APPEAL from the Circuit Court of Cook County; the Hon. NATHAN
COHEN, Judge, presiding.
MR. JUSTICE MCNAMARA DELIVERED THE OPINION OF THE COURT:
Rehearing denied June 7, 1978.
The Attorney General of Illinois brought this action seeking injunctive relief and an accounting from two charitable organizations, their officers, corporate fund raisers, and certain individual shareholders of the fund-raising corporations who had solicited donations for charities in Illinois as part of a nationwide mail campaign. The trial court dismissed the action against the defendant charities and their officers. The fund raisers have appealed from the trial court's order which enjoined them from future solicitation of funds in Illinois and which required them to pay the State $417,928 in compensatory damages and $150,000 in punitive damages. The charities have appealed from that portion of the order which dismissed their third-party complaint against the fund raisers seeking reimbursement for attorney's fees incurred in defense of this action.
Police Hall of Fame, Inc. (hereinafter "PHF"), is a Florida not-for-profit corporation whose stated purpose is to provide financial assistance to widows and orphan children of slain enforcement officers, to develop scholarships, and to educate the public concerning police problems. Defendant National Police Officers Association of America (hereinafter NPOA), a PHF affiliate, is a Florida based organization whose membership consists of law enforcement officers in active service.
In 1971, PHF and NPOA contracted with National Emblem Products (not a party to this action) to solicit contributions from the public by mail. The contract provided that contributions mailed to the charities' bank in Florida were to be divided between National Emblem and the charities. Seventy-five percent was allotted to National Emblem and 25 percent was allotted to the charities. National Emblem conducted campaigns which yielded $180,000 representing total contributions made by approximately 31,000 persons.
In 1972, the executive director of PHF and NPOA, Frank Schira, met with Patrick and Martin Gorman to discuss Helix, Inc., becoming the charities' new direct mail consultant. Helix's business included advising charities wishing to solicit funds by mail. Helix develops formats of solicitation and selects lists of names of possible contributors. Helix also oversees rental of lists for the mail campaign. The majority of stock in Helix is owned by Martin and Patrick Gorman who serve as corporate officers and directors.
On October 3, 1972, Helix purchased from National Emblem the house list consisting of the names and addresses of persons who had contributed to PHF and NPOA. On November 1, 1972, Helix contracted with the charities to provide direct mailing consulting services. The services would be provided upon advance notice by the charities. Helix would be paid the costs of conducting a national fund-raising and publicity campaign for the charities, Helix being entitled to up to 75 percent of contributions received. If costs exceeded 75 percent, Helix was to absorb cost overages. Helix was allowed to use its own lists of prior contributors in other campaigns and to charge the charities for the lists at public advertised rates. The contract allowed Helix to rent lists from third parties and to collect commissions in such transactions provided that the commissions did not result in additional costs for the charities. The list of persons responding to the campaign was to be the joint property of the charities and Helix.
On January 1, 1973, Washington Information Services, Inc. (hereinafter "WIS") entered into a three-year agreement with the charities to handle the printing and mailing of their literature. WIS is also a Washington, D.C., for-profit corporation and the majority of its stock is owned by Patrick and Martin Gorman. The cost to the charities was not to exceed 18.5 cents per printed package. WIS possessed the sole right to rent, exchange, or otherwise use those names for its own purposes as long as it scheduled mailings so as not to conflict with mailings conducted on behalf of the charities. The charities were given approval rights of all materials prior to printing and mailing. All supplier invoices, including those of WIS, constituted a first claim against the charities' accounts and payments were due within 10 days of the invoice date.
Pursuant to the contract with WIS, over 800,000 pieces of mail were sent to prospective donors in March and April 1973. "Outside" lists were utilized, using names of contributors to causes other than PHF and NPOA. Beginning in January 1973, all appeal letters sent out under the aegis of NPOA bore the following notation: "Established in 1955." In March 1973, the description was changed to the following: "Chartered in Illinois, 1955." Those words appeared on more than one million pieces mailed to prospective donors in 1973. The NPOA which was chartered in Illinois subsequently was dissolved on December 22, 1969.
By April 1973, as a result of disagreements with the fund raisers, the charities postponed a decision regarding additional fund-raising campaigns. The charities retained a Dr. Nichols as a special consultant to act as liaison between the charities and the fund raisers. By letter the charities informed Martin Gorman that the next campaign would be delayed pending resolution of questions which Nichols would present.
On May 1, 1973, WIS informed the charities that forms for approximately three million letters at a cost of $210,000 previously had been ordered. On May 8, 1973, Nichols met in Michigan with representatives of WIS. The parties entered into a new agreement whereby all prior contracts were cancelled. The agreement included a schedule for primary mailings and the postage required thereupon. Some mailings were to be conducted in early May 1973, at a postage cost of $5,440. During the week of May 28, 1973, nearly two million pieces requiring $31,500 in postage were scheduled for mailing. On May 14, Schira issued a check for the earlier mailing. On June 1, 1973, Schira advanced $31,535 for the larger mailing postage. At trial Schira insisted only the mailings conducted prior to April 1973 had been authorized by the charities.
Of the over three million pieces mailed during the May-June 1973 campaign, the vast majority were called "Safety Tips" letters. This type letter first had been mailed to prospective donors in December 1972. Included in the "Tips" letter was the following:
"So a large part of the funds we receive from good, law-abiding citizens like you help us continue this urgent campaign to inform and gain the vitally needed support of more and more Americans."
Enclosed in the "Tips" letter was a contribution card which stated:
"Here's my gift * * * to help reach and gain the support of more concerned citizens * * * so you can continue and expand your vital police aid and public information programs."
In the agreement entered into May 8, 1973, it was provided that all disputes between the parties were subject to arbitration under rules of the American Arbitration Association. In July 1973, pursuant to directions issued by the charities, WIS ceased all mailings. It then demanded payment for bills which had accrued. Thereafter WIS invoked the arbitration clause of the agreement, requesting a determination as to the amount owed.
Prior to arbitration, representatives of the charities met with Patrick Gorman and his counsel on September 10, 1973, in Arlington Heights, Illinois. At the meeting, the parties entered into a termination agreement whereby the charities paid WIS $135,000 and agreed to conduct two mailings to generate funds to pay other outstanding WIS bills. The charities themselves conducted mailings which resulted in $10,000 profits. According to WIS, it received none of the proceeds of these mailings.
On December 26, 1973, NPOA and PHF filed suit in Kentucky against Helix and WIS. The action was removed to the Federal court. The complaint charged that defendants had failed to conduct two mailings in the fall of 1973 which would have netted $700,000 in donations for the charities, and that defendants had used NPOA's name without authorization. The charities sought damages for unjust enrichment through defendants' conversion and control over the list of donors to PHF's fund appeals. The district court stayed the proceedings pending the outcome of arbitration.
The arbitration between the charities and WIS and Helix was conducted in Georgia. At the time of arbitration WIS and Helix had billed the charities $615,452 of which $476,242 had been paid. The arbitrator awarded WIS and Helix $24,585, and the award was confirmed by the United States District Court in Georgia. In June 1976 the charities paid WIS and Helix $20,120 in satisfaction of that award. On December 15, 1975, the district court in Kentucky granted WIS and Helix's motion for summary judgment and dismissed the action brought by the charities. This was predicated on the fact that the Georgia proceedings rendered the Kentucky issues res judicata.
Prior to 1973, donors sent all contributions directly to the charities' Florida bank where the donations were tabulated and deposited into a special account. Schira had authority to withdraw money from this account subject to bank approval and to Helix's first claim on account. Beginning in March 1973, contributions were mailed to the charities. Nearly 62,000 persons responded to the charities' fund appeals. Slightly over 3,000 Illinois residents sent contributions.
A total of $496,362 was paid by the charities to WIS and Helix. The charities paid an additional $94,472 to third parties to cover expenses generated by the fund raisers in their conduct of the campaigns. Additionally, Helix and WIS valued lists exchanged with third parties at $22,031 and charged the charities $35,951 for the use of their lists in the campaigns. The trial judge in the present action concluded that the WIS-Helix conducted campaigns raised a total of $785,731, and we accept that figure.
On April 10, 1976, the trial court granted the Attorney General's motion to dismiss defendant Patrick J. Gorman Consultants, Inc. On April 19, 1976, the Attorney General filed a second amended complaint containing seven counts against the charities, against the corporate fund raisers, and against the two Gormans. In Counts I through V the complaint alleged fraud, misrepresentations, and violations of the statute regulating the solicitation of funds in Illinois for charitable purposes. The charities were accused of spending more than the statutorily allowed maximum of contributions in fund raising expenses thus leaving too little money for charitable purposes. Count II charged misrepresentation citing representation of a defunct Illinois not-for-profit corporation as an affiliate. Count III charged Helix with fraud in that it had failed to disclose high costs to the public and thus had misled donors into believing their contributions would be used for charity. In count IV the complaint alleged that WIS, through the assignment of the fund raising contract, became a knowing beneficiary of the fraudulent acts of Helix because both corporations were controlled by the Gormans. It charged that the assignment was executed to deceive law enforcement agencies. Count V charged the Gormans with the use of the corporate fund raisers as screens for their unlawful activities. In count VI, all the fund raisers were charged with fraud and unjust enrichment. Count VII charged Helix and WIS with failure to register as professional fund raisers in violation of section 7 of the Illinois solicitation act (Ill. Rev. Stat. 1973, ch. 23, par. 5107). The complaint sought an accounting from all defendants and an injunction prohibiting future solicitation.
At the close of its case-in-chief, the Attorney General moved for the reinstatement of Patrick J. Gorman Consultants, Inc., as defendants. The trial court granted this motion.
At the close of the trial, the court dismissed the action against the charities and their officers. The court found that the corporate fund raisers and the Gormans had conducted the Phase III mailings, those handled by WIS after May 1, 1973, illegitimately and without the charities' authorization. The court determined that 99.8 percent of the contributions received by the charities during Phase III were used for expenses in violation of statute. The court also found that the fund raisers had proceeded with the mailings to add new donor ...