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Graham v. Mimms





Appeal from the Circuit Court of Cook County; the Hon. Donald J. O'Brien, Judge, presiding.


In the first of two consolidated appeals (Nos. 80-3233 and 81-0166), defendant Frank W. Mimms, the controlling shareholder in Mimms & Co., Inc., appeals from a judgment which found that he breached the fiduciary duties he owed to Mimms & Co. and its minority shareholders (plaintiffs Raymond G. Graham and James T. Rodgers) by misappropriating corporate assets and opportunities.

Mimms argues that the judgment should be reversed on the grounds that (a) the business opportunities which Mimms pursued on his own behalf were not Mimms & Co. corporate opportunities; (b) the trial court ordered more restitution than is justified by the record or by equitable principles; and (c) Graham and Rodgers are guilty of wrongful conduct which requires that they be deprived of an equitable remedy for Mimm's own misconduct.

In the second case, defendants Thomas and Sarah Fuller appeal from a judgment holding them jointly and severally liable with Frank Mimms for restitution of almost $1,400,000. The dispositive issue for the Fullers is whether they obtained any property or benefits from their alleged wrongdoing upon which a constructive trust could be fastened.

The record discloses the following evidence:

Graham, Rodgers, and Mimms were experienced condominium salesmen who went into business together in April of 1976 so that they could (a) convert rental buildings into condominiums; (b) obtain "project sales" listing agreements to sell the units in rental buildings which were being converted into condominiums by other developers; and (c) broker the resale of individual units in existing condominiums. Their enterprise was named Mimms & Co., and for brevity we shall refer to this entity as "Mimco."

It was agreed that all business decisions were to be made by a two-out-of-three vote, but that profits and salaries were to be apportioned under a formula which gave 40% to Mimms, 35% to Graham, and 25% to Rodgers. Although they decided to incorporate Mimco, their attorney, Charles Steinberg, advised them that a corporation cannot engage in the real estate brokerage business in Illinois unless the corporation is controlled by a licensed real estate broker. *fn1

Since Mimms was the only one of the three who was licensed as a broker, they agreed that he would initially receive 51% of the Mimco stock, in addition to becoming president, treasurer, secretary, and sole director of the corporation. As to the nonbrokerage aspects of the business, there was an unwritten understanding that they would continue to operate under a two-out-of-three vote, and that salaries and profits would continue to be apportioned under the 40-35-25 percent formula.

Although Mimms initially controlled the corporation, a preorganization subscription agreement provided that when either Graham or Rodgers received a broker's license, the corporation would issue enough additional shares to both Graham and Rodgers so that, as originally planned, they would respectively own 35% and 25% of the Mimco stock. It was anticipated that Rodgers would become licensed as a broker in early 1977 and that, as provided in the subscription agreement, Mimms would then lose control of Mimco.

Based on their business objectives, Mimco was divided into three divisions. Graham was placed in charge of the project division because of his experience in managing the mass "project sales" required when rental buildings are converted to condominiums. Mimms was placed in charge of the acquisition division because he believed he had the ability to obtain project listings and acquire suitable rental buildings for conversion. And Rodgers was placed in charge of the brokerage division, which was to handle the sales of miscellaneous condominium units.

The firm grew rapidly and had more than 20 employees within a few months. During the first eight months of business, the project and brokerage divisions accounted for more than $5 million in sales, despite the fact that most of their employees were trainees, and that most of their project listings were for buildings in which the developer had been having trouble making sales.

During the same period, Mimms and his acquisition division actively investigated, researched, and developed plans and proposals for potential condominium conversion projects. One of the properties checked by Stephen Clayton, a "property analyst" in the Mimco acquisition division, was the building at 100 E. Walton in Chicago. Clayton reported to Mimms that the building would make a good conversion project, and Mimms ordered Clayton to conduct additional investigation of its suitability for conversion. Charles Steinberg, Mimco's attorney, testified that Mimms ordered him to ascertain the ownership of several rental buildings, including 100 E. Walton. In the fall of 1976, according to Steinberg, Mimms ordered him to find out whether the 100 E. Walton building was for sale. Mimms also warned Steinberg:

"Don't tell them who you are representing because if they know we are in the condominium field, the price they say they want for the building may be higher."

Steinberg contacted one of the owners, Kenneth Marks, and pressed for financial information concerning the building even though Marks claimed he wasn't presently interested in selling. Mimms ordered Steinberg to do a title search so that they could be sure they were negotiating with the actual owners. And, following the initial conversation with Marks, Steinberg sent him a letter which stated:

"Dear Ken:

You may recall about two weeks ago we discussed the possible availability for the purchase of the above project, and you said you were in the process of preparing figures and would be pleased to send a copy to us.

Our client remains very much interested and we shall look forward to hearing from you."

In addition to his efforts to investigate potential conversion projects, Mimms acted to secure financing for such developments. Plus, the evidence shows that the acquisition division prepared detailed reports and proposals for conversion projects. Mimms initially claimed he did not have the missing files of Mimco's acquisition division, but at trial, when attempting to impeach the testimony of Hyman Spector, a real estate investor who testified that Mimms asked him to provide financing for a conversion project, Mimms produced a Mimco proposal for the conversion of an apartment building owned by Spector. This proposal was prepared by the acquisition division in October of 1976, and includes detailed analyses of the housing and mortgage markets, a sales pitch, and a proposed agreement for Mimco to purchase and convert the property.

Graham and Rodgers gave the following testimony:

Mimms began calling Graham at home in early November of 1976 to discuss restructuring Mimco. According to Graham, Mimms told him that Rodgers should not share in the profits from conversion projects because the brokerage division would never be a big profit maker. Mimms also said he was working on the acquisition of several rental buildings for Mimco — including the 100 E. Walton building — but that he did not want to purchase these buildings on behalf of Mimco until the corporation was restructured.

On November 24, 1976, Mimms visited Graham at home and again reported that he was ready to purchase several buildings for Mimco, but that he would not proceed with these projects until Graham agreed to a reorganization. Mimms showed Graham a reorganization proposal which almost completely eliminated Rodgers from receiving any of the profits generated by the conversion projects Mimms had been pursuing on behalf of Mimco, and he insisted that Graham sign it immediately.

Graham refused to sign the proposal without discussing it with Rodgers first, so Graham called Rodgers and informed him of the meeting with Mimms. Rodgers went to Graham's home, and Mimms again announced that he wanted his proposal executed immediately. Rodgers read the proposal and refused to sign it. Then, according to Graham, when Rodgers rejected the proposal, "Mr. Mimms told Mr. Rodgers that you either sign it or I am going to fire you and pay you off the bottom line and there is not going to be a bottom line."

According to Rodgers, Mimms also threatened that if they refused to sign the reorganization proposal, he would "clean the company of its assets and walk away from its remains."

Graham and Rodgers refused to capitulate, and later, using a different tact, Mimms tried to convince Graham that they should buy out Rodgers instead of just squeezing him out of the business. *fn2 So, on December 4, Mimms and Graham agreed to offer to purchase Rodger's interest in Mimco for $70,000. They also decided that if Rodgers refused the offer, they would dissolve Mimco and form a new corporation to take advantage of the business opportunities which had been developed by Mimms as head of the acquisition division.

Rodgers was not supposed to find out about the buy-out proposal until a written version of the agreement between Mimms and Graham was executed on December 6. However, on December 5, Graham informed Rodgers of the latest proposal, and Rodgers asked Graham to consult with an independent attorney first. Then, on December 6, after conferring with counsel, Graham told Mimms he wouldn't go along with the new agreement because he believed it would violate Rodgers' rights. Mimms responded by calling Graham "a vacillating son of a bitch," and, as president and sole director of Mimco, fired Graham on the spot.

The record also contains the following evidence:

Mimms directed Steinberg to set up a corporation named Wyclif & Co. And, even though Mimms admittedly stopped doing any work for Mimco, he paid himself $12,000 out of Mimco's funds. According to Mimms, this was an "advance against expenses."

Mimms did not name anyone to replace Graham as head of the project division, but Rodgers was able to keep things going until someone who identified himself as the president of Mimco ordered the phone company to turn off the phones at the Mimco offices.

Once the phone service was shut off, the sales personnel stopped coming to work. And, again using his authority as president and sole director, Mimms fired Rodgers and ordered him to stop visiting the Mimco offices. Mimms then resigned from his corporate positions and, as controlling shareholder, installed his sister and brother-in-law, Sarah and Thomas Fuller, as Mimco officers and directors.

Mimco's office lease was terminated for nonpayment of rent, even though there had been enough money in the corporate accounts to pay Mimms his $12,000 "advance against expenses." Mimms immediately negotiated a lease for the same premises on behalf of his new corporation, Wyclif & Co., and, negotiating with his sister and brother-in-law, he purchased all the Mimco office furniture and supplies — property that was already in place in the new Wyclif & Co. offices.

On March 17, 1977, Mimms started his first condominium conversion project by purchasing a building at 636 Buckingham in Chicago for $175,000. Mimms admitted that he had been aware of this business opportunity when he was working as head of the Mimco acquisition division, but he claimed that it was not until after he had formed his own corporation that he concluded that this building was "marketable."

This initial project was financed by a mortgage and a promissory note, and Mimms did not have to pay any earnest money. At trial, Mimms explained that he was able to afford increasingly expensive buildings because he started small and poured all his profits into the next project. Accordingly, several months after purchasing his first building, Mimms purchased a rental building at 1340 Touhy Avenue in Chicago for $560,000 and converted it into condominiums. Then, in August of 1977, Mimms and a group of partners obtained bank financing which permitted them to purchase the building at 100 E. Walton for $10,500,000 and convert it into condominiums. And less than a month later, Mimms started another conversion project by using his collateral in the Walton project to purchase a building at 1040 Erie in Oak Park for $1,530,000.

Graham and Rodgers demanded that the Fullers, as Mimco officers and directors, take action against Mimms for usurping corporate opportunities and for other breaches of fiduciary duty. Furthermore, when Graham received his real estate broker's license, Graham and Rodgers demanded that Mimco issue the additional shares of stock to which they had become entitled under the preorganization subscription agreement.

The Fullers failed to act on either request, and Graham and Rodgers, acting individually and on behalf of Mimco, filed this action against Mimms, Wyclif, and the Fullers. (Although Mimco is aligned as a plaintiff, we shall use the term "plaintiffs" to refer solely to Graham and Rodgers.)

Following a bench trial, the court found that Mimms usurped six corporate opportunities, including the four conversion projects listed above. *fn3 Therefore, the court imposed a constructive trust in favor of Mimco on the profits which Mimms generated from the usurped opportunities. The court used the profit apportionment formula under which plaintiffs were entitled to 60% of Mimco's profits, and ordered Mimms to pay $810,950 to Graham and $579,257 to Rodgers as restitution. However, because the financial data concerning the profits from the usurped opportunities only went up to September 1, 1978, and the judgment was entered in November of 1980, the court also ordered an accounting of the profits generated from the usurped opportunities after September 1, 1978.

The judgment further held the Fullers jointly and severally liable for the amounts awarded as restitution, on the grounds that they breached the fiduciary duties they owed to Mimco and ...

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