APPEAL from the Circuit Court of Cook County; the Hon. JOSEPH
M. WOSIK, Judge, presiding.
MISS JUSTICE MCGILLICUDDY DELIVERED THE OPINION OF THE COURT:
This suit was instituted on January 24, 1977, by the plaintiff, Nicholas A. Karris, on his own behalf and on behalf of all other shareholders of the Water Tower Trust and Savings Bank (Water Tower) similarly situated. Karris named as defendants the Water Tower Bank, certain individual directors and shareholders of Water Tower, the First National Bank of Chicago (First National) and the Water Tower Realty Company. In count I of the complaint Karris prayed that an agreement between Water Tower and First National for the sale of certain assets of Water Tower to First National be declared null and void. Karris further requested that a temporary restraining order, a preliminary injunction and a permanent injunction be entered prohibiting the consummation of the sales agreement and that defendants Asher, Himmel, Kostner, Mesirow and Johnson be removed as directors of Water Tower. In count II, which was based upon the same allegations that were raised in count I, Karris asked for $4,000,000 in actual damages and $5,000,000 in punitive damages. The circuit court entered an order denying Karris a temporary restraining order and a permanent injunction. The court further determined that there was no just reason to delay review of its order and this appeal ensued.
On or about February 23, 1977, Karris petitioned the court to set aside certain proxies which the management of Water Tower obtained through a solicitation to the shareholders of the bank and to enjoin a shareholders' meeting scheduled for March 1, 1977. This petition was subsequently denied. The court then heard evidence on the plaintiff's request for injunctive relief. This evidence, which is substantially uncontroverted, showed the following facts.
At the time of its incorporation in 1973 Water Tower issued 120,000 shares of stock at a stated price of $25 per share. A block of 60,750 shares, amounting to 50.625% of the initial capitalization, was purchased by one particular group of investors. This group was composed of the following individuals and entities:
Robert Asher Abner Mesirow Richard Curtis Michael Whelan James Frankel Michigan Avenue Financial Ivan Himmel Corporation Howard Johnson OPAR Corporation Joseph Kostner Lawndale Financial Corporation
These investors acquired this stock with the aid of a $1,147,500 loan obtained through the LaSalle National Bank. Pursuant to this loan, the investors signed demand notes; however LaSalle's records indicated that the loan was for three years, due to mature on July 9, 1976. The loan was cross-collateralized so that none of the shares of Water Tower stock, which were pledged as security for the loan, would be released until the entire loan was paid. At the time of the loan, Himmel, Johnson, Mesirow and Kostner were directors of Water Tower and Frankel was the attorney. Johnson was also the chairman of the board and the chief executive officer.
The plaintiff first became a shareholder in August 1975, when he purchased approximately 7,000 shares. Subsequently, in July 1976, Karris contracted to purchase 12,650 shares owned by Curtis and 11,200 shares owned by Whelan.
Water Tower was organized in 1973 and began operations in May 1974. Since the time of its inception, the bank maintained its facilities in a building at 717 North Michigan Avenue in Chicago. This location is on the southeast corner of Michigan Avenue and Superior Street. The building is owned by the National Sporting Goods Association. The bank's facilities are situated on the first and second floor of the Michigan-Superior building with the first floor space fronting on Superior Street. The Thayer-McNeil Shoe Company also rents space in the building and this space fronts on Michigan Avenue.
In a letter dated October 12, 1973, G. Marvin Shutt, the executive director of the sporting goods association, indicated that when the lease of Thayer-McNeil terminated, the Water Tower Bank would have a right of first refusal on that space. This lease is scheduled to expire in 1982.
On February 1, 1975, Water Tower purchased a 99-year leasehold interest in the land and building at 677-79 North Michigan Avenue. The building, which is a four-story commercial structure, is situated on the southeast corner of Michigan Avenue and Huron Street. Under the leasehold agreement, Water Tower paid $315,000 in cash and agreed to pay an annual ground rent. This rent escalates in graduated steps from $75,000 for each of the first two years of the leasehold to $130,000 for each of the final 20 years.
Water Tower transferred the lease to the Water Tower Realty Company, a wholly owned subsidiary of Water Tower, which was formed in March 1975 and operated the building as income property. The principal tenants in the building were Joseph's Salon Shoes, Inc., and Celano, Inc. The lease in effect at the time of trial for Joseph's Shoes was to terminate February 1, 1982. After February 1, 1979, Water Tower would have the right to cancel the lease upon six months notice. Joseph's paid a base rent of $90,000 per year for the space in the basement and first floor of the building, plus $6,000 per year for the common areas. In addition, they paid a percentage rental of 7% of their gross sales over $1,285,714. Celano's lease was to expire January 31, 1977, but they held an option to renew for four years. At the time of trial they paid a base rent of $2500 per year plus 6 percent of their gross sales in excess of $300,000. Water Tower's records showed that for the 11-month period ending December 31, 1975, there was a loss of $14,791 for the operation of the leasehold, $10,116.10 of which was attributable to depreciation.
In the spring of 1975, LaSalle Bank classified the loan to Curtis and Whelan as substandard. At the end of the year the loan to Curtis, Whelan and Kostner was classified as Risk 3, a denomination which indicated that the loan was considered high risk. In February 1976, LaSalle told Kostner that it would like the loan "moved" or refinanced through a different bank and, in April 1976, indicated the same desire to Curtis. The bank told the investors, in June 1976, that it wanted to have the loan repaid by July 9, 1976. Early that fall, Frankel and Kostner approached a number of Chicago banks in an attempt to obtain new financing. Only Continental Bank offered the investors a loan but the investors considered that the terms of the loan were unacceptable.
At approximately the same time, First National initiated efforts to locate a satisfactory location for a secondary banking facility, as authorized by section 5(15) of the Illinois Banking Act (Ill. Rev. Stat. 1977, ch. 16 1/2, par. 105(15)). This provision, which became effective October 1, 1976, in part permits a bank to establish a secondary facility within a radius of 3500 yards of the main banking premises providing it is not placed within 600 feet of an existing premises of another bank. This 600-feet limitation does not apply if the facility is closer to the main location of the establishing bank than to the other bank, or if the other bank grants an irrevocable consent to have the secondary facility within 600 feet.
James Cassin, senior vice-president and head of the Personal Banking Department at First National, was responsible for locating the site. By August 1976 First National had reduced the possible choices to three locations, including one on North Michigan Avenue. The testimony of Cassin, Pamela Bruce, an associate of Cassin, and Johnson varies to a degree as to the precise occurrences of the next several months.
Cassin testified that he first met with Johnson on August 18, 1976, at which time he disclosed First National's interest in obtaining Water Tower's consent to place a banking facility within 600 feet of Water Tower. At that meeting Johnson indicated a willingness to continue discussions on this matter. Johnson also stated at that meeting that there was a possibility that First National could buy all or a part of Water Tower. Cassin testified that he dismissed the possibility of such a purchase by First National because of antitrust implications, but he agreed to search for prospective purchasers. A week or two later, Cassin did locate a possible purchasing group, but the deal was never consummated.
Cassin stated that throughout September a series of meetings were held with Water Tower. The discussions turned to the sale of the consent along with the leasehold interest Water Tower held in the Michigan-Huron building. In late September or early October Cassin made an offer of $1,000,000 for both the consent and the leasehold.
It was also during these frequent contacts that Johnson asked whether First National would be interested in making a loan to the investing group involved in the LaSalle loan. Cassin testified that he indicated to Johnson that the bank was always interested in lending in credit-worthy situations. He further indicated to Johnson that this was a sensitive situation and that it would have to be handled separately from the sale of the consent. However, he told Johnson that if he would bring in the list of investors, he would put Johnson in touch with the proper unit at First National. Johnson subsequently forwarded the financial statements of the individual investors to Cassin. Cassin gave these documents to Joseph Migely who was the head of Division R, the unit responsible for handling loans to professionals and executives. Organizationally, this division was within the department headed by Cassin.
The Board of Directors of Water Tower held a special meeting on October 25, 1976, to consider the offer of $1,000,000 for the sale of both the consent and the leasehold. At that time the offer was rejected. Following that meeting, Cassin and Johnson discussed the possibility of the sale of the consent without the leasehold. Cassin subsequently made an offer of $425,000 for the consent. He testified that a subsidiary of the bank had made a valuation of the leasehold property which established a high of $1,451,000 and a medium of $575,000 and a low of $420,000. In arriving at the offered price of $425,000 for the consent, Cassin selected the medium value for the leasehold and subtracted it from the original offer of $1,000,000. The Water Tower board subsequently voted to accept the offer. Following the filing of a suit by Karris, on November 22, 1976, negotiations on the sale were suspended. Talks resumed in December and an agreement was finally reached to sell both the consent and the leasehold for $1,100,000.
Johnson testified that he first met with Bruce and Cassin on August 18, 1976, at which time Cassin probed the possibility of obtaining the consent from Water Tower. Johnson indicated that he would be interested in discussing it further. However, he denied that, at this meeting, he stated that the bank was looking for a buyer.
Johnson stated that through the remainder of August and September he had several additional meetings with Cassin. At one point he claims that First National made an offer of approximately $250,000 or $280,000 for the sale of the consent. He also stated that the discussions evolved into a consideration of the sale of the leasehold interest along with the consent. First National then made an offer of $750,000 to $800,000 for the sale of both assets. This offer was later raised to $1,000,000.
Johnson had not taken the original proposals to the board. However, at a special board meeting on October 25, 1977, the board considered the $1,000,000 offer. Because of concern over the legal status of their right of first refusal on the Thayer-McNeil space, the board declined First National's offer. However, the board approved a counteroffer to First National of $425,000 for the sale of the consent alone. Johnson testified that the price was selected "because we couldn't get $500,000." He claimed that an offer of $500,000 for the sale of the consent was specifically refused during the negotiations. First National subsequently agreed to enter into a contract to purchase the consent for $425,000 and, at a special meeting held on November 3, 1976, the bank's board of directors passed a resolution authorizing the consummation of the contract.
On November 22, 1976, Karris filed a lawsuit to enjoin the sale of the consent and, as a consequence, the contract was never signed. In mid-December, negotiations resumed for the sale of both the consent and the leasehold for an amount in excess of $1,000,000. Water Tower sought, from the sporting goods association, assurances that the bank held a contractual right of first refusal on the Thayer-McNeil space. Frankel and Johnson met with Shutt and then, in a letter to Shutt dated December 17, 1976, Johnson outlined his understanding of the agreement on the lease of the Thayer-McNeil space. Johnson, in the letter, noted that in a letter dated October 12, 1973, the association had indicated that Water Tower had been granted a right of first refusal. The letter also contained the following statement:
"Some of the Directors expressed concern regarding the informal nature of this commitment and raised questions concerning its legal validity. We were greatly heartened and reassured by your explaining to us that this entire matter had been thoroughly discussed and agreed upon by your Board of Directors and by the fact that you were acting in your official capacity as Secretary of the Association as well as its Executive Director, and that therefore, this letter constituted a legally valid and binding commitment."
In response, by letter dated December 20, 1976, Shutt commented that Johnson's letter "outlines the situation exactly as it exists." Subsequently, an agreement was reached between First National and Water Tower to sell both the consent and the leasehold for $1,100,000 and, on January 20, 1977, the contract for sale was signed.
Pamela Ann Bruce testified essentially the same as Johnson and Cassin. However, she stated that at their second meeting they discussed a sale of both the consent and the leasehold and at that time First National made an offer of $1,000,000 for both assets. She recalled that there were several more meetings between that time and the October 25 directors' meeting. Following the filing of the Karris suit on November 22, 1976, Bruce wrote a memorandum commenting upon the implications of the suit and she stated that if First National became a party to the suit and if the bank was asked to explain how it arrived at the market value of $425,000 for the consent "the situation would be most precarious." She explained that by this comment she was referring to the fact that the calculation was made so simply, merely deducting $575,000 (the median value of the leasehold) from $1,000,000 (the original offer for the leasehold and the consent).
While the negotiations for the sale of the consent and the leasehold were proceeding, First National was processing the loan applications for the investing group. Migely testified that he received copies of the financial statements of the individual investors in September 1976. After reviewing these statements, he advised Cassin that he thought there was a way of lending the money. Cassin told him to pursue the loan.
At Migely's direction, Phillip O'Neill, an employee in Division R, checked the credit-worthiness of the individual investors. O'Neill found that Waxman and Himmel were not acceptable. Sometime during the first or second week in November, O'Neill asked Karris to guarantee the loan for Waxman and Karris agreed. A new investor to take Himmel's place was also found. At this time O'Neill also requested that documentation be started.
O'Neill, Migely and a third individual from the legal department at First National met with Frankel sometime during the latter part of November or early December. At that time Migely testified the loan was not made. Subsequently, Frankel told First National to hold up on processing the loan and it was never finalized. However, Karris testified that Frankel had told him that the loan had been approved. In addition, Hill Hammock, of LaSalle Bank, received information from Frankel, in November, that ...