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Sinnissippi Apartments, Inc. v. Hubbard

OPINION FILED APRIL 20, 1983.

SINNISSIPPI APARTMENTS, INC., PLAINTIFF-APPELLANT,

v.

WILLIS HUBBARD, DEFENDANT-APPELLEE.



Appeal from the Circuit Court of Winnebago County; the Hon. Richard W. Vidal, Judge, presiding.

JUSTICE UNVERZAGT DELIVERED THE OPINION OF THE COURT:

The plaintiff, Sinnissippi Apartments, Inc., appeals from an order of the circuit court of Winnebago County which entered a judgment against it and in favor of the defendant, Willis Hubbard, on plaintiff's small claims complaint. Plaintiff, a corporation organized to operate a cooperative apartment complex, had filed a complaint requesting recovery of $2,500 due to defendant's alleged failure to pay maintenance charges, interest, accounting and litigation expenses relating to the unit in plaintiff's complex of which the defendant is a shareholder-tenant.

On appeal, the plaintiff contends that the judgment of the trial court was contrary to the manifest weight of the evidence.

Prior to trial, the parties entered into a stipulation of many of the key facts surrounding their dispute. It was stipulated that plaintiff is a corporation organized under Illinois law and is in the business of operating a cooperative apartment. The defendant is a tenant in the apartment complex and executed a lease agreement with the plaintiff. The plaintiff's tenants are assessed maintenance charges for the use of each apartment, and those charges are determined pursuant to the term and conditions of the lease agreement. Moreover, as a prerequisite for the occupancy of a residential unit in plaintiff's complex, the defendant was required to become a shareholder in plaintiff's corporation. During the defendant's tenancy, he constructed at his own expense (a cost of $32,437) an elevator for the sole and exclusive use of his apartment. As a result of the defendant's having made that construction, plaintiff's board of directors on June 24, 1981, issued the defendant an additional 175 shares of stock in the plaintiff corporation. This issuance of additional shares was authorized by pertinent provisions of the Business Corporation Act (Ill. Rev. Stat. 1981, ch. 32, par. 157.1 et seq.), the articles of incorporation and bylaws of plaintiff corporation and the lease agreement between the parties, subject to the requirement that such issuance be reasonable. No other additional shares had been issued to defendant by plaintiff since January 1978.

The trial court also heard the testimony of several witnesses concerning the controversy between the parties. Thelma Frary, plaintiff's secretary-treasurer, testified that the issuance of the 175 shares of stock to defendant had increased his shareholdings from 440 shares to 615 shares, and that each of plaintiff's shareholder-tenants was assessed a maintenance fee according to the number of shares which the tenant owned. The current assessment was 78 cents per share per month. Susan Kaltenbach, an employee of plaintiff's accounting firm, testified that defendant was $1,505.40 in arrears on payments of assessed maintenance fees, which arrearage resulted primarily from defendant's nonpayment of that portion of the monthly fee attributable to the extra 175 shares.

The trial court also heard the testimony of Harold Omark, an appraiser in the assessor's office, who testified on defendant's behalf. Mr. Omark had assessed the Sinnissippi Apartments in conjunction with the 1979 quadrennial reassessment and had increased the assessment of the complex by 10%. He had not considered the elevator previously constructed by defendant at all in computing his reassessment. Norris K. Levis, a real estate broker, estimated that only $5,000 of the $144,000 fair market value of defendant's building could be attributed to the installation of the elevator, and that this was a type of improvement for which the cost of construction did not result in an equivalent increase in market value.

The defendant testified that construction began on the elevator in 1978 and was finished in 1979, and that he had subsequently paid for all of its maintenance and operating expenses. He had written plaintiff's board of directors on January 9, 1981, offering to accept 50 shares of stock due to the elevator's construction. Defendant felt he should be issued some additional stock because of the elevator, but regarded 175 shares as an excessive number. On cross-examination, defendant acknowledged that after he had added a room to his apartment in 1965, he had accepted an issue of 20 additional shares. He maintained, however, that he had calculated at the time that his improvement had in fact caused an increase in plaintiff's taxes, which the resultant increase in his maintenance fee would fairly offset. He further acknowledged knowing prior to installing the elevator that he was going to have to take additional shares. However, he viewed the decision of plaintiff's board as to the number of shares to be issued to him as arbitrary.

Mrs. Frary, recalled as a witness for the defense, said that her feeling was that the increase in the quadrennial reassessment of plaintiff's property did not in any way contribute to the decision to increase the number of defendant's shares.

Owen Harding, president of plaintiff's board, testified in rebuttal that the decision to increase defendant's shareholding was considered at approximately 10 directors' meetings and was taken only after the board consulted both its accountant and its legal advisor. He denied that the board's decision had been motivated by malice or bad faith.

John Conrad, one of plaintiff's shareholders, explained that he had developed a formula for determining the value of each share of plaintiff's stock, which valuation was a factor of 29 areas of concern. Application of this formula resulted in a determination that plaintiff's stock should be valued at $183 per share. Use of this figure resulted in plaintiff's decision that defendant's expenditure of approximately $32,500 for the construction of the elevator should result in the issuance to defendant of an additional 175 shares. The predominant factor in his formula for evaluating plaintiff's shares was their fair market value, but Mr. Conrad did not know whether installation of the elevator had in fact caused a $32,500 increase in the fair market value of defendant's apartment.

In a letter of opinion, the trial court rejected the notion that the valuation placed on the stock by the directors was conclusive if made in good faith and not as the result of fraud. The court noted that some assessment might well be justified, but denied "the plaintiff's claim for 175 additional shares and [left] it to the parties to determine a reasonable assessment."

The court subsequently signed a written order in which it concluded that article II, section 1 of defendant's lease agreement with the plaintiff, which provides for plaintiff to levy an assessment for the necessary expenses, upkeep, maintenance and operation costs, afforded plaintiff the authority to issue additional shares to defendant. Moreover, special assessments would be enforced if reasonable and based upon unambiguous lease terms which were consistently enforced and applied. However, the court held that plaintiff had not introduced sufficient evidence to establish that the issuance to defendant of 175 additional shares was directly related to the necessary expenses, upkeep, maintenance and operation of the apartment complex. The court further held that issuance of the shares was unrelated to these items. Accordingly, the trial court found that issuance of the additional shares was unreasonable and unauthorized under the circumstances of the case. The court therefore issued judgment in favor of the defendant.

Plaintiff, contending that the judgment of the trial court is against the manifest weight of the evidence, urges that this case is one presenting the question of whether, in the absence of fraud, it is a matter for a corporation's board of directors to determine the value of its shares. In reliance upon both statutory and case authority (Ill. Rev. Stat. 1981, ch. 32, pars. 157.17, 157.18; Elward v. Peabody Coal Co. (1956), 9 Ill. App.2d 234), plaintiff answers this question in the affirmative. Further, assuming that the number of shares issued by the directors in exchange for defendant's contribution to plaintiff of a capital asset must be shown to be reasonable, plaintiff asserts that its use of the amount paid for the elevator as a basis for calculating that number must be considered reasonable under the circumstances. Finally, plaintiff attacks as illogical the statement in the trial court's letter of opinion (not repeated in the judgment order) that, while the plaintiff might well be entitled to an additional assessment to be determined by the parties, judgment was to be entered against plaintiff as to the entirety of its claim.

In response, defendant maintains that the issuance of additional shares here at issue amounts to an attempt by plaintiff's board of directors to make a unilateral amendment of article II, paragraph 1 of the parties' "Shareholder's Proprietary Lease." That paragraph concerns the computation of each tenant's assessment for the complex' maintenance charges and provides that the total assessment voted by the board of directors be prorated among the tenants according to the number of shares in the corporation held by each. Defendant takes the view that the directors' decision to increase his shareholdings over his protest was an invalid attempt to ...


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