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In Re Estate of Szantay

FEBRUARY 23, 1968.

IN THE MATTER OF THE ESTATE OF ELMER SZANTAY, DECEASED. MARIE SZANTAY KONOPKA, AS GUARDIAN OF RITA JEAN SZANTAY AND RUTH JOAN SZANTAY, MINORS, KATHRYN ELIZABETH SZANTAY AND MARGARET EILEEN SZANTAY, PETITIONERS-APPELLEES,

v.

THE NORTHERN TRUST COMPANY, INDIVIDUALLY AND AS EXECUTOR OF THE ESTATE OF ELMER SZANTAY, DECEASED, RESPONDENT-APPELLANT.



Appeal from the Circuit Court of Cook County, County Department, Probate Division; the Hon. JAMES M. CORCORAN, Judge, presiding. Order reversed.

MR. JUSTICE SCHWARTZ DELIVERED THE OPINION OF THE COURT.

This is an appeal from an order of the Probate Division of the Circuit Court surcharging the executor of the estate of Elmer Szantay in the sum of $25,000 for the allegedly improper adoption of a profit-sharing plan for the employees of Sandee Manufacturing Company. Sandee's stock is wholly owned by the estate and is its principal asset. The suit was brought by Marie Szantay Konopka, as guardian of Rita Jean Szantay and Ruth Joan Szantay, minor children of the testator, who together with two adult children were the principal beneficiaries. She charges that an unreasonable portion of the profits was distributed to employees under the plan, that the employees in fact designated their own compensation and that they did so in a manner contrary to the interests of the beneficiaries. The two adult children were also originally named as petitioners, but they do not appear to have continued in the litigation. Petitioner was given leave to file an amended petition in this court pursuant to Supreme Court Rule 362 (Ill Rev Stats, c 110A, § 362 (1967)), and the sole party petitioner named in the amended petition was Marie Szantay Konopka as guardian aforesaid. Respondent made a motion to file an amended answer, which motion was taken with the case and is now allowed.

Sandee Manufacturing Company was organized by the deceased Elmer Szantay who was president and owner of all its stock. On April 1, 1962, he and James Clemens, the sales manager, were killed in a plane accident. By his will the Northern Trust Company was named executor and trustee and was authorized to continue the business pursuant to the following provision:

"it is my wish that my Executor continue the operation of any business or businesses I may own at the time of my decease, using the same personnel then employed, as far as feasible, if in the opinion of said Executor it is or they are earning a fair return on the investment. . . ."

Pursuant to the express wish of the deceased, the executor continued the business, using the personnel then employed as far as possible. It contends that it earned an outstanding return on the investment after paying all expenses including salaries and profit-sharing incentive bonuses; that the total compensation paid including salary and incentive bonuses to fifteen employees was reasonable and that the executor received nothing by the adoption of the plan and should not be penalized for its stewardship.

At the time of Szantay's death, Sandee had a net worth of $137,999. In addition it had life insurance policies covering both Szantay and Clemens in the sum of $297,387.94. The net worth of the company as of July 31, 1962, was shown as $460,603.64. The insurance proceeds were held by the company largely in the form of federal government securities and cash. The amounts thereof held in the years 1962 to 1965, inclusive, were as follows:

Year 7/31/62 7/31/63 7/31/64 7/31/65 ____ _______ _______ _______ _______

Cash — $100,468.25 $106,811.14 $ 80,394 $ 28,751

U.S. Government Obligations At Cost — 125,000 224,262 298,783 298,297

By July 31, 1965, the holding in government securities slightly exceeded the original amount of the insurance proceeds. The interest on these securities was not subject to the bonus plan.

It appears that the sudden deaths of Szantay and Clemens caused great concern among the employees of the company. They urged the executor to continue the business and to adopt an incentive plan. The executor decided there was a good prospect of earning a fair return in excess of the amount which could be earned by selling the business and investing the proceeds. Having reached that decision, the executor after consulting the successor-president and others decided that an incentive plan was necessary to maintain the prosperity of the company and the continued employment and vigor of its staff. Negotiations with employees followed and a plan was agreed upon. The agreement defined that portion of the company's income subject to the bonus plan as follows:

"Net profits shall be construed as being before income taxes and shall be the amount as determined by the company's public accountants for audit purposes and reporting to stockholders. Nonrecurring or non-operating profits or losses, such as capital gains or losses, proceeds from life insurance policies, interest or gains on investments and other unusual items shall be eliminated."

The first $25,000 of operating income, as hereinbefore defined, was to be reserved to the stockholders. Thereafter, fifty percent was to be set aside for the incentive fund. As proceeds from life insurance, interest or gains on investments were excluded from the plan, this gave added assurance that a substantial sum would be available for dividends. The plan further provided that the board of directors would select an executive compensation committee to consist of the president and two directors. The committee was to select participants other than those specifically set forth in the plan and to determine the amount of bonus to be paid to each participant. The actions of the committee were subject to unanimous approval by the board of directors. Distribution of the bonus fund was subject to the limitation that no participant was to receive more than fifty percent of his basic salary out of the bonuses derived from the first $100,000 of operating income earned by the company in any year. If however the company succeeded in earning more than $100,000 in any year, fifty percent of the profit would go to the bonus plan, to be distributed to the employees without regard to their basic salaries.

The bonuses given employees under the plan for the three years 1963, 1964 and 1965 were respectively $69,176.63, $87,707.33 and $36,648.76. The top three executives ...


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