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Polivka v. Worth Dairy

AUGUST 5, 1974.




APPEAL from the Circuit Court of Cook County; the Hon. JAMES D. CROSSON, Judge, presiding.


Mr. JUSTICE EGAN delivered the opinion of the court:

The plaintiff, Robert Polivka, filed a two-count complaint in Chancery on May 11, 1970, against Worth Dairy, Inc., and Rueter-Worth Dairy Company, the surviving corporation in a merger between Worth Dairy, Inc., and Rueter Dairy Company, and both David Zuidema and Fred J. Rueter personally to recover a balance of money allegedly due him from his sale of common stock to Worth Dairy, Inc. On July 13, 1970, a default order was entered against Rueter personally and against Rueter-Worth Dairy Company. David Zuidema filed a motion to dismiss in part on the ground that the complaint failed to state a cause of action. The motion was denied, and he filed an answer. The case was transferred to the Law Division, and the trial was held on March 6 and 7, 1973. The trial judge entered a finding in favor of Zuidema at the close of the plaintiff's case. At the same time he entered a default judgment against Fred J. Rueter personally in the sum of $14,941. On April 2, 1973, Rueter filed a petition to vacate the default judgment which was denied.

On April 19, 1973, Rueter filed a motion to quash service of summons and that motion was denied. Polivka appeals from the judgment in favor of Zuidema; and Rueter appeals from the order denying his motion to vacate the default and the motion to quash service of summons.

• 1 The defendant Zuidema contends in this court that the complaint failed to state a cause of action and that judgment was properly entered in his behalf on that ground. Polivka counters that, since the trial judge denied the motion to dismiss and Zuidema answered and tried the case on the merits, the issue of the sufficiency of the complaint is not properly before us. It is the general rule that a party pleading over after an adverse ruling on his objection to a complaint waives the right to object to the pleading or the ruling on the motion. The rule, however, does not apply where the complaint totally fails to state a cause of action, and under such circumstances it is open to attack even though the defendant has pleaded over. Precision Extrusions, Inc. v. Stewart, 36 Ill. App.2d 30, 183 N.E.2d 547.

Count I alleged as follows: On September 3, 1963, the plaintiff was the owner of 25 shares of common stock of Worth Dairy, Inc. (Worth). On that date Worth by its president, David Zuidema, executed an agreement for the purchase of the 25 shares of common stock from the plaintiff for $31,000 payable at a rate of $400 or more on the first day of each month commencing July 1, 1963, including interest. Pursuant to the agreement Zuidema delivered to Polivka a collateral assignment dated November 1, 1963, signed by Zuidema as president of Worth, authorizing the plaintiff to hold the assignment plus 25 shares of its common stock as collateral security. The corporation was purchasing the 25 shares of stock. Payments were made under the agreement and by September 14, 1968, the obligation was reduced to $12,022.86. On or about November 23, 1964, there was in negotiation a proposed merger with the Rueter Dairy Company. At this time Zuidema represented to the plaintiff that his claim would be protected by the transfer over to him of 50 shares of common stock of the new corporation as collateral security. The plaintiff relied on this representation.

On November 23, 1964, Worth merged with Rueter Dairy Company and the name of the surviving corporation was changed to Rueter-Worth Dairy Company (Rueter-Worth). The new corporation assumed all the liabilities and obligations of Worth but never transferred to the plaintiff 50 shares of common stock as security for plaintiff's claim as previously represented by Zuidema, who later became an officer of the new company. The act of merger was never officially noticed to the plaintiff. The act of merger was thus a notice of intent to dissolve, and Zuidema, as president, was in sole control of Worth, well knowing at the time of the merger the obligation of the defendant corporation was still outstanding. The merger and the conduct of Zuidema, as president, was to misappropriate the properties of Worth whereby the security of the plaintiff would be impaired. The plaintiff made demands on Worth and to Zuidema for payment of the balance due, and they failed and refused to pay to the damage of the plaintiff. He had no adequate remedy at law.

In Count II the plaintiff re-alleged Count I and states, in addition, that on or about September 20, 1967, an agreement was entered into between Zuidema and Rueter, officers of Rueter-Worth, whereby Zuidema sold and transferred 136 shares of common stock to Rueter-Worth. Zuidema, knowing of the existing obligations to the plaintiff, pursuant to the agreement did in fact pay Rueter-Worth the sum of $16,000, which amount approximated the unpaid balance due and owing to the plaintiff. This amount was deposited with the company for the express use and benefit of the plaintiff which the company and Fred J. Rueter expressly assumed. The unpaid balance owing to the plaintiff was reduced to $12,022.86 as of September 14, 1968, and no part of the balance had been paid. Rueter-Worth had been totally liquidated without any notice of liquidation to the plaintiff. That by such act of the company and its principal officer, Fred J. Rueter, the security of the plaintiff had been impaired. The agreement of September 20, 1967, created a trust of the sum of $16,000, which was to have been set aside and preserved for the payment of plaintiff's claim. By the act of liquidation of the company by Fred Rueter, the failure to give plaintiff notice severely impaired the security of the plaintiff's claim. At the time of the merger it was represented to the plaintiff by the defendants that 50 shares of common stock of Rueter-Worth Dairy Company would be transferred over to the plaintiff as collateral security on the plaintiff's returning the 25 shares of Worth Dairy, Inc., common stock held as collateral security. The plaintiff turned over the 25 shares but never received the 50 shares as represented by the defendants. Subsequently, the plaintiff's 25 shares of stock held by him were returned to him. The representation of the defendants concerning the transfer of the 50 shares as collateral security was a false representation relied upon by the plaintiff.

In this court, the plaintiff contends that Zuidema violated sections 61, 62, 63 and 64 of the Business Corporation Act which contain the procedures to be followed in merging corporations. (Ill. Rev. Stat. 1969, ch. 32, pars. 157.61-157.64.) Section 63 provides in part for the notice to shareholders of the plan for merger, and section 64 provides for the meeting of shareholders to vote on the proposed plan. The linchpin of the plaintiff's argument is his assertion that as a creditor he had the right to vote on any proposed merger plan. He had no such right. Section 30 of the Act (ch. 32, par. 157.30) provides that "a shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred." The pleadings make it clear that at no time were the shares ever transferred into the name of Polivka.

The plaintiff relies on Green v. Hedenberg, 159 Ill. 489, 42 N.E. 851. In that case the court upheld the judgment against officers and directors of a corporation for misappropriation of corporate funds. The court noted that the complainant "was only a stockholder by reason of his holding the 750 shares of stock as collateral security." That case, however, does not say that a pledgee has the right to vote on any corporate matters. It is not authority for the right of a holder of stock as collateral security to maintain an action based on a violation of section 63 of the Act.

• 2, 3 The complaint also alleges Polivka relied on Zuidema's representation that he would get 50 shares of the new corporation as security. The plaintiff, we gather, seeks to allege fraud against Zuidema; and we conclude that he has not done so. Fraud must include a statement of a material fact, it must be false and known by the party making it to be false (Roth v. Roth, 45 Ill.2d 19, 23, 256 N.E.2d 838, 840); and the false representation must be one of an existing or past fact, and not a mere promise to do some act in the future. (Tonchen v. All-Steel Equipment Co., 13 Ill. App.3d 454, 463-4, 300 N.E.2d 616; Metropolitan Sanitary District v. Pontarelli & Sons, Inc., 7 Ill. App.3d 829, 841, 288 N.E.2d 905; ILP Fraud § 36, n. 34.) There is no allegation that Zuidema knew that the representation was false at the time he made it; and the statement of Zuidema, at best, may be construed as a promise to do something in the future and is not a representation of an existing or past fact.

• 4 The complaint alleges that the conduct of Zuidema in participating in the merger was to "misappropriate" the property of Worth. No fact, other than his participation in the merger procedure, is alleged against Zuidema to support the bald conclusion that he misappropriated the funds of Worth. It is, in our view, insufficient.

• 5 If the complaint is to be construed as a claim against Zuidema as an officer for the debt of the corporation, it must fall as a matter of law. It is the general rule that directors or other officers of corporations are not liable for debts contracted in the name of and on behalf of the corporation and which are binding upon it unless they are expressly made liable by statute, or unless they also contract in their own behalf. (Fletcher, Cyclopedia Corporation, vol. III, ch. 11, § 1193, at 905.) In Vulcan Corp. v. Cobden Machine Works, 336 Ill. App. 394, 401, 84 N.E.2d 173, the court held that in determining whether an officer has contracted in his own behalf the courts will apply the general rules of agency:

"The liability of an agent of a corporation purporting to act for it is no different from that of any ...

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