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Treco Inc. v. Land of Lincoln Savings and Loan

*fn*: July 26, 1984.


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division -- 572 F. Supp. 1447. Nicholas J. Bua, Judge.

Author: Cummings

Before CUMMINGS, Chief Judge, BAUER, Circuit Judge, and FAIRCHILD, Senior Circuit Judge.

CUMMINGS, Chief Judge. On June 24, 1983, plaintiffs purchased approximately ten percent of the outstanding shares of Land of Lincoln Savings and Loan (Lincoln), an association chartered under Illinois law and regulated by the Federal Home Loan Bank Board and the Illinois Commissioner of Savings and Loan Associations. Six days later, on June 30, 1983, two amendments to Lincoln's bylaws became effective.*fn1 The amendment to bylaw Article XI provided that shareholders could amend Lincoln's bylaws only by "two thirds vote of the total votes eligible to be cast by the stockholders at a legal meeting called expressly for such purpose." Treco, Inc. v. Land of Lincoln Savings and Loan Ass'n., 572 F. Supp. 1455, 1458 (N.D. Ill. 1983).*fn2 Bylaw Article III was amended by adding a provision that Lincoln directors could be removed only for cause and by a vote of 75 percent of the outstanding shares at a meeting called expressly for that purpose.*fn3 The Board adopted these amendments, pursuant to advice of counsel and after evaluating alternative defensive measures, in response to a takeover and liquidation threat made by a group of West Coast shareholders of Lincoln on June 8.Lincoln was informed at the time of the threat that the group owned 41 percent of Lincoln's stock, 572 F. Supp. at 1457, Finding of Fact 7, but subsequently it appeared that the group in fact may have owned only 25 percent of the stock (Tr. 101).

In August 1983, plaintiffs filed suit against Lincoln and its directors in the United States District Court for the Northern District of Illinois, Eastern Division. In the First Amended Complaint, filed September 8, 1983, plaintiff alleged their intent to solicit proxies to convene a special meeting of shareholders, before the October 26, annual shareholders meeting, to propose and enact a cumulative voting amendment to Lincoln's bylaws. Plaintiffs also alleged violations of federal security laws and an Illinois statute. District Judge Bua granted a preliminary injunction directing Lincoln to convene this special meeting on October 12 and notify all shareholders. Treco Inc. v. Land of Lincoln Saving and Loan, 572 F. Supp. 1447 (N.D. Ill. 1983) (reproduced at Def. App. A1-A7). At the October 12 meeting, the plaintiffs' cumulative voting proposal received support of about 43 percent of the outstanding shares eligible to be voted and therefore was defeated pursuant to the June bylaws. 572 F. Supp. at 1459, Finding of Fact 20.

On October 18, 1983, plaintiffs filed the Second Amended Complaint, which realleged the federal and state statutory violations in the First Amended Complaint and raised two new pendent state claims. Count IV sought a declaratory judgment that the directors' June 22 action without shareholder approval, amending the bylaws to increase the number of votes necessary to change the bylaws, was invalid as a breach of fiduciary duty because, plaintiffs claimed, the amendment's purpose was to perpetuate director control and preclude minority representation on the Board. Count VII sought a declaratory judgment that the plaintiffs' proposed cumulative voting amendment is valid under Illinois law. Plaintiff claimed that their amendment was supported by a majority of the votes cast at the October 12 special meeting and therefore was enacted under the pre-June l22 bylaws if the June 22 amendments are invalid. Plaintiffs joined Paul A. Downing, the Illinois Commissioner for Savings and Loan Associations, as a party-defendant for this Count.

The district court advanced the trial of the two counts on its calendar in an attempt to reach a decision before the October 26 annual meeting. 572 F. Supp. at 1457 n.1. After a two-day trial on October 24 and 25, the district court found, inter alia, that

the primary purpose of the June 22, 1983 bylaw amendments to Article XI and Article III was to protect the interests of all shareholders and depositors by taking defensive action in response to a threat to remove all directors and liquidate Lincoln. At the June 22, 1983, meeting, the directors reasonably believed that the threats of the California shareholders received on June 8, 1983, continued to be serious and potentially detrimental to the best interests of Lincoln and its shareholders.

Id. at 1458, Finding of Fact 16.

Relying on Lower v. Lanark Mutual Fire Insurance Co., 114 Ill. App. 3d 462, 448 N.E.2d 940, 70 Ill. Dec. 62 (1983), and Panter v. Marshall Field Co., 646 F.2d 271 (7th Cir. 1981), certiorari denied, 454 U.S. 1092, 102 S. Ct. 658, 70 L. Ed. 2d 631, the district court concluded that plaintiffs had "not met their burden of proof [in count IV] that Lincoln directors acted carelessly in performing their duties" nor had they proven that "defendants' desire to perpetuate themselves in office was the "sole or primary purpose" of their conduct on June 22, 1983." Id. at 1460, Conclusions of Law 10, 11.*fn4 Based on these findings of fact and conclusions of law, on October 31, 1983, the district court entered final judgment for defendants and against plaintiffs on Count IV and VII. At the same time, a Fed. R. Civ. P. 54(b) certification was issued, so that we have jurisdiction to review the judgment on the two counts.

Plaintiffs filed a timely appeal from the final order, challenging the district court's determinations as to Counts IV and VII.*fn5 Subsequent to this filing the remaining Counts (I through III, V-VI, and VIII) were voluntarily dismissed without prejudice pursuant to Fed. R. Civ. P. 41(a)(1) (Pl. Br. 3 n.*), but federal pendent jurisdiction remained valid, Forest Laboratories, Inc. v. Pillsbury Co., 452 F.2d 621, 629 (7th Cir. 1971), and indeed is not challenged by the parties.

We conclude that the district court's ruling for the defendants on Count IV was correct. Consequently, we need not consider plaintiffs' Count VII claims which have become moot since they incorrectly assume that the June 22 amendments challenged in Count IV are invalid.

Although plaintiffs claim to raise several issues under Count IV, their appeal really requires only that we determine what Illinois' common law business judgment rule is and whether it applies to this case. Plaintiffs' theory is that the Illinois business judgment rule insulates a director's action from scrutiny only when the action is "solely in the interest of the corporation [because] it is a breach of duty for the directors to place themselves in a position where their personal interest would prevent them from acting for the best interests of those they represent." Shlensky v. South Parkway Building Corp., 19 Ill. 2d 268, 278, 166 N.E.2d 793, 799 (1960) (quoting Dixmoor Golf Club, Inc. v. Evans, 325 Ill. 612, 616, 156 N.E. 785, 787 (1927) (emphasis omitted). Plaintiffs contend that this statement of the business judgment rule is inconsistent with Delaware's business judgment rule, which is applied in Panter, supra, relied on by the court below. Delaware's rule insulates a director's action unless plaintiff shows that an impermissible motive, such as perpetuation of director control, was the "sole or primary purpose" for the action. Panter, 646 F.2d at 297 (citing Cheff v. Mathes, 41 Del. Ch. 494, 199 A.2d 548 (1964)). Because the district court did not expressly find that Lincoln's directors' June 22 amendment was solely in the interest of Lincoln and apparently assumed that the directors were partially motivated by self-interest, plaintiffs contend that the district court erred in concluding that thet amendment was valid.

The corporate law of the state of incorporation is controlling with respect to the fiduciary duties of its directors as well as other internal corporate affairs. See First National City Bank v. Banco Para El Comercio Exterior De Cuba, 462 U.S. 611, 103 S. Ct. 2591, 77 L. Ed. 2d 46 ; Paulman v. Kritzer, 74 Ill. App. 2d 284, 219 N.E.2d 541 (1966), affirmed, 38 Ill. 2d 101, 230 N.E.2d 262 (1967).Therefore, the actions of Lincoln's directors must be reviewed in light of Illinois' business judgment rule.*fn6 In determining what the Illinois rule is, however, this Court is not required to apply mechanically the Illinois Supreme Court's last ruling, see Warner v. Gregory, 415 F.2d 1345 (7th Cir. 1969), particularly where, as here, significant developments in the case law have since taken place. Instead, we may determine the present status of Illinois law. Id.

Under Illinois' common law business judgment rule, "corporate directors, acting without corrupt motive and in good faith, will not be held liable for honest errors or mistakes of judgment, and a complaining shareholder's judgment shall not be substituted for that of the directors." Lower v. Lanark Mutual Fire Insurance Co., 114 Ill. App. 3d 462, 448 N.E.2d 940, 944, 70 Ill. Dec. 62 (1983) (citing, inter alia, Shlensky v. Wrigley, 95 Ill. App. 2d 173, 237 N.E.2d 776 (1968) (applying Delaware law)). This statement in Lower is essentially a restatement of the common law business judgment rule generally applied in most states (see 3A W. Fletcher, Cyclopedia of the Law of Private Corporations ยง 1039 (rev. perm. ed. 1975), cited with approval in Lower, supra, 114 Ill. App. 2d at 467, 448 N.E.2d 944)). ...

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