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Galler v. Galler

JUNE 21, 1974.

EMMA GALLER, INDIVIDUALLY, AS TRUSTEE, AND AS EX'RX OF THE LAST WILL AND TESTAMENT OF BENJAMIN A. GALLER, DECEASED, PLAINTIFF-APPELLANT,

v.

ROSE GALLER ET AL., INDIVIDUALLY, AND AS EX'RX OF THE ESTATE OF ISADORE A. GALLER, DECEASED, DEFENDANTS-APPELLEES.



APPEAL from the Circuit Court of Cook County; the Hon. CHARLES R. BARRETT, Judge, presiding.

MR. JUSTICE LORENZ DELIVERED THE OPINION OF THE COURT AS MODIFIED UPON DENIAL OF PETITION FOR REHEARING:

Plaintiff appeals from a finding that Isadore Galler's estate need not account to the Galler Drug Company for salaries he received during the years 1958 to February, 1965. Defendants cross-appeal from the order requiring Aaron Galler to account to the company for his increased salary paid from September, 1957, to December, 1965. Plaintiff contends that Isadore's $42,000 annual salary paid each year following Benjamin Galler's death in December, 1957, was not authorized and was excessive compensation for his services to the company. Defendants contend that Aaron's salary, although increased without authority from $15,000 to $20,000 during the years 1956 thru 1965, was nevertheless, the fair market value for his services to the company for that period. Also in dispute is whether interest should be assessed on any monies ordered to be repaid.

The background to this appeal can be briefly stated. In March, 1954, Benjamin and Isadore Galler, founders and shareholders of 95 percent of the issued and outstanding shares in the Galler Drug Company, conceived of a shareholders' agreement to assure their immediate families of financial protection and to provide for equal control in the corporation upon their death. The agreement was signed in July, 1955, by plaintiff and her husband Benjamin, and defendant Rose Galler and her husband Isadore. Although Benjamin was seriously ill throughout most of 1955 and, in fact, never returned to his corporate duties, he nevertheless continued to receive a $42,000 annual salary until his death in December, 1957. Isadore was also receiving $42,000 annually almost until his death in 1965. Isadore's son Aaron was employed by the company mainly as the supervisor of its warehouse. In September, 1956, Aaron was appointed president of the company for a term of 1 year and he increased his salary to $20,000. Plaintiff filed suit when, after Benjamin's death in December, 1957, Isadore and Aaron excluded her from the operation of the business and refused to honor the 1955 shareholders' agreement.

An order for specific performance and accounting was entered by the trial court in 1962. The appellate court in 1964 reversed the order for specific performance, affirmed in part the order for accounting and modified the order awarding master's fees. (45 Ill. App.2d 452, 196 N.E.2d 5.) The supreme court reversed the appellate court's orders with respect to specific performance and accounting, affirmed the finding that the master's fees were excessive, and upheld the trial court's order. (32 Ill.2d 16, 203 N.E.2d 577.) The action was remanded for the accounting proceedings.

A deadlock of the directors over salaries to be received after 1965 was adjudicated in an earlier appeal. 95 Ill. App.2d 340, 238 N.E.2d 274.

The present dispute involves Isadore's and Aaron's salaries prior to February 11, 1965, when the supreme court's order became effective. The accounting period in question for Aaron begins on September 25, 1956, when he increased his salary from $15,000 to $20,000. The accounting period in question for Isadore begins after Benjamin's death in December, 1957, when Isadore continued to receive $42,000 annually. The supreme court's directive to the trial court with respect to these issues was two-fold. First, Isadore and Aaron were required to "account for all monies received by them from the company since September 25, 1956, in excess of that theretofore authorized." Secondly, the supreme court affirmed the trial court's 1962 decree that Isadore and Aaron be allowed "fair compensation to be determined by the [trial] court, for services rendered by them to the corporation during said period, with the burden upon them to prove the fair market value of any such services."

On remand, a hearing was held before a master to determine these issues. In January, 1971, he issued his report finding that neither Isadore's $42,000 salary nor Aaron's $20,000 salary was authorized by either informal arrangement or by "proper directors" for the periods in question. He further determined that the fair market value of Isadore's and Aaron's annual services to the corporation for the periods in question was $10,000 and $15,000 respectively. The master, therefore, recommended that Isadore's estate repay the Company $226,666 plus interest and Aaron repay $41,666 plus interest.

The trial judge filed a memorandum opinion and entered orders on November 14, 1972, wherein he overruled the master's finding as to Isadore and adopted the finding as to Aaron, but without interest. Plaintiff and defendants have both appealed from those orders.

OPINION

Plaintiff challenges the trial court's finding that Isadore properly drew a $42,000 annual salary from the date of Benjamin's death until February 11, 1965. She argues that: (1) the salary was not authorized by "proper directors" nor by an informal agreement between Benjamin and Isadore; and (2) the salary was grossly in excess of the fair market value for the services Isadore rendered during this period.

Defendants do not maintain that "proper directors" authorized Isadore's $42,000 salary. Rather, they narrow the issue to whether Isadore was authorized to receive this salary after the death of Benjamin by reason of the informal agreement existing prior to Benjamin's death whereby both brothers took equal salaries of $42,000 annually. The supreme court in this very case determined that formal corporate meetings are not necessary to authorize officers' salaries in a closely held corporation. Nevertheless, the record does not support defendants' contention that the brothers' informal agreement in effect prior to Benjamin's death in December, 1957, was even an informal authorization for Isadore to receive $42,000 annually after the death of Benjamin without any corresponding payment to a member of the Benjamin Galler family. On the contrary, the evidence indicates that Isadore's salary during the 7 years in question here violated (1) the brothers' previous relationship, and (2) the clear import of the 1955 agreement.

The brothers' previous relationship was a close association. From 1919 to 1924 Benjamin and Isadore were equal partners in the Galler Drug Company. In 1924 the business was incorporated under the Illinois Business Corporation Act with each brother owning one-half of the outstanding 220 shares. They continued to operate the business as though partners, receiving equal salaries by mutual assent rather than by formal corporate authorization. Benjamin's continued receipt, as corporate president, of $42,000 annual salary from February, 1955, until his death in December, 1957, even though he was unable to perform his corporate duties during this period, is further evidence of this intent. A fundamental limitation in this arrangement is that upon the death of either brother, the element of mutual assent is necessarily lacking, and the survivor, without manifestly clear contrary evidence, is prevented from acting or benefiting unilaterally. Isadore's continued receipt of the same salary upon the death of Benjamin without the quid pro quo for his brother's family, is an alteration of the past arrangement, and was without authorization.

Furthermore, the clear import of the 1955 shareholders' agreement is that the partnership-like arrangement was intended to remain after the death of either Benjamin or Isadore. While not specifically addressing itself to salaries, the agreement provides that upon the death of either Benjamin or Isadore, four directors are to be elected; two from Isadore's family and two from Benjamin's family. The officers and their salaries are voted upon by the directors. Dividends are required to be paid provided $500,000 earned surplus is maintained. It may be inferred that this agreement sought to replace a deceased brother's position as an officer with members of his family, thereby permitting them to share equally in the company's earnings, including salaries, a significant means of distributing the corporate profits. This inference is not negated by the fact that no provision in the 1955 agreement requires equality of salaries between the family branches.

• 1 The effect of defendants' refusal to implement the 1955 shareholders' agreement highlights the fact that there could not have been any authorization for Isadore's salary after December, 1957. This effect can best be observed by comparing the 7 years in question here with the period subsequent to 1965. In 1965, as a result of the supreme court's opinion, the shareholders held an election and each family elected two directors who in turn elected two officers. Aaron Galler and Emanuel Galler, as president and treasurer, respectively, represented the Isadore Galler family, and Emma Galler and her son Gerald, as secretary and vice-president respectively, represented the Benjamin Galler family. The officers' salaries amounted to $37,500 for each family, which, had this sum been paid after Benjamin's death, would have provided each family with a salary income aggregating $262,500 for the 7-year period. Instead, Isadore's family received $434,000 in salaries during the same period while Benjamin's family received no salary income. We ...


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