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People Ex Rel. Scott v. Silverstein

OPINION FILED JULY 7, 1980.

THE PEOPLE EX REL. WILLIAM J. SCOTT, ATTORNEY GENERAL, PLAINTIFF-APPELLANT,

v.

HERMAN M. SILVERSTEIN ET AL., DEFENDANTS-APPELLEES.



APPEAL from the Circuit Court of Cook County; the Hon. GEORGE H. SCHALLER, Judge, presiding.

MR. PRESIDING JUSTICE GOLDBERG DELIVERED THE OPINION OF THE COURT:

Rehearing denied August 4, 1980.

People of the State of Illinois (plaintiff) appeal from an order denying plaintiff's motion for a hearing concerning the appointment of a receiver for The George F. Harding Museum, an Illinois not-for-profit corporation (Museum). (Ill. Rev. Stat. 1977, ch. 110A, par. 307(a).) Other litigation involving this Museum was before this court in People ex rel. Scott v. George F. Harding Museum (1978), 58 Ill. App.3d 408, 374 N.E.2d 756.

Plaintiff's verified complaint now before us alleged the Museum, "given to the public for its appreciation and enjoyment," was being mismanaged by its directors in breach of their fiduciary duties. The complaint charged the directors failed to display Museum artifacts to the public in violation of the Museum's corporate charter, mismanaged Museum assets by purchasing investment real estate, consistently operated the Museum at a deficit, awarded each other excessive salaries, and secretly sold a painting from the Museum collection. The complaint also specifically charged Herman M. Silverstein, a director and president of the Museum, was engaged in self-dealing in that the Museum borrowed money from a bank in which Silverstein had a 35.1-percent ownership of voting power. See Ill. Rev. Stat. 1975, ch. 32, par. 163a4.1.

The complaint further alleged the Museum artifacts were deteriorating because of mismanagement. On order of the directors, some of the artifacts were to be secretly sold at auction. Plaintiff sought a restraining order and preliminary injunction to prevent the Museum and its directors from selling any assets of the Museum, the appointment of a receiver to conduct an inventory and appraisal of the artifacts and assets, an accounting by defendants of all assets, a constructive trust for monies wrongfully obtained by the directors from the Museum, and removal of the directors from their positions.

A synopsis of the lengthy litigation is essential to consider fully the propriety of the order before us. The voluminous trial record indicates a preliminary injunction was entered on December 20, 1976, enjoining defendants from selling any assets of the Museum. Before that time, some of the Museum's assets had been shipped to Southeby Parke Bernet, Inc., in New York City for sale at auction. Southeby sold a painting and 48 musical instruments at two auctions, one of which occurred before the filing of the instant action and the other after a temporary restraining order had been issued by the trial court directing the proceeds from that sale be deposited into a Chicago bank. The proceeds of both these sales, $253,900, were deposited in a bank and later disbursed to Southeby and the Museum. The property shipped to Southeby but not sold due to the preliminary injunction remains in storage in New York.

The Museum filed an answer on January 20, 1977, verified by Herman Silverstein, its president. The answer denied the material allegations of plaintiff's complaint. During the course of discovery, the Museum filed an inventory of assets with the trial court. The trial court ordered three art appraisal experts to inspect the Museum's collection and report on its condition. Apparently two of the experts filed item-by-item reports with the court. These appraisal reports are not part of the record before us. The third expert died before he could make appraisal reports to the trial court of the items awaiting his examination.

We can only surmise from reference to the appraisal reports by the parties and the trial court that only a few of the appraised items were in a condition "inconsistent with average conditions of museums of comparable size, budget and staffing." However, many of the artifacts were not appraised because of the death of the third expert.

Discovery progressed slowly. The trial court threatened to impose sanctions on some defendants for failure to comply with requests for documents or depositions. Finally, trial was set for December 3, 1979. However, prior to that date, George Otlewis, one of the director-defendants, subpoenaed William Currie, a reporter who had been covering this case for his newspaper, for deposition. Currie moved to quash the subpoena. The trial court denied his motion and ordered his deposition to proceed. This order was stayed pending appeal by Currie. The appeal is presently docketed in this court. The trial court delayed trial of this cause due to the refusal of Otlewis to go to trial without Currie's deposition.

On November 30, 1979, plaintiff filed a verified motion for "an immediate hearing" concerning the appointment of a receiver. Plaintiff alleged a comparison of the verified inventory of the Museum collection, filed herein in March 1977 pursuant to court order, with an inventory taken in 1964 revealed approximately 80 items are missing and not accounted for by way of known sales or otherwise. The directors of the Museum have refused to appear for depositions to account for these losses.

Plaintiff alleged the financial statements for the Museum reveal consistent losses of $200,000 to $300,000 per year on an annual budget of $500,000. The Museum has borrowed money commencing before 1970 to meet its cash shortages. Its liability in this regard has escalated annually. At the time the complaint was filed the Museum was $845,000 in debt. By 1979, the liability was $1,775,000 evidenced by a note dated August 23, 1979, and due on December 31, 1979, copy of which was attached to the motion. The interest on this note is "1% above prime, floating" which plaintiff indicated was then 15 to 16 percent or approximately $266,250 annually. Some of the interest was paid to a bank in which one of the trustees, Herman Silverstein, had a personal financial interest.

The motion further stated the Museum did not have approximately $2200 to pay appraisers' fees and expenses to re-examine the objects previously shipped to New York for auction. The motion alleged the right of the People of Illinois to the use and enjoyment of the Museum was "being frustrated by the depletion, waste and mismanagement of Museum art objects and finances * * *." The motion prayed an immediate hearing and an order appointing a receiver, without bond, to take control of the Museum.

The Museum filed an unverified answer to plaintiff's motion. The answer alleged plaintiff previously filed motion for appointment of a receiver in December 1976. This moton was denied December 20, 1976. A similar motion was filed on April 4, 1977, and abandoned. The answer also alleged no bond was tendered by plaintiff; the motion failed to show plaintiff would ultimately prevail on the merits and the allegations of the motion did not sufficiently show the property of the Museum was in imminent danger of dissipation. However, the allegations of plaintiff's motion were not specifically denied.

Plaintiff filed a response to the Museum's answer. Plaintiff alleged the Museum has failed to deny the statements made in plaintiff's motion. Plaintiff alleged no written motion for appointment of a receiver was previously made. Neither a written nor an oral motion for appointment of a receiver was made in connection with the order entered herein on April 4, 1977, and said order did not pass upon appointment of a receiver. The response averred the issue of a bond was irrelevant until after the trial court had conducted a hearing on the appointment of a receiver. The response pointed out the failure of the Museum's answer to deny the allegations of plaintiff's motion to the effect that the Museum will have doubled its indebtedness from 1976 to 1979 and had incurred financial losses for 13 ...


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