Shlensky v. South Parkway Building Corp.

194 N.E.2d 35, 44 Ill. App. 2d 135, 1963 Ill. App. LEXIS 728

Opinions

MR. PRESIDING JUSTICE BRYANT

delivered the opinion of the court:

This case began in 1952 as a derivative stockholders’ suit brought by Harold Shlensky and Max Shlensky, owners of 236 shares of defendant South Parkway Building Corporation, on their own behalf and on behalf of all other stockholders similarly situated against said corporation and its directors: Aleck L. Bernstein, Harry M. Engelstein, Robert W. Mackie, and Louis R. Peyla. The chancellor entered a final decree in favor of plaintiffs on December 11, 1957, which found, inter alia, that the defendants-directors had violated their fiduciary duties to the stockholders of South Parkway Building Corporation and that they were in equity and in good conscience jointly and severally liable for the loss, if any, which resulted to the corporation in each of five transactions. The decree directed the defendants to account to the corporation for the benefit of its shareholders for such loss and set forth certain standards to govern the accounting. The court reserved jurisdiction of all matters pertaining to the accounting. The defendants were also required to pay costs aggregating $8,763.95 incurred by plaintiffs in bringing the suit.

An appeal was taken from this decree and the Appellate Court reversed and remanded with directions to dismiss the complaint for want of equity. Shlensky v. South Parkway Bldg. Corp., 21 Ill App2d 538, 159 NE2d 31. On further appeal the Supreme Court reversed the Appellate Court and “remanded to the circuit trial court so that the decree entered by the ehancellor may be properly effectuated.” Shlensky v. South Parkway Bldg. Corp., 19 Ill2d 268, 166 NE2d 793.

On August 10, 1960 judgment was entered for costs aggregating $9,894.75, plus $1,427 for the costs incurred by plaintiffs in the Supreme Court. This judgment has been paid in full and satisfied. Thereafter on March 27, 1961, plaintiffs filed a “petition for order on defendants to file statement of account.” Defendants were ordered to file this statement by April 27, 1961 and this was later extended to May 29, 1961. Defendants have never filed this statement.

Beginning June 9, 1961, plaintiffs and defendants initiated a plan of compromise, the general outline of which, was for the corporation to borrow money and redeem the shares owned by the minority shareholders at a price of $97 per share and for the corporation to pay counsel for plaintiffs $85,000 as attorneys’ fees for services and to pay plaintiffs a special additional sum of $20,000 to cover the “costs of the litigation not otherwise heretofore reimbursed.” Defendants-directors were to be excused from their joint and several liability to account and pay for the loss to the corporation for the five transactions referred to in the original decree. This plan was approved on September 27, 1961 by final order of court, at which time the court also found that the plan of compromise obviated the need for an accounting and denied the application of Louis Engelstein for leave to intervene.

It is from this order that the instant appeal is taken.

In the present proceeding counsel for plaintiffs estimated that the total amount recoverable by the corporation from the defendants would be approximately $446,500. He also testified that assuming counsel fees and costs aggregating $105,000 were deducted from the $446,500, there would remain a total of $341,500 which, divided hy the 17,284% shares of the corporation outstanding, would produce a recovery to the corporation in the. gross amount of $19.71 per share.

Louis Engelstein, applicant for intervention, contends in this appeal that, following the affirmance by the Supreme Court and the remandment to effectuate an accounting, the Circuit Court had no jurisdiction except to take the accounting and fix the joint and several liabilities of defendants.

Louis Engelstein is a 40% partner in a partnership, Englestein v. Mackie, 35 Ill App2d 276, 182 NE2d 351, which owns approximately 92% of the shares of South Parkway Building Corporation. The remaining 8% is owned by miscellaneous persons including plaintiffs. The final order from which this appeal is taken excuses defendants from accounting and paying anything to the corporation and instead provides that the corporation shall buy out the 8% minority interest at $97 per share and pay plaintiffs’ attorneys’ fees of $85,000 plus an additional $20,000 for unrecorded costs. Louis Engelstein contends that the provisions of the order appealed from prejudice him and that the order is invalid. He further contends that he is entitled to intervene pursuant to Ill Rev Stats 1961, c 110, § 26.1 on the ground that the representation of his interests by existing parties has become inadequate and that he will be bound by the final order. The applicant prays for a reversal of the order and a remandment of the case to the Circuit Court to take the accounting ordered by the Supreme Court.

After the remandment by the Supreme Court the Circuit Court was bound to proceed in conformity with the specific directions of the Supreme Court and take an accounting. We agree with the applicant for intervention that the Circuit Court had no right to readjust any part of the former decree and it was improper to enter the order approving the plan of compromise. Wolkau v. Wolkau, 217 Ill App 471; People v. Waite, 243 Ill 156, 90 NE 183; Griesbach v. People, 226 Ill 65, 80 NE 734; Union Nat. Bank v. Hines, 187 Ill 109, 58 NE 405. See also Baum v. Hartmann, 238 Ill 519, 87 NE 334. It was the duty of the Circuit Court to examine the opinion of the Supreme Court and proceed in conformity with it. Pittsburgh, C., C. & St. L. Ry. Co. v. Gage, 286 Ill 213, 117 NE 726.

The plaintiff in a stockholders’ suit does not sue in an individual capacity, but as the representative of the corporation. Duncan v. National Tea Co., 14 Ill App2d 280, 294, 144 NE2d 771 (citing numerous cases). In view of this general rule and the facts presented here which show that the so-called plan of compromise would wipe out what may prove to be a substantial recovery from the directors, keeping in mind that the recovery accrues to the corporation rather than to any individual stockholder, the plan of compromise presented here is not such a situation where the parties may consent to the entry of a decree in a lower court different from that directed by the mandate or judgment of a higher court. See Spring Lake Drainage & Levee Dist. v. Stead, 263 Ill 247, at 251, 104 NE 1014.

Plaintiffs attempted to pave the way for the plan of compromise by filing an unverified petition for liquidation of the corporation, which contained no factual allegations as grounds for liquidation. See Ill Rev Stats 1961, c 32, § 157.86(a) 3 & 4; Central Standard Life Ins. Co. v. Davis, 10 Ill2d 566, 141 NE2d 45; Gidwitz v. Lanzit Corp. Box Co., 20 Ill2d 208, 170 NE2d 131. No answer was made to the petition since defendants were excused from answering, the court never acted on the petition, no receiver was ever appointed and there was no decree of liquidation. The filing of the petition for liquidation was therefore of no consequence and does not serve as a basis for the plan of compromise.

Plaintiffs’ next step was the filing of a petition for discontinuation of liquidation proceedings. This proceeding need not be discussed at length. Suffice it to say that the case was not converted into a liquidation proceeding and the subsequent plan of compromise cannot be used to thwart the remanding order of the Supreme Court.

The facts presented here also show that Louis Engelstein is entitled, as a matter of right, to intervene in this action by virtue of the intervention statute. Ill Rev Stats 1961, c 110, § 26.1. That statute provides: “(1) Upon timely application anyone shall be permitted as of right to intervene in an action: . . . (b) when the representation of the applicant’s interest by existing parties is or may be inadequate and the applicant will or may be bound by a judgment, decree or order in the action.” See also Duncan v. National Tea Co., 14 Ill App2d 280, 144 NE2d 771; Mensik v. Smith, 18 Ill2d 572, 166 NE2d 265.

Plaintiffs contend that intervention in a representative action is sought too late when it comes after a decree and appeal. This argument is without merit in the instant case because it was not until after there had been a decree and appeal that appellant’s rights were prejudiced and he could avail himself of the intervention statute for protection. It was at this time that the actions of the appellees rendered “the representation of the applicant’s interest . . . inadequate.”

Plaintiff is correct in that there is a general rule of law that intervention comes too late when it comes after a decree and appeal. He cites Fisher v. Capesius, 369 Ill 598, 17 NE2d 563 for this proposition. In the Fisher case, the appellant, a member of the class being represented, was not permitted to intervene in a representative taxpayers’ suit after a final decree had been entered. In Haase v. Haase, 261 Ill 30, 103 NE 628, appellant was not permitted to intervene in a partition suit concerning land devised by will after a final decree of partition, even though he had a contract with the testator which would have prevailed over claimants in the partition suit. Appellant, in this case, was fully aware of the partition suit while it was pending and could have successfully intervened at that time. In Groves v. Farmers State Bank of Woodlawn, 368 Ill 35, 12 NE2d 618, intervention was not permitted in a situation wherein claimants could have intervened during the pendency of this suit but waited instead until after the final decree before asserting their equities. See also Yedor v. Chicago City Bank and Trust Company, 323 Ill App 42, 54 NE2d 728.

These cases differ from the case at bar in that in the instant case appellant’s representation did not become inadequate until after the decree of the Supreme Court. In the cases cited, the applicants for intervention could have asserted their equities during the pendency of the suits. In this case, Engelstein had no reason to intervene during the pendency of the suit since his interests as a stockholder were being adequately represented. When the appellees began acting in their own interests rather than in the interests of the corporation and assented to the compromise which was subsequently effectuated by a final order of which Engelstein had no notice, his rights became prejudiced and he should be allowed to intervene and assert the impropriety of the compromise and subsequent order.

Ill Rev Stats 1959, c 110, § 26.1 provides: “Upon timely application anyone shall be permitted as of right to intervene in an action: ... (b) when the representation of the applicant’s interest by existing parties is or may be inadequate and the applicant will or may be bound by a judgment, decree or order in the action. . . .” It is true that in the instant situation if this statute is strictly construed the applicant should not prevail in his petition for intervention since his interest has already become bound by a final order. However, Ill Rev Stats 1960, c 110, § 4 as amended from the. 1961 act provides: “This act shall be liberally construed, to the end that controversies shall be speedily and finally determined according to the substantive rights of the parties. The rule that statutes in derogation of the common law must be strictly construed does not apply to this act or to the rules made pursuant thereto.” Gray v. Kroger Grocery & Baking Co., 294 Ill App 151, 13 NE2d 672; People v. Village of Wilmette, 294 Ill App 362, 13 NE2d 990, and Harris v. Sovereign Camp of Woodman, 302 Ill App 310, 23 NE 2d 793. In the Wilmette case, at page 368, after emphasizing that the purpose of the act was to provide for a speedy and final determination according to the substantive rights of the parties, the court stated: “The purpose of the entire act (i. e., Civil Practice Act) was to simplify the procedure and the prime object of the act was to enable the parties to a cause to have the merits of their controversies passed upon by the courts —the realities considered rather than the matter be decided on mere technicalities which often justly bring the courts in disrepute. If the act is to be liberally construed according to the substantive rights of the parties, as it is expressly provided, this purpose will be nullified and the act guillotined by strict construction of rules of court adopted to aid the carrying of the act into effect — a strange commentary to construe the act liberally but the rules strictly.” See also People v. Davis, 357 Ill 396, 192 NE 210 and People v. Feinberg, 348 Ill 549, 181 NE 437.

Appellees filed their unverified petition for liquidation on June 7, 1961. Defendants were excused from answering this petition by an order of June 23, 1961. On June 23rd plaintiffs also filed their petition for discontinuation of liquidation proceedings which for the first time set forth the plan of compromise which recited that the plan “has been approved by the majority stockholders of the company and by the directors of the company.” Defendants filed an answer on the same date approving the plan and had their order entered setting forth and approving the plan. Louis Engelstein had no notice of these proceedings on June 23rd. Subsequently, defendants printed the order and mailed it to all stockholders. It was at this time that Louis Engelstein became aware that plaintiffs had repudiated or were improperly pursuing their derivative representation of the corporation.

The applicant’s petition for intervention was filed July 13, 1961 and this must be regarded as timely because it was at this time that his interests became prejudiced.

Louis Engelstein’s interest in seeing that the corporation realizes on its judgment is based on his 40% interest in a partnership which owns 92% of the South Parkway Building Corporation, 35 Ill App2d 276, 182 NE2d 351. It is obvious that the applicant’s economic interest would be seriously affected if the plan of compromise were allowed to short circuit the required accounting. Appellees were suing derivatively on behalf of the corporation, not on behalf of the minority stockholders. The plan of compromise must therefore be regarded as a nullity. To permit it would result not only in a personal detriment to the appellant but also in a loss rather than a gain to the corporation for whose benefit the original action was brought.

The order denying Engelstein’s application for intervention and the decree confirming the settlement are reversed and the case remanded for the purpose of effectuating the Supreme Court’s decree.

Reversed and remanded.

FRIEND, J., concurs.