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James v. Erlinder Manufacturing Co.





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


Plaintiff, Lewis F. James (James), brought this action pursuant to the Illinois Securities Law of 1953 (Ill. Rev. Stat. 1973, ch. 121 1/2, par. 137.1 et seq.) (the Act), to rescind his purchase of stock sold in violation of the Act's requirements governing exempt transactions in unregistered securities. James sought to recover the purchase price, plus interest and attorney's fees, from defendants Erlinder Manufacturing Company (EMC), Jane L. Nesius (Nesius), and Carl P. Erlinder (Erlinder). The trial court granted James' motion for summary judgment.

Defendants appeal that judgment and ask this court to consider (1) whether the instant action is barred by the limitation provision of the Act, and (2) whether the trial court erred in granting summary judgment for James.

Prior to 1973, James was a supplier to EMC, a closely held Illinois close corporation. During July 1973, James negotiated with Nesius *fn1 and Erlinder *fn2 to purchase EMC stock. At that time the Erlinder family, through Nesius and Erlinder, held a majority interest in the 2,000 shares of EMC outstanding stock. Three other shareholders held minority interests.

On July 12, 1973, James agreed to buy 400 shares of EMC stock in exchange for $12,500. James paid the purchase price on July 20, 1973. On August 15, 1973, he acquired the shares. Later that day James attended a shareholders meeting. At that meeting the five then current shareholders, including James, voted to accept the tendered resignation of a director and, then, voted to elect James to EMC's board of directors. A special meeting of the directors was held immediately after the shareholders meeting. At this meeting James was elected to the offices of vice-president and assistant secretary. The minutes from that meeting indicate James voted for the adoption of two amendments to the corporation's bylaws and participated in other corporate business.

Thereafter, James participated in the management of EMC. Almost three years later, however, the company apparently began to suffer financially. In the first half of 1976, James resigned his offices and consulted an attorney. In June of that year, James' attorney advised him that the EMC securities sale could be rescinded because the stock was not registered with, and the sale was never reported to, the Secretary of State.

James notified defendants of his desire to rescind the sale and on July 30, 1976, he filed this action to recover the purchase price. Defendants answered that James was equally at fault for any statutory violation under the Act because during and after the period in which the violation occurred, James participated actively in the management of EMC.

After all parties filed motions for summary judgment, affidavits, exhibits, and memoranda, the trial court granted summary judgment for James and against all defendants.


• 1 We first note the sale of securities to James was made in violation of the Act. The 400 shares are within the scope of "securities" regulated by the Act. (See Ill. Rev. Stat. 1973, ch. 121 1/2, par. 137.2-1.) Section 5 of the Act requires registration of securities unless they are exempt therefrom. Subsection (G) of section 4 provides the only relevant exemption to the registration requirement. The subsection provides that sales of securities within any 12-month period to 25 or fewer persons are exempt from registration under the Act if, inter alia, the issuer files with the Secretary of State:

"[A] report of sale not later than 30 days after the sale, setting forth the name and address of the issuer * * *, the total amount of securities sold under [subsection (G)], the price at which the securities were sold, * * * and a representation that offers to sell such securities were not made to persons in excess of the number permitted * * * (Such report of sale shall be deemed confidential and shall not be disclosed to the public except * * * in court proceedings.)" (Ill. Rev. Stat. 1973, ch. 121 1/2, par. 137.4(G)(4).)

No report of the sale to James was filed. Section 12(D) of the Act provides: "It shall be a violation of the provisions of this Act for any person: * * * [t]o fail to file with the Secretary of State any * * * report * * * required to be filed * * *" under the Act. (Ill. Rev. Stat. 1973, ch. 121 1/2, par. 137.12(D).) Thus, the sale was in violation of the Act.


• 2 Defendants claim that the remedy of rescission is inappropriate. They first argue the three-year limitation provision of the Securities Law bars James' claim. Defendants contend the provision is applicable because James stated in one of his pleadings that the sale "occurred on July 12, 1973, when the contract was signed * * *." The complaint to rescind the sale of securities was filed July 16, 1976. Three years and four days had elapsed since the purported sale of July 12, 1973. Section 13(D) of the Securities Law provides "[n]o action shall be brought for relief under this Section [civil remedies] * * * ...

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