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Sherman v. Klopfer

SEPTEMBER 12, 1975.




APPEAL from the Circuit Court of Cook County; the Hon. DONALD J. O'BRIEN, Judge, presiding.


Defendant appeals from a judgment based upon the trial court's finding that he had breached his fiduciary duty to plaintiff Sherman. The judgment (1) voided a purchase and sale agreement and a general partnership agreement by which defendant (Klopfer) and his aunt (Sherman) effected the purchase of a going warehouse business; (2) dissolved the parties' equal partnership which managed the warehouse building and land and ordered the property sold and the proceeds distributed first to reimburse Sherman for her employment contract and then to the parties equally; (3) imposed a constructive trust upon Klopfer's 49% interest in Wakem & McLaughlin (conditioned on liquidation of the corporation) and ordered the public sale of the corporation's assets (exclusive of the land and building) and the distribution of the proceeds in accordance with the party's 51% to 49% ratio of ownership in the corporation; and (4) denied Klopfer's counterclaim for plaintiffs' alleged breach of fiduciary duty. Plaintiffs have moved to dismiss defendant's appeal and their motion has been taken with the case. Plaintiffs have also cross-appealed from that portion of the judgment which provides for distribution of the proceeds of the sale of the assets of each entity in accordance with each party's respective interests in those entities.

On February 3, 1970, plaintiffs filed a complaint alleging that defendant owed Sherman certain fiduciary obligations arising out of their familial relationship and their attorney-client relationship and that defendant breached these duties by failing to provide her with control of the business including the power to unilaterally dispose of its assets, by refusing to consent to the sale of the business, and by seeking to manipulate a financial windfall for himself. The complaint sought an order authorizing sale of the business, rescission of the parties' agreements, and transfer to Sherman of all defendant's interests in both the partnership and the corporation in exchange for his initial contribution. On the eve of trial, plaintiffs filed an amendment to their complaint alleging that in addition to the other fiduciary duties he owed, defendant also owed Sherman fiduciary duties arising out of their partnership and that he breached all these duties when he and his agents disclosed information about Sherman to the Internal Revenue Service.

Copies of various documents including the purchase and sale agreement and the general partnership agreement were attached to the complaint. The former was executed by Wakem & Mc Laughlin and by Sherman and Klopfer. It provides that the corporation shall employ both shareholders at salaries established from time to time; neither may encumber or dispose of his stock without the corporation's consent; either may sell or give his or her shares to the other; in the event that either wishes to dispose of his or her stock the corporation (or if it refuses to act, the other shareholder) must be offered and may purchase the shares; in the event of the death of either shareholder, his or her stock must be purchased by the corporation to the extent it may legally do so and the remainder by the other shareholder; the purchase price in either event is the stock's book value as of the month prior to such event; that such price, plus interest at six per cent per year, must be paid in monthly installments over a period of five years; and as security for payment, the corporation shall not take certain specified actions and the stock to be transferred shall be retained until payment is made. The second paragraph of the agreement had been stricken. It had provided that each shareholder would be elected as a director and that if a third director were required, the shareholders would jointly select him.

In the general partnership agreement, Sherman and Klopfer agreed that they would manage certain real property at 4045 W. Chicago Avenue (where Wakem & Mc Laughlin conducts business); they would own that property as beneficiaries of a land trust; they would contribute equal amounts of capital, share profits and losses equally, and generally have equal rights; they would receive no salaries; neither would encumber or dispose of his or her interest without the written consent of the other; either may sell or give his or her interest to the other; either may retire at the end of a fiscal year; that in the event of the death or retirement of either partner, the other may elect to purchase the other's interest or to liquidate the partnership; the purchase price of a partnership interest was fixed as follows: the amount of the decedent's or retiring partner's capital account as of the end of the month prior to the event triggering purchase, adjusted for capital changes during the month of the event and for depreciation calculated on a straight-line basis, but making no provision for goodwill; such price, plus interest at six percent per year, must be paid in monthly installments over a period of five years; and the beneficial interest in the land trust shall be held as security for payment.

Defendant filed answers denying and attempting to explain the substantive allegations of both plaintiffs' complaint and the amendment thereto. Defendant also filed a counterclaim which, as amended, alleged that Sherman owed him certain fiduciary obligations arising out of their familial relationship, her role as majority stockholder of Wakem & Mc Laughlin, and her partnership with him; and that she had breached these duties by fraudulently inducing him to invest his funds, by failing to honor her commitments to him, by removing him from office and terminating his salary, and by otherwise freezing him out of the business. Defendant sought an order setting aside certain corporate acts by which he was removed from office and his salary terminated; forbidding Max Crocker from acting as a director; prohibiting the payment of attorney's fees by the corporation; and requiring Sherman to sell her shares in Wakem & Mc Laughlin and her partnership interest to him pursuant to the agreements they had executed. Plaintiffs filed a reply to defendant's answer and an answer to the counterclaim denying and attempting to explain their substantive allegations.

A copy of an agreement the parties had entered on August 8, 1968, modifying various provisions of both the purchase and sale agreement and general partnership agreement was attached to defendant's answer. It provides that the prior agreements operate interdependently; the price of the stock purchased pursuant to the purchase and sale agreement (book value) is adjusted to permit provision for insurance on the lives of the shareholders; the limitations on the corporation's activities during the period of purchase were extended; the surviving shareholder is required to purchase a deceased shareholder's stock; the purchase price of a partnership interest is to be based upon appraisal of the property and the amount of $75,000 is to be added or subtracted depending on whose interest is purchased; and as security for payment, provision was made for a promissory note secured by the beneficial interest in the land trust and for the mortgage refinancing, subject to certain limitations, upon the death of either partner with the heirs of such partner bearing the finance charges.

The matter then proceeded to trial where the following pertinent evidence was adduced:

Defendant Joseph R. Klopfer under section 60.

He is a lawyer and Frances Berg Sherman is his aunt. In 1967, he was in his mid-thirties and she was in her early seventies. After the death of his father, she assumed parental responsibility and gave him and his family generous gifts. In November of 1967, he drafted a will for her under which he was a beneficiary equally with other relatives.

In 1962 or 1963, he wanted to purchase Wakem & Mc Laughlin, the warehouse firm which employed his aunt, and started discussing that possibility with his friend and accountant Al Levine. These discussions continued intermittently until mid-1967, when he and his aunt offered to purchase the business for $1,500,000, less $150,000 which the firm owed Sherman under her employment contract. This offer was accepted in July of 1967.

He and Sherman then held discussions, some with Levine, regarding how the sale should be consummated and regarding the best structure for operating the business. Sherman wanted to be able to control the everyday operations while he wanted to be able to purchase her interest when she left the business. They then consulted with Stan Polak, an attorney employed by the accounting firm Alexander Grant & Co. regarding how to conduct their business. It was decided that the business should be conducted as a corporation, with Sherman owning 51% of the stock and Klopfer owning the remaining 49%; but that the major asset of the business, the land and building, should be held in a partnership, each partner owning a 50% interest. This method of holding the property was similar to the way the seller had conducted its business except that it held its major asset in a wholly owned corporate subsidiary, Way-Mac.

During the fall of 1967, in order to consummate the purchase, Klopfer prepared the articles of incorporation and by-laws for Berg Corporation which had two directors and was capitalized at $10,000. He and Sherman met with attorneys for the seller regarding the terms of purchase, and they simultaneously secured a mortgage commitment from the Equitable Assurance Co. He handled much of the correspondence relating to this commitment. After discussing various drafts of the purchase agreement prepared by the seller's attorneys, the parties closed the sale. A purchase agreement and a bill of sale for the seller's assets (other than Way-Mac stock) were signed transferring these assets to Berg Corporation and a purchase agreement and an assignment for Way-Mac stock were signed transferring the stock to Sherman and Klopfer. Without considering the employment contract, they each contributed equal amounts (approximately $150,000) except that Sherman contributed $200 more to account for her 51% interest in Berg Corporation. Interim financing prior to finalizing the mortgage arrangements was handled through the Lake Shore Bank.

The old Wakem & Mc Laughlin was then dissolved and Klopfer arranged to have the Berg Corporation assume its predecessor's name. He also dissolved Way-Mac, deeding the land and building to the Lake Shore Bank as trustee of a land trust with him and Sherman as beneficiaries of undivided one-half interests. In cooperation with attorneys for Equitable, an industrial lease was entered between the trustee and the new Wakem & Mc Laughlin. In addition, after numerous discussions with Sherman (although Levine and Polak may also have contributed their ideas), he completed the final draft of the purchase and sale agreement and general partnership agreement, and those agreements were signed in October of 1967.

Subsequently, the mortgage arrangements with Equitable were finished. Klopfer completed some of the necessary papers and dealt with Equitable's attorneys regarding some of the details. In the process, Al Kahn, Klopfer's law partner, signed a letter of opinion in which he represented that he was attorney for the borrowers. The mortgage arrangements were finally closed in November of 1967. Klopfer admitted that his signature appeared on a letter to Equitable typed on Wakem & Mc Laughlin stationery, which referred to a publicity draft regarding the mortgage; but testified that he could not specifically recall the letter. The publicity draft represented that Klopfer had handled the legal details for the borrowers. The letter and draft were admitted into evidence after an expert document examiner testified that they had been typed on the same typewriter.

Klopfer testified that no lawyer representing Sherman was present during these transactions. Although he insisted that he did not represent her in these dealings, he admitted that he had not told her that two-thirds control of a corporation was required in Illinois before its assets could be sold. Klopfer agreed that as a result of his employment with Wakem & Mc Laughlin his income increased substantially.

In the summer of 1968, the parties deleted the second paragraph of the purchase and sale agreement and Sherman consulted attorney Milton Shadur. After negotiations, the parties agreed to modify their prior agreements. The two-thirds requirement for sale and assets was mentioned during these negotiations.

In the summer of 1969, Klopfer resigned from Wakem & Mc Laughlin. Again the parties met with Shadur. During these discussions, Klopfer offered tg purchase Sherman's interest and Shadur told Sherman she could not unilaterally sell the business. Following these discussions, Klopfer resumed his employment.

In December of 1969, Sherman received an inquiry from Distribution America regarding purchase of the business for an amount more than one million dollars greater than their cost. Klopfer told Sherman he was not interested in selling, but did not oppose negotiations. However, Sherman cancelled a meeting with the firm.

Alan Levine

Until 1970, when he thought Klopfer was having an affair with his wife, he was Klopfer's friend and accountant. In the early 1960's Klopfer began talking to him about purchasing Wakem & Mc Laughlin. In early 1967, these discussions became very frequent, almost daily. He advised Klopfer that Sherman could be subject to income tax liability if her employment contract were used to reduce the purchase price for the business and he suggested the structure for the business which was ultimately adopted. He attended two meetings with both Sherman and Klopfer before their offer to purchase was accepted. At these meetings, Sherman said she wanted complete control of the business and therefore wanted a 60% interest. Klopfer, who wanted equality with Sherman, was unreceptive to this suggestion and told Sherman that 51% would give her as much control as 60%.

After being fired, Klopfer was upset and talked to him about turning Sherman in to the Internal Revenue Service. Ultimately Klopfer told him that he was going to have his girlfriend, Mildred Kelly, report Sherman; and Levine was present when Kelly told them the details of her meeting with the Internal Revenue Service. At no time did he urge Klopfer to inform on Sherman, and he denied ever suggesting that Klopfer do so. He also denied telling his former wife that he was going to get Klopfer.

Plaintiff Frances Berg Sherman on her own behalf.

She started working for Wakem & Mc Laughlin when she was 14 years old. The owners delegated increasingly more responsibilities to her until she was running the business herself and eventually became president of the company and a member of its Board of Directors although she owned no stock. Moreover, she was generous with her relatives, giving them both her aid and various gifts.

After Klopfer was admitted to the bar, he began handling her legal matters. Although he had not requested to see them, she showed him the financial statements of Wakem & Mc Laughlin; and he expressed an interest in working for her. During her employment, the corporation received various purchase offers and she observed that if such offers were accepted the new owners might eventually fire her.

In 1966 or 1967, Klopfer suggested that they purchase the business. She dismissed the suggestion, telling him he would not like the business; but when he renewed it, she investigated the availability of mortgage financing and then decided that they should make an offer, using her employment contract which had been valued at $150,000 as a credit against the purchase price. She had two conversations with Klopfer regarding control of the business. Levine was present at the second one. In both discussions, she insisted on complete control of the business; and although she was not concerned with percentages, she suggested ratios of 2/3 to 1/3 or 60% to 40%. At the second meeting, when Klopfer told her that 51% would give her the control she wanted, she agreed to that percentage. She told Klopfer how Peter Mc Laughlin, although he owned no stock, had gained control of the company and expressed the hope that nothing like that would happen to her. The possibility of selling the business to a third party was not discussed.

After their offer was accepted, Klopfer agreed to handle the legal details of the sale and she introduced him to both the representatives of the mortgagee and the attorneys for the seller as the attorney who would handle the transactions. While Klopfer was attending to these matters, he presented her with only one draft of the purchase and sale agreement and of the general partnership agreement and she signed them the same day. She admitted that she was aware that the latter provided for equal partnership interests. When the legal matters were completed, it was intended that Klopfer would phase out ...

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