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Edward Don & Co. v. Ufland

SEPTEMBER 11, 1968.




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


Rehearing denied October 18, 1968.

The question is simple. Who are the officers of Edward Don & Company, a corporation, and who owns the corporate stock? The answer must be found in a thicket of testimonial and documentary diction, fiction and contradiction arising out of 97 trial days, a record of over 8,500 pages, and exhibits in excess of 2,000. On November 13, 1957, the plaintiffs met and elected directors and officers on the theory that they as individuals were the owners of a majority of the corporate stock. On the same day, the defendants elected directors and officers of the corporation on the theory that a family partnership owned 100% of the stock and that they constituted a majority of such partners. The plaintiffs promptly filed their complaint alleging that the defendants were unlawfully acting as officers and directors of the corporation and sought an injunction restraining the defendants from acting as such officers and directors and likewise restraining any interference with the plaintiffs as officers and directors. All collateral issues have been resolved and settled by agreement between the parties and an agreed order entered except as to the two issues here presented. The defendants answered the complaint and filed a counterclaim alleging that the purported issuance of stock to individuals was abortive, a sham and without any legal force whatsoever. The trial court so held and found that the family partnership was the owner of 100% of the stock of the plaintiff-corporation and that the stock purportedly issued to the individuals was null and void. A decree so finding was entered and the suit of the plaintiffs for an injunction was dismissed for want of equity. The plaintiffs appeal.

Edward Don, the husband of the plaintiff-Irene and the father of the plaintiffs, Richard and Daniel, founded the business in 1921. The defendants are brothers and a sister of Edward, who entered the business from time to time as they completed their education, beginning in 1921 through 1927. The business progressed from an individual proprietorship doing business as Edward Don & Company to a partnership and then to a corporation. The company manufactured nothing, operated as a restaurant supply house and grew from a $16,000-a-year business into a multimillion-dollar corporation. The record is clear that Edward, as the founder and the oldest member of the family, was the patriarch, the leader, the bellwether sheep, and it is fair to say the dominant and dominating individual in the business until his untimely death on February 11, 1956. It was he who made the decisions and directed the operation of the business. During this period, as between themselves, there is an atmosphere of hard work, honesty, integrity, diligence, mutual respect and confidence in each other. In this atmosphere and on this record, it is not even debatable but that each of the parties occupied a fiduciary relationship one with the other. Rizzo v. Rizzo, 3 Ill.2d 291, 120 N.E.2d 546. The juridical marathon that we now review does not result from an intentional or malevolent breach of that fiduciary relationship by anyone. The controversy has its origin in a policy persistently practiced before and after Edward's death of showing one picture of the family business organization in the privacy of the family and presenting an entirely different picture of the family organization to creditors, loaning agencies, advertisers, tax agencies and the public generally. Expediency was the watchword when any problem arose with a minimal if not an almost total lack of legal direction and guidance prior to Edward's death and for awhile thereafter. This has in no sense retarded the growth and the development of the corporation nor has the policy thus pursued in any manner adversely affected any in the business world with whom the corporation dealt. It has, nevertheless, created an evidentiary and documentary swamp which we now explore for some solid ground for the corporate ownership.

From the entry of Julius into the business in 1921, it was conducted under the apparent sole proprietorship of Edward. His individual income tax returns were prepared and filed on that theory. From its inception, however, the brothers and sisters were on a salary, plus a profit-sharing plan, and the profits not required for individual personal living were ploughed back into the business as working capital. Annually the amount ploughed back into the business by each individual was represented by a treasury note signed by Edward and later by Edward and Dave. It is clear that all parties during this period acquiesced in and consented to this arrangement. Whether these treasury notes created a debtor-creditor relationship or a partnership between Edward and his brothers and sister is now more or less immaterial. In 1946, this practice brought Edward Don & Company into a head-on conflict with the wartime Wage and Stabilization Board because Edward's personal income tax returns showed salary increases to his brothers and sister in violation of the Wage Stabilization Act.

A partnership agreement dated January 1, 1947, was formalized and submitted to the Wage and Stabilization Board to establish the fact that the business operation was a partnership. In reliance upon this contract, the Government settled the Wage Stabilization Act violation with a savings of some $75,000. In lieu of his individual returns previously filed, Edward filed partnership returns for the business for the years 1942-1945, showing the earnings of the business as an income of the partnership, the date of origin of the partnership as 1922, and the partners as Edward and the defendants. This partnership contract provided in substance the following:

1. Appointed Edward Don as sole general manager with authority to operate the ventures of the partnership under the apparent ownership of Edward Don personally, "whenever necessary, but for the benefit of all the partners,"

2. Provided for 3% interest to be paid on the capital accounts of the partners for the sums ploughed back into the partnership by each partner,

3. Provided that wherever the assets were assigned or transferred in whole or in part, the division between the partners would include not more than 48% of the total to Edward Don individually, and that the remaining should be distributed proportionately to the other partners, or their legal representatives pro rata,

4. That if Edward Don died or ceased to be connected with said business owning more than 48% of the business, his executors or administrators would transfer that amount over 48% to the remaining partners pro rata according to the respective percentage of the then remaining partners, or if such division was not practicable, then to the said partners jointly as tenants in common,

5. And that "the purpose of the above paragraph is to make impossible the dictatorship of any partner's widow, or widower or any heirs and their attorneys."

In their answer to the counterclaim, the plaintiffs charged that this agreement is not a true, correct or accurate picture of the agreement, but was prepared for the express purpose of justifying the payments heretofore made to some of the defendants and to neutralize the charge that the company was in violation of the Wage Stabilization Act. Expedient though it may have been, the cold fact remains in this record that this contract saved the business a substantial sum of money and whatever may have been the interests of the partners at this time, they all profited by it. They cannot enjoy its fruits and repudiate its terms. Either it was devised to knowingly mislead the Government or it was fairly, intentionally and honestly entered into. We conclude the latter and in so doing suggest that good conscience, simple equity and common honesty dictates this conclusion.

This experience triggered the thought that the business should be incorporated — a suggestion which had been made for some time by Goldfine, the company auditor, and the internal revenue agent who had been assigned to this account. This was accomplished notwithstanding the fact that Julius, Pearl and Sam testified they were not consulted about nor did they participate in the decision to incorporate, but learned about it some months later. Their statements are torpedoed by the fact that the corporate charter was issued by the State of Illinois on April 14, 1947, and their genuine signatures appear on the application for that charter.

On May 1, 1947, the operating assets of Edward Don & Company, a partnership, were transferred to the corporation and on that day, Stock Certificate 0 for 500,000 shares at $1 par value was issued to Edward Don & Company, a partnership. The record shows that this was a bona fide dollar for dollar transfer of assets from partnership to corporation. About this time, Edward discussed with his auditors the question of breaking up Certificate 0 and making stock distributions to the individual partners for estate planning purposes. Both sides agree that Rootberg, one of the auditors, advised against it at this time for the reason that the proposed distribution suggested by Edward was at a variance with the capital account and profit account owned by each party and thus the danger of tax consequences was present. Five years later, the same subject was brought up and under date of September 18, 1952, a memorandum concerning Federal gift tax and Federal estate tax was prepared and forwarded to all members of the partnership. By an assignment dated April 30, 1952, the partnership assigned Certificate 0 with all partners signing the transfer and the certification at the bottom that the transfer of the shares did not constitute a sale. In conformity with the specific terms of that assignment, Certificates 1-6 were then issued as follows:

Certificate 1 Edward Don and Irene Don 310,000 shares (62%)

Certificate 2 Julius K. Don and Charlotte Don ...

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