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Romanik v. Lurie Home Supply Center

OPINION FILED APRIL 13, 1982.

JOAN ABBY ROMANIK ET AL., PLAINTIFFS-APPELLANTS,

v.

LURIE HOME SUPPLY CENTER, INC., ET AL., DEFENDANTS-APPELLEES.



APPEAL from the Circuit Court of St. Clair County; the Hon. ROBERT A. HAYES, Judge, presiding.

PRESIDING JUSTICE KARNS DELIVERED THE OPINION OF THE COURT:

This appeal arises from an action brought by the minority shareholders of Lurie's Home Supply Center, Inc., an Illinois corporation, with a business located in East St. Louis, Illinois, against the corporation, its president and majority shareholder, and one of its directors, officers and legal counsel. Plaintiffs sought redress for injuries incurred by the corporation as a result of alleged breaches of fiduciary duty involving various transactions and agreements between the corporation and defendants. Plaintiffs further sought to compel declaration of a dividend and for an accounting for any profits received as a result of the alleged wrongful actions. The circuit court of St. Clair County entered judgment granting partial relief. Specifically, the court declared the following to be void: an amendment to the articles of incorporation authorizing the issuance of 10,000 shares of preferred stock; three loans made by the corporation to the Peter Lurie Revocable Trust totaling $70,913.09; and a $5,000 gift to Edna Lurie, Peter Lurie's widow. The court further awarded plaintiffs $5,000 in attorney fees. Plaintiffs appeal from that order and judgment seeking complete relief as prayed. Defendants cross-appeal, asserting that the portions of the court's order granting plaintiffs relief were erroneous and seeking a reversal of the order and entry of judgment for defendants, or in the alternative, remandment for new trial.

On January 31, 1958, after existing for some years as a partnership, Lurie's Home Supply, Inc., was incorporated under the laws of Illinois. Stock was issued to three brothers in proportion to their partnership interests with Peter Lurie receiving 50% (850 shares) and Bernard Lurie and Dan Lurie receiving 25% (425 shares) each.

Dan distributed his 425 shares among his children and his wife, Etta, and they, along with Dan, are plaintiffs in the instant case. Defendants are the corporation, Edna Lurie in her capacity as executrix of Peter Lurie's estate, and Ronald Lurie as director, officer and legal counsel to the corporation.

It is undisputed that throughout the existence of the business, before and after incorporation, that of the shareholders, only Peter actively participated in management. Peter directed all corporate activity as the company president and chief executive officer and had maintained a profitable enterprise despite the fact that it was located in an economically depressed area, although no dividend was ever declared since incorporation.

Prior to 1974, the board of directors consisted of five members. Peter was a director from the inception of the corporation until his death in 1977. Bernard was a director from 1958 until his death in 1971, at which time his widow, who had succeeded to his stock interest, became a director. Dan served as a director until 1974. On May 30, 1974, Bernard's widow sold her 425 shares to Peter, making him the owner of 75% of the corporation's stock.

At a special shareholder's meeting on April 17, 1974, the following were elected to the board of directors: Peter Lurie, Edna Lurie (Peter's wife), Robert Lurie (Peter's son), Ronald Lurie (Peter's son), and Jeffrey A. Rosenblum. Shortly thereafter, Edna Lurie and Jeffrey A. Rosenblum resigned as directors and the articles of incorporation were amended to reduce the board's membership from five members to three. The newly assembled board of directors, composed of Peter, Robert and Ronald, named Peter as president, Robert as vice-president and Ronald as secretary and legal counsel. Prior to this time, Dan Lurie had served as corporate secretary.

On June 1, 1974, Peter Lurie entered into two agreements with the corporation, a lease and an employment agreement.

In 1968 Peter Lurie purchased the building and underlying property where Lurie's Home Supply, Inc., is located for $125,000. He purchased the property from a third party from whom the company had leased the premises at an annual rental of 2 1/2% of gross sales in excess of $41,666.67 monthly after certain adjustments with a minimum of $12,500 per year. From this time until June 1, 1974, Peter leased the premises to the corporation pursuant to an oral agreement. As best we can determine from the record, the terms of the oral lease called for an annual rent of 2 1/2% of gross sales in excess of $50,000 monthly with a minimum of $15,000 per year. The aggregate rentals for fiscal years 1975 and 1974 were $32,769 and $26,439, respectively. The corporation, as lessee, paid all utility costs on the leased premises. On June 1, 1974, the corporation entered into a written five-year lease with Peter Lurie as lessor, requiring a fixed monthly rental of $3,000. In addition the company paid all assessed taxes, insurance, maintenance, and utility charges on the leased premises.

On June 1, 1974, the corporation entered into an employment agreement with Peter Lurie, who was then 69 years old. The agreement provided for a five-year term, with an option for renewal exercisable by Peter, paying $54,600 annually, an amount which could be increased but not decreased. This represented a $15,000 increase over Peter's 1973 salary. The agreement provided for deferred compensation in the event of Peter's retirement, disability or death. In the event of his retirement or disability, he would receive 60% of his base salary subject to cost of living increases. In the event of his death, the payments would be made directly to his estate. The deferred compensation payments would continue for a period of 10 years. The agreement also contained a provision requiring Peter's consent before the company declared a dividend.

On December 3, 1975, plaintiffs filed a complaint against defendants seeking to have the following declared null and void: the lease agreement between the corporation and Peter Lurie; the salary increase pursuant to the employment agreement with Peter Lurie; and Peter Lurie's purchase of stock from the estate of Bernard Lurie. The complaint further sought to enjoin the corporation and Peter Lurie from contracting in the future and to compel declaration of a dividend.

On January 25, 1977, a plan to recapitalize the corporation was submitted by the board of directors and thereafter approved by the shareholders. The amended articles of incorporation were properly filed on February 14, 1977. The amendment provided for the authorization of 10,000 shares of callable preferred stock which were subject to the terms and conditions of a consulting agreement to be executed between the corporation and Peter Lurie. The holders of the preferred stock were to receive a dividend preference on the first $1,000 of cash dividends declared and were entitled to one vote per share on any action requiring shareholder participation and approval. The shares contained transfer restrictions limiting the holders to transfer only to lineal descendants. In addition, the amendment eliminated preemptive rights for all classes of corporation stock.

On April 8, 1977, a consulting agreement, as referred to in the February 14, 1977, amendment, was presented to the board of directors at its annual meeting. The agreement provided that upon Peter Lurie's retirement from his employment as president of the company, that he would continue to perform "consulting duties" for the corporation. As consideration for the execution of the agreement and performance of consulting duties, the company would transfer to him 5,000 shares of the newly authorized preferred stock. The agreement further provided that if Lurie failed to perform the consulting duties, that he should forfeit all rights and interest in the 5,000 shares of preferred stock. This agreement was not signed by the company or by Peter Lurie individually.

At the April 8, 1977, meeting a resolution was passed authorizing the issuance of the 10,000 shares of preferred stock to Peter Lurie "in consideration for his past services to the company and in order to assure itself of retaining his continuing services as a consultant subsequent to his retirement." Peter Lurie died on May 16, 1977, prior to retiring and, thus, prior to performing any consulting duties. One week after Peter Lurie's death, the remaining directors (Ronald Lurie and Robert Lurie) authorized a $5,000 death benefit to Peter's widow, Edna.

On June 3, 1977, plaintiffs filed an amended complaint in which they prayed that the recapitalization amendment be declared null and void and that the corporation be enjoined from issuing the preferred stock in accordance with the amendment, or, in the alternative, that the corporation be required to rescind any such issuance.

Between February 16, 1978, and February 8, 1979, the corporation made three loans to the Peter Lurie Revocable Trust of $53,988, $5,571.04, and $11,353.05, respectively, to pay Peter Lurie's estate taxes. These were short-term loans made on unsecured promissory notes bearing an 8% interest rate. The latter two loans were made while the former remained delinquent and past due.

On February 22, 1979, plaintiffs' final amended complaint was filed. The complaint restated the counts previously filed and further sought to enjoin the corporation from issuing any additional loans to the Peter Lurie Revocable Trust and requesting that the outstanding notes be immediately called for payment. Plaintiffs further prayed for other and further relief as the court deems equitable and proper.

Following trial, the court entered the following order:

"This matter coming before the Court and the Court being fully advised in the premises, does find that the following actions taken by or on behalf of the Defendant, Lurie Home Supply Center, Inc., by its directors, to be contrary to law and the same are hereby declared void:

1. The amendment to the Articles of Incorporation dated January 26, 1977 authorizing the issuance of 10,000 shares of preferred stock;

2. The $5,000 gift made by the corporation to Edna Lurie;

3. The loan of $53,988 made to the Peter Lurie Revocable Trust on February 16, 1978;

4. The loan of $5,571.04 made to the Peter Lurie Revocable Trust on ...


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