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Murphy v. Walters





APPEAL from the Circuit Court of Lake County; the Hon. ROBERT K. McQUEEN, Judge, presiding. MR. JUSTICE UNVERZAGT DELIVERED THE OPINION OF THE COURT:

Rehearing denied September 9, 1980.

The plaintiff sued Christian Walters and Jack Zuideveld and the Christian Audio Visual Corporation in three counts. Count I alleged fraudulent representations by Zuideveld and Walters; count II alleged the same by Christian Audio Visual Corporation and count III was against all three based on the Illinois Securities Law of 1953, section 1 et seq. (Ill. Rev. Stat. 1977, ch. 121 1/2, par. 137.1 et seq.) and particularly section 12, subparagraphs A, F, G and I thereof.

This appeal is from a judgment against Zuideveld under count I in the amount of $25,000, plus the right to receive 2 percent of the stock of Christian Audio Visual Corporation and for $20,000 under count III, plus $7,500 attorney fees and costs. Only Jack Zuideveld prosecutes this appeal. It should be noted that there was no judgment rendered against Christian Audio Visual Corporation, that corporation being in bankruptcy at the time of the trial.

The defendants, Zuideveld and Walters, are the incorporators and owners of the majority of the stock of Christian Audio Visual Corporation (hereinafter referred to as "CAV") which produces such publications as "The Spoken Bible," "The Spoken Proverbs," and "The Spoken Psalms." It is also a distributor of electronic equipment and a member of the Christian Booksellers Association. In June of 1977, the plaintiff responded to an advertisement in the Chicago Tribune offering a position as advertising manager for CAV corporation. The plaintiff met with Zuideveld and Walters and engaged in several negotiating sessions with them regarding the position. Before signing a contract of employment with CAV, the plaintiff had for eight years been advertising manager of a corporation in Hinsdale at a salary of $23,000 per year plus performance bonuses. He alleged he was still so employed when he answered the CAV advertisement. The job was advertised as a "business opportunity" for a person with a background in advertising and catalogue production. After several meetings with Zuideveld and Walters, the plaintiff signed a contract of employment with CAV which provided that (a) Murphy would invest $10,000 in the corporation — $5,000 in cash and $5,000 in two notes for $2,500 each payable in 12 months, in return for which he would receive 2 percent of the common stock and (b) Murphy would be hired as advertising manager for CAV for five years at a beginning salary of $25,000 per year with a 10% bonus each year thereafter, plus fringe benefits such as life insurance and vacations. The contract spelled out in some detail what his duties would be, suggesting an actual employment contract, not just an investment scheme. The contract was between CAV corporation and Murphy, the plaintiff, although it was signed on CAV's behalf by Zuideveld as secretary of the corporation. Murphy was given at the time of his employment a typed sheet entitled "Financial Projection", apparently prepared by Zuideveld and Walters, which projected a prosperous future for CAV and indicated the stock would be a good investment. This projection was based on past and estimated future sales.

The plaintiff commenced working for CAV on July 6, 1977. The agreed salary of a little over $2,000 per month was paid for July but the August salary was not paid in full — Murphy received only $1,500 at the end of August. He was promised the $500 balance for his August salary would be paid in September. Apparently at this time the corporation was in some financial difficulty and, on September 28, Murphy was still $500 short on his August salary. It is alleged by the defendant that on September 28, Murphy went to the Illinois Department of Labor and made a claim for unemployment compensation, stating that he had not been paid in accordance with his employment contract. A memo from the Illinois Department of Labor purportedly sustaining this allegation was offered in evidence, but objection to it was sustained and the memo is not before us. In any event, Murphy did not work for CAV after September 30, and the suit before us was filed on October 4, 1977, as well as a temporary restraining order against the defendants prohibiting them from disposing of any assets of the corporation without the approval of the court. In January of 1978, the corporation filed for bankruptcy and according to Zuideveld was being operated under chapter XI at the time of the trial.

After initial answer to the complaint, the defendants' attorney withdrew as counsel and Zuideveld and Walters acted pro se at the trial. After hearing extensive testimony and considering the briefs and arguments on both sides, the trial court on April 17, 1978, gave judgment for the defendants, holding that (1) the evidence did not support the contention that the defendants acted "outside their corporate existence," (2) that the contention that the plaintiff should have received 2 percent of the stock of the corporation upon tendering $5,000 in cash and $5,000 in promissory notes was not supported by a preponderance of the evidence, (3) that the evidence did not support the personal and individual liability of the defendants, Zuideveld and Walters, and (4) that the evidence did not support count III of the complaint as to Zuideveld and Walters personally. Judgment was therefore given for the defendants as to counts I and III. Count II involved only the corporation and no proof was offered in connection with the claim against the corporation.

On May 16, 1978, the plaintiff filed a motion for rehearing and thereafter submitted a brief in support of that motion. Zuideveld filed a brief opposing it. In a judgment order filed October 4, 1978, the trial court completely reversed itself and found for the plaintiff on both counts I and III, stating that he had erred in his original judgment "having misapprehended the law to be applied to the facts" and finding that the individual defendants, Zuideveld and Walters, had acted "individually and outside their corporate existence." The trial court therefore entered judgment as noted above. In this appeal, Jack Zuideveld again acted pro se and his brief on appeal does not conform fully to Supreme Court rules. However, he clearly raises contentions which, if correct, we consider to be dispositive of this case: (1) that the contract of employment in question and the associated purchase of stock were transactions between the plaintiff and Christian Audio Visual Corporation, not between the defendant, Zuideveld, and the plaintiff and (2) the "Financial Projection" of CAV and other statements made to the plaintiff by Zuideveld and Walters as officers of the corporation were not fraudulent in nature nor made with intent to deceive and therefore did not give rise to the doctrine whereby the corporate veil may be pierced and personal liability established on the basis of deliberate fraud practiced by the alter ego of the corporation.

• 1-3 As to Zuideveld's personal liability, it was established that the negotiations preceding the plaintiff's employment were conducted in the name of the corporation and that it was the corporation which offered the employment, not Zuideveld. While Walters, his wife, and Zuideveld were the incorporators and owned all of the stock of the corporation, the contract of employment clearly indicated that Zuideveld and Walters were signing as officers and on behalf of the corporation, not personally. It is therefore incumbent on the plaintiff if he wishes to go behind the corporate veil and fasten personal liability on Zuideveld as an individual to establish that the corporation, through Zuideveld, perpetrated a fraud on the plaintiff by making knowingly false statements to him, which were reasonably believed by the plaintiff and acted on to his detriment. (Pustelniak v. Vilimas (1933), 352 Ill. 270; Mother Earth, Ltd. v. Strawberry Camel, Ltd. (1979), 72 Ill. App.3d 37; Forrester v. State Bank of East Moline (1977), 52 Ill. App.3d 34; 19 Am.Jur.2d Corporations §§ 1384 through 1386 (1965).) As set forth in Citizens Savings & Loan Association v. Fischer (1966), 67 Ill. App.2d 315, 322-23:

"As a general rule a corporate officer or director is not liable for the fraud of other officers or agents merely because of his official character, but he is individually liable for fraudulent acts of his own or in which he participates. [Citation.] The mere fact that a person is an officer or director does not per se render him liable for the fraud of the corporation or of other officers or directors. He is liable only if he with knowledge, or recklessly without it, participates or assists in the fraud. [Citations.]"

Thus, the burden of proof is on the person attempting to pierce the corporate veil and to hold the officer or director personally liable to establish that the statement or information upon which such person acted was fraudulent; that the statement was uttered by the officer personally and that it induced the plaintiff to an action resulting in an injury to him are not sufficient. In most cases, even the fact that the statement is untrue is not enough to make it fraudulent. The Illinois cases have generally agreed, that as stated in Broberg v. Mann (1965), 66 Ill. App.2d 134, and restated in Mother Earth, Ltd. v. Strawberry Camel, Ltd. (1979), 72 Ill. App.3d 37, 48:

"`[A] misrepresentation to be the basis of a charge of fraud, either in a suit at law or in equity, must contain the following elements:

(1) It must be a statement of material fact, as opposed to opinion;

(2) it must be untrue;

(3) the party making the statement must know or believe ...

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