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Illinois Rockford Corp. v. Kulp

NOVEMBER 3, 1967.




Appeal from the Circuit Court of Cook County; the Hon. CORNELIUS J. HARRINGTON, Judge, presiding. Decree reversed and cause remanded with directions.


This action was filed for the rescission of a stock sale agreement or, in the alternative, for damages arising out of defendants' allegedly fraudulent misrepresentations which induced plaintiff, through its sole stockholder, William Leeb, to sell to defendant Western Picture Frame Company its 50% share of the capital stock of the Pullman Couch Company (hereinafter referred to as Pullman) for a grossly inadequate price. The cause was referred to a Master in Chancery (later appointed as a Special Commissioner) who, after extensive hearings, filed a report wherein he recommended a decree denying the prayer for rescission of the transaction and awarding damages to plaintiff in the amount of $112,500 as against all defendants, jointly and severally. The decree entered by the Chancellor approved the report of the Special Commissioner, adopted the findings of fact contained therein, and provided for judgment in favor of plaintiff and against all defendants in the recommended amount, including costs.

Defendants maintain on this appeal that they are not liable for fraud or deceit as a matter of law since the alleged false representations attributed to them were not statements of a present fact or of a past fact, but were merely statements of an intention to do something in the future and, that in any event, plaintiff did not rely upon the statements in the sale of its stock; that the record fails to disclose defendants conspired in the breach of any fiduciary obligation owing to plaintiff with regard to the sale of the stock; and that the damages awarded to plaintiff are grossly excessive for the reason that plaintiff wholly failed to prove its shares of the Pullman stock to have been worth more than the amount actually received for the stock and further, that the award fails to take additional factors into consideration.

Plaintiff maintains on this appeal that defendant Leo Kulp, who owned the other 50% of the Pullman stock, owed a fiduciary obligation to plaintiff, through Leeb, and was consequently obligated to make full disclosure to Leeb of all details of his negotiations for the sale of the Pullman stock; that the other defendants knew of Kulp's fiduciary position and acted in concert with him in the breach of that fiduciary duty; and that defendants engaged in a conspiracy to defraud plaintiff through deceit and misrepresentation.

The Pullman Couch Company of Chicago, together with its subsidiaries in Mississippi and California (all three of which are involved herein,) were engaged in the manufacture of convertible sofa beds and other upholstered furniture. Pursuant to an agreement entered in September of 1957 between plaintiff and Leo Kulp as owners of 100% of the Pullman stock, which agreement related to the management of Pullman, Kulp was to be president of Pullman and primarily responsible for the design, production and manufacturing operations. William Leeb, owner of plaintiff's stock, was to be chairman of the Pullman Board, vice-president and treasurer of the companies, and was to be in charge of the sales and finances of the Pullman enterprises. The agreement further provided that Kulp would receive $60,000 for his full-time services, that Leeb would receive $40,000 for his services, that each man had the right to elect two of the four-man board of directors, and that the parties would confer with regard to all major company policies.

In January of 1958 Leeb was hospitalized for an illness and upon recovery commenced to spend more of his time in Palm Springs, California. He continued to participate in the affairs of Pullman, keeping himself informed with respect thereto by periodical visits to Chicago, telephone communications and the regular receipt of financial reports and statements. From the inception of the company, Leeb spent little time in Chicago and Kulp, as president, managed and controlled the affairs of Pullman.

From 1958 Pullman experienced substantial operating losses. The decline in the financial condition of the companies became so serious that in the early part of 1959 the companies were unable to meet their liabilities and the possibility of an involuntary bankruptcy was imminent. Leeb came to Chicago from Palm Springs in March of 1959 and he and Kulp engaged in a series of meetings with members of the law firm of Schwartz and Cooper, specialists in matters of bankruptcy, which culminated in a decision that Pullman should file Chapter XI proceedings to effect an arrangement with creditors under the Federal Bankruptcy Act. On April 2, 1959, the Chapter XI proceedings were filed in the Federal District Court in Chicago by all three Pullman companies. Orders were entered by that court permitting the companies to continue their operations as debtors in possession under supervision of the court. On April 3rd Leeb returned to Palm Springs.

It was made clear to all parties concerned by the referee in bankruptcy and by Attorney Schwartz that unless a plan of arrangement with creditors of Pullman was promptly forthcoming the Chapter XI proceedings would be converted into straight bankruptcy proceedings involving the liquidation of all the assets and properties of Pullman. Efforts were made by all parties concerned to find persons who would be interested in Pullman and in providing funds to finance an arrangement with creditors. It appears the only interest shown in the purchase of Pullman was that of defendants Jackson and Reinhold, and by a Mr. Hertenstein who offered to purchase all the Pullman stock for $35,000.

Defendant William Ray Jackson resides in Tennessee and is engaged in the furniture manufacturing business in that area. Defendant Arthur Reinhold, a longtime business acquaintance of both Leeb and Kulp, is president of the defendant Western Picture Frame Company, a furniture manufacturing company with headquarters in Chicago.

Shortly before the filing of the Chapter XI proceedings Reinhold learned of Pullman's troubles and contacted Leeb in California, offering to purchase Leeb's interest in the companies, but Leeb turned down the offer. Subsequent to the filing of the Chapter XI proceedings, Kulp contacted Leeb in California at the suggestion of the Southwest Texbank, one of Pullman's largest creditors, and offered $25,000 for Leeb's share in Pullman, but Leeb again refused. Lester Reinwald, Leeb's personal attorney for 28 years and also the attorney for Kulp and Pullman, testified as a court's witness that Leeb contacted him in Chicago with regard to Kulp's offer and told Reinwald that he, Leeb, would sell his shares in Pullman for $35,000 on condition he received a certified check therefor immediately. Leeb, however, testified he did not offer his stock for $35,000, but that he contacted Reinwald to determine why Kulp offered him $25,000. On April 21, 1959, Reinhold and his attorney, Harold Perlman of Chicago, met with Kulp and Attorney Reinwald. The financial condition and affairs of Pullman were discussed, and Mr. Reinwald reported to Leeb by letter following the meeting that nothing had come of the conference. The testimony concerning this meeting is that Kulp was asking between $250,000 and $300,000 for his "working interest" in Pullman and that Leeb wanted $125,000 for his stock in Pullman. Shortly after the meeting Kulp telephoned Leeb in California and advised him to stay away from Chicago because of "ugly creditor remarks," and further advised him that he was "taking care of everything." Shortly thereafter Leeb telephoned Attorney Schwartz in Chicago who advised Leeb to come to Chicago.

Defendant Jackson, having been previously advised of the Pullman situation by Reinhold, came to Chicago from Tennessee on April 23rd and spent a day with Reinhold at the Pullman plant in Chicago. On April 27th Jackson's accountant, Meyer Winer, came to Chicago to study the Pullman books and records.

In keeping with Mr. Schwartz's recommendation, Leeb returned to Chicago from Palm Springs on Thursday, April 30th; on that date Jackson also returned to Chicago from Tennessee. On April 30th or on the morning of May 1st, Leeb met with Jackson, Winer and Kulp in an office at the Pullman plant at which time Jackson stated he would be willing to pay $50,000 for all the Pullman stock. Leeb and Kulp then stepped out of the room and talked privately. Leeb asked Kulp whether he thought $50,000 was a fair price for their interest in Pullman and Kulp replied that he thought it was a fair price because he had interviewed several other prospective buyers and had gotten nowhere with them. Kulp suggested that the offer be accepted or they might wind up with no deal at all. The two men returned to the office and Leeb said to Jackson, "O.K., Mr. Jackson, it's a deal." Jackson stated that he would like to explore the possibilities of a plan of arrangement with the creditors, whose claims against Pullman at that time constituted some $1,300,000, and that he would meet with Leeb the following day. Kulp left the factory and Leeb inquired of Jackson whether Kulp was getting anything over and above the $25,000. Jackson replied, "No, Kulp is getting $25,000. He is getting exactly the amount you are getting. We don't do business — we wouldn't do business behind your back. We do not do business that way." Winer confirmed these remarks.

Later that morning, Kulp and Leeb drove to the Standard Club in downtown Chicago to attend a meeting to discuss a plan for an arrangement with creditors. On the way to the club, Leeb testified, he inquired of Kulp concerning the prospective stock sale and Kulp replied, "All we could get for the stock in the Pullman Company was $50,000." Kulp testified it was possible he discussed the value of the Pullman stock with Leeb. Leeb asked whether Kulp was getting anything over and above the $25,000 and Kulp stated he was getting nothing other than the $25,000, but he was trying for a one-year employment contract with the reorganized companies and was not certain whether he would get it.

At the Standard Club were present Kulp, Leeb, Jackson, Winer, Perlman, Reinwald, Attorneys Schwartz and Cooper, and a Mr. Berz who represented Pullman in the reorganization. Schwartz spoke of the necessity of adopting a plan of reorganization immediately or facing liquidation and a discussion ensued relative to what would be required to reach a compromise with the creditors. Jackson spoke of giving the creditors ten cents on the dollar but Schwartz felt that twenty cents would secure the creditors' consent to a reorganization. At this meeting Jackson reiterated that Leeb and Kulp were to be treated equally in the purchase of the Pullman stock.

A creditors' meeting was called for that afternoon at the offices of Schwartz and Cooper. Both Leeb and Kulp went to the meeting but only Kulp attended; Leeb rested in another room. Leeb's position was represented by Attorney Schwartz to the persons attending the meeting that unless Leeb was to receive $25,000 for his stock immediately he was going back to California and "the whole deal would blow up." A compromise offer was submitted to the members of the creditor committee on behalf of Jackson and was rejected as inadequate. The meeting broke up without an agreement having been reached.

Jackson and Kulp engaged in several meetings and telephone conversations beginning in April of 1959 and continuing through the early part of May. It does not appear that Leeb was informed of any of these meetings. The topic of discussion at the meetings appears to have been the overall situation of Pullman, as well as negotiations for the acquisition of Kulp's interest in Pullman. Kulp testified, as did several other persons, that nothing definite came of any of these meetings or negotiations; Kulp further testified that this was the reason he did not report to Leeb concerning the meetings.

On the morning of Saturday, May 2nd, Jackson and Reinhold arranged to present Leeb with a check in the amount of $25,000 for his share of the Pullman stock, but Leeb desired to consult with Attorney Reinwald before consummating the deal. Reinwald was unavailable on Saturday and made arrangements to meet with Reinhold and Attorney Perlman at Perlman's home on Sunday, May 3rd, to complete the transaction. Reinwald prepared a handwritten agreement for the sale of plaintiff's stock and explained the agreement to Leeb during the automobile ride to Perlman's home on Sunday. Reinwald further testified he told Leeb that he assumed Kulp would come to him for representation in the handling of the sale of Kulp's stock, and that if this should occur, regardless of what nature of deal Kulp might make, Reinwald would represent him as a separate matter, completely independent of and without any regard to Leeb's deal, just as Leeb was now asking Reinwald to close his deal without any relation to Kulp. Leeb made no mention of any promise by Reinhold or Jackson that Leeb and Kulp were to be treated identically in the sale of the stock. Leeb did express his awareness that Kulp would probably seek an employment contract with the reorganized Pullman companies and stated that he, Leeb, was not interested in future employment by the reorganized companies. Reinwald further testified that Leeb stated to him that the figure of $25,000 was $10,000 less than he had offered to sell his stock in April, but that he was anxious to get his money and to "forget about the whole matter." At the Perlman home the sales agreement submitted by Reinwald was revised to meet certain objections made by Perlman and plaintiff's stock was sold to the Western Picture Frame Company for the sum of $25,000.

On Monday, May 4th, Reinhold and Perlman met with Kulp and Reinwald in Perlman's office. Negotiations were had for the purchase of Kulp's share in Pullman, and it was finally agreed that Kulp would receive an option for the purchase of his stock for $25,000, a year's employment contract with the reorganized companies at a salary of $40,000, and a consultation agreement under which Kulp would receive, after the termination of his full time employment, compensation equal to 10% of the annual net profits of Pullman, if any, with a maximum limit of $225,000. At one point during the negotiations Kulp walked out of the meeting when his demand for a five-year employment contract was rejected. The agreement was finally signed by Kulp on May 7th.

The evidence shows that, after extensive negotiations, the problems concerning the burdensome leases, including the amount of rent, the size of the leasing space, equipment to be leased, the duration of the leases, and the like, were settled on or prior to June 17th, as were the matters relating to the arrangement with the Southwest Texbank which held a factor's lien on all Pullman's accounts receivable. On May 10th the arrangement with the creditors was accepted by the creditors' committee, Jackson and Reinhold offering twenty cents on the dollar to the creditors of each of the Chicago and Mississippi companies and fifty cents on the dollar to the California company creditors. The arrangement was confirmed by the District Court on June 17th and 18th. On June 18th Kulp was served with notice that the option to purchase his 50% of the Pullman stock would be exercised by Jackson and Reinhold. Following these dates the evidence shows that Jackson and Reinhold invested some $600,000 in Pullman to finance the settlements and to provide working capital. The evidence further shows that Pullman continued to lose money and had a net loss for the year June 30, 1959 of over $580,000, with losses from July of 1959 to January of 1960 in an estimated amount of $250,000 to $300,000.

Pursuant to his employment contract, Kulp worked for the reorganized Pullman companies until the end of 1959. However, in September of 1959, he tendered his resignation, giving as the reason therefor differences which had occurred between him and Reinhold relating to the operation of the reorganized companies and also his desire to enter the furniture manufacturing business in Florida. Kulp was released from his contract and was paid the sum of $10,000 for the release and a further sum of $2,000 as reimbursement for expenses incurred in connection therewith. In January of 1960, Kulp contracted for the purchase of a furniture business in Florida, and Jackson and Reinhold invested $60,000 in this business in the form of a purchase of nonvoting common stock.

Plaintiff introduced evidence to show that Kulp's consultation agreement and his subsequent rescission agreement were a sham and a fraud and that they were both part of the overall conspiracy to pay Kulp substantially more for his stock than was paid to plaintiff. The consultation agreement was attacked by evidence that Kulp was considered in the furniture industry as a poor business manager; that he was considered to have been the person responsible for Pullman's financial troubles; and that Reinhold was heard to have said he would not have employed Kulp "for twenty cents a week." The rescission ...

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