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Henry's Drive-in, Inc. v. Anderson

JUNE 6, 1962.

HENRY'S DRIVE-IN, INC., PLAINTIFF-APPELLEE,

v.

THOMAS A. ANDERSON, DEFENDANT-APPELLANT.



Appeal from the Circuit Court of Cook County; the Hon. DANIEL A. ROBERTS, Judge, presiding. Affirmed in part, reversed in part and remanded with directions.

MR. PRESIDING JUSTICE MCCORMICK DELIVERED THE OPINION OF THE COURT.

Rehearing denied September 27, 1962.

In this case the defendant is taking an appeal from two decrees entered in the Circuit Court of Cook County. The plaintiff, Henry's Drive-In, Inc., filed a suit primarily seeking an injunction to restrain the defendant, Thomas A. Anderson, a former employee of plaintiff, from competing with plaintiff over the entire United States except the "Chicago Metropolitan Area" for a period of five years from April 8, 1958. The complaint also prayed that the plaintiff might have such other and further relief as may be equitable in the premises. The plaintiff sought the injunction on the basis of a restrictive covenant in the defendant's employment contract. The matter was referred to a master in chancery, and the chancellor in his decree entered June 25, 1959 followed the recommendations contained in the master's report and held the covenant too broad under the circumstances of the case and therefore unenforceable. As a part of the findings of fact in that decree the chancellor found, in accordance with the master's recommendations, that when defendant left plaintiff to form his own corporation, The Golden Hamburger Drive-In Corporation, he took with him three of plaintiff's prospects for operators of plaintiff's drive-in restaurants, Nicksic, Busse and Carrerras, and made them operators for Golden Hamburger. These three had made money deposits and executed deposit agreements for franchises with the plaintiff. In the June 25, 1959 decree the chancellor, in accordance with the master's recommendations, re-referred the cause to the master to take an accounting under his direction to determine the loss and damage sustained by plaintiff by reason of the sale of franchises by defendant to the three mentioned persons. On the re-reference the master held a hearing and found that the plaintiff had suffered damages in the sum of $52,456.69. The defendant had filed a counterclaim alleging that he was owed compensation by the plaintiff for his work prior to April 8, 1958. The master found that the plaintiff owed the defendant $1,864.05, which finding was approved by the chancellor in his decree. This amount was set off against the amount found due the plaintiff as damages, and a monetary decree was entered January 6, 1961 entering judgment against the defendant in the amount of $52,130.03 including certain costs. The defendant appeals from certain portions of these decrees, to wit, from the portion of the decree of June 25, 1959 which re-refers the cause to the master in chancery with directions to take an accounting to determine the loss and damage sustained by plaintiff by reason of the sale of franchises by defendant to persons who had made deposits and executed deposit agreements for franchises with plaintiff while the defendant was in the employ of plaintiff, and from the portion of the decree which denied defendant's motion at the close of plaintiff's case to dismiss the cause for want of equity. He also appeals from the portion of the decree of January 6, 1961 overruling defendant's exceptions to the master's report and approving the master's report, and from the portion of the decree which entered a judgment in favor of plaintiff and against defendant in the sum of $50,592.64 and in addition a judgment in the amount of $1,537.39 as the cost of the accounting from the defendant, making in all the sum of $52,130.03. The defendant prays that this court reverse the above portions of the decrees and remand the cause with directions to enter a judgment in favor of the defendant-counterclaimant in the amount of $1,864.05, together with all the costs of the injunction proceedings and the accounting proceedings heretofore paid by the said defendant-counterclaimant, being the sum of $4,373.93.

We will first consider the appeal from the portions of the decree of June 25, 1959.

It appears from the record that in 1955 plaintiff was organized to engage in the self-service drive-in restaurant business. Its method of operation was, after deciding on a location, to locate an operator and negotiate with the owner of the premises to build a restaurant according to plaintiff's specifications. The owner would then lease the premises to plaintiff which in turn would sublease it back to the operator. Plaintiff derived income from these operators from the following sources: (1) initial franchise fee of $1,500; (2) profit on the sale of equipment; (3) an annual franchise fee of 1 1/2% of the yearly gross sales; (4) $100 per month rental override, which was the difference paid by plaintiff and the amount paid by the sublessee to plaintiff; (5) a management fee of 5% of the gross purchases made by the operators from approved food purveyors.

On May 11, 1956 the defendant joined plaintiff's organization and entered into a contract of employment with it. Under that contract defendant's responsibilities were to supervise plaintiff's operations outside the Chicago metropolitan area. The contract further provided that when defendant should obtain a prospect who is desirous of becoming a franchiser he shall submit to the plaintiff a deposit agreement, together with a good faith deposit, and if the prospect is acceptable to the plaintiff the plaintiff shall execute and issue its standard form franchise agreement for a Henry's Drive-In to said prospect, and it provided that defendant should be compensated on a commission basis. The contract also contained a restrictive covenant which provided that on the termination of the agreement defendant should not, for a period of five years thereafter, directly or indirectly engage in the business of setting up franchisers or franchises for the operation of drive-in type restaurants in the territory provided for therein either for his own benefit or for or with any person, firm, or corporation whatsoever except plaintiff.

Subsequently on or about November 20, 1956 Bresler, the principal stockholder of the plaintiff, orally agreed with the defendant that the defendant was to take on the servicing of the Chicago metropolitan area in addition to his other duties, and that the plaintiff would pay him $600 per month plus 17 1/2% of the net profit made on the sale of equipment to the operators in the Chicago area. Later the $600 per month was raised to $900 per month. With respect to the national market the plaintiff and defendant were to divide all profits on a 50-50 basis and the defendant was to pay all expenses related to sales. The plaintiff was to pay all operational expenses, such as office rent, office personnel, telephone, telegraph and supplies. Early in 1958 serious disagreements and disputes arose between plaintiff and defendant. In March or the early part of April defendant decided to leave plaintiff's organization. He admitted that he had discussed the formation of his own company with a number of plaintiff's employees while he was still employed by plaintiff. Defendant had been elected president of the plaintiff corporation on October 1, 1957. In March of 1958 defendant retained an architect to draw some building plans for his prospective drive-in business, and on April 5, 1958 he retained another architect to draw additional plans. He submitted his resignation on April 8, 1958, but told Bresler that he would stay for an additional thirty days to train anyone that Bresler had in mind. Bresler said that that was not necessary and defendant said he would like to leave as soon as he possibly could. There was subsequently some further conversation with reference to defendant's leaving and about the restrictive covenant in defendant's contract of employment, as well as about money allegedly owed defendant. Heller, the bookkeeper for plaintiff, left the corporation with defendant on April 9, 1958.

Two days prior to the time when defendant left plaintiff he had talked with one Kotlisky, plaintiff's Florida franchiser, and in that conversation defendant attempted to persuade Kotlisky to leave plaintiff and join his organization. Kotlisky told him that he could not afford to make such a move. Defendant made another proposition to him with reference to the money to be paid for a franchise but Kotlisky finally refused to leave plaintiff.

Defendant admitted soliciting Carrerras to accept a franchise with his organization, and at the time that defendant was negotiating with him he knew Carrerras had a good faith monetary deposit with plaintiff. Defendant, the day that he resigned as president of plaintiff, directed plaintiff's bookkeeper to return the $1,500 good faith deposit to Nicksic and Busse. The deposit of Carrerras was returned to him sometime after April 8th. Carrerras, Nicksic and Busse subsequently took out franchises with Golden Hamburger.

Defendant states that the decree of June 25th should not have been entered because there is no showing that Carrerras, Nicksic and Busse would have become franchisers for plaintiff if there had been no intervention by defendant.

The good faith agreement which was executed with plaintiff by the three required a deposit from each, but it further provided that plaintiff could reject the applicant and the applicant could, if he did not approve of the franchise agreement and lease tendered to him by plaintiff, refuse it and thereupon his deposit would be returned to him. Defendant had been negotiating with the three prospects concerning a franchise from plaintiff for six or seven months, though at the same time there was some negotiation between the three and other owners operating drive-in restaurants.

There is no question that the deposit agreement was not a binding contract. However, it is unreasonable to take the view that the negotiation between the three and plaintiff was a merely casual relationship, and such a view would disregard the reality of the situation. The master in his report on which the decree of June 25th was based found that the plaintiff was entitled to an accounting to all sums received by the defendant from the sale of franchises, "including profits on the sale of equipment and all other income" received from such persons who had made deposits with plaintiff while the defendant was in the employ of the plaintiff, and the master recommended that an accounting be taken under the direction of the court to determine the amount of loss and damage sustained by the plaintiff. The court in its decree ordered that an accounting be taken to determine "the loss and damage sustained by plaintiff by reason of sale of franchises by defendant to persons who had made deposits and executed deposit agreements or franchises with plaintiff while defendant was in the employ of plaintiff."

The defendant here argues the decree was not clear as to whether there was to be an accounting to determine the money received by defendant from the three franchisers or whether the master was to determine the loss and damage which was sustained by the plaintiff by reason of the allegedly wrongful enticing of the three franchisers away from plaintiff and into his company at the time when he owed a fiduciary duty to plaintiff. From the decree of the court and the proceedings in the subsequent hearing before the master it is apparent that what was really sought was a determination of the loss and damage sustained by the plaintiff.

[1-5] The law is uncontroverted that corporate officers and directors owe a duty to the corporation to take no advantage of their position for their financial gain in derogation of the corporation's rights. An officer or director of a corporation, though not responsible for errors of judgment, is a fiduciary charged with the duty of caring for the property of the corporation and managing its affairs honestly and in good faith. If this duty has been so violated as to result in an impairment of its assets or loss of its property he can be compelled to make ...


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