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Paulman v. Kritzer

SEPTEMBER 1, 1966.

EDITH KRITZER PAULMAN, PLAINTIFF-APPELLEE,

v.

HENRY E. KRITZER, KRITZER RADIANT COILS, INC., A DELAWARE CORPORATION, BATAVIA-KRITZER, INC., A DELAWARE CORPORATION, COURTLAND G. NEWTON AND MANFRED A. LUCCHESE, DEFENDANTS-APPELLANTS.



Appeal from the Circuit Court of the Nineteenth Judicial Circuit of Lake County; the Hon. JOHN S. PAGE, Judge, presiding. Decree adverse to defendants affirmed.

MR. JUSTICE DAVIS DELIVERED THE OPINION OF THE COURT.

This suit was instituted by the plaintiff and her sister as a stockholders' derivative suit for the benefit of the defendant, Kritzer Radiant Coils, Inc., a Delaware Corporation, herein called KRC. The plaintiff contends that her brother, the defendant Henry E. Kritzer, Sr., herein called Kritzer, violated the fiduciary duty owed by him to KRC as an officer and director in seizing certain corporate opportunities for his own benefit. The plaintiff's sister withdrew from the case before testimony was heard before the Special Master.

Since 1954 Kritzer has been president and a member of the Board of Directors of KRC and has owned 50% of its outstanding stock, and the plaintiff and her sister have each owned 25%. At the stockholders' meeting on February 20, 1956, a deadlock developed in the election of directors when Kritzer refused to vote to elect a representative of the plaintiff. Since that time no further meetings of the shareholders were called or held and the same directors have continued in office. Since such deadlock, the personal relations of the shareholders have deteriorated and they have sought recourse through litigation.

The corporation was engaged in the business of manufacturing and selling heating equipment. Its quarters in 1954, located at 2901 Lawrence Avenue, Chicago, were inadequate for various reasons and it was searching for a more suitable location. In October of 1954, Kritzer, individually, purchased on contract for the sum of $126,400 certain unimproved real estate known as the Ebertt tract, for the purpose of solving KRC's housing and location problem. The down payment and the installment contract payments in the sum of $82,950 — being all of the payments due on said contract to the date of the sale of the tract by Kritzer — were made from KRC funds. In August of 1957, Kritzer sold this property for a gross profit of $140,515.25, which he personally retained.

In October of 1955, Kritzer, individually, also purchased on contract for $45,000 a smaller parcel of land which adjoined the Ebertt tract, for the same purpose. This real estate is referred to as the Bulaw tract. The down payment and the first two semiannual installment contract payments were made by Kritzer from KRC funds. The funds invested in such real estate were carried on the KRC books as "Advances to Officers." Shortly after his sale of the Ebertt tract, Kritzer repaid to KRC $82,950, as well as an additional $7,403.22 which apparently was interest on such sum, although no explanation was given as to what the rate was or how it was determined. No part of the profit made by Kritzer on the sale of the Ebertt tract was turned over to KRC, and he still retains title to the Bulaw tract.

Early in 1956, Union Asbestos and Rubber Company, hereinafter called UNARCO, contracted KRC for the purpose of selling its heating division to KRC. An investigation of this proposal was made by KRC, and it was concluded that the equipment of the heating division would supplement that already owned by KRC and that its products would complement those of KRC. The officers of KRC decided that it would be advantageous to purchase this division of UNARCO. Subsequently, Kritzer organized Batavia-Kritzer, Inc., herein called B-K, a Delaware Corporation, with a capitalization of $1,000. He held all of its capital stock and was its president and one of its three directors. Courtland G. Newton — also a director of KRC — was one of the directors, as was Kritzer's son, Henry E. Kritzer, Jr. Kritzer then personally purchased substantially all of the assets of the heating division of UNARCO, including its inventory of raw materials, machinery, equipment, tools, dies and jigs. As a part of this transaction, UNARCO assigned to Kritzer its rights as the lessee of certain premises used by its heating division, for manufacturing purposes. Kritzer then reassigned those interests to B-K, remaining personally liable on all of B-K's obligations to UNARCO. Over the next five to six years, KRC paid all or substantially all of B-K's purchase price for these assets to B-K as rental for the equipment and machinery, and also paid to B-K rental for the use of the manufacturing facilities located on the leased premises. KRC never acquired title to any of this property, which, at the end of this period, had considerable value.

The Master recommended that Kritzer be held to account to KRC for his net profits on the purchase and sale of the Ebertt tract; that he convey to the corporation the Bulaw tract — the title thereto still being vested in him; and that he convey all of his stock in B-K to KRC, all subject to credit for his payments on the realty still owned, his contributions to the capital of B-K, and to indemnification for personal liability on the purchase of UNARCO's assets. The trial court approved and adopted the findings and orders of the Master.

KRC is a Delaware Corporation, and Delaware law, with respect to the fiduciary duties of a corporation's officers and directors, is controlling. National Lock Co. v. Hogland, 101 F.2d 576, 579 (CA 7th, 1939). It is almost universally recognized that the directors and officers of a corporation occupy a fiduciary relation toward it. Shlensky v. South Parkway Bldg. Corp., 19 Ill.2d 268, 278, 166 N.E.2d 793 (1960). This standard is succinctly set forth in Loft, Inc. v. Guth, 23 Del. Ch. 138, 2 A.2d 225 (1938) at pages 238 and 239 in the following language:

"Such are the fiduciary duties and obligations of an officer and director of a corporation that if a business opportunity comes to him which is in the line of his corporation's activities and of advantage to it and especially if really intended for it, the law will not allow him to divert the opportunity from the corporation and embrace it as his own. If he does so, the corporation has a right to claim the benefits of the opportunity for itself and to impress the property which the director and officers received together with all profits thereon with a trust in its favor."

In the case at bar it is conceded that KRC was in need of and searching for a new location. The real estate purchased by Kritzer — both the Ebertt tract and the adjoining Bulaw tract — was intended for the use of KRC. The availability of the real estate came to the knowledge of Kritzer while searching for property for KRC. The funds of KRC financed the purchase of the Ebertt tract and were used to make the down payment and all semiannual payments thereon — in the sum of $82,958 — up to the time when Kritzer sold the property. KRC funds were also used to pay a considerable portion of the purchase price of the Bulaw tract; namely, the down payment and additional contract payments in the sum of $22,000. These factors clearly bring the transactions within the corporate opportunity doctrine.

As to UNARCO, it is conceded that it approached an officer of KRC, suggesting that KRC acquire its heating division; and that the acquisition would be advantageous to KRC. Again, the evidence indicates that KRC ultimately paid for the purchase of the UNARCO division. In the spring of 1956, Kritzer entered into a contract to purchase the assets of UNARCO heating division including a leasehold interest in a manufacturing plant in Batavia, on a time basis, the total ultimate obligation being in excess of $550,000. These assets were transferred from UNARCO directly to B-K, which then commenced operations at the Batavia plant.

KRC advanced $45,000 to B-K to enable it to commence operations and B-K then began to manufacture certain items previously manufactured by KRC. KRC also manufactured and sold to B-K, at 85% of the regular sale price, certain other items, thereby enabling B-K to resell at a profit. KRC further advanced other funds to B-K with the result that by December 31, 1956, B-K owed approximately $190,000 to KRC. By June 30, 1957, B-K had accounts payable to KRC totaling $352,000, and accounts receivable from KRC in the sum of $88,600.

In December of 1956, KRC bought all of B-K's inventory and work in progress valued at $415,000. B-K retained title to the machinery, tools and dies, as well as the leasehold interest. From January 1, 1957 to November 1, 1963, KRC paid B-K, $381,600 rental for B-K's equipment and machinery. The total purchase price paid by B-K to UNARCO for these items was $298,750. During the same period of time, KRC paid to B-K, $392,400 rental for the UNARCO premises and B-K paid UNARCO $331,200 for the same premises under lease to it. These circumstances likewise clearly bring these transactions within the corporate opportunity doctrine.

This doctrine is but one of the manifestations of the general equitable rule which demands of an officer or director of a corporation the utmost good faith and loyalty in his relations to the principal which he represents, and requires an undivided and unselfish loyalty to the corporate principal without conflict between this duty and the self-interest anticipated of human nature. The rule, described as inveterate and uncompromising in its rigidity, rests upon the broad foundation of a wise public policy that, for the purpose of removing all temptation, extinguishes all possibility of profit flowing from a breach of the confidence imposed by the fiduciary relation. Guth ...


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