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Shlensky v. South Parkway Bldg. Corp.

APRIL 22, 1959.




Appeal from the Circuit Court of Cook county; the Hon. JOHN T. DEMPSEY, Judge, presiding. Reversed and remanded with directions.


Rehearing denied June 22, 1959.

This is an appeal from a decree entered in favor of Harold and Max Shlensky as stockholders of the South Parkway Building Corporation, against the South Parkway Building Corporation and four directors of that corporation, that the directors personally account to the corporation for damages allegedly suffered by the corporation in certain transactions.

All of the transactions of which complaint is made were with other corporations in which some if not all of the individual defendants, directors of the South Parkway Building Corporation, were also directors. None of the transactions were between the South Parkway Building Corporation and the named defendants directly and individually.

[1-3] A director of a corporation occupies a fiduciary relationship with that corporation for the benefit of its stockholders. He must act fairly and be free from all fraud or unfair conduct, and, if he becomes a party to a contract with the corporation, his obligation to candor and fair dealing is increased in the precise degree that his representative character has given him power and control from the confidence reposed in him by the stockholders. Dixmoor Golf Club, Inc. v. Evans, 325 Ill. 612, at 616. In White v. Stevens, 326 Ill. 528, after stating the above mentioned principle, the court held:

"It has also been repeatedly held that corporations having one or more common directors may contract with each other if the contracts are fair and reasonable. There is no presumption in such case that the contract is unfair or oppressive but the person attacking it must prove its unfairness."

In the case of Nagel v. Northern Illinois Gas Co., 12 Ill. App.2d 413, where ten out of the seventeen directors of the Commonwealth Edison Company were the same persons as ten of the eleven directors of the Northern Illinois Gas Company, the court cited White v. Stevens and the quotation above and stated that no presumption of want or gross inadequacy of consideration arose from the identity of the directors. The case of Winger v. Chicago Bank & Trust Co., 394 Ill. 94, involved the transfer of all of the assets of an assessment life insurance company to a legal reserve life insurance company, where the directors of the transferor held all the stock in the transferee company. The court said:

"Thus, directors who acquire title for themselves hold it in trust for the benefit of the shareholders or policyholders. The fact that they ostensibly deal with another corporation and transfer the property to it will not change the effect of the transaction, where all of the stockholders of the buying corporation are the same persons as the directors of the selling corporation, for in such case the property of the beneficiaries would merely be held by another trustee, . . . ."

The statements of the law therein contained have particular application to the facts there involved, and the rule laid down in White v. Stevens, supra, is not changed.

Mr. Harry M. Englestein was the original promoter and developer of the property herein involved. After default and foreclosure of the mortgage on the property, it was reorganized and a new corporation formed. He acquired by the reorganization in the federal court 7% of the stock. He acquired additional stock, until he owned at least 63% of the stock of the new corporation. Plaintiffs acquired 241 shares. There were 17,773 outstanding shares of the stock in the South Parkway Building Corporation. This suit involves the rights of minority stockholders and the duties and obligations of those in charge of the corporation, the directors, in the management of the corporation.

The building, which was erected in the 1920's and is now owned by the building corporation, is a large mercantile building including space for numerous merchandising concerns including a large department store, a theater, and a large hall. It was in a sense an on-the-street shopping center.

At the time of the building the promoter organized two corporations which became tenants of the building corporation. One was the South Center Department Store, organized to operate a department store in a large part of the space. The other was the Union Amusement Company, organized to operate the ballroom space. The promoter also owned certain other vacant real estate adjacent to the building property, and he formed another building corporation, known as the 4753 South Parkway Building Corporation, which held this vacant land. The dealings here all involve transactions between the South Parkway Building Corporation, an Illinois corporation, the corporation which arose out of the reorganization of the building in the federal court, and these three corporations, largely owned and controlled by Englestein.

Englestein was the original manager of the property. When the property was transferred to the building corporation he continued to manage the property. Englestein was employed by the trustee in bankruptcy with the approval of the federal court to continue to manage the property. After the reorganization the board of directors was composed of five members of the bondholders committee, the trustee in bankruptcy, and Englestein. The board of directors employed Englestein as management agent of the building and agreed to pay him a commission of 5% of the gross rents collected from the building corporation tenants. He had received that same compensation during the reorganization period, and that arrangement has been in effect since that time.

The South Center Department Store leased the department store space in the building from the new corporation in 1936. The Union Amusement Company leased the ballroom space on January 1, 1937. These companies had leased ...

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