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Sax v. Sax





APPEAL from the Circuit Court of Cook County; the Hon. F. EMMETT MORRISSEY, Judge, presiding.


Rehearing denied May 19, 1977.

The trial court dismissed a stockholder's suit brought by the plaintiff on behalf of the corporate defendant against the individual defendants on the grounds that plaintiff was guilty of "unclean hands." We find that while the plaintiff technically had a right to prosecute this action, the trial court under the unique circumstances present here did not abuse its discretion in dismissing his claims. We hold, however, that under the particular circumstances the other stockholders should have been given notice and an opportunity to intervene.

The nominal plaintiff, Jerome M. Sax (hereinafter called Jerome), was, from about 1956 to 1965, an executive vice president and member of the board of directors of Exchange National Bank. He is also a stockholder. The defendants, George and Samuel Sax, together controlled over 50% of the common stock of Exchange National Bank. George, until his death in 1974, was the chairman of the board of directors of the bank; Samuel was a director and the president of the bank.

On October 29, 1965, Jerome was indicted by a Federal grand jury on charges of misconduct in the discharge of his duties as a bank officer in certain loan dealings with the Kitzers. When the Kitzers, who were also indicted, were acquitted, the charges against Jerome and certain other persons were dismissed. At the time of his indictment, Jerome was suspended from his position by the bank and, apparently, despite the dismissal of the charges, has never been reinstated.

Sometime after the indictment was dismissed Jerome filed a suit to recover his back salary and the attorney's fees and other expenses incurred in his successful defense of the criminal charges. *fn1 In 1970 (complaint amended in 1972) Jerome filed the derivative action against the two Saxes with Exchange as the nominal defendant. He joined to this action, in other counts, his claims against the bank and also one against the Saxes for tortious interference with his employment relationship. The individual action previously filed was thereupon dismissed at his request without prejudice.

The basic charges Jerome made on behalf of the stockholders against the two Saxes were:

1. The payment of excessive amounts to George for fees, salary, etc. from 1969 on when he was too ill due to heart disease to perform his duties.

2. The misapplying of bank funds by payment in 1970 for settlement of the claims of the receivers of American Allied Insurance Company and Bell Mutual Casualty Company and Bell Casualty Company arising out of the Kitzer transactions. Jerome alleged that the liability was an individual one of the Saxes arising out of their improper conduct, specifically involving various loans and misrepresentations occurring between 1961 and 1965.

3. The negligent and improper making of an illegal loan to George Liederman, who was a secret owner with George Sax, of the Sherry Hotel, such loan first being made in 1964 but being enlarged over seven years, and the failure to collect any interest on it.

4. Causing the loss in 1968 of $112,279.33 as a result of defaulted bank loans made to Marvin Hornstein, a nephew of George Sax, such loans being illegal as excessive, and improperly made to a member of the defendant's family with the knowledge Hornstein could not repay them.

On April 24, 1975, the trial court, on the defendants' motion, dismissed the derivative action without prejudice on the grounds that Jerome had unclean hands, was an improper person to represent the stockholders and there was a want of equity. The court also found that there was no reason to delay appeal.

The defendants on appeal have attempted to assert that some of the claims were barred by laches. The trial court, however, properly did not find the claims to be so barred; indeed, it could not, since, while the defendants raised the defense of laches in their answer, they have never alleged that they were prejudiced by any delay in bringing the action. Prejudice is a necessary element to the defense of laches. 13 Fletcher, Cyclopedia of Corporations § 5875 (1970).

While it would appear from the report of proceedings that the judge's ruling of unclean hands and improper representations was in fact limited to a finding that Jerome had participated in the improper conduct and therefore could not bring the action, the ...

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