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Compton v. Paul K. Harding Realty Co.

JUNE 27, 1972.




APPEAL from the Circuit Court of St. Clair County; the Hon. ALVIN H. MAEYS, JR., Judge, presiding.


Defendants appeal from a judgment of the trial court rendered in a suit for dissolution of a closely held corporation and other relief. Plaintiff Compton was a shareholder and officer, and plaintiff Leoty was a shareholder of the corporation. Defendants were the president-manager of the corporation, Paul K. Harding (to be hereinafter referred to as defendant Harding) and his wife Marguerite Harding, and the corporation.

The facts show that plaintiff Compton and defendant Harding had been acquainted since 1959 and they were co-employees of a real estate concern, he as its sales manager and she as a saleswoman. In February, 1962, they commenced discussions concerning the formation of their own real estate business. It appears that defendant Harding took the initiative in the discussions because of his more extensive experience in the business. The discussions culminated in the formation of a corporation named Paul K. Harding Realty Co., the charter being issued on May 8, 1962. Further discussions ensued, principally between plaintiff Compton and defendant Harding. They were concerned with preparation of a written agreement relating to the formation and conduct of the business of the corporation. Plaintiff Compton stated that it was worked out during several meetings and was initially prepared in a rough draft on yellow paper by Mr. Harding and she assumed that he typed it. Afterward she and her brother (Leoty) read it over, thought it was fair and agreed to it. She further said that the only provisions she and her brother wanted were that there would not be any other shareholders brought into the company, the rest of it was Mr. Harding's ideas. Defendant Harding, called by plaintiffs as an adverse witness, testified he and plaintiff Compton had many meetings regarding the agreement and that she asked him to sign it and he said, "What do you want me to sign this for, this has no value whatsoever except as a memo." Later in his testimony he made further comment regarding the agreement as follows:

"Well, this memo copy of what the thing — The lines this corporation was to be drawn on, and the whole picture, was made up like was testified, on yellow paper, and it was the work of several times of gotten together. This was made up, and sometime after it was made up Martha came to me and asked me to put my name on it. I said it wasn't necessary, it was a memo thing and it had no further force and effect except to be the memorandum along which this corporation was to be formed and operated."

The written agreement is a two page, undated document, typed on letterhead bearing the printed name, address and telephone number of defendant corporation. It is divided into two sub-parts, sub-part A, entitled Ownership Distribution and Responsibility, and sub-part B, entitled Operating. The instant dispute principally involves only the latter. The relevant parts of the section are set out as follows:

"President as operating head shall have authority to set salaries * * * and to do those things which normally are the responsibility of the operating head of the company.

Manager — Salary of operating manager is to be set at $100 a week, basic. When business is showing a profit salary is to be increased to $175 a week. This salary is to be determined on the previous 90 days profit experience(.)

Management shall consist of Paul K. Harding as president and manager, Martha L. Compton as executive vice president and treasurer. * * *"

The document is signed in ink by Paul K. Harding, Martha L. Compton, and Forrest C. Leoty.

From the inception of the business the internal affairs of the corporation were badly managed and loosely attended. The shares of stock were not issued to the parties in conformity with the agreement. Under the terms of the agreement the corporation president, defendant Harding, had authority to set the salaries of the officers of the corporation. The record indicates that the salary of the manager was to be set at $100 a week, basic, but when the business was showing a profit the salary would be increased to $175 a week. The record indicates that the salary of defendant Harding was fixed at $175 per week at the onset of business and a few months later was raised to $200 a week, and in the fall of 1964, to $250 a week. Plaintiff Compton was aware of the raises and voiced some objection to them. In addition to his salary defendant Harding received commissions based upon listings and sales in which he had a part on a standard commission basis. He also made real estate appraisals, splitting the fees 70% to the corporation and 30% to himself. There was testimony from the parties, the office manager of the corporation and an accountant, regarding the various items of yearly profits of the corporation on both a calendar year and a fiscal year basis, and as to the amounts received by defendant Harding as salary, commission and appraisal fees. The testimony is so conflicting and divergent that it is readily apparent that the salaries, commissions and appraisal fees of the officers were without a discernible pattern or plan; a state of affairs that quite naturally led to disagreement of the parties and the necessity, in a closely held corporation, for dissolution.

Plaintiffs' complaint alleged the execution of the agreement, the organization of the corporation and their payment of the sum of $7,650 pursuant to the agreement; the defendant Harding would be employed as its manager at a salary of $100 per week but when the business was showing a profit his salary was to be increased to $175 per week. It further states that no notice of meetings of the stockholders or directors were given or sent to plaintiffs; that to the knowledge of the plaintiffs there has been no meeting of the stockholders or directors and that the operation and policies of defendant corporation were controlled and directed by defendant Harding without the knowledge or consent of the plaintiffs. The early payments of salary to defendant Harding were listed, the aggregate being $52,133.06 as of April 1966. It was then alleged that as the corporation had shown a profit for every 90 days (which it did not) the defendant Harding would have paid $175 per week for 207 weeks or a total of $36,225 and since he was actually paid $52,133.06, the salary payments were excessive in the amount of at least $15,908.06, as of April 1966. The plaintiffs then charged that defendant Harding was guilty of common law corporate mismanagement, self-dealing and waste of corporate assets. The individual defendants were also charged with conspiracy for the purpose of taking over the entire business of the corporation to the exclusion of the plaintiffs. The complaint next alleged the elements necessary for the issuance of an injunction order against the individual defendants which would prohibit them from holding directors meetings or exercising any rights or powers as officers, directors or managers with respect to the affairs of the corporation. It ended with a prayer for a temporary injunction, appointment of a receiver, an accounting of the individual defendants and a decree dissolving the corporation and winding up its affairs. By leave of court, Counts II and III were later added to the complaint to allege fraud and breach of contract.

The trial court, acting without notice and without bond, issued a temporary injunction against the individual defendants, enjoining them from exercising authority as officers, directors and managers of defendant corporation and from in any way conveying or attempting to convey, sell or encumber any assets of the corporation. On appeal to this court the temporary injunction order was reversed. (See 87 Ill. App.2d 219.) The defendants filed a motion for damages resulting from the trial court's injunction. After a hearing the trial court allowed the individual defendants damages in the amount of $1,500 for attorney fees and $209.50 for costs of printing briefs.

After a trial on the merits before the court sitting without a jury the trial court found that from the date of incorporation to the date of the trial defendant Harding was paid $29,457 in excess of the contractual salary. The court expressly found that no fraud was committed by defendant Harding. After making certain other findings the court entered judgment that defendant Harding repay the corporation $29,457 and ordered a final accounting of the corporation assets. The order incorporated a formula for liquidation which provided that 12 1/2% of the assets should be allocated to the individual plaintiffs and defendant Harding; thereafter the remaining 62 1/2% of the assets should be divided 25% to Paul K. Harding and 25% to Martha L. Compton; thereafter the remaining 31 1/4% of the total assets should be divided equally between defendant Harding and plaintiffs. The judgment provided that the $29,457 to be paid by defendant Harding was to be placed in escrow in a bank pending final determination of this case. The costs of the action, including fees for the accounting ordered as part of the final dissolution were taxed against the defendant Harding. After a hearing on a post trial motion the court amended the judgment to provide that the receiver appointed during the pendency of the temporary injunction was entitled to fees of $2,496.90, and charged them against defendant Harding. The amended judgment also changed the dissolution order as follows:

"Each investor was allowed a return of 12 1/2% of his investment ($8,500 in the case of the individual defendants and $7,650 in the case of the plaintiffs); 75% of the remainder of the assets were then to be divided equally between management, Paul K. Harding and Martha L. Compton, and 25% of the remainder was to be divided ...

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