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Korman v. Matthias

SEPTEMBER 18, 1961.




Appeal from the Superior Court of Cook County; the Hon. WALKER BUTLER, Judge, presiding. Affirmed in part and reversed in part.


Rehearing denied and opinion modified November 7, 1961.

This is an interlocutory appeal by defendants from a temporary injunction restraining the payment of salaries, fees and compensation to the top level officers and directors of defendant Highway Insurance Company. Payment of Highway's defense expenses is also restrained. No evidence was heard. The injunction was entered on the pleadings. Plaintiff, Clyde L. Korman, cross appeals from the denial of his petition to remove Highway's defense counsel.

Defendant, Highway Insurance Company, formerly known as Metropolitan Insurance Company, is an Illinois stock insurance corporation organized in 1950. In April, 1958, discovery was made that Harry Gralnek, treasurer of Highway, had misappropriated a large part of Highway's assets, rendering it insolvent. On May 26, 1958, the shareholders of Highway concluded an oral agreement with defendant Insurance Corporation of America, an Indiana corporation, whereby all outstanding shares of Highway stock (100,000 shares) were to be transferred to ICA for its undertaking to put in sufficient assets to make Highway solvent, and to take control and "operate it as a going concern" in Illinois.

Defendant Russell H. Matthias, as the then president of Highway, handled the stock transfer negotiations with ICA, and acted as "informal escrowee," from May 26, 1958, to June 5, 1958, for the assignment and final delivery to ICA of the Highway stock. Of the 100,000 shares of Highway stock transferred to ICA, plaintiffs owned 40,000 shares, defendant Matthias owned 4500 shares, defendant Brody owned 10,000, defendant Highway owned 40,000, assigned to it by its former treasurer, Gralnek, under a program of restitution for its misappropriated assets.

On October 6, 1958, ICA divested itself of all of the Highway stock and withdrew from the management of Highway, which it had assumed for the period between June 5, 1958, and October 6, 1958. The 100,000 shares were transferred to defendants Matthias, Fahrenbach and Stenhouse. Matthias received and now owns 69,998 shares.

The instant proceedings were filed on July 30, 1959. Plaintiffs charge that the defendants, "individually and in conspiracy with each other" secretly and fraudulently divided the capital stock and assets of Highway, with the stock routed to Matthias and the assets to ICA. Plaintiffs pursue two distinct actions, both equitable in nature and based in fraud of fiduciaries and attorneys. The primary action seeks the return of Highway stock to its former stockholders. The secondary action, a stockholders' derivative action, seeks restoration to Highway of alleged misappropriated assets.

On September 23, 1960, plaintiff, Clyde L. Korman, filed a petition alleging that Highway is the owner of a cause of action for the recovery of $3,500,000 of misappropriated funds and assets from the "alleged wrongdoers," defendants Matthias, Stenhouse, Jr., Fahrenbach, Brody and Matthias, Jr., who are "substantially all of the officers and directors of Highway" and who are adverse and hostile to Highway, "their principal."

The petition further alleges that these defendants employed A. Bradley Eben to act in these proceedings for Highway; that they have wrongfully caused Highway to pay Eben $5,000 for his services, and will continue to pay and incur the liability of Highway for the payment of attorneys' fees and costs and "expenses incurred or to be incurred in the separate defense of the individual wrongdoers." The petition prays that the court select and appoint an attorney for Highway, restrain the use of Highway assets for the payment of defense expenses of the previously named defendants, and to restrain them and Highway from paying them any salaries, fees or compensation until the further order of court.

Defendants' sworn answers to the petition state that the business of Highway is large and complex, with thousands of policyholders, requiring daily dealing with policyholders, agencies and brokers, settlement of losses and defense of policy suits; that the conduct of Highway's daily operations is under the direct supervision and control of those defendants whose salaries are sought to be restrained; that Fahrenbach is a director, the president and the chief executive officer of Highway, and since October 8, 1958, has been performing all of the duties attached to that office; that he has a wife and six children, totally dependent on him, and if deprived of compensation, it is likely that he "could no longer continue to work for the corporation"; that Stenhouse, Jr., is its secretary and renders "valuable, essential and daily services" to the company; that to deprive Fahrenbach, Stenhouse, Jr., and Brody of compensation may necessarily halt the operation and conduct of the internal affairs of Highway, result in great financial loss to it, and impose great hardship on Highway and its policyholders; that the directors approved the selection of Eben and want him to continue, as a replacement would result in a waste of company assets for doing work already done by Eben.

The court, after considering all of the pleadings on file and the arguments of counsel, entered an order which (1) denied the petition to enjoin Eben from continuing to act as attorney for Highway; (2) restrained the use of Highway assets for the payment of defense expenses incurred by it or the other defendants; and (3) restrained the use of Highway assets for the payment of salaries and compensation of defendants Matthias, Fahrenbach, Matthias, Jr., and Stenhouse, Jr. It is from this order the appeal and cross appeal are taken.

Although many contentions are made and argued at length, we believe the determinative question is whether it was error for the court to enter the salary restraining order without basing it upon a complaint by the Director of Insurance, because Section 201 of the Insurance Code of Illinois (Ill Rev Stats 1959, c 73, § 813) provides that "[N]o order . . . enjoining, restraining or interfering with the prosecution of the business of any [insurance] company . . . shall be made or granted otherwise than upon the complaint of the Director represented by the Attorney General."

Plaintiffs contend that "equitable jurisdiction, in the absence of specific abridgement or withdrawal of specific power for exclusive exercise by the Director of Insurance, embraces the authority to suspend use of corporate funds for the defense and salary support of fraudulent insurance officials."

Defendants concede that, "short of interference with Highway's business," plaintiffs may proceed with the determination and enforcement of their primary action for the return of their stock and the secondary action to recover Highway assets without intervention from the Director of Insurance. (Winger v. Chicago Bank & Trust Co. (1946), 394 Ill. 94, 102, 67 N.E.2d 265; People v. Williams (1946), 392 Ill. 224, 239, 64 N.E.2d 464.) However, defendants argue that the order which prohibits Highway from paying salaries to its officers, the "key level of top management," was entered without charges that the salaries are excessive or unreasonable; that it is a drastic action and a direct and serious interference with Highway's business; ...

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