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Ditis v. Ahlvin Construction Co.





APPEAL from the Third Division of the Appellate Court for the First District; — heard in that court on appeal from the Circuit Court of Cook County; the Hon. JOHN PRYSTALSKI, Judge, presiding.


Rehearing denied March 19, 1951.

On May 7, 1945, appellant, Charles G. Ditis, filed a complaint in equity in the circuit court of Cook County, against the Ahlvin Construction Company, a corporation, Martin V. Ahlvin, Jorgen Hubschman and Vernon E. Crosell, the stockholders, directors and officers of the corporation, and the Trust Company of Chicago, as trustee. He sought an accounting relative to 97 houses constructed and sold by the corporation, and the recovery of his property, property rights and interest in 80 of said houses of which he claims to have been wrongfully deprived by Ahlvin, Hubschman and Crosell, when the two latter directors were allowed to purchase the 80 dwellings from the corporation. The chancellor, having heard the evidence, found that appellant had no interest in the real estate; that the sale to the two directors was valid, inasmuch as they had no fiduciary duty toward appellant; that appellant was entitled, by contract, to 37 1/2 per cent of the profits realized from the sales of all houses by the company; and ordered an accounting. Appellant took a direct appeal to this court, which we transferred to the Appellate Court for the First District because no freehold or other grounds were involved so as to give us jurisdiction on direct appeal. (Ditis v. Ahlvin Construction Co. 400 Ill. 77.) The Appellate Court affirmed the decree of the trial court, (Ditis v. Ahlvin Construction Co. 339 Ill. App. 378,) and we have granted leave to appeal for further review.

Since the facts detailed in our former opinion are limited to those bearing on the question of jurisdiction, some further description of the relationship between the parties and the transaction involved becomes necessary. In the early part of 1942 the Strandberg & Ahlvin Construction Company was a corporation with little business and few assets. Strandberg withdrew and the name was changed to Ahlvin Construction Company on January 13, 1942, with appellee Ahlvin becoming president. On the same day Ditis was appointed a director and elected vice-president and secretary. He claims that he became a stockholder at the time, but this is denied by Ahlvin. No conclusive documentary evidence was introduced to prove or disprove the point; however, minutes of a special meeting of the shareholders, dated July 8, 1942, recite that Ditis was one of the shareholders present. We gather that Ditis was taken into the company, without investment of capital, as the result of his having conceived and approached Ahlvin with the idea that the company go into the business of building homes for war workers under the authority of the War Production Board. Ahlvin was receptive to the scheme and the two men set about to put the plan into being. All matters in dispute in this litigation arise from this enterprise conceived by Ditis.

Property upon which to build was located and secured by a contract of purchase, preliminary plans were drawn by an architect, a lending agency was secured to underwrite a loan of $5400 on each dwelling erected, title arrangements were made, and other required preliminary negotiations were completed to the satisfaction of the War Production Board. As a result, on June 23, 1942, the Ahlvin company was issued priorities to construct three hundred houses, which were to be sold to war workers, or to third parties for occupancy by war workers, for $6000 cash or for $6250 if the purchase was financed. The degree for which Ditis was responsible for these accomplishments is disputed in the record but the evidence shows that it was largely his successful efforts which transformed the enterprise from an idea into an operation. It is apparent, too, that at this stage of the transaction, the Ahlvin company had not the necessary finances to embark upon the actual construction.

On July 8, 1942, Crosell, a public accountant, who had been the company's auditor for a number of years, was taken into the corporation and made a director and treasurer. The record does not show if he became a stockholder at that time, or if he paid any consideration for his entry into the firm. During the same month a land trust was created, and by its terms the Trust Company of Chicago was to hold title as trustee, for benefit of the Ahlvin Construction Company, to certain of the lots on which one hundred dwellings were to be erected. At its execution the trust covered only eight lots but as new lots were purchased by the company they were to be added to this trust. The trust agreement provided that no beneficiary should at any time have any right, title or interest in, or to any portion of, the real estate covered by the trust, either legal or equitable, but only an interest in the earnings, avails and proceeds thereof, and that the rights of such interested parties should be deemed to be personal property.

Hubschman, who had a construction company of his own, became connected with the enterprise on September 14, 1942, when he became a director and vice-president of the Ahlvin company, replacing Ditis who resigned both offices but continued as secretary. Although he admits that he was first approached by Ditis, Hubschman testified that his primary purpose for coming into the Ahlvin company was to share in a war contract the company had in the State of Virginia, and that to do so he had to agree to join in the housing project. It is not clear as to whether he became a stockholder at the time, but on October 15, 1942, he put $8800 into the Ahlvin company and advanced $1200 to Crosell to purchase stock from the retired Strandberg.

Another point worthy of note is, that on September 14, 1942, Ahlvin, Hubschman and Crosell, acting as directors, fixed their respective salaries as officers at $1000 each for a period of three months. At the end of the three-month period the figure was reduced to $550 each per month, and it appears that all of said salaries were paid. Previous to this time neither Ditis nor Ahlvin had drawn any salaries from the corporation. The next step occurred on October 25, 1942, when, pursuant to a resolution of the directors, the Ahlvin company entered into a contract with Ditis, which described the relation of the parties as that of employer and employee. The contract recited Ditis's past service in the plan to erect 300 houses, the need of his full time future services, his duties, and then stated, "instead of being paid a fixed salary by the employer, the employee shall receive as and for his services payable by the employer, thirty-seven and one-half per cent (37 1/2%) of the net profits derived from the sale of said premises; or, in the event said premises are not sold, then thirty-seven and one-half per cent (37 1/2%) of any and all equities that remain in any of the unsold dwelling houses. The compensation shall be paid upon the termination and sale of each individual dwelling house." Ditis testified that upon signing the contract he surrendered his stock in the corporation to Ahlvin because he was to devote his full time to the one project.

The next action of the company was to execute and deliver assignments of the beneficial interests in the land trust previously created. By separate assignments Ahlvin received 26 per cent, Crosell 15.625 per cent, Hubschman 20.875 per cent and Ditis 37.5 per cent of the beneficial interest in the trust. These assignments were never delivered to, or brought to the attention of, the trust company. Ditis stated they were not delivered because of Crosell's advice that to do so would subject both the company and the individuals to an income tax liability. Crosell denies this and from his testimony implies that the assignments were signed at the insistence of Ditis with no intention that they would be effective unless the parties financed the project in proportion to their beneficial interest. This, however, is not borne out either by the terms of the assignments or the future actions of the company.

From this point on it appears that Ahlvin was absent in Virginia and had little to do with the housing project, and, because of events in Virginia and financial difficulties, fell into Hubschman's bad graces. Ditis continued to performed his assigned duties on the housing project, the extent of which is disputed, but he, too, seemed to fall from the inner circle of the Ahlvin company. In the summer of 1943, the subject of the assignments of the beneficial interests in the trust, which were evidently in Ditis's possession as secretary, was raised again. According to Ditis, Huschman and Crosell asked for the assignment to Ahlvin, saying that the latter did not deserve to participate in the housing project because of his failure in Virginia. Ditis testified that he became suspicious, had photostatic copies made of assignments to Ahlvin, Crosell and Hubschman, then placed the originals in the vault, from whence they disappeared. He retained the original of his own. Crosell's version of what occurred is quite different. He testified that Ditis voluntarily agreed that all of the assignments should be surrendered and destroyed when he was told he would have to put up sufficient money to finance his proportionate share in the project; that Ditis failed to deliver up his own assignment, and that he, Crosell, tore up the other three. Despite Crosell's testimony, we note that on September 8, 1943, the corporation adopted a resolution which authorized Hubschman and Crosell to modify or execute a new agreement with Ditis "relative to the beneficial interest that is to be paid to him."

Thereafter, in November, 1943, the Ahlvin company acquired title to ninety-two additional lots. Instead of causing title to be conveyed to the trustee under the land trust previously created, Hubschman and Crosell, acting without a corporate resolution, created a new land trust as to these lots, again with the Trust Company of Chicago, who held title for the benefit of the Ahlvin Construction Company. Though Ahlvin was still president of the company at the time, he knew nothing of the formation of the new trust, and we think it apparent from the evidence that the fact was concealed from Ditis, the secretary. Without going into a detailed account of the varied transactions which followed, by September 30, 1944, the entire beneficial interest in both trusts had been assigned from the construction company to Hubschman and Crosell, and all of the assignments effecting the transfer had been delivered to the trustee. During the period these events were occurring, Ahlvin, Hubschman and Crosell were the sole directors and had become the only shareholders of the construction company. From the corporate records it is apparent that Ahlvin knew of, and participated in, the assignments, but Ditis, who was still secretary, neither participated in nor had knowledge of what was transpiring.

In the meantime, the construction was progressing. The first sixteen houses completed were sold but no adjustment was made with Ditis under his contract, because, as Hubschman explained, the net profit on each single dwelling could not then be ascertained. By early 1945 eighty-one additional houses were completed, and were rented with the exception of one occupied by Ditis. Three lots of the one hundred purchased were returned to the seller, the remaining two hundred priorities were surrendered voluntarily, and the construction end of the project was terminated with a total of ninety-seven houses having been built.

There is much argumentative evidence in the record as to the scope and importance of the duties performed by Ditis after his contract had been entered into. Appellees seek to discredit both the quality and quantity of his work, but there is sufficient evidence to show that Ditis performed all tasks assigned to him and devoted full time to the project, all without pay. To provide some relief for his financial strait, he was given and assumed the job of watchman on the project, and as such was paid twenty-five dollars a week salary, and given ten dollars expenses for his car. Appellees contend here, as they did in the lower courts, that there was an oral cancellation of the contract by Ditis and that he accepted the watchman job in lieu of his rights under the contract. Our examination of the record convinces us that the Appellate Court properly decided that there was no cancellation, for the reasons adequately expressed in its opinion. (339 Ill. App. 378.) We shall not comment on this point at any greater length.

On January 20, 1945, unbeknown to Ditis, a special meeting of the board of directors was held at which Ahlvin, Hubschman and Crosell were present. A resolution was passed by all three directors selling the equity in eighty of the unsold houses to Hubschman and Crosell for $45,000, or a net cost to them of $5860 per house, the sale price of which to war workers was to have been $6000. To pay this amount Hubschman was to apply the sum of $24,078.24 due on a note he held from the construction company; Crosell was to apply the sum of $13,643.02 due him on a similar note; and the balance of $5698.24 was to be paid in cash. Hubschman and Crosell both established by their oral testimony that they had advanced the sums represented by the notes to the company in order to complete the dwellings here in question. This is not borne out by documentary evidence in the record, nor were the alleged advances traced to the housing project. Following the resolution, a deed order was given the trustee and deeds for the eighty properties were issued to Hubschman and Crosell on February 28, 1945. They were recorded March 14, 1945. Four days later Ditis was tendered a statement summarizing the costs of the project and asked to approve it. The statement showed that the project had operated at a net loss of $19,383.00, making worthless Ditis's contractual interest of thirty-seven and one-half per cent (37 1/2%) ...

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