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Mullaney, Wells & Co. v. Savage

OPINION FILED NOVEMBER 6, 1978.

MULLANEY, WELLS & CO., PLAINTIFF-APPELLANT AND CROSS-APPELLEE,

v.

BERNARD A. SAVAGE, JR., ET AL., DEFENDANTS-APPELLEES AND CROSS-APPELLANTS. — (GLEN ELLYN CORPORATION, DEFENDANT-APPELLEE.)



APPEAL from the Circuit Court of Cook County; the Hon. FRANCIS T. DELANEY, Judge, presiding.

MR. JUSTICE BUCKLEY DELIVERED THE OPINION OF THE COURT:

Rehearing denied December 11, 1978.

This case began in 1963 as an action in chancery for an accounting and to impose a constructive trust on proceeds of certain transactions by the defendants on the grounds that they had their origin in a breach by defendant Savage of fiduciary duties owed by him to plaintiff, Mullaney, Wells & Co.

The procedural history of this case is as follows:

The plaintiff's second amended complaint was referred on February 26, 1965, to a master in chancery. Sixteen witnesses appeared and four depositions were admitted before proofs were closed on September 12, 1968. The master submitted his preliminary report and findings on February 1, 1971, finding for the plaintiff, and the defendants filed numerous objections.

Before the master could rule upon the objections, he was appointed and took office as a magistrate of the Circuit Court of Cook County. Thereupon, defendants moved that he be disqualified from taking any further action in this case, and that a trial de novo be ordered. The trial court ordered that the master certify the record and his preliminary report, and further ordered that it would pass upon defendants' objections. Defendants objected to the trial court's order and this court permitted an appeal. In its opinion (Mullaney, Wells & Co. v. Savage (1972), 5 Ill. App.3d 1, 282 N.E.2d 536), this court reversed the order of the trial court insofar as it held that the master was disqualified from continuing to the completion of the case.

Upon remand, the master considered and then substantially overruled defendants' objections. Defendants refiled their same objections as exceptions to the master's report. Glen Ellyn also filed another motion for trial de novo, again challenging the jurisdiction of the master but on additional or different grounds. In an order dated September 6, 1974, the trial court ruled that (1) "the exceptions of the defendants to the said master's report are sustained and the said report is held for naught"; and (2) "the motion of defendant Glen Ellyn Corporation for a trial de novo is sustained and this cause shall be retried, a new trial being hereby ordered."

Plaintiff petitioned this court for leave to appeal under Supreme Court Rule 306 (Ill. Rev. Stat. 1975, ch. 110A, par. 306), from an interlocutory order granting a new trial. This court granted plaintiff's petition and, in its opinion (Mullaney, Wells & Co. v. Savage (1975), 31 Ill. App.3d 343, 334 N.E.2d 795), reversed the provisions of the trial court's order holding the master's report for naught and granting a new trial. The court based its decision on several grounds, including res judicata. The court further held that, in appeals under Rule 306, it did not have authority to review that provision of the trial court's order sustaining defendants' exceptions to the master's report, nor could it determine the rights of the parties on the merits. The court ordered the trial court to enter judgment and conduct further proceedings consistent with its opinion. On January 12, 1976, the trial court entered a final decree dismissing the action for want of equity.

On appeal, two issues are presented: (1) Whether the decree of the chancellor dismissing this action was proper under the law and evidence; and (2) whether the law firm of Winston & Strawn should have been barred from representing the plaintiff because it formerly represented one of the defendants in this action.

The evidence relating to these issues is as follows:

Mullaney, Wells had been in the investment banking business since 1938. It specialized in the sale and distribution of municipal securities, but was also a general investment banking firm dealing in all types of securities. In 1957, when its relationship with Savage began, Mullaney, Wells had no department or division which exclusively handled corporate or industrial securities transactions. Instead, various people in plaintiff's organization worked part-time on such transactions as they developed.

When Savage first contacted Paul Mullaney he had been working for approximately two years for a consulting firm at a salary of $500 per month. Savage submitted a brochure to Mullaney setting out his suggestion for a "Proposed Industrial Financing Department" and indicating the type of securities transactions which he proposed to solicit and develop on plaintiff's behalf:

"PROPOSED INDUSTRIAL FINANCING DEPARTMENT

"PROPOSED

This brief presentation is intended to provide a background pertinent to opportunities for profit in private placement and investment banking functions in the industrial field and how such opportunities can be capitalized into interesting profits.

OBJECTIVES

1. Originate, negotiate and facilitate private placements.

2. Originate and participate in corporate underwritings.

3. Undertake the sale and/or acquisition of going concerns for merger or direct sale purposes."

After a second meeting between Savage and Mullaney in which they discussed compensation, Savage prepared in his own handwriting an agreement, dated September 19, 1957:

"Agreement between Paul L. Mullaney, President of Mullaney, Wells & Co. and Barnard A. Savage, Jr.

1. Nature of Agreement — An understanding has been reached whereby Barnard A. Savage, Jr. will become affiliated with Mullaney, Wells and Co. to undertake the establishment and direction of an `industrial financing division'. The function of this newly created division will principally focus on activities involving the organization and negotiation of private placements and the underwriting of corporate securities in the industrial field.

2. Remuneration — Six thousand dollars ($6,000) per annum, payable to Barnard A. Savage, Jr., to be deducted from divisional gross revenues at the conclusion of each calendar year.

3. Division of Net Profits — At the conclusion of each calendar year, total net profits, after deducting all operating expenses accrued by the `industrial financing division' and after deducting the salary taken by Barnard A. Savage, Jr., will be divided on a 50-50 basis between Mullaney, Wells & Co. and Barnard A. Savage, Jr.

4. Duration of Agreement — Both parties concur to appraise this agreement and make such adjustments as the facts and circumstances may warrant at the conclusion of the first year of operations. This agreement is subject to cancellation by either party at any time."

/s/ Barnard A. Savage, Jr. /s/ Paul L. Mullaney"

Savage started working immediately, and was paid his $6,000 per year draw. Savage was given a position in the company's conference room from which to operate, and was later given a stenographer's desk. When the conference room was being used Savage had to vacate. Savage's supervisor testified before the master that Savage's primary function "was to go out and find deals." Accordingly, he spent the majority of his time outside the office. Savage testified that he had no regular hours and that no control by the company was exercised over him. In the 3 1/2 years of Savage's affiliation with Mullaney, Wells he never received a vacation, a bonus, nor an increase in his draw.

Savage worked for plaintiff from September 1957 until he resigned on March 28, 1961. In 1957 and 1958 Savage contributed to two transactions within Mullaney, Wells' office. The first transaction involved plaintiff's purchase of all the outstanding common stock of the Arlington Heights Bank. The opportunity to purchase the stock had been brought to plaintiff by one of its employees and negotiations had gone on for about two years before Savage started working for plaintiff. There was conflicting testimony regarding the extent of Savage's involvement in consummating the transaction. Plaintiff's president testified that Savage was not really involved and merely accompanied employees to the bank on two occasions. Contrary testimony was given by Savage himself and some of plaintiff's employees. Savage requested financial recognition for his services in the transaction despite the fact it was beyond his functions under his contract. Savage testified that his request for compensation was refused by Mullaney, Wells because he had not initially procured the deal and that it was not a "private placement" within the purview of his contract. Plaintiff's president testified no compensation was ever requested by Savage and that no profit on the stock was credited to Savage's account.

At plaintiff's 1959 Christmas party, at which Savage and the entire staff of Mullaney, Wells were in attendance, Paul Mullaney announced that the company had experienced a poor year and bonuses reflected this slump, but that it was fortunate that the men could engage in transactions for their own account to supplement their income. At trial, plaintiff's former vice president corroborated this testimony.

In the Berry Steel Door Company transaction, Savage, in January 1958, spent considerable time with plaintiff's vice president on the placement of that company's new bonds. The initial contact of the client company had also been made before Savage joined Mullaney, Wells. However, there was no dispute that Savage made a significant contribution to the closing of the transaction by developing a valuable contact with the Prudential Insurance Company in March 1958. Savage considered this a "private placement" and felt entitled to 50% of the $28,000 fee. Mullaney, Wells refused Savage's request since Savage had not "found the deal" but agreed to credit Savage's account with 15% of plaintiff's fee. Paul Mullaney requested and received a letter written by Savage agreeing to the division, despite Savage's dissatisfaction with his share. Following the disagreement, Savage decided to pay all his own business expenses, rather than the original 50% split, so as to improve his bargaining position with Mullaney.

Savage worked on other transactions while affiliated with plaintiff. These minor deals, the Von Troble, Gerber and Prestcrete transactions, involved Savage's time and energy but Paul Mullaney testified that the proceeds from them never equaled Savage's compensation in any one year and no profits were realized or divided. The Prestcrete transaction was Savage's initial business dealing with defendant Williams.

Savage first met Williams in connection with a proposed club swimming pool financing in 1957 which was never completed. Subsequently, the two men made four investments, in a leasing company, a foundry and two concrete block companies. Savage and Williams, in each instance owned in excess of 50% of the stock of the companies. Mullaney, Wells had knowledge of two of the four investments.

In 1958, Williams enlisted Savage's aid to obtain mortgage financing for the Prestcrete Company. It involved approximately $250,000 and was brought to fruition through a loan from an insurance company. Williams received 8% of the Prestcrete stock as a fee, gave some shares to other interested parties, and divided the remainder equally between himself, Savage and Mullaney, Wells. The Prestcrete stock certificate was issued in their joint names as tenants in common. When Mullaney, Wells' vice president saw the certificate bearing Savage's name, he became outraged and "fired" Savage immediately. Paul Mullaney told Savage to disregard the man and to deal only with him in the future.

It was also Savage's relationship with Williams which led eventually to the underlying basis of this action, the Blossman transaction. Savage first learned of the undervalued stock of Blossman Hydratane Gas, Inc. in January 1960, through a college friend. Following a financial check, Savage telephoned A.R. Blossman, Sr., the president and chairman of the Blossman Company with the intent of arranging financing for it. Savage admitted at trial that he first called Blossman in his capacity as "plaintiff's representative" and the purpose of the call was to persuade Blossman that he needed plaintiff's services. Savage wrote the following letter, on plaintiff's letterhead:

"February 5, 1960

Dear Mr. Blossman:

I was delighted to have the opportunity to converse with you and become acquainted with you and your rapidly expanding L.P.G. business.

Mullaney, Wells & Company, Inc. of Chicago, Illinois are investment bankers of almost thirty years standing. We are members of the Midwest Stock Exchange and principally engaged in municipal underwriting. In addition, over the years, we have developed a noteworthy group of clients for which we have arranged and negotiated an impressive list of acquisitions, mergers and financings. * * *

As I indicated to you, we have been requested by a private individual to investigate the investment opportunities in the L.P.G. industry. During the past two years, we have invested funds in excess of two million dollars for his account; recently he has become heir to a sizeable fortune and consequently his investment program must be accelerated. We, ...


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