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Zack Co. v. Sims

OPINION FILED JULY 16, 1982.

ZACK COMPANY ET AL., PLAINTIFFS-APPELLANTS,

v.

WILLIAM E. SIMS ET AL., DEFENDANTS-APPELLEES.



Appeal from the Circuit Court of Cook County; the Hon. Joseph M. Wosik, Judge, presiding.

JUSTICE MEJDA DELIVERED THE OPINION OF THE COURT:

JUSTICE MEJDA delivered the opinion of the court:

This is an action by the Zack Company, Christine Zack DeZutel (hereinafter Christine) and Isabell A. Zack (hereinafter Mrs. Zack) against William E. Sims and Terre Haute Industries, Inc. (hereinafter THI), claiming that plaintiffs were entitled under a number of different legal grounds, to recover certain corporate stock and other assets from defendant Sims. The eight-count complaint in chancery was filed on January 30, 1976. An amended complaint was filed on September 26, 1978. *fn1

The trial commenced on March 5, 1979, and, after a number of adjournments, was concluded on October 2, 1979. The parties filed written briefs, suggesting appropriate findings, and on July 2, 1980, the trial court heard oral argument. On October 3, 1980, the trial court issued an oral ruling indicating that judgment would be entered for defendants on a number of issues. Then, on December 2, 1980, the trial court entered its findings of fact and conclusions of law, entering judgment in favor of defendants and against plaintiffs on all counts of the amended complaint.

Plaintiffs appeal, contending that: (1) the trial court's findings are contrary to the overwhelming weight of the evidence, and in some cases contrary to undisputed evidence or based on no evidence at all; (2) the trial court erred in according credibility to certain witnesses; and (3) the trial court erred in limiting discovery, and in admitting and excluding certain evidence at trial.

The parties herein have submitted extensive factual summaries in their respective briefs tracing the history of the Zack Company and the Zack family and the circumstances under which Sims became the owner of the common stock of THI and 44% (186 shares) of the stock of Zack Company. The evidence adduced at trial consisted of testimony of an array of witnesses and substantial documentary evidence. Facts necessary for determination of this appeal are set forth below. Additional facts will be referred to in this opinion only as they are necessary for the determination of particular issues presented.

The Zack Company is an Illinois corporation engaged in sheet metal fabrication and contracting. The company was founded in 1922 by Hans J. Zack, husband of plaintiff Mrs. Zack, and father of plaintiff Christine. Defendant THI is an Indiana corporation also in the business of metal fabrication. Defendant Sims, president of THI, is the former husband of Christine *fn2 and former son-in-law of Mrs. Zack.

In 1946 Hans set up the "Christine Zack Trust" for his daughter's benefit, placing in trust 200 of Zack Company's 500 outstanding shares of stock, other stock and approximately $150,000 in cash, notes and bonds. Under the terms of the Christine Zack Trust, Christine was to receive 25% of the trust corpus at age 21 (1960), another one-third at age 25 (1964), and the balance at age 30 (1969). Christine was also beneficiary of a guardianship account, containing about $85,000, which was distributed to her in 1958 after her 18th birthday.

Hans Zack died in October 1956. After his death Mrs. Zack became president of Zack Company and Charles Howard became general manager. Two additional trusts, a marital trust and a residuary trust, were created by Hans Zack's will. Mrs. Zack was the trustee and life beneficiary with a power of appointment over the marital trust, and also trustee and life beneficiary of the residuary trust, with Christine the vested remainderman after her death. One hundred eighty-six shares of Zack Company stock were put into the marital trust and 33 shares into the residuary trust. The balance of 200 shares remained in the Christine Zack Trust, of which Mrs. Zack became trustee.

In 1959 Christine married Sims. Immediately after their marriage Sims became an employee of Zack Company, remaining a continuous employee from 1960 until January 1976 when he was terminated. During the first few years of their marriage, Christine and Sims maintained one joint checking account and deposited monies they received from any source into that account. Later Sims opened up a "special" checking account into which he deposited his salary checks, while Christine continued to maintain the joint checking account with her salary from Zack Company. She paid all routine family household expenses out of that account and Sims would contribute when she became low in funds. Sims' Zack Company compensation increased from $12,600 in 1964 to $70,000 in 1971. Three children were born to the Sims family during their marriage.

THE THI TRANSACTIONS

In 1967 Howard learned of the availability of an old boiler works plant in Terre Haute, Indiana, which he thought could serve as a production facility for Zack Company. Mrs. Zack, however, rejected any such expansion. Sims, on the other hand, became interested in the Terre Haute facility and formulated the idea of making a separate corporation. Sims testified that early in 1967 he asked Mrs. Zack if it would be possible to acquire some equipment from the Zack Detroit operation for the Terre Haute company. He said she indicated that the stockholders were not interested in investing any more money but that "if it was such a great opportunity, why didn't he do it himself," and that there were funds available for him to borrow.

After Mrs. Zack gave Howard and Sims approval, the building in Terre Haute was purchased in late 1967. The Zack Company paid the $25,000 earnest money deposit on behalf of the new company. Later, in January 1968, the Hans Zack residuary trust took title to the property, reimbursed the Zack Company for the earnest money deposit, and paid the balance of approximately $155,000 for the property. The residuary trust eventually took back a note from the new company (THI) for the purchase price, at 4% interest.

In early 1968, Howard drafted the details of the proposed incorporation. This document indicated that the "beginning shareholders" were to be "William E. Sims and Christine Zack Sims" with an 80% interest, "Charles L. Howard" with a 10% interest, and "Stephan W. Duncan" with a 10% interest. This document was approved by Howard and Sims, who then presented it to Mrs. Zack, who in turn referred the matter to her attorney, Andrew Gatenbey. Following assurance by either Sims or Howard that the joint ownership arrangement was acceptable to everyone, Gatenbey indicated his approval of the incorporation details by initialing the document. A few weeks later a Terre Haute attorney, Sam Beecher, sent to Howard for final signature typed incorporation papers still showing Christine as an incorporator and shareholder. Howard took no further action with respect to the documents, however, until months later in September 1968.

During the above period, THI went into full operation using various assets and benefits obtained from the Zack Company and other Zack family sources. These assets included the purchase by THI of the Zack Detroit operation, including all work-in-progress, inventory, accounts receivable and the transfer of key personnel. The Zack Company in turn received a note for $198,000 at 4% interest for these items, which was subsequently paid by THI. In addition, other assets were leased from Zack Company for an annual rental, and administration services were provided by Zack Company, for which THI was paid $10,000 per year. The amounts charged for administrative services, leasing of equipment and the sale of work-in-progress by Zack Company to THI, as well as other matters involving Zack Company's relationship with THI, were determined by Howard, as general manager of Zack Company. Zack family sources, including the residuary trust and the Zack Foundation, also provided long-term loans to THI totaling $678,983, and guaranteed without consideration another $371,000 in bank loans. The Zack Company also guaranteed THI's credit with its suppliers, and its performance under numerous contracts, and provided other services and intangible benefits to the new company.

In September 1968 Howard and Sims reviewed the incorporation documents which had been forwarded by Beecher, and began to make some necessary revisions, most notably the deletion of Stephan Duncan's name as 10% shareholder due to Duncan's withdrawal from the enterprise. At that time Sims told Howard to also eliminate Christine's name as a subscriber and joint shareholder. Howard had the documents retyped to reflect the changes and mailed them to Beecher with instructions to proceed with the incorporation. Actual THI stock certificates were not prepared by Howard until January 1973. Christine testified that at all times Sims represented to her that THI was a venture for their mutual benefit and not for himself alone, and that she did not learn otherwise until late in 1973 when a divorce was contemplated.

THE USE OF CHRISTINE'S MONEY TO PURCHASE THE THI STOCK

In 1961 Christine, on Sims' advice, placed $55,000 which she received from the Christine Zack Trust into joint certificates of deposit at Olympic Savings & Loan. In 1966 she agreed to let Sims close the accounts. Sims testified that he put the money into their joint safety deposit box in 1966. In November 1967 Christine deposited approximately $28,000 she received from the above trust into the joint household checking account. Christine testified that she agreed that this money could be used to invest in THI. Accordingly, Sims wrote a $28,000 check to cash on the account on December 7, 1967, and placed the $28,000 cash into the joint safety deposit box.

Sims testified that after the above $83,000 was put into the safety deposit box, he used $45,000 from the box, in early 1968, to pay THI for 4,500 shares of stock, representing 90% of outstanding THI stock. He also testified that later he took another $50,000 from the safety deposit box, and that he loaned it to THI on June 27, 1968. After these two transactions, according to Sims' testimony, the cash fund was depleted.

Sims stated that he had at least $45,000 of his own money in the safety deposit box which he used to pay for the stock. The money he used came from his income, company salary and cash gifts made to him by Mrs. Zack during the earlier years of his marriage. He testified that he also made $12,000 on a salvage job in earlier years, although his income tax returns for those years showed no such income. Sims offered no documentary evidence to corroborate his contributions to the joint safety deposit box funds. It is undisputed that the $45,000 used by Sims to purchase the stock came from the cash fund kept in that joint safety deposit box.

In 1972 Sims purchased the 500 THI shares (10%) then held in the name of Howard for $10 per share, for a total of $5,000. Under the agreement Howard received $5,000 cash and was to receive a specified percentage of THI's earnings each year until he reached age 65. The $5,000 payment was made from Sims' personal checking account. Pursuant to the agreement Howard received $8,550 in January 1973. This payment was also made from Sims' checking account. Then, in the spring of 1973, under a verbal agreement to extinguish any future rights, Sims bought out Howard's interest completely with a lump sum payment of $40,000. This payment was made with proceeds of a check, repaying the original $50,000 loan made to THI on June 27, 1968, with the funds in the joint safety deposit box. Sims cashed the check, totaling $68,825.20 with accrued interest, on May 1, 1973, used $40,000 to pay Howard, and deposited the balance of $28,825.20 into his special checking account. The stock certificates for the 500 THI shares were issued in the name of "William E. Sims."

THE ZACK COMPANY TRANSACTIONS

The evidence as to events leading up to the sale of 186 shares (44%) of Zack Company stock held by the marital trust to Sims is disputed. According to Sims' testimony, in the fall of 1971 Mrs. Zack asked him if he was interested in buying the Zack stock for about $1 million. Since Sims was not interested in a minority position in the Zack Company, he agreed to purchase the stock provided that Mrs. Zack would agree to resign as trustee of the residuary trust in favor of Christine. Mrs. Zack agreed to these terms, but at a later meeting at the office of attorney Gatenbey she refused to resign as trustee of the residuary trust. Sims had no desire to proceed with the deal under such circumstances. Howard and Christine testified that following the meeting Sims angrily ordered that his children were not to see Mrs. Zack, their grandmother, any more. Sims denied making such a statement. Christine also testified that on the day following the meeting she voluntarily tendered to Sims an executed power of attorney which she had had prepared earlier in 1971. It was undisputed that from the time of the aborted sale in 1971 until May 1973 the Sims family had virtually no contact with Mrs. Zack. The extent and cause of the estrangement between Mrs. Zack and the Sims family during this time was, however, largely disputed.

On May 29, 1973, Mrs. Zack resurrected her offer regarding the stock sale. Howard prepared an agreement which provided, inter alia, that the marital trust, of which Mrs. Zack was trustee and beneficiary, would receive $800,000 for the 186 shares of Zack stock and another $200,000 already owed to the trust by the Zack Company on a note, for a total price of $1 million. Christine testified that Sims notified her of the offer and that Mrs. Zack saw her grandchildren that very weekend for the first time in two years. The agreement was later modified to include the transfer of Mrs. Zack's interest in Arctic Engineering to Sims. Sims and Howard decided that Sims should offer to pay Mrs. Zack $88,000 for the Arctic stock and reduce the price of the Zack stock by the same amount to $712,000.

Under the final terms of the 1973 transaction: (1) Mrs. Zack sold the 186 shares of stock held by the marital trust for $712,000; (2) the Zack Company paid back a $200,000 loan to the marital trust; (3) Mrs. Zack sold her interest in Arctic Engineering for $88,000, which Sims immediately sold for the same price to Howard and William Mitchell; and (4) Mrs. Zack resigned as trustee of the residuary trust in favor of Christine, and assigned her life interest in the trust to Christine. The stock certificates were issued in the name of Sims alone. Christine testified that she was aware of this fact but thought that the stock was being purchased for their mutual benefit.

THE USE OF CHRISTINE'S MONEY TO PURCHASE THE 186 SHARES

In order to purchase the 186 shares of 1973, Sims arranged for an $800,000 bank loan. Christine pledged her 200 shares of Zack stock as part of the collateral for this loan. Plaintiffs presented documentary evidence to establish that Sims used $28,825 received as part of the proceeds of the $50,000 loan made to THI from the safety deposit box in 1968, as part of the purchase of the Arctic Engineering stock. The Arctic stock then was immediately sold to Howard and Mitchell for $88,000 and $84,000 of the sale proceeds was deposited in Sims' account along with the original $800,000, bringing the account balance to $884,000. Sims then used $712,000 to pay Mrs. Zack for the 186 shares and immediately repaid $150,000 to the bank to reduce the loan balance to $650,000. The interest payments on the loan were made by Sims using various funds, including funds received from Christine.

The bank required that the note evidencing the $650,000 loan balance be renewed every six months. On one occasion in December 1974 Sims simulated Christine's signature on the renewal note. Prior to this the bank had indicated that his signature on her behalf was unacceptable since the bank had no power of attorney on file relating to Christine. At this time Sims was in possession of the power of attorney Christine had given to him with respect to her 200 shares of Zack Company. Christine testified that had the documents been placed in front of her at the time, she would have signed them herself, and had she known that Sims signed her name, she would not have charged him with forgery.

In January 1975 Sims caused THI to pay back its outstanding loans, paying $65,000 balance on a note it owed to Christine and a $402,500 note it owed to the residuary trust, and other notes owed to Sims. Christine thereupon loaned to Sims, at an interest rate of "zero percent per annum," the $402,500 from the residuary trust and $65,000 of her own money. The notes were payable within 30 days after the sale of the Zack Company. Sims used the $467,500 received from Christine, together with other funds, to pay the $650,000 balance on the bank loan.

Later, in February 1975, Sims converted to cash the balance of money remaining in his checking account and invested various large sums in certificates of deposit in the Cayman Islands. The Cayman accounts were opened originally in the joint names of himself and Christine, although her name was deleted in 1975 when the divorce was contemplated. Sims also made other investments in 1975 including loans to personal friends and an investment in the Mitchell Film Company.

In support of Zack Company's claim for excessive compensation and corporate waste, there was considerable evidence presented relating to Sims' compensation from both Zack Company and THI, particularly from 1974 through 1975. Plaintiffs also presented evidence regarding Sims' purchase of two corporate airplanes, one for THI, and another for Zack Company, and ...


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