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Melish v. Vogel

OPINION FILED DECEMBER 23, 1975.

ANNA KOSTER MELISH, EX'RX OF THE ESTATE OF FRANK KOSTER, PLAINTIFF-APPELLEE, CROSS-APPELLANT,

v.

HILMOND O. VOGEL ET AL., DEFENDANTS-APPELLANTS, CROSS-APPELLEES.



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

MR. JUSTICE STAMOS DELIVERED THE OPINION OF THE COURT:

Rehearing denied January 29, 1976.

Plaintiff, Anna Koster Melish, executrix of the estate of Frank Koster, filed a nine-count complaint in the circuit court of Cook County against defendants, Hilmond O. Vogel, Vogel Tool & Die Corporation, Edward Coulon, Harry May, and George Pickard. Subsequently, Hilmond O. Vogel and Vogel Tool & Die Corporation filed a third-party complaint against Edward Melish and Anna Koster Melish.

The cause was referred to a master in chancery who, after hearing witnesses and receiving numerous exhibits, entered a final report. The circuit court, after receiving objections to the master's report from both plaintiff and defendants, entered a final decree, from which defendants appeal and plaintiff cross-appeals.

This case was before the master for over four years. During that time, he conducted 33 hearings, heard 13 witnesses covering over 1500 pages of transcript, and considered almost 200 exhibits. His final report exceeds 50 pages. Due to the complex nature of the issues raised and the voluminous record presented, we will refer to the evidence only to the extent necessary and then only as it refers to the issue being considered.

• 1 Plaintiff's complaint was in nine counts. For various reasons, Counts III, VII, VIII, and IX are not before us. Each of the remaining counts and the third-party complaint will be considered separately. However, one preliminary comment is in order. All the evidence in this case was presented to the master. Based on that evidence and on his determination of the credibility of the witnesses, the master made certain findings of fact and conclusions of law. The trial court, based on the objections of the respective parties to the master's report, but without the benefit of hearing the witnesses, rejected several of the master's findings. Both parties now raise the question of what weight is to be given to the master's report under such circumstances. The apportioning of weight between the master's report and the chancellor's final decree has posed no small problem for courts of review. However, in Uksas v. Zelensky, 21 Ill.2d 303, 172 N.E.2d 359, the Supreme Court set forth the different rules and explained their interrelationships.

"While it is generally agreed that where the chancellor has heard the evidence his findings will not be disturbed unless they are clearly and manifestly against the weight of the evidence [citations] where, however, as in the instant case, the master alone heard the evidence and the chancellor adjudicated the cause on the `frozen record,' there is no such unanimity of expression in the case law. Under these circumstances, some decisions have applied the manifest weight rule if the chancellor approves the findings of the master [citations]; while others insist that all the facts are open for consideration on review, particularly if the chancellor rejects the master's findings. [Citations.] These decisions reiterate the rule that the master's report, while prima facie correct, is of an advisory nature, and that all the facts in a chancery case are open for consideration in the first instance by the trial court, and, in case of an appeal, by the reviewing court, where the ultimate question is, `Was the decree rendered by the court a proper one under the law and the evidence?'" (21 Ill.2d 303, 310-11.)

The court went on to state that where the chancellor had no better opportunity to judge the credibility of witnesses than the court on appeal, it was the reviewing court's duty to make its own independent determination of the facts, giving due consideration to the findings of the master who heard and saw the witnesses. Thus, with the rule set forth in Uksas in mind, we have made our own independent determination of the record before us. Galler v. Galler, 61 Ill.2d 464, 336 N.E.2d 886.

A.

In Count I of plaintiff's complaint, plaintiff alleged that her late husband, Frank Koster, invented a device or apparatus known as a "Mitre-Snug." Plaintiff further alleged that the patent for the Mitre-Snug was assigned to defendant corporation because defendants May and Coulon falsely and fraudulently claimed to be the inventors thereof. Plaintiff claimed that defendant corporation holds said patent as constructive trustee for the estate of Frank Koster and asked for an accounting of the profits derived from the patent and for other relief. Both sides presented testimonial and documentary evidence. The master found that although the oral evidence presented by both sides would make the issue a stand-off, the documentary evidence produced by defendants was more persuasive. The master concluded that plaintiff failed to prove her case by a preponderance of the evidence. The trial court, although not having heard the witnesses, rejected the master's findings and granted plaintiff the requested relief. A summary of the evidence follows:

Julius Vogel, father of defendant Hilmond Vogel, was the sole proprietor of a tool company that eventually became defendant corporation. He invented a device known as an Arc-Fit. It is unnecessary to describe in detail how the Arc-Fit worked. Suffice it to say that it was a device that allowed steel tubing to be joined without the aid of couplers. Frank Koster joined defendant corporation, becoming a partner and the general manager. While with the corporation, he invented two devices, the Arc-Twin and the Arc-Snug. Both operated on the same basic principle as the Arc-Fit, but both clearly improved on the Arc-Fit principle. Frank Koster died on June 8, 1958. The patent for the Mitre-Snug, the device in question, was issued on January 22, 1963. Suffice it to say that although the Mitre-Snug is similar to the Arc-Snug, it is inventively different and clearly an improvement over the Arc-Snug. To establish that Frank Koster had also invented the Mitre-Snug before his death, plaintiff and two other witnesses testified.

Donald Kerr, a former employee of the corporation, stated that he first saw the Mitre-Snug in operation in 1957 and that Frank Koster worked on the basic development of this type of punch and die assembly. However, in several instances, when pressed by the master as to whether he actually saw Koster working on the Mitre-Snug, the witness replied, "I assume he did." The witness was shown an order for tubing from the Checker Cab Company taken during Koster's lifetime and stated that the order called for the type of work the Mitre-Snug could have easily accomplished. However, on cross-examination, the witness admitted that the order could also have been filled by other methods. The witness further testified that several other persons besides Frank Koster also worked on the Mitre-Snug, and several times, his best recollection of who had actually worked on a particular problem was "we all" did.

Harry Hayward, another former employee of the corporation also testified for plaintiff. As a machinist for the corporation, Hayward remembered working with Frank Koster on the development of the Mitre-Snug early in 1958. He built more than one Mitre-Snug during Koster's lifetime and ran off sample parts with those units while Koster was alive. It was Hayward's opinion that certain notations on the Checker Cab Company order as to price indicate that the order was filled using the Mitre-Snug rather than any other production method. However, Hayward later testified that while employed by defendant, he was not involved in calculating the prices on the work done. Hayward stated that Frank Koster began referring to an apparatus called a Mitre-Snug about a year before he died.

Anna Koster Melish testified that she heard the word "Mitre-Snug" about a month or so before her husband died. She further testified that on the Friday before her husband's death, Koster, while sketching on a pad of paper, snapped his fingers and said, "This is it, now I've got it. This is the Mitre-Snug." He went on to explain that it worked similarly to the Arc-Snug, but a little differently.

Defendant Vogel testified that he acted as the patent attorney for the corporation. He stated that he received information concerning the Arc-Snug from Frank Koster, but information concerning the Mitre-Snug came from Edward Coulon. He denied ever having received any information concerning the Mitre-Snug from Koster and produced drawings, dated January 22, 1959, which he said were used in the patent application. He testified that Coulon was the first person to ever show him the apparatus. However, he admitted that he did not know how long before January 22, 1959 that the Mitre-Snug was operational. In fact, it was possible that, unknown to him, it was in existence before Frank Koster died. He further admitted that it was within Koster's mental capacity to invent a device such as the Mitre-Snug.

Defendant Edward Coulon testified that he is now the general manager of defendant corporation, Koster's former position. He has 30 years experience as a tool designer, experimental engineer, tool room foreman, and assistant chief engineer and assistant to the vice-president of other companies. He produced documents, dated October 27, 1958, which he stated represented the first development of what came to be the Mitre-Snug. He claimed that he invented the Mitre-Snug, although he was aided by the ideas of others, including Harry May. He had never seen any other drawings of the Mitre-Snug, nor did he have knowledge of any discussions by any other persons concerning a similar product. He has seen no evidence on any company documents that indicate Hayward or Kerr ever worked on a similar product. He has not found anything in the company records to indicate that Frank Koster ever gave any time or attention to the question of making a mitre-cut for tubing.

The final witness for defendants as to Count I was Harry May, another employee of the corporation. Although not a registered engineer, he is a tool and die designer and has been employed by defendant corporation since 1954. He prepared the first drawings of the Mitre-Snug, dated October 27, 1958, after discussions with Edward Coulon. He had never seen a product such as the Mitre-Snug prior to that date, nor had he received any information regarding the development of that product from Frank Koster. He admitted that it was possible, although not probable, that Koster had tools made and operating before June 1958 of which he was not aware.

As to the documentary evidence, there was much discussion of the Checker Cab Company order. Plaintiff contends that certain notations on the order, which was filled during Koster's life, indicated that the Mitre-Snug had been used to fill the order. Defendants, on the other hand, introduced drawings that indicated that a punch and die totally different from the Mitre-Snug had been used to fill that order.

The evidence thus presented consisted of testimonial and documentary evidence. The testimonial evidence was, as the master noted, at best a stand-off. Kerr and Hayward, both of whom had worked with Frank Koster, testified that the Mitre-Snug was in operation before Koster's death and that Koster had helped develop the apparatus. However, when pressed, Kerr's testimony became less than persuasive, and neither could point to any job order or situation which would explain their allegedly accurate recall of events occurring ten years earlier. Moreover, their testimony is internally inconsistent with that of Anna Koster Melish. Kerr and Hayward testified that they had used the Mitre-Snug in conjunction with Frank Koster as early as 1957. However, Anna Melish testified that it was not until the Friday before he died in June 1958 that Frank Koster perfected the idea.

Balanced against plaintiff's evidence is the consistent testimony of Coulon and May that they were the ones to develop the Mitre-Snug. While Coulon and May had a possible interest or bias in the outcome of the litigation, that fact was before the master.

Finally, there is the added fact of the documentary evidence. A review of all the evidence demonstrates that plaintiff's reliance on the Checker Cab Company order to prove the existence of the Mitre-Snug was misplaced. For while that order could have been filled using the Mitre-Snug, it also could have been filled through various other methods.

Defendants introduced further documentary evidence that indicated, because of its cross-numbering and dating, that the Mitre-Snug was developed by Coulon and May after Koster's death. Again, the possibility that these documents were "manufactured" by defendant corporation for use during this litigation was a fact no doubt considered by the master.

• 2, 3 In short, this was a case, at best, of evenly balanced conflicting evidence. In such cases, the opportunity to observe the witnesses and their demeanor while testifying becomes crucial to deciding questions of fact. That determination is peculiarly appropriate to the master who saw the witnesses. (Stanley J. Gottschalk Construction Co. v. Carlson, 253 Ill. App. 520.) All of the witnesses in this case were testifying to events that occurred ten years earlier. Both the trial court and this court have but the cold and unresponsive record upon which to determine the reliability of the various witnesses. As such, the master was better able than the trial court, or we, to give credit accordingly. After a review of the complete record, we cannot disagree with the master who found that plaintiff had not proven her case by a preponderance of the evidence.

Accordingly, that portion of the circuit court's order finding for plaintiff as to Count I is reversed and the cause remanded with directions to enter judgment for defendants as to Count I.

B.

In Count II of her complaint, plaintiff alleged that at the time of Frank Koster's death, Koster and defendant Vogel each owned equal amounts of the stock of the corporation. Plaintiff alleged that there was a fiduciary relationship between Frank Koster, during his lifetime, and defendant Vogel; that the fiduciary duty owed to Frank Koster during his lifetime was owed to plaintiff after Koster's death; and that when Vogel later acquired control of the corporation through the purchase of stock from certain minority shareholders, Vogel breached this fiduciary duty owed to plaintiff. While unclear from the pleadings, plaintiff also apparently argued that the purchase of the minority stock was a corporate opportunity that Vogel wrongfully appropriated for himself. *fn1

The master found that Vogel had not breached a fiduciary duty owed to plaintiff based either on his status as a controlling party in the corporation, or on his close relationship with plaintiff's husband. The trial court, without hearing any witnesses, rejected the master's findings and granted the requested relief. A summary of the evidence follows:

When the Vogel Tool & Die Corporation was formed in 1946, Vogel and Koster had been equal partners in a predecessor business, Vogel Tool Works. Koster managed the actual running of the business and Vogel took care of all legal matters. In 1946, the business needed additional funds. Consequently, defendant Vogel retained attorney David Shipman to form a corporation and raise additional capital. The additional funds came from a small group of Shipman's personal friends. Vogel and Koster each received 40% of the stock with the remaining 20% apportioned among the new shareholders. Koster served as general manager of the corporation and Vogel was its president.

During Koster's lifetime, he and Vogel remained good friends and cooperative business associates. Although they often discussed together buying out the minority shareholders, they never actually made any offers. Besides serving as legal counsel for the corporation, Vogel was the first attorney plaintiff saw after her husband's death. Vogel took Frank Koster's will to attorney Robert Gorman, a friend of Vogel's, who eventually represented the Koster estate. *fn2 In short, during Koster's lifetime, he relied on Vogel for legal advice and Vogel relied on Koster to manage the business.

Frank Koster died in June 1958. Later that year, Edward Melish, apparently on behalf of plaintiff, began an "investigation" of the corporation's affairs. During the course of this "investigation," Melish entered the corporate plant several different times after it had closed for the night. Melish admitted going through the waste paper baskets during these visits. Vogel objected to these late night visits and changed the locks to the building several different times late in 1958 and early 1959. In January 1959, plaintiff married Edward Melish.

Some time early in 1959, plaintiff retained attorney Albert Sheppard as her representative for corporate affairs. In May 1959, plaintiff sued Vogel in an effort to avoid her late husband's testamentary trust. In June 1959, plaintiff appointed Melish proxy for her shares in the corporation. Also that month, plaintiff requested an opportunity to go over the corporate books and records.

In July 1959, Vogel completed his efforts to acquire the minority stock.

In August 1959, plaintiff was represented at defendant's annual shareholders' meeting by another attorney, Peter Chamales, and by Melish as her proxy. Also that month, plaintiff engaged a certified public accountant to go over the corporation's books. The instant lawsuit was filed in August 1960.

To establish Vogel's breach of a fiduciary duty, plaintiff relies on two alternate theories. Plaintiff first argues that Vogel, as a controlling party in the affairs of the corporation, owed a fiduciary duty to plaintiff.

• 4 It is true that the directors and majority shareholders of a corporation are trustees of the business and property of the corporation for the collective body of stockholders. As such, they cannot in their dealings with the business or property of the trust use their relation to the corporation for their own personal gain. (Dixmoor Golf Club, Inc. v. Evans, 325 Ill. 612, 156 N.E. 785.) However, this is not a case where a director or majority stockholder took ...


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