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Ross v. 311 N. Central Ave.

SEPTEMBER 21, 1970.

EARL ROSS, ET AL., PLAINTIFFS-APPELLEES,

v.

311 NORTH CENTRAL AVENUE BUILDING CORPORATION, G.J. NIKOLAS, ET AL., DEFENDANTS-APPELLANTS.



Appeal from the Circuit Court of Cook County; the Hon. SAMUEL B. EPSTEIN, Judge, presiding. Affirmed and remanded with directions. MR. JUSTICE MURPHY DELIVERED THE OPINION OF THE COURT.

This is a class action brought by plaintiffs, minority stockholders in the defendant building corporation. In a non-jury trial, the court entered a decree which found that in the use of surplus funds of the corporation, the acts of the defendant directors, who were in control of the corporation, were fraudulent and oppressive as against the minority stockholders. The relief granted included liquidation of the defendant corporation and attorney's fees for plaintiffs. In this appeal from the decree, the contentions of defendants are primarily based on the premise that the conduct of the individual defendants did not constitute fraud and no damage resulted to anyone.

The material facts in this case are not in dispute and are substantially set forth in the decree which follows:

DECREE

This cause having come up for trial and testimony having been taken and arguments having been made by all counsel, the Court makes the following findings:

1. That the suit by the plaintiffs is a proper class action in behalf of themselves and the other shareholders of the 311 North Central Avenue Building Corporation.

2. That the plaintiffs directly own 806 shares of the capital stock of the said corporation, and represent by their class action approximately 34% of the capital stock of said corporation.

3. That the individual defendants, G.J. Nikolas, Jr., G.J. Nikolas, III, and Robert C. Nikolas, and other relatives and members of their families, own approximately 64% of the shares of stock issued by said corporation, and are the sole directors and officers of said corporation.

4. That the said corporation is the owner of the building commonly known as an apartment hotel.

5. That the said individual defendants have operated and managed said real estate for and in behalf of the corporation, for a number of years.

6. That sometime in the year 1967, the individual defendants withdrew from the said corporation the sum of $48,597.16, and purported to loan same to a corporation known as S.W. Corner Washington and Harvey Corporation, the shares of which were owned by the said individual defendants and their families, and the said individual defendants were the directors and officers of said corporation.

7. Defendants maintain that the loan to the said S.W. Corner Washington and Harvey Corporation was evidenced by a second mortgage of said corporation, payable in 20 years, without prepayments, bearing interest at 6% per annum; that said loan was used to reduce the amount of a first mortgage upon the property of said corporation from $250,000.00 to $200,000.00. No such second mortgage was produced, none was recorded, no evidence was offered of any person, lawyer or otherwise, who prepared such a mortgage, nor were minutes of a meeting of the directors produced authorizing the loan; no proof was offered of any insurance to cover protection for this mortgage, no opinion of title showing the condition of the title was produced. I find that no such second mortgage was ever executed.

8. Even if there had been such a second mortgage executed, the loan to said S.W. Corner Washington and Harvey Corporation was frozen for the full term of 20 years.

9. The minority shareholders of the 311 North Central Avenue Building Corporation were not informed of this loan, excepting that in the report to shareholders for the year 1967 under "investments" appeared an item "Second Mortgage in the sum of $49,597.12." The fact that the loan was made to a corporation owned and controlled by the individual defendants and their families, was not disclosed in any of the reports issued to the shareholders of the defendant corporation. Upon learning of the said loan, the plaintiffs filed this suit on April 10, 1968; summons were served on the defendants on April 15, 1968, and the money was replaced in the account of the defendant corporation on April 24, 1968, purporting to represent the proceeds of sale of the alleged second mortgage at par.

10. The individual defendants contend that the purpose of loaning the money on the second mortgage was to increase the income from 4 1/2% on previous investments to a 6% return.

11. The defendants contend further that the funds were not distributed to the shareholders as a liquidating dividend, but was kept as a reserve for future needs of the corporation. Obviously, loaning the money for a period of 20 years without prepayments, would make it impossible to use these funds for future needs of the corporation. It is my opinion that if the directors were willing to freeze the loan for a 20 year period, the funds were not needed for corporate purposes, and were available for a liquidating dividend.

12. The evidence is clear that a commission or bonus for a second mortgage loan for a straight period of 20 years, at 6% interest, would justify a commission of not less than $15,000.00.

13. The contention of the defendant that they gained no benefit from the loan, because there was no reduction in the monthly payments on the first mortgage, which was reduced by the loan is not persuasive. The loan enabled the defendants to retire the first mortgage many years sooner, relieving them of the necessity of payments of principal for a number of years after the first mortgage is retired.

14. The return of the funds after the commencement of the suit does not negate the effect of the fraud.

15. That the loan to the S.W. Corner Washington and Harvey Corporation, a corporation owned and controlled by the individual defendants and their families, was a fraud upon the 311 North Central Avenue Building Corporation, and upon the minority stockholders.

16. That no second mortgage was ever executed and that, in falsely representing that there was such a second mortgage, they compounded the fraud.

17. The plaintiffs have rendered a beneficial service to all the shareholders of the corporation in filing the suit and procuring a refund of the funds improperly diverted by the defendants, and are entitled to compensation for attorneys' fees and other services and expenses.

18. That the conduct of the defendants was oppressive.

IT IS THEREFORE ORDERED:

1. That the prayers to remove the board of directors and to deny the defendants to vote their stock is hereby denied.

2. That the funds returned to the corporation, approximately Forty-nine Thousand ($49,000.00) Dollars, and presently invested in Certificates of Deposit be kept intact, and not be used, changed or distributed without leave of Court.

3. That the defendants be and are hereby removed from management of the aforesaid 311 North Central Building and that the Court retain jurisdiction to appoint a fair, impartial and ...


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