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Harris Trust & Sav. v. Joanna-western Mills





APPEAL from the Circuit Court of Cook County; the Hon. SAMUEL B. EPSTEIN, Judge, presiding.


Plaintiffs, Harris Trust & Savings Bank and Dorothy A. Rumsfeld, as co-executors of the estate of Herbert W. Rumsfeld, commenced this action following decedent's death in 1973 against defendant, Joanna-Western Mills Company, seeking specific performance of a stock redemption agreement allegedly entered into by decedent and defendant on February 17, 1949. The trial court denied defendant's motion for summary judgment and granted plaintiffs' motion for summary judgment, whereby defendant was ordered to perform pursuant to the terms of the redemption agreement.

Defendant appeals from the decree for specific performance and presents the following issues for review: (1) whether the trial court erroneously denied defendant's motion for summary judgment; (2) whether a genuine issue of fact was raised by the pleadings mandating a denial of plaintiffs' motion for summary judgment; (3) whether the trial court could have properly found against defendant on the grounds of estoppel, ratification and laches even though these defenses were not specifically pleaded by plaintiffs; (4) whether defendant was improperly denied an opportunity to fully exploit discovery procedures by the rulings of the trial court; and (5) whether the decree for specific performance is free from doubt. We affirm the denial of defendant's motion for summary judgment, reverse the granting of plaintiffs' motion for summary judgment, and remand.

The contract upon which this action is predicated was executed on February 17, 1949, and provides in pertinent part as follows:

"3. Purchase by Joanna on Rumsfeld's Death. Upon Rumsfeld's death, Rumsfeld's heirs, executors or administrators shall sell to Joanna and Joanna shall purchase Rumsfeld's shares (less all such shares he may have disposed of pursuant to the terms hereof during his lifetime) at the contract price per share. Such shares shall be transferred and delivered to Joanna not later than three (3) months after Rumsfeld's death and Joanna shall pay the said price therefor upon delivery to it of merchantable title to such shares."

In addition to creating by the contract a market for Rumsfeld's stock upon his death, defendant was granted a right of first refusal as to any shares of stock which Rumsfeld may have desired to dispose of during his lifetime. The terms "contract price per share" and "Rumsfeld's shares" were defined in the agreement, the latter term encompassing "all shares now owned by Rumsfeld and all shares thereafter acquired by him." Along with Rumsfeld's signature, the agreement was signed on behalf of defendant by its president, William F. Regnery, and the execution of the contract was attested to by defendant's secretary, R.H. Jackson. All three persons signing the contract were members of defendant's board of directors on the date of execution.

It was alleged in the complaint that Rumsfeld performed in accordance with the redemption agreement and that upon his death plaintiffs tendered to defendant the 325 shares of stock then owned by Rumsfeld but that defendant refused to redeem the stock pursuant to the terms of the contract. Plaintiffs contended that they were without an adequate remedy at law, and therefore, they sought specific performance of the redemption agreement.

Defendant filed several responsive pleadings to the complaint, and four principal defenses were advanced: that the officers who purported to act on behalf of defendant when the contract was executed did so without the requisite authority to bind the corporation; that the unauthorized, executed contract was never ratified by either the shareholders or the board of directors of the corporation; that Rumsfeld, as a member of the board of directors, owed a fiduciary duty to defendant to disclose the underlying circumstances and terms of the contract and seek ratification thereof, but such duty was breached; and that the terms of the agreement are unfair and inequitable to defendant. Defendant also advanced the equitable defenses of laches and unclean hands.

The record discloses that defendant was operated as a close corporation with the ownership and control thereof vested in principal part in the Regnery and Volker families. In 1949, defendant's board of directors was comprised of seven members, including William H. Regnery and four of his sons. Rumsfeld, a member of the Volker family, became associated with a parent company in 1924 and then was an officer of the corporation until his resignation in 1958. He continued as a member of the board of directors until his death in 1973. Also, as an employee of the corporation in 1949, Rumsfeld served as the General Superintendent of defendant's Chicago plant at which he had supervisory authority over 700-800 employees who were engaged in the manufacture of diversified textile products.

Some 24 years elapsed from the date on which this redemption agreement was executed and Rumsfeld's death. During that time period, the membership on defendant's board of directors underwent numerous changes. In fact, by 1973 none of the directors involved with the negotiation and execution of the contract was alive; W.H. Regnery, W.F. Regnery, and R.H. Jackson died prior to 1960. Of the six directors who voted to repudiate the contract, however, the record reveals that each of them acquired full knowledge of the Rumsfeld agreement by no later than 1967.

Shortly after Rumsfeld's death in 1973, plaintiff tendered the 325 shares of stock owned by Rumsfeld to defendant and requested that defendant redeem the stock pursuant to the contract. Rumsfeld had not purchased these shares under the redemption agreement, but rather had apparently purchased them from an uncle and already owned them when the agreement was executed. On November 19, 1973, defendant's board of directors considered plaintiffs' request and, finding a lack of authorization for or ratification of the agreement contained in the corporate records, repudiated the redemption agreement. This action followed.


Section 57(3) of the Civil Practice Act (Ill. Rev. Stat. 1973, ch. 110, par. 57(3)) provides that summary judgment is appropriate "* * * if the pleadings, depositions, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment or decree as a matter of law." Thus, summary judgment is proper when the issue is determinable solely as a question of law. Sidwell v. Sidwell (1975), 28 Ill. App.3d 580, 328 N.E.2d 595; Applicolor, Inc. v. Surface Combustion Corp. (1966), 77 Ill. App.2d 260, 222 N.E.2d 168.

• 1, 2 In ruling on a motion for summary judgment, the trial court must construe the pleadings, depositions and affidavits included therein most strictly against the moving party and most liberally in favor of the opponent. (Baier v. State Farm Insurance Co. (1975), 28 Ill. App.3d 917, 329 N.E.2d 543; Lumbermens Mutual Casualty Co. v. Poths (1968), 104 Ill. App.2d 80, 243 N.E.2d 40.) Inferences may be drawn from the facts which are not in dispute, and if fair-minded persons could draw different inferences from these facts then a triable issue exists. (Farmer's Automobile Insurance Association v. Hamilton (1975), 31 Ill. App.3d 730, 335 N.E.2d 178, aff'd, 64 Ill.2d 138, 355 N.E.2d 1 (1976); McHenry Sand & Gravel, Inc. v. Rueck (1975), 28 Ill. App.3d 460, 328 N.E.2d 679.) The right of a party to summary judgment must be clear and free from doubt. (McHenry Sand & Gravel, Inc. v. Rueck; Dakovitz v. Arrow Road Construction Co. (1975), 26 Ill. App.3d 56, 324 N.E.2d 444.) Thus, where doubt exists as to the right of the moving party to entry of a summary judgment, the wiser judicial policy is to permit resolution of the dispute by trial rather than by summary judgment. National Bank v. S.N.H., Inc. (1975), 32 Ill. App.3d 110, 336 N.E.2d 115; Wegener v. Anna (1973), 11 Ill. App.3d 316, 296 N.E.2d 589.

Application of the foregoing principles in the instant case mandates that the trial court's grant of summary judgment in favor of plaintiffs be reversed, and this cause be remanded for a trial on the merits. In our view, triable issues of fact exist both as to the authorization for, or ratification of the instant agreement, and as to the fairness of the instant agreement.

Both parties correctly state that Delaware law is applicable to the instant case. The pertinent Delaware statute provides as follows:

"(a) No contract or transaction between a corporation and one or more of its directors or officers, or between a corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the board or committee which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if:

(1) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors or the committee, and the board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or

(2) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the shareholders; or

(3) The contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the board of directors, a committee thereof, or the shareholders.

(b) Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or of a committee which authorizes the contract or transaction." (Emphasis added.) Del. Code Ann. 1974, tit. 8, § 144.

Thus, by the terms of section 144(a)(3) any transaction between a corporation and one of its directors apparently need not be fully disclosed in order for it to be valid; however, the fairness of any such transaction to the corporation at the time of its approval must be affirmatively shown by the individual attempting to enforce the contract. The burden of proof rests on the interested parties when "fairness" alone can sustain the transaction. (E.L. Folk, Review of the Delaware Corporation Law for the Delaware Corporation Law Revision Committee, at 72-73 (1968).) This fairness requirement shall be dealt with more fully in following portions of today's opinion.

In its memorandum opinion, the trial court, based on what it viewed as uncontroverted facts, stated several conclusions of law, any one of which would constitute just grounds for granting plaintiffs' motion for summary judgment. This court, therefore, on review, must consider the correctness of each of these particular findings.

Initially, the trial court found that the action taken by the board of directors at a meeting conducted on October 28, 1960, constituted a ratification of the agreement. The court based its conclusion in this regard on a letter to one of the directors, Morris A. Cox, dated May 5, 1966. This letter was from Charles Kimball, a director and the general counsel of defendant. It listed 19 names, including Rumsfeld, with which defendant had some type of stock agreement. This letter also stated, in pertinent part:

"I call your attention to the minutes of the Board of Directors' meeting of October 28, 1960. * * *. At that meeting the existence of the past agreements was discussed and we were all aware of the agreements covering the shares which were issued as a result of the conversion of the Class "B" stock. I recall your comments at the time to the effect that we all realized that agreements had been entered into in the past which we had to live with and that what we should be ...

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