Illinois Rockford Corp. v. KulpIllinois Rockford Corp. v. Kulp
delivered the opinion of the court:
This is an action for the rescission of a stock sale or, in the alternative, for damages arising out of defendant’s alleged fraudulent representations, which induced plaintiff, Illinois Rockford Corporation (Rockford), to sell to defendant, Western Picture Frame Company, its 50% share of the capital stock of Pullman Couch Company (Pullman) for an inadequate price.
The cause was referred to a master in chancery (later appointed a special commissioner) who, after extensive hearings, filed a report recommending a decree awarding damages to the plaintiff in the amount of $112,500 as against all defendants jointly and severally. The decree adopted the findings, approved the commissioner’s report and found against all defendants in the recommended amount, together with costs. The decree was appealed to the Appellate Court, First District, which reversed and remanded with directions. (
In 1958, after an illness, Leeb spent most of his time in California, and, although he continued to maintain an office at the plant of Pullman and to keep himself informed as to Pullman’s affairs, Kulp managed and controlled its operations. Although Pullman had enjoyed a number of years of profitable operations (after-tax consolidated earnings, for example, for the six fiscal years preceding 1958 ranged from a high in 1952 of $341,368.09 to a low of
Notwithstanding Pullman’s insolvency (both in the sense that it was unable to meet its obligations as they fell due and in the sense that its assets were less than its obligations) in view of the Company’s history of successful operation the Pullman stock was not without value. It would be valuable to one who could settle its debts at substantially less than full value and who was willing to provide Pullman with sufficient funds to compromise with its creditors and provide adequate working capital. If a buyer were to be found, no time was to be lost since operations of Pullman were still being conducted at a loss with a consequent further drain on its assets. Joseph H. Schwartz, the attorney who represented the Pullman debtors in the bankruptcy action, cautioned that if a feasible plan of reorganization were not presented promptly to creditors, straight bankruptcy would result.
Kulp seems to have negotiated with several persons attempting to arrange a sale of all the stock of Pullman, both his and Rockford’s. He informed Leeb that this was being done. He told Leeb that when he got a prospective purchaser who “looked like he was willing to come up with some money” he would report to him. The only persons Kulp was able to interest in the purchase of the stock were defendant Arthur Reinhold, who was in the furniture business in Chicago and who was president of and acting for the defendant Western Picture Frame Company, and defendant William Ray Jackson of Tennessee. A number of
On April 21, 1959, Kulp and his attorney (who also represented Leeb) met with Reinhold and his attorney. At that meeting it was indicated by Kulp that Rockford’s 50% of the stock might be acquired for $25,000, but Kulp made it clear that he expected more than that for his stock. He spoke of his “working interest” in Pullman being worth $250,000. No agreement was then reached. On April 30 or May 1, Leeb met with Jackson, Kulp and others at the Pullman plant in Chicago. Jackson offered $50,000 for all stock of Pullman. Kulp, out of Jackson’s presence, recommended to Leeb that the offer be accepted, saying that he had interviewed other prospective buyers and had gotten nowhere with them. Leeb then discussed the situation alone with Jackson and inquired whether more than $25,000 was being paid Kulp. Jackson assured him that Kulp was receiving only $25,000 and that “we wouldn’t do business behind your back.” Leeb indicated willingness to sell for $25,000, but the sale was not then agreed upon because Jackson wished to explore the possibilities of a compromise with creditors of Pullman before committing for the purchase of Rockford’s stock.
From the Pullman plant Kulp, Leeb and Jackson went to the Standard Club for luncheon. Schwartz also attended. Kulp and Leeb drove to this luncheon meeting together and during the drive Kulp again assured Leeb that the Pullman stock would bring only $50,000 and that he was getting no more than $25,000 for his. Kulp mentioned that he was trying for an employment contract with the reorganized company, not indicating this to be a condition to the sale of his stock, thus leaving the impression that this was a completely independent transaction from the sale of his stock. The luncheon meeting, however, seems to have been for the principal purpose of exploring what percentage of
In the afternoon of the same day Kulp, Jackson, Leeb, Schwartz and others, attended a meeting with representatives of the creditors of Pullman. Jackson offered these representatives ten cents on the dollar. This was refused, but the creditors’ representative thought “20-20-50” (20 cents on the dollar for Pullman and one subsidiary and 50 cents on the dollar for the other subsidiary) would be acceptable to creditors. The meeting terminated without agreement. Although no compromise with creditors was effected at this meeting, Jackson obviously left the meeting knowing with reasonable certainty the amount which would satisfy the creditors. On the same or the next day, Jackson indicated acceptance of the “20-20-50” compromise, and the creditors’ representatives agreed to recommend it to the creditors.
Leeb, as a result of his talks with Kulp and Jackson, was led to and did believe that $25,000 was the best deal available for Rockford’s stock. He pressed to get that amount. On Sunday morning, May 3, Jackson and Kulp purchased Leeb’s stock for $25,000.
Following a series of negotiations, on Monday, May 4, Kulp and his counsel met with Reinhold and with counsel representing both Reinhold and Jackson. The result of this and earlier conferences carried on before and after Rockford’s shares in Pullman were purchased for $25,000, resulted in an option agreement dated May 7, 1959, which accorded Jackson and Reinhold an option to acquire Kulp’s stock. It was exercised on June 18, 1959. Pursuant to the terms of the option and its exercise Kulp received $25,000
A number of conclusions are inescapable. First, Kulp wanted more than $25,000 for his stock. Second, Jackson and Reinhold knew this and were willing to give him consideration in addition to $25,000 in order to obtain all of the stock. Third, Kulp by his statements that he was receiving only $25,000 for his stock and Jackson (representing himself and Reinhold) stating that they would pay no more than $25,000 for Kulp’s stock and would not deal behind his back, were intended to create and undoubtedly did create in Leeb’s mind a false impression as to the then value of that stock and what he might obtain for it. Fourth,
The question is raised as to whether a fiduciary relationship existed between Kulp and Leeb. While this court has from time to time set out factors and circumstances to be considered in ascertaining whether a fiduciary relationship in fact exists, we have consistently refused to set out their precise boundaries. (Landau v. Landau,
The inception of the Pullman venture between Rockford (always represented by Leeb) and Kulp, the circumstances of their participation in it and of the negotiations for the sale of the stock, required Kulp to deal openly and honestly with Leeb in connection with the bankruptcy proceedings and the sale of the Pullman stock. Kulp and Leeb had been close business and personal friends for a long period of time. Each did not proceed independently of the other to acquire the Pullman stock. They entered into preacquisition agreements at a time when it was undetermined whether to operate under the corporate form or as a partnership. If tax advantages appeared to result, they were quite willing to eliminate the corporation and operate the venture as partners. It was agreed that Kulp and Leeb were
When financial difficulties occurred, Leeb was in California. Kulp was in Chicago and searched for prospective buyers for all the stock and negotiated with those whom he could interest. He told Leeb that when he got a purchaser who looked like he was willing to come up with some money he would inform Leeb which, in our view, was equivalent to assuring Leeb that he would fully report on all negotiations with persons seriously interested in buying any or all the stock of Pullman. Not only did Kulp fail to make a full and honest disclosure of his negotiation with Reinhold and Jackson, but he seriously and materially misled Leeb when he advised him that in his (Kulp’s) judgment $50,000 was all that could be obtained for the stock and that he was receiving no more than $25,000 for his shares. At the same time he was negotiating for a consideration in addition to $25,000 for himself and he must have known that he had good prospects of getting it. We hold that Kulp stood in a fiduciary relationship to Leeb and Rockford, that he failed to deal openly and honestly with Leeb, and that, in fact, his conduct was fraudulent.
We are of the opinion that Jackson and Reinhold were aware of and knew of the close relationship between Kulp and Leeb, and that Leeb was placing confidence in Kulp’s judgment as to the value of the Pullman stock and that they co-operated and aided Kulp in breaching that confidence. It should have been, and no doubt was, plain to them that if Kulp judged his shares worth more than $25,000 Leeb would judge likewise, and that if Kulp was asking more Leeb would also. Jackson’s answer to Leeb’s inquiry, as to whether Kulp was getting the same amount as Leeb, was that Kulp was to receive only $25,000 and that Jackson and his associate would not do business behind Leeb’s back. We believe this was intended to convince Leeb of an existing
“[Fjraud may be inferred from the nature of the acts complained of, the individual and collective interest of the alleged conspirators, the situation, the intimacy and relation of the parties at the time of the commission of the acts, and generally all the circumstances preceding and attending the culmination of the claimed conspiracy.” (Majewski v. Gallina,
We agree with the trial court that rescission is not an appropriate remedy in this case. Defendants, while contending that the evidence was insufficient for assessing any damages against them, assert that in any event the damages
It is argued that at the time Rockford’s Pullman stock was purchased, Reinhold and Jackson had not agreed with Pullman’s creditors as to the amount they would accept, while Rockford received $25,000 with no conditions attached. Kulp gave an option which clearly would not have been exercised if a satisfactory settlement with creditors were not effected. Thus, it is argued that Kulp was entitled to receive more for his stock than Leeb. This argument is unsound since when Leeb concluded the sale of Rockford’s stock on May 3, Jackson and Reinhold had every reasonable assurance at least that the “20-20-50” settlement could be effected. We view the risk negligible, at the time of the purchase of Rockford’s stock on May 3, that an arrangement with creditors satisfactory to Jackson and Reinhold would not be affected.
It is also contended that the evidence was insufficient to support the award of damages of $112,500. The special commissioner concluded, and this was adopted by the trial court, that the total agreed to be paid for all the shares of Pullman by Jackson and Reinhold was $50,000 plus an additional $225,000 to be paid from profits, or a total of $275,000 for 100% of the stock. One half of that, less the $25,000 already received by Rockford, was the amount the special commissioner concluded to be due to Rockford. It is clear that this profit-sharing agreement was an important consideration for Kulp’s stock. Pullman was an attractive investment to Jackson and Reinhold. It had a good name in the trade and if properly financed and managed must have had good prospects of being profitable and successful. This is confirmed by the facts that Jackson and Reinhold were willing to pay a substantial consideration for its stock, that Pullman was able to attract $600,000 in additional capital in connection with the reorganization and that, after reflecting the composition with creditors after issuance of
The judgment of the Appellate Court, First District, remanding the case to the trial court with instructions is reversed, and the decree of the circuit court of Cook County is affirmed.
Appellate Court reversed; circuit court affirmed.