Regnery v. Meyers

SECOND DIVISION February 25, 1997 No. 1-94-3760 GRETCHEN REGNERY, et al., Plaintiffs-Appellants/Cross Appellees, v. DAVID R. MEYERS and FREDERICK C. MEYERS, Defendants-Appellees/Cross Appellants, DAVID R. MEYERS and FREDERICK C. MEYERS, Counter-Plaintiffs/Cross Appellants, v. GRETCHEN REGNERY, et al., Counter-Defendants/Cross Appellees. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) Appeal from the Circuit Court of Cook County. Honorable Edward C. Hofert, Judge Presiding. PRESIDING JUSTICE TULLY delivered the opinion of the court: Plaintiffs, Gretchen Regnery (hereinafter Gretchen), Verla Regnery (hereinafter Verla), Lynn Regnery (hereinafter Lynn), Elisabeth B. Regnery (hereinafter Elisabeth), William H. Regnery II (hereinafter William), Peter B. Regnery (hereinafter Peter), Anne Regnery (hereinafter Anne), David B. Regnery, Patrick Regnery (hereinafter Patrick) and Bank of America N.T. and S.A. (fomerly Security Pacific Bank) (hereinafter Bank of America), brought this action in the circuit court of Cook County against defendants, David R. Meyers and Frederick C. Meyers (hereinafter David and Frederick M., or collectively the Meyers), seeking damages for breach of fiduciary duty. The trial court found that David breached his fiduciary duties which he owed to plaintiffs and that Frederick M. induced, participated in and accepted benefits from such breaches. It is from this judgment that plaintiffs now appeal and defendants cross-appeal to this court pursuant to Supreme Court Rule 304(a) (155 Ill. 2d R. 304(a)). For the reasons which follow, we affirm in part and reverse in part and remand with directions. FACTUAL BACKGROUND Joanna Western Mills Company (hereinafter Joanna) was a family-owned business, incorporated under the laws of Delaware, with its principal place of business in Chicago, Illinois. In 1980 and 1981, Joanna experienced financial difficulties and had a net operating loss of between 2 and 4 million dollars over the course of the 2 years. On August 12 and 13, 1981, shareholder meetings were held to discuss the future of the company. William, then president of Joanna, expressed concern over the 1,904.5 shares of Joanna stock that he had purchased from the Hoover Institute, one of Joanna's investors, in May of 1981, at $500 per share. As a result of the meetings, William resigned as president of Joanna upon the condition that the shares that he purchased from Hoover be repurchased by other Joanna shareholders for $500 per share. Also as a result of the meetings, a voting trust was established, and Verla, one of the majority shareholders, deposited 3,745 shares of Joanna stock into the voting trust. Those 3,745 shares constituted slightly more than half of the 7,483.5 then issued and outstanding shares of Joanna. Frederick Regnery (hereinafter Frederick R.), Henry Regnery (hereinafter Henry) and David were named trustees of the voting trust. In 1982 and 1983, Joanna's financial condition began improving. In 1983, Frederick began discussing with Henry the possibility of Frederick M. and David, as executives, each purchasing 500 shares of Joanna at $500 per share. Henry refused to support such a sale but did agree to support a sale of 300 shares to each at $500 per share. On September 13, 1983, at a board of directors meeting, Henry proposed the sale to Meyers. The board passed a resolution to call a special stockholders meeting for purposes of allowing the sale to the Meyers. Notice of the special stockholders meeting was mailed to each stockholder of record. The notice informed the stockholders that the meeting was being held for the purpose of approving the sale of 600 shares of compnay stock to 2 executives of Joanna. The special stockholders meeting was held on September 26, 1983. David, acting as trustee of the voting trust, voted the trust's 3,745 shares of stock, which constituted 71% of the company's total shares, in favor of the sale to the Meyers. The sale of stock to the Meyers was approved by the stockholders at the meeting by 98.8% of the total shares. In 1986, Frederick R. and Kenner & Company (hereinafter Kenner) each made separate proposals for the purchase of Joanna. At a special meeting of the board of directors, the board voted to approve the Kenner offer and recommended that Alfred be appointed as the stockholders' agent in connection with the Kenner transaction. At the time, Frederick R. was still concerned about the prior sale of stock to the Meyers and threatened to assert a claim on behalf of himself and the company relating to that sale. Thus, the board authorized the payment of $150,000 to Frederick R. for, among other things, his covenant not to sue Joanna, its stockholders or directors in connection with the 1983 sale of stock to the Meyers. The stockholders were notified of the settlement of Frederick R.'s claims. They were also asked to sign a consent which authorized the execution of the merger agreement, escrow agreement and agency agreement which appointed Alfred Regnery (hereinafter Alfred) as the shareholders' agent. The consent was signed by a majority of Joanna shareholders. As a result of the sale to Kenner, the Joanna shareholders received $7,766.50 per share owned, $7,097 of which was paid in cash and $669.50 of which was put into escrow to cover corporate liabilities. The shareholders also received stock rights for 10% of the common and preferred stock in the new corporation. In July, 1987, Gretchen, Anne, Verla, Lynn and Peter filed the present action against defendants. Defendants contacted Alfred and requested that he release plaintiffs' claims against them pursuant to the agency and consent agreements. Thereafter, in a separate action, Alfred filed a complaint for declaratory judgment in the circuit court of Cook County, naming as defendants all parties in the present case and all former Joanna shareholders, requesting that the court enter a judgment authorizing him to execute a release of plaintiffs' claims brought in the present action. The two cases were consolidated and both Alfred and plaintiffs herein filed cross-motions for summary judgment on Alfred's claims. The trial judge granted Alfred's motion, thus allowing his execution of the release. On appeal, this court reversed the trial court's order and remanded the case for further proceedings. On remand, several other Joanna shareholders requested and were granted leave to intervene. However, the remaining Joanna shareholders who were named in the consolidated suit filed by Alfred have not intervened in the present suit and have not asserted their own separate claims against defendants. Following a bench trial, the trial court found that defendant David breached his fiduciary duties owed to the minority stockholders of Joanna and that defendant Frederick M. induced those breaches, participated in them, knowingly accepted benefits from them and engaged in an intentional plan to act in concert with David. Moreover, the trial judge found that the Meyers received $4,359,900 in profit from David's breaches of fiduciary duties as well as $195,000 in dividends on the stock they wrongfully acquired. The trial court awarded plaintiffs, who were 35.71% stockholders in Joanna at the time of the breach, 35.71% of the amounts obtained by the Meyers and denied plaintiffs' claim for interest. Plaintiffs filed a motion to modify the trial court's judgment. The trial court treated plaintiffs' motion as a posttrial motion to reconsider and denied the motion. ISSUES PRESENTED FOR REVIEW On appeal, plaintiffs argue that the trial court erred when it: (1) allowed defendants to retain the majority of the profits they obtained through their breach of fiduciary duties; and (2) denied plaintiffs' claim for prejudgment interest on such profits. On cross-appeal, defendants raise the following issues: (1) whether the trial court erred in finding that the 1986 consent to the Kenner transaction does not constitute a release of plaintiffs' claims against them; (2) whether this court's decision in Regnery v. Regnery, 211 Ill. App. 3d 607 (1991), was erroneous in light of additional evidence presented at trial; (3) whether the trial court improperly disregarded Delaware law; (4) whether the trial court erred in finding that defendants breached their fiduciary duties to the voting trust and to the minority stockholders; and (5) whether the trial court erred in finding that Frederick M. induced David to breach fiduciary duties. As the issues raised in the direct appeal are dependent upon the outcome of those raised in cross-appeal, we will address the arguments raised on cross-appeal first. OPINION We first turn to defendants' contention that the trial court erred in finding that the 1986 consent agreement to the Kenner transaction does not constitute a release of plaintiffs' claims against them. In order to determine the extent and scope of a release, it is necessary to consider the language of the instrument as well as the circumstances surrounding the transaction. 535 North Michigan Condo. Ass'n v. BJF Development, Inc., 143 Ill. App. 3d 749, 751 (1986). The interpretation of a party's agreement or contract on appeal is a question of law to be determined by the appellate court de novo. Best Coin-Op, Inc. v. Old Willow Falls Condominium Ass'n, 120 Ill. App. 3d 830, 833 (1983). In the present case, the language of the 1986 consent agreement reads in pertinent part: "WHEREAS, it is in the best interests of the stockholders of this corporation to fully and finally resolve all claims and matters related to the Acquisition Agreement, Escrow Agreement, Agreement of Merger and the issuance of the Company's stock." Defendants claim that, since the consent agreement stated that plaintiffs agree to resolve all claims related to the issuance of the company's stock and since no limitations were included, plaintiffs thereby released all claims that they had against defendants relating to defendants' purchase of company stock. We disagree. Although the consent agreement contains the above-referenced language, it does not clearly and unequivocally state that plaintiffs released such claims against defendants. Moreover, the words "I release" or "we release" are not found within the agreement. Rather, as the trial court noted, the only reference made toward releasing any claims is made in the recitals, or the "whereas" clauses, preceding the agreement. As this court stated in Illinois Housing Development Authority v. M-Z Construction Corp., 110 Ill. App. 3d 129 (1982), a recital is merely an explanation of the circumstances surrounding the execution of the contract but is not a binding obligation unless referred to in the operative portion of the contract. Illinois Housing Development, 110 Ill. App. 3d at 144 . Thus, in the present case, we find that the language in the recitals of the consent agreement was included for purposes of consummating the sale to Kenner. The purpose of such language was simply to restrict plaintiffs and others similarly situated from asserting claims which arise in connection with the acquisition, merger, escrow or agency agreements with Kenner or the Kenner transaction itself. See Regnery v. Regnery, 211 Ill. App. 3d 607, 615 (1991). Plaintiffs' claims bear no relation to the Kenner transaction and do not arise under any of the agreements associated with that transaction. Moreover, even if plaintiffs' claims had arisen under the Kenner transaction, it is questionable as to whether such language buried in a "whereas" clause would have been sufficient to even constitute a release of plaintiffs' claims. If defendants desired that plaintiffs release all claims against them, they could have simply requested that plaintiffs execute a covenant not to sue as they did with Frederick R. Accordingly, we find that the trial court correctly found that the consent agreement did not constitute a release of plaintiffs' claims against defendants. We now turn to defendants' contention that this court's decision in Regnery was erroneous in light of additional evidence presented at trial. Specifically, defendants request that this court depart from its previous decision and rule that Alfred was properly authorized to release plaintiffs' claims against defendants. Upon a careful review of the Regnery opinion and the record on appeal in the instant case, we do not find that our decision in that case was palpably erroneous. See Martin v. Federal Life Insurance Co., 164 Ill. App. 3d 820, 824 (1987); Stallman v. Youngquist, 152 Ill. App. 3d 683, 689 (1987). Assuming, arguendo, that plaintiffs' claims are identical to those asserted by Frederick R., we still find, as we did in Regnery, that the agency agreement empowers Alfred to dispose or settle only those claims relating to the Kenner transaction or the documents executed in connection therewith. Plaintiffs' claims asserted in the instant case, although they arise out of the sale of company stock to the Meyers, are in no way related to the Kenner transaction. Accordingly, we do not find that Alfred was authorized to release plaintiffs' claims against defendants. Thus, we need not disturb our decision in Regnery. We will now address defendants' contention that the trial court erred by disregarding Delaware law. Section 152 of the Delaware Corporations Code (hereinafter the Delaware Code) provides in pertinent part: "In the absence of actual fraud in the transaction, the judgment of the directors as to the value of such consideration [for which shares of stock with par value may be issued] shall be conclusive." Del. Code Ann. tit. 8,  152 (1991). Defendants argue that, under Delaware law, the decision of the board of directors to set the price of the stock sold to defendants at $500 per share is conclusive and should not have been disturbed by the trial court unless plaintiffs had shown actual fraud. We disagree. Although defendants are correct in their initial premise that, under section 152 of the Delaware Code, a board of directors' determination as to the value of the company's stock is conclusive absent a showing of fraud, this section is inapplicable to the facts of the present case. Although the Joanna board of directors considered the sale of 600 shares of company stock to defendants for $500 per share, the board itself did not set the price. Rather, the board left it up to the shareholders to decide whether such a sale at that price was proper. Even the language in the board's resolutions indicates that the decision was that of the shareholders: "*** the Board of Directors hereby calls and requests *** a special meeting of stockholders *** for the purpose of considering the sale of 300 shares of common stock of the Company, $100 par value per share, to each of David R. Meyers and Frederick C. Meyers at a price of $500 per share ***." Following such resolution of the board, a special meeting of the stockholders was held at which the sale to Meyers was voted on and approved. Thus, we find that the trial court's determination that the board of directors did not vote to issue the 600 shares of stock to defendants was not against the manifest weight of the evidence. Since we find that it was not the board who determined the price of the shares or approved the sale to defendants, it was unnecessary for the trial court to require plaintiffs to make an actual showing of fraud. Moreover, given this finding, the trial court properly questioned the adequacy of price. Accordingly, we find no error in the trial court's determinations. We now address defendants' fourth argument that the trial court erred in finding that defendant David breached his fiduciary duties to the voting trust. Defendants argue that the trust instrument itself created a conflict of interest for the trustees of the voting trust. Therefore, defendants argue that under In re Estate of Halas, 209 Ill. App. 3d 333 (1991), where a conflict of interest is created by the trust instrument itself, the fiduciary will not be held liable for his conduct unless the fiduciary has acted dishonestly or in bad faith, or has abused his discretion. Halas, 209 Ill. App. 3d at 345 . Defendants claim that plaintiffs have not met their burden of proof, and, thus, the trial court erred in finding a breach of duty. We disagree. As plaintiffs point out, the trust agreement specifically provides that the trustees shall exercise their best judgment so that the interests of the trust certificate holders (i.e., Verla) shall be safeguarded. Moreover, it is well settled that a trustee owes the highest duty to his beneficiary to fully and completely disclose all material facts relating to dealings with the trust. Obermaier v. Obermaier, 128 Ill. App. 3d 601 , 607 (1984). Because we agree with the trial court's ruling that the shareholders, rather than the board members actually determined the price of the shares sold to defendants, we find that David abused his discretion by voting in favor of the sale to himself and his brother at a price substantially below the fair market value of the shares. We further agree that David acted in bad faith by disregarding the interests of Verla and causing the value of her stock to be diluted. Instead of taking into account Verla's interest as a majority stockholder, David acted in his own best interest and in that of his brother's. Moreover, upon a careful review of the terms of the voting trust, we agree with the trial court's interpretation that a decision of the trustees regarding a sale of shares must be unanimous. Therefore, we find that David abused his discretion in causing the voting trust to vote in favor of the sale without a unanimous decision of the trustees. Finally, we also agree with the trial court that in failing to notify Verla of his intentions to vote her stock in favor of a sale in which he was an interested party, David also abused his discretion. Accordingly, the findings of the trial court are not against the manifest weight of the evidence. Next, defendants argue that the trial court erred in finding that David as trustee and majority stockholder breached his fiduciary duties owed to the minority stockholders. Delaware courts have consistently held that majority stockholders owe a fiduciary obligation to minority stockholders. See Panter v. Marshall Field & Co., 486 F. Supp. 1168 (D.C. Ill. 1980); Singer v. Magnavox Co., 380 A.2d 969 (Del. Super. 1977). Because the voting trust was the majority stockholder of the corporation, David, as trustee, owed a fiduciary duty to the minority stockholders. Thus, plaintiffs contend that David breached his fiduciary duties to the minority shareholders by causing the voting trust to vote in favor of a sale of stock to his brother and himself at a price far below fair market value. We agree with plaintiffs' contention. Because David stood on both sides of the transaction (i.e., as majority shareholder voting to sell the shares and as employee wishing to purchase such shares), he and Frederick M. have the burden of proving the fairness of such a transaction. See Weinberger v. UOP, Inc., 457 A.2d 701, 710 (Del. Super. 1983); Singer, 380 A.2d at 976 . Defendants rely on Sandler v. Schenley Industries, Inc., 79 A.2d 606 (Del. Ch. 1951), for the proposition that where there is a disparity between the fair market value of stock and the price at which it is sold, the transaction may still be valid as a form of compensation. Sandler, 79 A.2d at 610 . However, we find Sandler factually distinguishable from the case at hand, for the executive purchasing the stock was not the controlling shareholder who voted in favor of the sale. Moreover, the trial court in the present case specifically found that, not only were the shares worth substantially more than $500 per share at the time of the sale, but also that defendants knew that they worth substantially more. Accordingly, we find that the trial court properly held that David breached his fiduciary duty to minority shareholders. We now turn to defendants' final argument that the trial court erred in finding that Frederick M. induced David to breach fiduciary duties. Specifically, defendants argue that there is insufficient evidence to support a finding that Frederick M. induced or participated in any breach of fiduciary duty. Plaintiffs contend, however, that Frederick M. was instrumental in the scheme that caused David to breach his fiduciary duties to the voting trust and the minority shareholders. We agree with plaintiffs and find ample evidence of Frederick M.'s participation in the events leading to a breach of fiduciary duty by David. A third party who colludes with a fiduciary in committing a breach of duty, induces or participates in such breach, and obtains the benefits therefrom is directly liable to the aggrieved party. Village of Wheeling v. Stavros, 89 Ill. App. 3d 450, 455 (1980). In the p