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Pinelli v. Alpine Development Corp.





APPEAL from the Circuit Court of Cook County; the Hon. SAMUEL B. EPSTEIN, Judge, presiding. MR. JUSTICE WILSON DELIVERED THE OPINION OF THE COURT:

This is an appeal from an order of the trial court rescinding a contract for the sale of stock in the defendant, Alpine Development Corporation. The issues raised in this appeal arise out of the original trial between the parties and a remanded proceeding necessitated by an order of this court in an earlier appeal. We affirm on all issues raised.

Since some of the pleadings and procedural history in this case are of utmost importance for an understanding of the present appeal, we will set them out in some detail along with the relevant evidence presented at trial.


On July 30, 1970, plaintiffs, John and Henry Pinelli, filed a complaint for a resulting trust against defendants, Alpine Development Corporation (hereinafter, Alpine Development), First National Bank of Park Ridge (hereinafter, First National Bank), and O'Hare International Bank. *fn1 The complaint alleged that plaintiffs had transferred title to certain property located on Dempster Avenue (hereinafter, Dempster property) to the First National Bank to be held by it as trustee under Trust Agreement No. 62 and for the sole benefit of Alpine Development. Plaintiffs claimed that said transfer was without consideration and was intended to be without consideration because the Dempster property was only transferred for appearance sake so that Alpine Development and plaintiffs could obtain financing to construct an apartment building on the property. It was alleged that "[i]t was understood and agreed by and between the plaintiffs and Alpine [Development] that Alpine [Development] should hold the beneficial interest in Trust No. 62 with The First National Bank * * * in trust for the benefit and use of the plaintiffs." An apartment building was built on the Dempster property but plaintiffs alleged that they did not receive their share of the profits. As a result, and in fear that Alpine Development would sell the Dempster property to an innocent purchaser, plaintiffs requested both an accounting and a return to them of the Dempster property. Additionally, they asked "[f]or such other and further relief in the premises as justice and equity may require."

Defendants' answer denied that plaintiffs had a claim for a resulting trust. Their answer included several affirmative defenses stating that plaintiffs had received consideration for their property and that plaintiffs had sold their interest in the property upon sale of their stock in Alpine Development. Defendants alleged that plaintiffs had agreed with William S. Allen to undertake construction on their Dempster property. Under the express understanding of the agreement plaintiffs had agreed to contribute their property to such a venture and Allen agreed to furnish financial backing. Plaintiffs and Allen eventually agreed to incorporate and all of them received one-third of the corporate stock. Additionally, Allen contributed certain property that he owned in Park Ridge (hereinafter, Park Ridge property) as collateral for a $10,000 loan to Alpine Development for preliminary expenses. On February 14, 1966, plaintiffs sold their stock in Alpine Development to Allen. Defendants alleged that plaintiffs did not have a right to the return of the Dempster property or an accounting because when plaintiffs sold their stock in Alpine Development, they also sold their share in the corporate assets, which included the Dempster property.

Subsequent to the filing of defendants' answer, Allen, as sole shareholder of Alpine Development, sought and was granted leave to intervene as a defendant. He filed an answer alleging essentially the same facts as were alleged in First National Bank and Alpine Development's answer. He further claimed in a counterclaim that plaintiffs had failed to perform certain conditions of the sale of stock agreement.

A few weeks later, Alpine Development and First National Bank filed a counterclaim alleging that plaintiffs had failed to perform the conditions of the sale of stock agreement. Specifically, they stated that plaintiffs had failed to comply with the term of the agreement which required plaintiffs to pay certain excess costs for the construction of the apartment building on the Dempster property.

On November 18, 1971, plaintiffs filed an amended complaint for a resulting trust. Their amended complaint differed from the original complaint in that it alleged that Alpine Development did not exist at the time they made the transfer of the Dempster property. They further alleged that they did not know that Alpine Development did not exist and that they were fraudulently led to believe by Allen that Alpine Development did exist.

On July 7, 1972, plaintiffs filed a second amended complaint for a resulting trust. The second amended complaint differed from the amended complaint in that it alleged that Alpine Corporation, not Alpine Development, was the beneficiary of Trust Agreement No. 62 and that Alpine Corporation, not Alpine Development, constructed the building on the Dempster property, managed it and collected rents. It also alleged that Alpine Corporation was unrelated to Alpine Development. The complaint specifically requested that the court declare that a resulting trust existed under which the O'Hare International Bank held title to the Dempster property in trust for the benefit of plaintiffs.

On October 11, 1972, Alpine Development and the First National Bank amended their counterclaim to include added construction costs which became due after the filing of their original counterclaim.


The relevant proof in this case consisted of the testimony of several witnesses, the deposition of Henry Pinelli, who was ill and thus unable to testify at trial, and many exhibits.

William S. Allen, intervenor-defendant, testified both as a section 60 witness and a witness for the defense. Allen was a college-trained individual who was employed as a division advertising manager for Union Carbide prior to his retirement. He stated that in late 1963 or early 1964 he began a series of discussions with plaintiffs on the idea of their getting together and developing certain property on Dempster Avenue which plaintiffs owned and certain property in Park Ridge which Allen owned. In their discussions, he mentioned drawing up a pre-incorporation agreement. They discussed setting up a Delaware corporation in which Allen would get 50% of the voting stock and one-third of the dividend stock; the plaintiffs would get the remaining stock. At some point, they also discussed the term "front end take out." Allen said that the term was explained to him as meaning a situation in which "the lender would lend enough money to allow the people that were going to develop the project to get their investment out * * * on the front so that the investors would actually have nothing invested in it and the lender would be the one with the entire investment responsibility." He agreed with plaintiffs that if their property was developed first, they could get their investment out of any profits which might be generated from the property. He told them that they would have to pay tax on those profits as dividends.

At some later date, plaintiffs and Allen met in the office of Attorney Ralph Madsen and told him that they had reached an agreement on setting up the corporation. At this meeting, each party agreed that they would put their property into the corporation, that John Pinelli would provide his ability as a building contractor, and that Allen would provide his bank connections and personal credit for the benefit of the corporation. They decided on the name of Alpine Corporation for their corporation and requested that Madsen draw up the appropriate papers and make the proper filings. The contract which Madsen drew up as the "Alpine Incorporation Agreement" was admitted into evidence. It did not contain any information on what property belonged to Alpine Corporation. Also, it did not contain any reference to a "front end take out." However, it did recite that plaintiffs and Allen were entitled to stock. The agreement was signed by all three of the principals.

On June 23, 1964, Allen and plaintiffs met at the First National Bank to transfer their properties into Alpine Corporation. Allen said that there never was any agreement between the parties that the transfers would be for balance sheet purposes only. The court admitted into evidence a memorandum, written by Allen and dated July 24, 1975, indicating that the Dempster property was valued at $80,000 and the Park Ridge property was valued at $40,000 for balance sheet purposes only. When asked about this memorandum, Allen said that it was a suggestion which they made to their attorney, but that their attorney said that the idea was illegal and could not be carried out.

While at the First National Bank, plaintiffs executed a trust deed conveying their Dempster property to the bank as trustee under Trust Agreement No. 62. The trust agreement named Alpine Corporation as the beneficiary under the trust. Allen's Park Ridge property was already in Trust Agreement No. 53 at the First National Bank and he was the sole beneficiary under that trust. He said that he intended to transfer his property to Alpine Corporation; however, he was informed by the attorney for the bank, Marshall Howard, that he and plaintiffs could not obtain a $10,000 loan which was necessary for operating expenses for the corporation unless they used Trust No. 53 as collateral. Several letters, dated from July 16 to July 24, were admitted into evidence and they indicate that, at least at the time these letters were dated, Howard was in fact attempting to transfer the Park Ridge property into a trust for the benefit of Alpine Corporation.

In addition to Howard, the trust officer, the president, the executive vice president, and the loan committee also told Allen that he would have to use the Park Ridge property as collateral for the loan. He said that both he and plaintiffs objected to the bank president about this arrangement, but their objections were to no avail. Eventually, plaintiffs and Allen agreed to the use of the Park Ridge property as collateral. Allen said that they agreed to the use of the Park Ridge property as collateral because the Dempster property would be developed first and would need a mortgage for building expenses. He said that they did not want to further encumber the Dempster property by using it as collateral for a loan. The reason they were not going to develop the Park Ridge property first was that they were unable to obtain the proper zoning for that property.

Plaintiffs and Allen signed a promissory note at the First National Bank for the $10,000 loan. According to the terms of the loan, Allen assigned all of his beneficial interest in Trust Agreement No. 53 as security. A copy of a renewal of the promissory note was admitted into evidence and the corporate name did not appear on the note. Nevertheless, the proceeds of the loan went into a bank account in the name of Alpine Corporation. The funds were ultimately used for permits and other general expenses relating to the Dempster property and "might" have been used to pay a tax bill on the Park Ridge property.

After obtaining the loan, the corporation functioned under the name of Alpine Corporation. The officers of the corporation included Allen as president, plaintiffs as vice presidents, and Madsen as secretary. The board of directors met on a number of occasions, but Allen said that there were no corporate minute books, corporate seal, corporate tax returns, or stock certificates issued. Later in his testimony, Allen stated that Madsen kept the minutes of the meetings of the board of directors. He also stated that although no stock certificates had been issued, he felt that he was entitled to stock in Alpine Corporation because he had given the corporation collateral and credit for the $10,000 loan. He also stated that Madsen was "given" one share of stock because he had said that he needed a share to be a director.

In August, Alpine Corporation began application to Draper and Kramer, Incorporated, for a mortgage loan on the Dempster property. Around this time, John Pinelli said that he wanted his $80,000 back. Allen told him that he could not get it back this way because the Dempster property, which had been valued at $80,000, had been placed into the corporation in return for its stock.

Sometime during application for the loan, Allen became aware that Alpine Corporation had not been incorporated. He said that he had originally been told by Madsen that the corporation had been incorporated in Delaware even though he said that he had never seen the incorporation papers. Later, Madsen first told him that Alpine Corporation had not been incorporated in Delaware and then he told him that he could not incorporate the corporation under the name of Alpine Corporation in Illinois. Madsen had been informed by the Secretary of State that the name "Alpine Construction Company" was already in use. At this point, Allen spoke to plaintiffs about the corporation's name on three or four occasions and, on one of these occasions, they all agreed to accept any name with the word "Alpine" in it. Although not clear from the record, at some point, Allen called the Secretary of State in plaintiffs' presence and cleared the name "Alpine Development."

On August 31, Allen and plaintiffs wrote Draper and Kramer to tell them that they had no objection to signing personal liabilities behind the corporate liability, and to tell them that they would not be taking out the loan under the name of Alpine Corporation because there was another corporation with a similar name. The letter, which was admitted into evidence, contained the purported signatures of Allen and plaintiffs. The first loan application, dated September 8, was made under the name Alpine Corporation and was signed by Allen and plaintiffs. The second application for a loan of $280,000 was made under the name Alpine Development and signed by Allen as president of the corporation. This application was dated October 15. It was accepted and approved by both John Pinelli and Allen. The commitment for the mortgage was to Alpine Development. This commitment was dated October 27. Prior to the commitment, there was talk of dissolving the corporation so that plaintiffs could get their property back. Plaintiffs were concerned especially since Madsen had been slow in incorporating and had been having problems with the rezoning of the Park Ridge property. However, after the commitment was made, their concern apparently subsided.

On November 9, Alpine Development was incorporated in Illinois. After the incorporation, Allen and plaintiffs went to Madsen's office and insisted that they be shown the incorporation papers. Madsen showed them the papers and they were pleased that the incorporation had been finally accomplished. Allen said that there was no pre-incorporation subscription agreement for the incorporators of Alpine Development. He said that he thought that he had executed the articles of incorporation for Alpine Development, but he could not remember if plaintiffs did too. He also thought that the Dempster property had been transferred over to the benefit of Alpine Development. However, no changes had been made in Trust Deed No. 62 evidencing the change in names from Alpine Corporation to Alpine Development.

Initially, when called as plaintiffs' section 60 witness, Allen testified that he did not believe that plaintiffs received any stock in Alpine Development in 1964. He said that he believed that both plaintiffs received their stock certificates sometime in 1965. Later, when called as a defense witness, Allen testified that he personally delivered a stock certificate to John Pinelli in December of 1964. Throughout the trial, Allen maintained that Madsen had issued himself some stock in return for services which he rendered for the corporation.

Allen stated that plaintiffs were present at the meetings of the shareholders of Alpine Development from its inception until February 14, 1966, and they participated in the voting for directors. He said that John Pinelli held the records on the loan from Draper and Kramer and signed all payment authorizations to contractors and subcontractors. Although Allen claimed that the corporation's attorneys kept minute books, the books were not produced at trial.

In 1965, certain property owned by plaintiffs and located on Lawrence Avenue in Chicago (hereinafter, the Lawrence property) was transferred into Alpine Development. The corporation assumed the mortgage on the property as a favor to plaintiffs. The mortgage note was admitted into evidence. The note was for the sum of $50,000 and was in the name of Alpine Corporation. It was signed by Allen as president and his wife as secretary and was dated July 21, 1964. Allen said that Henry Pinelli asked the corporation to assume the mortgage for a short period of time until he could refinance the property. At the time Alpine Development assumed the mortgage, it did not plan to build on the property. Later, the corporation made an attempt to get Federal guaranty financing for development of the property. However, the attempt failed. Since Alpine Development had no other assets to apply to the mortgage, it first offered the property back to plaintiffs for no consideration, but when they refused to take the property, the corporation notified the mortgagee bank that it would not oppose foreclosure. Allen claimed that the corporation never received any benefit from the property.

In mid-1965, Henry Pinelli came to Allen and said that he wanted to sell his interest in the corporation. He told Allen that he would take $30,000 for his interest, however, Allen told Henry that he would have to take $30,000 minus his proportionate share of the liabilities of the corporation. Henry agreed to the arrangement and Allen gave him a $10,000 initial payment on the purchase price. Allen stated that the original option to purchase form for Henry's stock did not list him as the purchaser because Henry did not want John to know that he was selling to him.

In September or October, Allen met with both plaintiffs. At the meeting, John objected to Henry's selling out to Allen on the ground that that now made him a minority shareholder. John expressed an interest in selling his stock and said that he would accept $35,000 from Allen for his share in the corporation. Later, when they became aware of an offer for the purchase of Allen's Park Ridge property, both plaintiffs told Allen that they wanted more money for their shares in the corporation.

Sometime in October, plaintiffs again met with Allen to discuss a new price for their shares in the corporation. Allen told them that the corporation owed $5,000 to a Stanley Howard, $10,000 to the First National Bank, and plaintiffs owed the corporation $3,800, and he said that the money had to come from somewhere. John then asked Allen for $50,000 for the purchase of his share, but he agreed to $45,000 when Allen agreed to pay off the debts and cancel out the $3,800 debt. The purchase price for Henry's stock remained at $30,000.

Allen said that as of February 13, 1966, just prior to finalization of the stock purchase, the corporate assets included the Dempster land and the apartment building which was 80% completed, the right of the corporation to the Park Ridge property, a small amount of cash, and the $3,800 debt of plaintiffs. The liabilities of the corporation included the $280,000 mortgage on the Dempster property, the $10,000 loan from the First National Bank, and the $5,000 owed to Howard.

On February 14, 1966, Allen and plaintiffs met to finalize the sale of the stock. Allen's attorneys drafted all of the documents involved in the sale. The stock sale agreement was contained in contracts for the purchase of the stock and related escrow agreements. Under the terms of the contracts, plaintiffs agreed to sell their respective one-third of the stock in Alpine Development for the $45,000 and $30,000 prices already agreed to between the parties. Allen agreed to indemnify both plaintiffs against any claim or loss arising from their indebtedness to Howard and the First National Bank, and their personal guarantees on the mortgage taken out on the corporation's Dempster Street property. Also, each of the parties agreed to be responsible for one-third of the cost of construction on the Dempster property in excess of the original contract price of $280,000 provided that the amount did not exceed $12,000. Plaintiffs assumed sole responsibility for any amount in excess of the $12,000.

The escrow agreement provided for the disbursement of funds to the parties. Part of the proceeds in the escrow account came directly from Allen's sale of his Park Ridge property. Allen said that he sold the property for $58,000. When asked about the difference between the sale price and the $40,000 figure he had originally valued the property at, he said that the original $40,000 value was an undervaluation. He added that the Dempster Street property was overvalued at $80,000, even though an appraisal which was admitted into evidence indicated that it was worth $120,000. From the proceeds of the sale, $41,000 was used for the purchase of John's stock and $1,000 went toward the purchase of Henry's stock.

Allen said that since February 14, 1966, Alpine Development has made the principal and interest payment on the $280,000 mortgage loan. From February 14, to the time of the filing of the suit, neither Henry nor John had demanded return of the property, an accounting, or a financial report on the building. Also, at no time during this period did either of the plaintiffs offer to pay anything for managing the building.

The trial court said that it would take judicial notice of the court file indicating that Allen was suing the law firm which represented him at the closing for malpractice in failing to ...

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