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Behrstock v. Ace Hose & Rubber Co.





Appeal from the Circuit Court of Cook County; the Hon. Harold A. Siegan, Judge, presiding.


Plaintiff Alfred Behrstock (hereinafter Alfred), a 50% owner, officer, and one of two directors of five closely held corporations, brought this suit to set aside a written employment contract executed on behalf of all five companies by plaintiff's brother, Eugene Behrstock (hereinafter Eugene), in favor of Eugene's son, Bruce Behrstock (hereinafter Bruce), and for accounting and other relief. After a trial, the trial court denied the relief sought in plaintiff's complaint and held that the written contract was valid and enforceable as against the five corporations.

Plaintiff appeals, contending that: (1) the employment agreement is an extraordinary contract and beyond the authority of Eugene to execute on behalf of the corporations, absent approval of the board of directors; (2) the trial court erred in finding that the employment contract was ratified by Alfred; and (3) the trial court erred in finding that Eugene exercised "complete control" over the "Ace Companies."

The evidence presented as to the following preliminary matters is largely undisputed. Plaintiff Alfred and defendant Eugene are brothers. Each controls 50% of the stock of five closely held corporations. Those companies, Ace Hose & Rubber Company, Ace Lite-Step Company and Ace Stretch Hose Company (hereinafter the Ace Companies), L. Behrstock & Company, and 1708 South State Street Building Corporation (hereinafter Building Corp.), are also defendants. The companies sell industrial rubber products and pressing equipment, except the Building Corp., which owns the property and buildings in which the others operate. Defendant Bruce is Eugene's son and Alfred's nephew.

The companies were originally founded in 1943. They were incorporated in 1956 or 1957. Alfred is the president of the Building Corp. and L. Behrstock & Company. He is also secretary-treasurer of each of the three Ace Companies. Eugene is the president of the Ace Companies and secretary of the other two companies. During all relevant times, Alfred owned 50% of the stock of each company. Eugene owned the other 50% until 1972, when he began transferring stock to his son Bruce. Alfred and Eugene are the only two directors of each of the five companies and Bruce is neither a director nor an officer of any of them.

In 1970, Eugene employed his son Bruce as a comptroller and by 1973, Bruce had become assistant to the president, and general manager of the Ace Companies. In 1975, Eugene retired from the companies but continued to consult with Bruce, who by that time had taken over Eugene's managerial duties. As salary, Bruce was paid approximately $700 per week during the period preceding 1978; however, no written employment contract had been entered into between the parties.

At a time during 1978, Eugene and Bruce suggested to Alfred that a written contract be entered into concerning Bruce's employment with the companies. By this time Bruce was managing all five companies. In June 1978 Alfred refused, telling Bruce, "It's entirely out of the question." Despite this refusal, Bruce negotiated terms with Eugene resulting in the employment agreement which is the subject of this suit.

During a meeting of the board of directors in September or October, 1978, Eugene brought up the topic of a written employment contract for Bruce, and Alfred again refused. Alfred's position was that Bruce would continue to receive a share of the profits, but that no written contract was necessary. It was known by Bruce, at the time of the meeting, that Alfred would not approve a written contract. The meeting erupted into an argument and Alfred left the room.

On December 16, 1978, Alfred received a letter from Bruce and a copy of the written employment agreement entered into between Bruce and the five companies. This was the first time that Alfred was aware of the contract. The agreement was signed on behalf of the companies by Eugene as "President" of the Ace Companies and as "Vice-president" of L. Behrstock & Company and the Building Corp. Defendants have admitted that Eugene is not a "Vice-president" of either of these two companies, although he was secretary. It is undisputed that Alfred did not sign the employment agreement nor did he authorize Eugene to enter into the contract on behalf of the companies.

Under the agreement, Bruce was employed as general manager of the five companies for a term of five years. The contract terms provided, inter alia, for (1) a retroactive salary increase from $36,000 to $52,000 per year; (2) a bonus of 3% based upon gross sales up to $2,000,000 and 4% if the sales exceeded this amount; (3) an additional bonus of 20% of the adjusted net profits of all five companies; and (4) if the companies were sold under certain conditions, Bruce was to receive 20% of "the gross sale proceeds over and above any amount by virtue of his stock ownership."

On January 5, 1979, Alfred sent a registered letter to Eugene expressing his disapproval. In the letter Alfred stated that the agreement was not presented to, or approved by, the board of directors; that he would not consent to the agreement; and that he considered the agreement illegal and void. Alfred thereafter initiated this action on February 16, 1979.

Defendants presented the following evidence to establish Eugene's authority to bind the companies to the employment agreement sued on: Eugene testified that from their inception, the Ace Companies were managed entirely by him. He testified that pursuant to an oral agreement in 1956 or 1957, entered into between Alfred and himself, it was agreed that he would have "100 percent of the say of running the * * * rubber business * * * lock stock and barrel." Alfred, in turn, would have "all the say of running L. Behrstock & Co. We shook hands. We had a deal." Under this arrangement, Eugene was to receive "20 percent of the profit of the Ace Companies off the top."

Thereafter, until his retirement in 1975, Eugene managed the Ace Companies. Alfred managed L. Behrstock & Company. Eugene testified that "for the Ace Companies, every facet of the business, I made the decisions, sources of supply, who was hired, who was fired, everything." He also set company policies, supervised the employees, negotiated with the unions, and he executed all contracts, including all employment contracts. He testified that he had, over the years, hired all the employees of the Ace Companies; that some of the key employees had been given percentages of the profits of the companies; that no employment contract was ever submitted for approval by the board of directors; and that the only employment contract to be challenged was the contract sued upon.

Eugene testified that annual board meetings were held in October for the voting of bonuses, at which he, Alfred and the company accountant were present. At these meetings the accountant would recommend to him bonus figures. He then would customarily take his 20% off the top and the remainder was split between the two brothers. He admitted that the amount of bonuses was agreed to jointly saying, "if there were further bonuses to be paid, it was decided between Alfred Behrstock and myself." At these ...

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