Appeal by plaintiffs from the Superior Court of Cook county;
the Hon. DONALD S. McKINLAY, Judge, presiding. Heard in the
second division of this court for the first district at the
December term, 1948. Decree reversed, and cause remanded with
directions. Opinion filed October 10, 1950. Rehearing denied
November 1, 1950. Released for publication November 2, 1950.
MR. JUSTICE FRIEND DELIVERED THE OPINION OF THE COURT.
Rehearing denied November 1, 1950
Steven Humpa and nine other former employees of the Oscar W. Hedstrom Corporation filed their amended complaint in equity to recover monies from the Oscar W. Hedstrom Corporation Profit-Sharing and Employees' Savings Trust and Russell W. Hedstrom, trustee, and also asked for discovery, accounting and other relief. The corporation, having subsequently been adjudged bankrupt, was dismissed as a party defendant. Trial by the chancellor resulted in dismissal of the complaint for want of equity, and plaintiffs appealed.
The Hedstrom Corporation, a metal-processing concern, was founded in July 1940 to succeed a former partnership, the Hedstrom Pattern Works, engaged in a similar business. By the summer of 1945, Russell W. Hedstrom and members of his family had acquired all but 15 per cent of the stock. Government contracts in 1942 had yielded large profits for the company, and in the spring of 1943, after consultation with accountants and counsel, an employees' profit-sharing and pension plan was established. At a company-sponsored banquet in July 1943, the officers of the corporation presented each eligible employee with a profit-sharing account book outlining the trust and containing figures for the individual participant's account. Subsequently two deposits of approximately $33,000 and $56,000, respectively, were made in the trust in a separate trust bank account, each representing 20 per cent of the corporation's net income, before Federal income taxes, and computed according to the formula set forth in the trust instrument to which the corporation was a party. The company's fiscal year ended June 30, and the deposits represented the employees' share for the periods ended June 30, 1943 and June 30, 1944. Working papers, signature cards, and accounts for the 86 members were maintained for the trust. Subsequent entries were made in members' books for additional credits for profits and for forfeitures created through former members' partial loss when they ceased to be employees.
The trust instrument provided for three trustees, but any two could take action. Russell Hedstrom had been a trustee from the inception of the trust; the company's comptrollers, Carl Olson, and later, Elmer Paulson, were at times also trustees. Charles Hague was elected by the employees at the banquet in July 1943 as a third trustee. The record discloses that there were no regularly scheduled meetings, nor was there any place specially designated for meetings. No written notices of meetings were ever given by Russell Hedstrom to the other trustees. Apparently the only meetings had were at times when the corporation needed money, when funds were taken from the trust and loaned to the company. Charles Hague testified that he was never notified of any meeting, whereas Russell Hedstrom stated that he told Hague on one or two occasions that there would be a meeting in several hours' time. No copy of the trust instrument was ever given or made available to the participants to inspect, and although promises were made to produce it, both before and after suit was filed, it was finally furnished to plaintiffs only under order of court after proceedings for contempt for failure to produce had been instituted.
Prior to December 1943, there had been placed in the trust fund approximately $89,000. Subsequently the corporation needed funds to pay its income taxes. It was supposedly financially sound, but its funds were tied up in work in process, and payment was due from the Navy under contracts which had been assigned or pledged to a bank for loans. At a meeting held December 20, 1943, at which only the comptroller trustee and Hedstrom were present, $30,000 was taken from the trust and given to the corporation to pay corporate income taxes. The same situation existed a year later in December 1944; at that time $56,000 was transferred. No attempt had been made on behalf of the corporation to borrow funds on the commercial market. Materials were constantly mortgaged, and the war contracts were assigned to a bank. No minutes, records or notes of the transactions had at these meetings were ever made. For the respective sums of $30,000 and $56,000 taken from the trust funds, Russell Hedstrom gave the trust two notes on behalf of the corporation, signed by him as president and treasurer, which were filed with the trust records. Each of these notes called for payment of principal five years after date, with interest at five per cent per annum, and contained a confession clause. After the first loan the balance in the trust account was about $3,000, and it so remained until December 1946. Hedstrom testified that the corporation gave the trust a note for one year's interest on the first loan at the time of the second loan, but no interest was actually paid to the trust on either of the loans.
In July 1945, the government lodged a claim against the corporation for renegotiation on the 1943 contracts. After adjustment of income credits for taxes already paid, the amount owed was fixed by negotiation at $115,000. By June 30, 1946, the first renegotiation bill for the year ended June 30, 1943, had been paid, but by that time a second bill in the amount of $270,000 had been presented to the corporation, and its net worth had been wiped out. The general creditors, excluding the trust estate, had claims against the corporation for about $100,000 for goods and merchandise delivered over the previous twelve-month period, and its bank balance was only $387.
The second renegotiation bill was adjusted finally after bankruptcy adjudication of $100,000. The company was automatically given a tax credit on this transaction. No monies were paid by the corporation on the second bill, but the final figure became a claim against the bankruptcy estate in the sum of $20,000, that being the maximum percentage allowed by the excess-profits law. The 20 per cent contributions to the trust, as adjusted under the renegotiation proceedings, would have aggregated $56,000.
In an effort to alleviate its financial difficulties, three separate mortgages were given to the Merchants Acceptance Corporation for loans, pledging all the personal property of the company, together with its good will, and various parcels of real estate were conveyed by the members of the Hedstrom family to the corporation. The details of these vain efforts to rescue the business are not material to the issues involved.
In June 1946, in the presence of Paulson, then a trustee and the comptroller of the corporation, Russell W. Hedstrom canceled the original notes of the corporation to the trust in the respective amounts of $30,000 and $56,000, and signed two new notes of like amounts, due five years thereafter. There was apparently no discussion concerning the advisability of extending the loans or of obtaining security for the trust, nor was any notice given to the third trustee. No minutes or records were kept of the transaction. The new notes had yearly interest coupons attached and contained a cancellation clause, but no provision for confession of judgment. Hedstrom signed the notes and then placed them with the trust papers. At the same time Hedstrom signed a note for $4,300 to the trust, representing interest due on the two notes marked paid and canceled.
The instant proceeding was filed October 9, 1946. In December of that year Hedstrom transferred the sum of $1,700 from the trust to the corporation to pay a bill of the corporation for materials. There was no formal notice to the trustees, and no minutes were kept of the transaction. Paulson and Hedstrom both knew that the corporation had no funds. Several days later Hedstrom as president signed a note for $1,700, due five years after date, payable to the trust. The present balance in the trust is $435.33.
In December 1946, a bankruptcy petition was filed against the corporation. Hedstrom did not file any claim against the bankruptcy estate on behalf of the trust. His reason for not doing so, as he stated, was that all profits of the corporation had been wiped out by the renegotiation so that there was no trust.
The investments authorized by the trust included government bonds, investments approved by Illinois law for insurance companies, and bonds and debentures of any corporation, including those of the Oscar W. Hedstrom corporation. The trust instrument also provided that when the corporation should fail to contribute for any two successive years, the trust would terminate and the employees' accounts become 100 per cent vested. Under the terms of the trust the corporation has no reversionary interest in the trust.
Although defendant makes and argues ten separate points in support of the decree, the controversy resolves itself into two principal questions: (1) was there an existing trust; and (2) if so, did the trustees, in good faith, perform within the provisions of the trust. Defendant argues that since the trust instrument was never fully executed by the corporation nor signed by any of the trustees or beneficiaries, no trust existed. However, the failure to sign the trust instrument in this case was the only formality lacking. A trust instrument was prepared on advice of accountants and counsel; the board of directors of the corporation adopted it, and they and the officers of the corporation conducted their operations in accordance with its provisions. Books and records were installed and maintained for several years. Funds were set aside into separate bank accounts, and membership account books advising the cestui que trusts of the general provisions, and containing various entries of the members' accounts, were distributed and maintained. Amendments were enacted to conform to the United States Treasury Department requirements to have the contributions allowed as deductible corporate expenses. Trustees were selected and operated the trust by means heretofore described to comply with the trust instrument and amendments. As to one of the plaintiffs, a payment of a share of his account was made out of the trust funds, and Russell W. Hedstrom testified by deposition that he signed the instrument. It is significant that at the conclusion of the hearing the chancellor who heard the evidence found that the trust came into legal existence, and the corporation and its officers ratified it by statements contained in the employees' books and by depositing monies to the creditors of the trust. He also found that Hedstrom as trustee assumed control of its ...