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Circle Security Agency, Inc. v. Ross





APPEAL from the Circuit Court of Cook County; the Hon. ARTHUR L. DUNNE, Judge, presiding.


Lewis D. Ross (defendant) and his wife own 49% of the shares of Circle Security Agency, Inc. (Circle), an Illinois insurance agency. Bernard Levin (Levin) and Harmon Kravitz (Kravitz) hold 51% of Circle's shares. Ross, Levin and Kravitz are the three directors of Circle, and the latter two are president and vice-president, respectively, of the company. West Side Agency, Inc. (West Side), is a subagent and wholly owned subsidiary of Circle. Following a dispute over the terms of an employment agreement between defendant and Circle, the latter brought a declaratory judgment action to determine the rights of the parties. Defendant then filed a counterclaim against Circle, West Side, and Levin and Kravitz (collectively referred to as plaintiffs) alleging that Levin and Kravitz violated various provisions of the Business Corporation Act (Ill. Rev. Stat. 1979, ch. 32, par. 157.1 et seq.) and the Criminal Code of 1961 (Ill. Rev. Stat. 1979, ch. 38, par. 1-1 et seq.), and breached fiduciary duties owed defendant. The trial court dismissed defendant's counterclaim, finding that he had no standing to sue. Defendant appeals, solely contending that he has standing as a creditor and director of Circle to maintain the action.

In order to resolve this issue, a more detailed discussion of the facts is necessary. Prior to 1966, defendant and his wife were the sole stockholders of Circle. In January of 1966, defendant sold 51 percent of Circle to Levin and Kravitz pursuant to a reorganization agreement, a contract for the sale of defendant's stock and an employment contract. The agreements provide, inter alia, for the employment of defendant for the remainder of his life in an executive and managerial capacity, in exchange for an annual salary varying from $40,000 to $15,000, depending on the nature and extent of services rendered.

The agreements also provide for the sale of Circle's stock under various contingencies. Basically, if defendant predeceases Levin and Kravitz, Circle is obligated to buy the shares of defendant and his wife (Ross shares) for $138,000. But, if Levin and Kravitz die while defendant is still living, their shares must be sold to Circle, thus making defendant and his wife sole shareholders again. During the lifetime of defendant, Circle has an irrevocable option to purchase the Ross shares for a fixed price.

The original declaratory judgment action brought by Circle has no relevance to this appeal. However, defendant's counterclaim alleged that Levin and Kravitz have committed unlawful acts, which include: (1) the failure to furnish defendant with notice of any shareholder or director meetings; (2) the misappropriation of substantial amounts of money from Circle and West Side; (3) the unlawful borrowing of funds from the corporation; and (4) the failure to hold any shareholder or director meetings, thus removing defendant from participation in the management of Circle.

In moving to dismiss the counterclaim in the trial court, Levin and Kravitz relied upon a provision of the stock sale agreement wherein defendant and his wife waived several of their rights as shareholders of Circle. Because of this waiver, it was argued, they faced no injury to the value of their shares as a result of the alleged misconduct of Levin and Kravitz, and thus had no standing to bring suit. The relevant provision in the stock sale agreement states:

"16. Except as otherwise provided in the Agreement L. Ross and D. Ross agree to and do hereby waive, release and relinquish any and all rights, (except preemptive and voting) that each has or may be entitled to after the date hereof by reason of their stock ownership in Circle, including without limiting the generality of the foregoing any rights to participate in the net profits earned by Circle, to their proportionate share of the earned or other surplus of the corporation now or hereafter existing or created, to any distributions by way of dividends (stock, cash or otherwise), if any that may be declared, and to their respective proportion of the net assets or property of the corporation that may be available for distribution upon dissolution or liquidation in any manner whatsoever except as provided in paragraph 17 hereof."

The trial court, finding that defendant had failed to allege or show that he would suffer "any individual harm," dismissed the counterclaim.


Defendant maintains that his standing to bring the counterclaim derives from his status as a creditor and director of Circle. In his counterclaim, however, defendant primarily alleged that he was instituting the action "in his own behalf and as a stockholder of Circle." The two-count counterclaim prayed for the following relief: (1) an accounting and restoration of funds that were allegedly misappropriated; and (2) a constructive trust upon the allegedly misappropriated assets of the corporation. No relief was sought by defendant in an individual capacity; the remedies were requested on the corporation's behalf.

Plaintiffs initially argue that defendant failed to properly allege his status as a creditor and director of the corporation in the counterclaim. It is true that the complaint alleges that defendant brought the action in his capacity as a stockholder. Yet, it also states that defendant is a director of Circle and that his stock "is his only security for obligations owed him by Circle evidenced by certain contracts, appended as Exhibits to the Complaint and Answer in this action." In addition, defendant's memorandum in opposition to plaintiffs' motion to dismiss asserts that defendant had the right to bring suit as a creditor and director of Circle.

• 1 In determining the propriety of a dismissal based upon a motion to dismiss, the appellate court is concerned only with questions of law presented by the pleadings. (Oswald v. Township High School District No. 214 (1980), 84 Ill. App.3d 723, 406 N.E.2d 157.) Generally, questions not raised by the pleadings cannot be urged for review. (Ricke v. Ricke (1980), 83 Ill. App.3d 1115, 405 N.E.2d 351.) However, in this case, the issue as to defendant's status as a creditor and director was, indeed, set forth in his counterclaim. Both theories were also briefed and argued by both sides in the trial court. Because these are purely questions of law and were considered by the trial court, we will consider the issues as presented by defendant. See People ex rel. Sterba v. Blaser (1975), 33 Ill. App.3d 1, 337 N.E.2d 410.

We first turn our attention to the issue of whether defendant was entitled to bring the counterclaim against plaintiffs in the capacity as a creditor of Circle.

It is well settled that where an officer or agent of a corporation breaches his fiduciary responsibility by wrongfully converting or misappropriating funds and thereby adversely affecting the contractual and equitable relation between the corporation and a creditor, the creditor can maintain an action against the officer personally. (Pepper v. Litton (1939), 308 U.S. 295, 84 L.Ed. 281, 60 S.Ct. 238; Winger v. Chicago City Bank & Trust Co. (1946), 394 Ill. 94, 67 N.E.2d 265.) The pivotal question in this case is whether defendant has sufficiently alleged his status as a "creditor" to maintain such a suit. The word "creditor" means a person to whom a debt is owing by another person. (Woolverton v. George H. Taylor Co. ...

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