [Citations.] Underlying this rule is the recognition that, especially where the testimony is contradictory, the trial judge as the trier of fact is in a position superior to a court of review to observe the conduct of the witnesses while testifying, to determine their credibility, and to weigh the evidence and determine the preponderance thereof. We may not overturn a judgment merely because we might disagree with it or might, had we been the trier of facts, have come to a different conclusion. (Greene v. City of Chicago (1978), 73 Ill. 2d 100, 110, 382 N.E.2d 1205.)
With these principles in mind we turn to plaintiff‘s specific allegations of error.
In support of his contention that the trial court erred in refusing to order the dissolution of Hudson, plaintiff Coduti first argues that Hellwig‘s conduct has been and continues to be oppressive. In Gidwitz v. Lanzit Corrugated Box Co. (1960), 20 Ill. 2d 208, 214-15, 170 N.E.2d 131, our supreme court stated:
We have held that the word oppressive as used in this statute, does not carry an essential inference of imminent disaster; it can contemplate a continuing course of conduct. The word does not necessarily savor of fraud, and the absence of mismanagement, or misapplication of assets, does not prevent a finding that the conduct of the dominant directors or officers has been oppressive. It is not synonymous with illegal and fraudulent. Central Standard Life Ins. Co. v. Davis, 10 Ill. 2d 566.
A review of the case law discloses no single act which, by itself, will be deemed oppressive without consideration of the surrounding circumstances. In Gray v. Hall (1973), 10 Ill. App. 3d 1030, 1034, 295 N.E.2d 506, the court stated that actions which might be oppressive under one set of circumstances would not be oppressive under others. Thus, each case claiming oppression as a basis for corporate dissolution must be determined solely upon its own facts. The court found no oppression where preferred stockholders alleged that they would reap no investment gain before the expiration of a 99-year corporate charter. (Central Standard Life Insurance Co. v. Davis (1957), 10 Ill. 2d 566, 141 N.E.2d 45.) An equal division of stock which resulted in a 10-year deadlock enabling the corporate president to control the corporation so as to deprive certain shareholders of their rights and privileges
In the instant case plaintiff Coduti cites numerous actions on the part of defendants which, he argues, fit within the concept of arbitrary, heavy-handed and overbearing conduct that has been found to constitute oppression of minority shareholders. (See e.g., Compton v. Paul K. Harding Realty Co. (1972), 6 Ill. App. 3d 488, 285 N.E.2d 574.) We must, therefore, examine plaintiff‘s contentions in the context of the operation of the corporation and consider the circumstances surrounding the actions which form the basis of his complaint. Briefly, Coduti asserts that Hellwig engaged in the following conduct which he seeks to have characterized as oppressive: refusing to authorize dividends or bonuses when the corporation has large cash reserves; refusing to allow Coduti‘s attorney to be present at a director‘s meeting; holding director‘s meetings without notice to Coduti; causing Coduti to be arrested; and opening Coduti‘s mail and belittling him in the presence of others. We will consider the evidence regarding each of these actions in turn.
Coduti first asserts that Hellwig‘s refusal to authorize bonuses or dividends while Hudson amassed large reserves constituted oppression. The decision concerning whether to declare a dividend where funds are available for such dividend rests within the discretion of the board of directors. Courts are reluctant to interfere with such decisions unless the withholding is fraudulent, oppressive or totally without merit. (Romanik v. Lurie Home Supply Center, Inc. (1982), 105
It is not disputed that Hudson has accumulated a large cash reserve. Hudson has certificates of deposit in a total amount of approximately $775,000. Coduti testified that a reserve of $350,000 to $400,000 would be adequate for the type of business in which Hudson is engaged. Hellwig testified, however, that the accumulated reserve is required for the following business purposes: (1) to provide for continued existence of the corporation if its major account is lost; (2) to provide the liquidity needed in the present economic climate; (3) to provide for replacement of Hudson‘s machinery and equipment without incurring debt at current high interest rates; and (4) to provide for plant expansion as presently under consideration. Thomas E. Reyer, Hudson‘s accountant, also testified that such accumulation is good business practice considering the purposes specified for such reserves. Under these circumstances we are, therefore, unable to say that the trial court‘s finding that there was no oppression is against the manifest weight of the evidence. See Gray v. Hall (1973), 10 Ill. App. 3d 1030, 1035, 295 N.E.2d 506.
Coduti next catalogues various improprieties regarding meetings of the board of directors. He first raises the board‘s conduct in not allowing his attorney to remain in attendance at the board meeting on December 12, 1979. All five directors were present at that meeting. Only Coduti was represented by an attorney. A motion was passed to exclude attorneys from that particular meeting, whereupon Coduti and Allen left the meeting in protest. The three remaining directors constituted a quorum pursuant to Hudson‘s bylaws and they proceeded to
Coduti also maintains that in January 1980 Hellwig consented to postpone a board meeting at Coduti‘s request, then held the meeting as originally scheduled. Conflicting testimony was presented on this matter. No minutes of such board meeting were produced, nor was there a record of any action taken by the board at such meeting.
Coduti next asserts that in May 1980, without notice to him, Hellwig called a special meeting of the board and, in Coduti‘s absence, obtained authorization from the board to draw checks with his signature alone, a departure from prior corporate policy which required that all checks carry both Hellwig‘s and Coduti‘s signatures. Coduti stated that his refusal to sign such checks, beginning at the end of April and continuing into the middle of May, was based upon his insistence that Hellwig sign the checks first, in accordance with long-standing corporate practice sanctioned by resolution of the board. Hellwig testified that he had requested that Coduti sign the checks first to indicate approval of the bills for payment, as Coduti had ordered the materials for which payment was being made. He admitted that on May 12, 1980, the board met in an emergency session and authorized Hellwig‘s single signature on checks written on the general operating account. He stated, however, that Coduti was not available for such meeting and that the board‘s action was necessitated by Coduti‘s refusal to sign any checks drawn on the general account which caused interference of cash flow to accounts payable and the payroll account for over 14 days. Coduti resumed signing checks when informed of the board‘s May 12 action. From the date of such action to the date of trial no check had been signed solely by Hellwig; Coduti does not contend that he or Hudson suffered any detriment as a result of the foregoing actions. Thus, the evidence supports the trial court‘s finding that there was no oppression regarding these matters.
Coduti next contends that Hellwig‘s causing him to be arrested was a form of oppression. On July 8, 1980, Hellwig delivered to Coduti a memorandum rescinding Coduti‘s authority to make bids and requiring that, henceforth, all quotations to customers were subject to Hellwig‘s written approval. Coduti testified that Hellwig swore at him and used a racial slur when delivering the memorandum. Hellwig denied swearing at Coduti and stated that his review of quotations was prompted by a 55% decline in business and was merely a part of his duties as president of Hudson. Coduti testified that Hudson was then experiencing a very profitable year. Coduti admitted, however, that upon delivery of the memorandum he lost control, shouted obscenities, and picked up a piece of copper and chased Hellwig into the plant. Co-
Finally, Coduti related the details of several incidents wherein he asserts that Hellwig belittled him in the presence of outsiders and consistently opened his mail. Hellwig admitted that he may have opened Coduti‘s mail by accident upon occasion, but denied belittling Coduti or engaging in any other petty conduct as claimed by Coduti.
Our review of the entire record in this case reveals conflicting testimony regarding each of Coduti‘s assertions. We must, therefore, defer to the determination of the trial court, which is uniquely situated to hear and weigh the evidence and whose findings will not be disturbed unless against the manifest weight of the evidence. (Greene v. City of Chicago (1978), 73 Ill. 2d 100, 382 N.E.2d 1205.) A finding is against the manifest weight of the evidence only if, upon hearing such evidence, no reasonable person would reach the conclusion arrived at by the trial court. On the record here presented we cannot, therefore, state that the trial court‘s finding that there was no oppression of Coduti was against the manifest weight of the evidence.
In support of his contention that the trial court erred in refusing to order the dissolution of Hudson, Coduti next asserts that Hellwig has breached his fiduciary duty to Hudson and that such breach constitutes fraud. There is no general rule for determining whether certain acts constitute fraud; such determination depends upon the facts of each case (Majewski v. Gallina (1959), 17 Ill. 2d 92, 99, 160 N.E.2d 783) and is therefore a matter peculiarly within the province of the trial court. The findings of the trial court will not be disturbed unless they are manifestly against the weight of the evidence. (Ross v. 311 North Central Avenue Building Corp. (1970), 130 Ill. App. 2d 336, 264 N.E.2d 406.) In determining the fairness of a specific transaction particular emphasis is placed on such factors as whether the corporation to which the fiduciary duty is owed has received full value in the transaction, whether there was a detriment to the corporation resulting from the transaction, whether there was a possibility that corporate gain was siphoned off in favor of the fiduciary, and whether there was full disclosure—although even full disclosure and shareholder assent will not save an inherently unfair transaction. Shlensky v. South Parkway Building Corp. (1960), 19 Ill. 2d 268, 283, 166 N.E.2d 793.
Coduti argues that Hellwig has dealt unfairly with Hudson and
Coduti also argues that Hellwig‘s financial dealings with Hudson have been illegal. He asserts that Hellwig‘s records regarding his business expenses may be insufficient to meet the requirements of the Internal Revenue Code and, further, that the retention of a substantial cash reserve by Hudson may be in violation of Internal Revenue Code provisions. (See
Coduti also charges waste and misapplication of assets by Hellwig as grounds for dissolution. He asserts that Hellwig has built up large credit balances on his corporate charge cards and country club membership, both paid by Hudson, and maintains that such advance payments deprive Hudson of interest on its money. Coduti also asserts that Hellwig acted in a manner adverse to the best interests of Hudson by failing to contest the claim for unemployment insurance made by Anne Bernardi, a former secretary for Hudson. Regarding the latter charge, Hellwig testified that Hudson filed two written objections to Bernardi‘s claim. Thus, the trial court was presented with conflicting testimony on this point.
The manager of the Bob-o-Link Golf Club where Hudson maintains a membership for Hellwig testified that at Hellwig‘s request, he is billed in advance for his membership dues. Although not the usual method, he added that there are other members of the club who are billed in that manner. Hellwig testified that his decision to pay such fees in advance and to maintain credit balances on various charge accounts was to provide for the continuance of business-related entertaining should Hudson fall into a position where cash was not available for such expenditures. Thus, these appear to be matters of business judgment, within the responsibility of the board of directors and the officers of Hudson and with which the court will not concern itself—
In reviewing Coduti‘s assertions it is, we believe, important to keep in mind the context in which the events here complained of occurred, that is, within a corporate organization. Regarding such organization, our supreme court has stated:
It is, however, fundamental in the law of corporations, that the majority of its stockholders shall control the policy of the corporation, and regulate and govern the lawful exercise of its franchise and business *** Every one purchasing or subscribing for stock in a corporation impliedly agrees that he will be bound by the acts and proceedings done or sanctioned by a majority of the shareholders, or by the agents of the corporation duly chosen by such majority, within the scope of the powers conferred by the charter, and courts of equity will not undertake to control the policy or business methods of a corporation, although it may be seen that a wiser policy might be adopted and the business more successful if other methods were pursued. The majority of shares of its stock, or the agents by the holders thereof lawfully chosen, must be permitted to control the business of the corporation in their discretion, when not in violation of its charter or some public law, or corruptly and fraudulently subversive of the rights and interests of the corporation or of a shareholder. (Wheeler v. Pullman Iron and Steel Co., 143 Ill. 197, 207, 32 N.E. 420; quoted with approval in Central Standard Life Ins. Co. v. Davis, 10 Ill App 2d 245, 250-51, 134 N.E.2d 653.) Polikoff v. Dole & Clark Building Corp. (1962), 37 Ill. App. 2d 29, 35-36, 184 N.E.2d 792.
The record here does not support Coduti‘s contention that he has been deprived of his lawful right to participate in the management of Hudson. Rather, his complaints stem from his position as a minority shareholder and from personal disagreements with Hellwig, neither of which form a basis for the drastic remedy of corporate dissolution. The trial court found that plaintiff had not proved grounds for dissolution of Hudson, and we may not disturb such finding unless it is clearly against the manifest weight of the evidence. A finding is not against the manifest weight of the evidence merely because the record might support a contrary decision. (Graham v. Mimms (1982), 111 Ill. App.
The second issue is whether the court erred in refusing to order an accounting of the benefits which Coduti asserts were improperly received from Hudson by the other defendants. Coduti argues first that the trial court erred in assigning the burden of proof to Coduti and, second, that Hellwig did not satisfy his burden of proof. Coduti asserts that where an officer or director transacts business with a corporation the burden of proof is on the officer or director to show the fairness of the transaction by clear and convincing evidence. Thus, he maintains that, as the controlling shareholder of Hudson, Hellwig has a duty to show that any dealings he (or any entity in which he has an interest) has had with Hudson are fair and reasonable.
It is undisputed that the individuals in control of a corporation owe a fiduciary duty to such corporation and its shareholders. (Shlensky v. South Parkway Building Corp. (1960), 19 Ill. 2d 268, 278, 166 N.E.2d 793; Graham v. Mimms (1982), 111 Ill. App. 3d 751, 761, 444 N.E.2d 549.) The duties imposed upon directors as fiduciaries require them to act with utmost good faith and loyalty in managing the corporation and thereby prohibit them from enhancing their own personal interests at the expense of corporate interests. (Patient Care Services, S.C. v. Segal (1975), 32 Ill. App. 3d 1021, 337 N.E.2d 471.) Where the discharge of this duty is challenged, the burden of demonstrating fairness rests on the fiduciary. (Karris v. Water Tower Trust & Savings Bank (1979), 72 Ill. App. 3d 339, 389 N.E.2d 1359; Romanik v. Lurie Home Supply Center, Inc. (1982), 105 Ill. App. 3d 1118, 435 N.E.2d 712.) It is not enough, however, to show merely that a fiduciary has entered into a transaction with the corporation to which he owes the duty of loyalty in order to shift the burden of proof. Rather, the one asserting the breach of the duty of loyalty must first establish that the fiduciary profited from the transaction. Karris v. Water Tower Trust & Savings Bank (1979), 72 Ill. App. 3d 339, 389 N.E.2d 1359.
Coduti‘s argument that the trial court erred in assigning him the burden of proof is based solely upon the single statement of the trial court that Plaintiff‘s evidence *** bears the burden. This is, of course, correct as it related to the claim for dissolution and to other matters not here on appeal. The court, however, was aware that the burden of proof may shift. When Coduti‘s attorney argued that in certain situations the burden shifts to the fiduciary the court expressed such awareness by stating: That will be conceded by everyone. You
For all the foregoing reasons the judgment of the trial court is affirmed.
Affirmed.
LORENZ and SULLIVAN,* JJ., concur.
SUPPLEMENTAL OPINION ON DENIAL OF REHEARING
PRESIDING JUSTICE MEJDA delivered the opinion of the court:
Plaintiff has petitioned for a rehearing and that this cause be remanded to the circuit court for consideration under section 12.55 of the Business Corporation Act of 1983, which became effective July 1, 1984 (
Sec. 12.55. Alternative remedies to judicial dissolution.
(a) In either an action for dissolution pursuant to Section 12.50 or in an action which alleges the grounds for dissolution set forth in Section 12.50 but which does not seek dissolution, the Circuit Court, in lieu of dismissing the action or ordering
dissolution, may retain jurisdiction and: (1) Appoint a provisional director;
(2) Appoint a custodian; or
(3) In an action by a shareholder, order a purchase of the complaining shareholder‘s shares as provided in subsections (f) and (g) below.
From the statutory language it is apparent that the new section contemplates only an alternative remedy, rather than a distinct action. Consequently, the right to that remedy depends upon proof of all of the elements which would have entitled a party to a judicial dissolution, because the action must be either for dissolution or must allege the same grounds for dissolution as set forth in section 12.50 (
LORENZ and SULLIVAN, JJ., concur.