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Continental-midwest Corp. v. Hotel Sherman

MARCH 20, 1957.




Interlocutory Appeal from the Circuit Court of Cook county; the Hon. JULIUS H. MINER, Judge, presiding. Affirmed in part. Reversed in part.


This is an appeal by defendants from an order for a temporary injunction (Sec. 78, CPA) [Ill. Rev. Stats. 1955, ch. 110, § 78] in favor of plaintiff, a minority stockholder in Hotel Sherman, Inc., referred to herein as Sherman. The order restrains defendants (a) from voting Sherman stock held by its subsidiary, Ambassador East, Inc., referred to herein as Ambassador; (b) from purchasing, acquiring or exchanging any of the stock of Sherman; (c) from declaring or paying dividends by Sherman until its current assets exceed its current liabilities; and (d) from voting upon or effecting mergers if the same requires voting the stock of Sherman held by Ambassador.

The order was entered August 10, 1956, upon pleadings and argument of counsel, and most of the relevant facts are admitted. The order was intended to preserve the status quo until final disposition of the issues. The question on appeal is whether the chancellor abused his discretion in granting the injunction.

Sherman and Ambassador are Delaware corporations with offices and principal business in Chicago. They are owners respectively of the Hotel Sherman and Ambassador East Hotel. There are about 101,000 shares of Sherman stock outstanding, of which plaintiff holds more than twenty per cent, Ambassador about twenty-five per cent, and a voting trust holds about thirty-nine per cent. Sherman owns about seventy-five per cent of Ambassador stock, and several directors and officers are common to both corporations and are also trustees of the voting trust.

The complaint, filed July 31, 1956, charged generally that the majority ownership by Sherman of Ambassador stock, and the common officers, trustees and interlocking directorates of the corporations resulted in the domination of Sherman affairs to the detriment of minority shareholders. Specifically, it charged that Sherman purchased, without the approval of stockholders, large amounts of outstanding Sherman stock, using Sherman cash, thereby impairing Sherman capital and wasting its assets; the borrowing of $1,100,000 to purchase and retire 7,805 shares of Sherman; the declaring and paying of a $4 dividend in 1956 for no corporate purpose, but on the contrary, to permit the trustees of the voting trust to pay off a loan made to purchase, in 1955, 5000 additional shares of Sherman; and the calling of a meeting for August 2, 1956, without giving requisite notice under Delaware law, to eliminate from the Sherman charter the cumulative voting right, in fraud of the minority and to preclude minority representation. The chancellor found expressly there was no question of either fraud or insolvency.

Issues raised by the pleadings were (a) whether plaintiff's suit is barred by res judicata or unclean hands; (b) whether the chancellor had jurisdiction to interfere with the administration of Delaware corporations respecting dividends, mergers, and acquisition of common stock; (c) whether the Ambassador had the right to vote Sherman stock; and (d) whether the Sherman stockholders had the right to eliminate the cumulative voting provision.

On August 2, 1956, the chancellor entered an order permitting defendants to proceed with the special meeting of August 2, on condition that any action taken was subject to final decision upon the main case. The issue with respect to cumulative voting was continued generally and therefore was removed from the scope of this proceeding and the parties agree that that issue is not before us.

This is a representative suit by a minority stockholder (Mayer v. Oxidation Products Co., Inc., 110 N.J. Eq. 141, 159 A. 377) and the first question is whether the exercise of jurisdiction by the chancellor is an exercise of visitorial power by Illinois over the internal affairs of these Delaware corporations so as to invalidate the injunctional order. The term visitorial power was described by Judge Story, in treating of charitable corporations, as "the controlling authority of its legal visitor who . . . may amend and repeal its statutes, remove its officers, correct abuses, and generally superintend the management. . . ." (Dartmouth College v. Woodward, 17 U.S. (4 Wheaton) 518, 675-676.) In Mayer v. Oxidation Products Co., Inc., 159 A. 377, it was said that the idea of visitorial power derived from canon law and was in the eighteenth century applied extensively as part of common law to charitable corporations, especially colleges, and as applied "may be defined as the exclusive right of the founder of a corporation . . . to make by-laws for the corporation and to adjudge disputes arising thereunder. . . . The visitor was not the proper judge in all disputes among members of the corporation or relating to its internal affairs, but only in cases arising under its by-laws; controversies under the general law of the land were adjudicated in the public courts. . . . In our country it has been laid down that the legislature is the visitor of all corporations. . . ." The chancellor in that case said this had little meaning for him because he had found no case "of the exercise of visitorial power over a civil corporation."

Defendants do not claim the Chancellor was without jurisdiction, and could not successfully make such a claim in the face of Babcock v. Farwell, 245 Ill. 14, Voorhees v. Mason, 245 Ill. 256, and Williamson v. Missouri-Kansas Pipe Line Co., 56 F.2d (7th Cir.) 503. The question is not whether the Chancellor had jurisdiction, but whether he exercised his jurisdiction properly. (Williamson v. Missouri-Kansas Pipe Line Co., 56 F.2d 503, 507.) In Sprague v. Universal Voting Machine Co., 134 Ill. App. 379, 383, cited by defendants, the court did not "determine whether or not an exception to the general rule exists where . . . all the property of the corporation is within the state, its officers reside here, and the act sought to be restrained is claimed to be ultra vires."

Under the facts in this case, where all the actions complained of took place in Illinois, all the corporate assets are located in Illinois, all corporate business is done in Illinois, and all officers and directors reside in Illinois, it would be unjust to remand plaintiff to the courts of Delaware. We think justice, expediency, and the policy of Illinois compel the conclusion that the Chancellor did not abuse his discretion through undue interference in the affairs of the Delaware corporations. (Voorhees v. Mason, 245 Ill. 256.)

We need not consider defendants' contention that Rubin, who made the affidavit for the complaint, has "unclean hands" which preclude plaintiff's suit. Under a contract of purchase, he is the "equitable and substantial" owner of the Sherman stock held by plaintiff (Stevenson v. Loehr, 57 Ill. 509), and did, as a Sherman director, vote for execution of an option to buy that stock and also voted for a $1,100,000 loan to buy Sherman stock held by him and the Morrison Hotel, of which he is president. If the unclean hands doctrine is applicable, it is limited to these transactions (Carpenters' Union v. Citizens Committee, 333 Ill. 225, 250), and since we shall hereinafter find erroneous, on other grounds, the order restraining the purchase of stock, we do not reach the question of unclean hands. We do not decide whether Rubin's participation in the two transactions precludes alleging those transactions as part of a pattern of Sherman stock purchases of which plaintiff complains.

There is no merit to the contention that the decree in the Circuit Court in Ross v. Hotel Sherman, Inc., Hart et al., No. 54 C 6151, is res judicata with respect to the instant suit for an injunction to restrain the voting by Ambassador of Sherman stock. The answer discloses that the Ross suit was "dismissed." Nothing appears to disclose the substance of the motion to dismiss and we are not at liberty to make the necessary assumptions in favor of the motion or decree. We see no merit either in the similar contention made with respect to the case of Rubin and Morrison Hotel, Inc. v. Sherman et al., No. 56 C 5033, in the Circuit Court of Cook County. That suit made allegations of the interlocking officers and directors as in the instant suit, the domination of Ambassador by the defendants, and the plaintiffs' fears that unless restrained, defendants, at the April, 1956, meeting, would vote the Sherman stock held by Ambassador in violation of Delaware law and with harm to the minority stockholders. Plaintiffs moved for a temporary injunction and the relief was denied. The instant complaint contains several allegations which were not made in the Rubin-Morrison Hotel suit. We hold that neither of the previous actions is res judicata of any issue in the present proceeding.

The pleadings, upon which the chancellor acted, raised issues of fact and law and no evidence was heard. The order was justified, if at all, therefore, upon the basis of preserving the status quo. (Gillam v. 661 Sheridan Apartments, Inc., 1 Ill. App.2d 11.)

The parties agree that an essential element in applying this extraordinary remedy in this instance is the probability of plaintiff's success in the main case. The prayer for relief at the final hearing is that the injunction sought, pendente lite, "be made permanent"; that plaintiff be permitted to inspect the Sherman ...

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