APPEAL from the Appellate Court for the Third District;
heard in that court on appeal from the Circuit Court of Sangamon
County; the Hon. DEWITT S. CROW, Judge, presiding.
MR. JUSTICE SCHAEFER DELIVERED THE OPINION OF THE COURT:
Central Standard Life Insurance Company owns 4098 shares of the preferred stock of Abraham Lincoln Hotel Company. On its own behalf, and on behalf of approximately four hundred other preferred shareholders, it brought this class action in the circuit court of Sangamon County, praying for the dissolution of the Hotel Company and a sale and distribution of its assets. After a trial before a master, the circuit court dismissed the complaint for want of equity. Plaintiff's direct appeal was transferred to the Appellate Court, because this court lacked jurisdiction. (7 Ill.2d 266.) The Appellate Court affirmed the decree of the trial court, (10 Ill. App.2d 245,) and we granted leave to appeal.
Something of the history of the corporate venture is essential to an understanding of the contentions of the parties. The Hotel Company was organized on May 1, 1924. Its original capitalization consisted of 8000 shares of no par value common stock, issued at $5 per share, and 7250 shares of 7 1/2 per cent cumulative preferred stock having a par value of $100 per share, issued at par. The corporation acquired a hotel site in Springfield and constructed a hotel. To do so it borrowed $700,000 at six per cent, secured by a mortgage. In 1935 the maturity of the mortgage was extended in proceedings under section 77B of the Bankruptcy Act. In 1944 the principal balance of the mortgage, $350,000, was refinanced with a fifteen-year refunding mortgage bearing interest at four and one-half per cent.
From the outset the hotel has been operated by the Abraham Lincoln Hotel Operating Company, under leases from the Hotel Company. When the mortgage was refinanced in 1944, a new lease was entered into between the Hotel Company and the Operating Company. That lease is the Hotel Company's only source of income. It provides that the lessee shall pay all taxes, ground rent, insurance, interest on the mortgage and "principal payments not in excess of $15,000 per year" and all costs necessary to put and keep the building and its equipment and furnishings in good condition as a first class hotel. After paying these and other expenses, except depreciation and Federal income taxes, the Operating Company is to pay annually one half of all profits to the Hotel Company.
The defendants are C. Hayden Davis, who owned 7990 shares of the common stock of the Hotel Company when this action was commenced, and F.M. Condit and E.E. Nicholson, each of whom owned 5 shares. When this action was commenced, Davis owned or controlled 4051 shares (a very substantial majority) of the common stock of the Operating Company, and 418 shares of its preferred stock. While the case was pending all of these shares were sold by Davis to Charles H. Mitchell. The Hotel Company and the Operating Company were also original defendants, and Mitchell was allowed to intervene as a defendant.
Dividends were paid on the preferred stock from 1924 to 1931, but no dividends have been paid since 1931. As of October 2, 1952, when the complaint was filed, cumulated dividends amounted to $1,051,800. The plaintiff points out that this amount would have to be paid before any dividends could be paid on the common stock, and that this amount, plus the par value of the outstanding preferred ($701,200), would have to be paid to the preferred shareholders on liquidation, before anything could be paid to the holders of the common stock. The complaint alleges that the operating history of the company shows that it will never make a profit sufficient to meet the accrued dividends on the preferred stock; that the individual defendants therefore have no interest in the continuance of the company except that which results improperly from their exclusive control and management of it; that the assets of the company are presently worth substantially less than $1,753,000 and are depreciating, and that under these circumstances the conduct of the defendants in refusing to liquidate the company is oppressive.
The various defendants admitted that $1,753,000 was the sum to which the preferred shareholders would be entitled on liquidation, as of the date the complaint was filed, but denied the other significant allegations. They alleged that the assets of the company are presently worth more than two million dollars, and they set forth a separate defense of estoppel and laches. The separate defense alleges that in 1944, when the new lease between the Hotel Company and the Operating Company was entered into, E.H. Henning, now the president of plaintiff company, was a director of the Hotel Company and president of Illinois Bankers Assurance Company which then owned the preferred stock now owned by the plaintiff; that E.H. Henning as director of the Hotel Company moved to adopt the resolution authorizing the lease, and as president of the Illinois Bankers Assurance Company voted the stock now owned by the plaintiff in favor of the resolution. Defendants allege that in reliance on that action and as controlling shareholders of the Operating Company, they produced and applied large sums of money in retiring the mortgage indebtedness of the Hotel Company and made extensive renewals and improvements upon the building and that plaintiff's predecessor in title to the stock, the Illinois Bankers Assurance Company, and plaintiff, which acquired the stock in October, 1951, at all times acquiesced in their conduct until the resignation of E.H. Henning from the board of directors of the Hotel Company in April, 1952. They assert that plaintiff is thereby estopped from maintaining this action. Plaintiff admits these facts but argues that they do not work an estoppel.
The evidence as to the present value of the Hotel Company's assets was conflicting. On behalf of plaintiff, Edwin A. Boss, who has bought and operates thirty-two similar hotels, testified that in his opinion the assets of the Hotel Company, excluding the furnishings which are owned by the Operating Company, were worth $700,000. Defendants introduced an appraisal obtained for insurance purposes that fixed the reproduction value, less depreciation, of the hotel building at $2,150,273.77. To this figure they add $218,733.49, the amount at which the ground is valued on the books, to arrive at a total value of $2,369,007.26.
As another indication of value, plaintiffs point to a contract entered into in April of 1954, after this suit was instituted, by which C. Hayden Davis sold all his stock interests in both companies to Charles H. Mitchell for $1,500,000. The contract provided for a contemporaneous payment of $105,000, and a payment of $25,000 by August 1, 1955. It further provided for payments of $5000 a month, which increased to $7000 per month in the last 15 years of the contract. The balance of the purchase price was payable May 1, 1979. The contract provided that on default by the purchaser all payments theretofore made to the seller should be retained as liquidated damages, and that neither party should have any further liability to the other by reason of the contract. There was testimony that all payments falling due under the contract prior to June 30, 1954, had been made in accordance with its terms.
The master regarded the evidence as to the earnings and value of the two companies "immaterial and irrelevant to the issues in this case," and he held that in the absence of any evidence that the plaintiff, or its predecessor in title, ever dissented in a stockholders or board of directors meeting to action then taken, the actions of the defendants have not been illegal, oppressive or fraudulent. His recommendation that the cause be dismissed for want of equity was adopted by the chancellor.
The Appellate Court affirmed on a different ground. While that court spoke of "clear abuse of trust" as being sufficient to establish oppressive conduct within the meaning of section 86 of the Business Corporation Act and cited definitions of the term "oppressive" as "unreasonably burdensome; unjustly severe. Tyrannical. Overpowering to spirit or senses," and while it recognized that the word "oppressive" in the section must be read separately from "illegal" and "fraudulent," it held that the evidence did not establish oppressive acts on the part of defendants apparently because there had been no showing of "mismanagement, or misapplication of assets." The court did not reach the question of estoppel.
This court has held that the authority of courts of equity to decree the dissolution of a corporation is statutory. (Wheeler v. Pullman Iron and Steel Co. 143 Ill. 197.) Section 86 of the Business Corporation Act of 1933 provides that courts of equity shall have full power to liquidate the assets and business of a corporation in an action by a shareholder when it is made to appear "[t]hat the acts of the directors or those in control of the corporation are illegal, oppressive, or fraudulent." Ill. Rev. Stat. 1955, chap. 32, par. 157.86.
The plaintiff does not contend that there has been any illegal or fraudulent conduct. It does not charge that the 1944 lease was improper or unfair, and it admits that the operation of the hotel has been as efficient as could reasonably be expected. Its complaint rests squarely on the ground that the conduct of the individual defendants in refusing to liquidate the Hotel Company is "oppressive" within the meaning of section 86. Its position is that sufficient time has elapsed to demonstrate conclusively that the venture cannot succeed, and that only the holders of the common stock can profit from its continuance, and it contends that the corporation should therefore be liquidated so that the preferred stockholders may now salvage what they can of their investment without being compelled to await the expiration of the corporation's 99-year charter.
The concept of oppressive conduct as a ground for dissolution of a corporation in equity appears for the first time in the 1933 act. The able briefs of counsel have not referred us to any authoritative determination of its precise scope. Tower Hill Connellsville Coke Co. v. Piedmont Coal Co., Inc., 64 F.2d 817, relied upon by the plaintiff, is a case in which liquidation of a corporation was ordered in an action brought by preferred shareholders. What is there said as to the degree of good faith required in transactions between corporations that have interlocking directorates and as to the powers of courts of equity to enter decrees of dissolution in appropriate cases is instructive and persuasive. But that case clearly turned on the fraudulent conduct of the principal common shareholder in using corporate assets that should have been applied to the payment of dividends on the preferred stock to finance speculations that could not benefit the preferred shareholders but might be advantageous to the owners of the common stock. The fraudulent aspects that colored that ...