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Johnson v. Central Standard Life Ins. Co.

SEPTEMBER 25, 1968.




Appeal from the Circuit Court of Cook County; the Hon. JOHN J. LUPE, Judge, presiding. Affirmed and remanded with directions.


MR. JUSTICE DAVIS delivered the supplement to opinion on denial of petition for rehearing.

Rehearing denied and supplemental opinion January 15, 1969.

Ray P. Gardner and another brought this suit as a class action on behalf of some 41,000 former shareholders of Illinois Bankers Life Assurance Company ("Assurance Company"). The plaintiffs sought an accounting for secret profits allegedly obtained by certain of the defendants, who at the time, occupied a fiduciary relation to the plaintiffs as either the dominant stockholders, directors, or attorney for the Assurance Company.

The case was referred to a master who recommended an accounting against the defendants, Central Standard Life Insurance Company ("Central Standard"), and Alfred MacArthur; and that the other individual defendants be dismissed. The circuit court entered a decree in substantial conformity with the master's recommendation.

The defendants, Central Standard and MacArthur, appealed and contend that their actions were taken pursuant to court orders in another proceeding, and that plaintiffs' present action constituted an improper collateral attack against those orders; that the defendants' conduct was not improper and did not constitute a breach of any fiduciary duty owed by reason of MacArthur's positions; and that the plaintiffs' action is barred by reason of estoppel and laches. The plaintiffs filed a cross appeal which asked for reinstatement of the defendant, John B. Gallagher, and asserted that the trial court erred in limiting, somewhat, the relief recommended by the master.

This dispute is an outgrowth of Winger v. Chicago City Bank & Trust Co., reported in 325 Ill. App. 459, 60 N.E.2d 560 (1945), and in 394 Ill. 94, 67 N.E.2d 265 (1946), on appeal. Winger arose out of a reinsurance contract entered into in 1929, between the Assurance Company and Illinois Bankers Life Association ("Association"). It was there held that the assets of the Association had been obtained fraudulently by the Assurance Company and, consequently, a constructive trust was declared of the entire capital stock of the Assurance Company for the benefit of those persons who were policyholders of the Association as of November 19, 1929.

In 1946 the case was remanded with directions to the circuit court to carry out the distribution of the Assurance Company stock to those who were the Association policyholders as of the 1929 date. Decrees were entered in 1947 to implement the distribution of the Assurance Company stock. The stock was first converted into 325,000 shares. Thereafter, 97,500 of these shares were awarded to plaintiffs' attorneys in the Winger case, as fees. This represented 30% of the new stock. The defendant, Vernon Loucks, received the majority of these shares and subsequently, by 1950, acquired 75,500 of them. By the end of 1950 — the beginning of the critical time with reference to the case at bar — he had obtained authority to sell, along with his 75,500 shares, the other 22,000 shares which had been awarded as fees, thus controlling the disposition of the total 97,500 shares.

By this time, only 138,500 of the remaining 227,500 shares had been distributed. These had been distributed to some 41,000 shareholders in lots averaging less than 4 shares each. On December 20, 1950, the Assurance Company filed a petition in the court which indicated that some 89,600 shares of the stock ultimately would not be deliverable under the court's previous distribution order because of the impossibility of locating all persons entitled thereto.

The Assurance Company represented that four plans had been suggested to it for the disposition of these 89,600 shares of stock; namely,

1. Reduction of total number of shares by the number of shares incapable of distribution;

2. Distribution of the so-called "undeliverable" shares pro rata either to all stockholders or to those who had received their shares because they or their predecessors in interest had been policyholders of the Association on November 19, 1929;

3. Sale of the shares, with proceeds to be credited to the surplus of the company; and

4. Distribution of the shares to a pension fund to be established for employees of the company.

No order was entered on this petition until June 5, 1951.

In the meantime (December 27, 1950), Loucks entered into two contracts with MacArthur, under the terms of which the 97,500 shares originally awarded as attorneys' fees were sold to MacArthur at a guaranteed price of $15 per share, and a price of $20.50 if, on the final determination in the Winger case, the voting strength of these shares would be maintained at 40 to 42%. The latter price is the one ultimately paid for the stock.

At the time the contract was entered into, MacArthur was the chief executive of Central Life Insurance Company and he and his family owned 75% of this company, which in turn owned 92% of Standard Life Insurance Company. The former reinsured the latter in May of 1951 and the name was changed to Central Standard (the defendant). Its present name is Reliance Standard Life Insurance Company. Without disclosing the transaction to Central Life Insurance Company at the time, MacArthur contracted to buy the stock from Loucks, on its behalf, for approximately two million dollars. MacArthur stated that from the very beginning it was his intention to consolidate the three insurance companies through reinsurance.

At the directors' meeting of Central Life held on March 22, 1951, a special committee was appointed to investigate plans and formulate methods for future expansion. The special committee was composed of MacArthur, John B. Gallagher (one of the defendants), and David Kadyk, a director and attorney for the company. The committee was given a million dollars for this purpose. Gallagher and Kadyk were aware of MacArthur's contract with Loucks. A confidential memo was prepared by MacArthur, for Gallagher and Kadyk, which recited that the million dollar fund placed at the committee's disposal was to be used for the acquisition of the Assurance Company stock under the contract entered into with Loucks.

Thereafter, on March 27, 1951, at the Assurance Company shareholders' meeting, MacArthur, through the 97,500 shares of stock purchased from Loucks, placed himself, his son-in-law, Loucks, and Gallagher on the six-man board of directors of the Assurance Company. The MacArthur-dominated Board brought about the hiring of the Central Life attorney, Kadyk, in lieu of the present Assurance Company attorneys and this was accomplished a few days later. Kadyk, a director and attorney for Central Life, then also represented the Assurance Company in the Winger case.

At this time, the petition filed in December of 1950, for the disposition of the undeliverable stock, was still pending, and no action had been taken on it. Loucks then advised the court that he had sold his stock to MacArthur; that there were two classes of former policyholders of the Association: those who had received their stock in the Assurance Company, and those who had not because they had not been located; and that special counsel should be appointed to represent each of them as separate classes. The court then appointed special counsel for each of these two classes to represent them on the petition before the court.

Hearings were held on this petition in April and May. MacArthur was present at some of them, and Kadyk represented the Assurance Company. On June 5, 1951, the court entered two decrees which provided that approximately 90,000 unclaimed shares should not, in any manner, be disposed of without compensation; that the shares should be offered to the then existing shareholders on a pro rata basis at a price of $5 per share; that after the initial offering the existing shareholders would be entitled to purchase additional shares at the $5 price; that the holders of the 97,500 shares (MacArthur interests) purchase all remaining shares at $5 per share; and that the funds from the purchase of the stock be held by the Assurance Company for the benefit of those whose stock was being sold until March 4, 1953, after which time, the funds remaining would be the property of the Assurance Company.

Prior to the entry of these decrees, Kadyk advised the court that MacArthur would buy all the unpurchased stock if the price for the stock were $5 per share, or under; and the court heard evidence, under which it subsequently made its ...

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