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Pros v. Mid-america Computer Corp.

OPINION FILED APRIL 3, 1986.

ANTON PROS ET AL., PLAINTIFFS AND COUNTERDEFENDANTS-APPELLANTS AND CROSS-APPELLEES,

v.

MID-AMERICA COMPUTER CORPORATION, ET AL., DEFENDANTS AND COUNTERPLAINTIFFS-APPELLEES AND CROSS-APPELLANTS.



Appeal from the Circuit Court of Du Page County; the Hon. John J. Nelligan, Judge, presiding.

PRESIDING JUSTICE NASH DELIVERED THE OPINION OF THE COURT:

Anton Pros and Perry Callas, plaintiffs-counterdefendants, appeal from judgments entered against them in the circuit court of Du Page County in favor of defendants-counterplaintiffs, Flick-Reedy Corporation (Flick-Reedy) and its subsidiaries Mid-America Computer Corporation, a Delaware corporation (Mid-America), and Miller Fluid Power Corporation (Miller Fluid). Counterplaintiffs were awarded $270,000 in compensatory damages and $850,000 as punitive damages against Pros and Callas which were alleged to have resulted from the loss of computer services occasioned by a walkout or mass resignation of key employees of Mid-America. The walkout was alleged to have been fostered by Pros and Callas in breach of their fiduciary duties as president and vice-president, respectively, of Mid-America. In addition, both men were found liable for $85,000 under an indemnity agreement between the parties relating to a customer claim. Directed verdicts in favor of counterplaintiffs were also entered against Pros on certain outstanding promissory notes to Flick-Reedy totaling $180,917.24, and against Callas for one note for $152,479.45. Pros and Callas appealed separately from the judgments against them.

The corporations cross-appeal from judgments entered in favor of Pros for $457,061 and in favor of Callas for $520,000 premised upon promissory notes given to them by Flick-Reedy for the 1978 purchase of the assets of Mid-America Computer Corporation, an Illinois corporation, by Flick-Reedy and also appeal from judgments in favor of Pros and Callas on counts of their counterclaim in which damages were sought for breach of fiduciary duties and alleged duress relating to the 1978 sale.

We have consolidated the appeals and cross-appeals for purposes of this opinion.

In their appeals, Pros and Callas raise issues relating to their fiduciary duty and the instructions to the jury. Alternatively, if liability is found to exist, Pros and Callas contend punitive damages were unfounded and excessive. They also each raise numerous claims of trial error and contend that verdicts were improperly directed against them on certain counts of the countercomplaint and that the $85,000 indemnity award to counterplaintiffs should be reversed for lack of notice, waiver and evidentiary support.

The record discloses that in 1967 Anton Pros, a data processor; Perry Callas, an attorney then employed as a trust officer for a bank; and James O'Toole formed Mid-America Computer Corporation, an Illinois corporation, each investing approximately $25,000 in the enterprise. The purpose of the corporation was to process data for other companies, and in 1969 it acquired a nonexclusive right to use of a manufacturing control computer software system called MACE. In 1970, Mid-America (Ill.) entered into an agreement with Frank Flick, who was the founder, president and board chairman of Flick-Reedy Corporation, to install the MACE system and assume control of computer operations at Miller Fluid Power Corporation. Flick-Reedy was essentially a holding company located in Bensenville with several operating subsidiaries, the principal one being Miller Fluid, which was also located at Bensenville and manufactured hydraulic cylinders; it was Flick-Reedy's primary source of profit.

Mid-America leased a computer and moved into the Miller Fluid plant, employing some of Miller's former computer employees. By the mid 1970's, Miller Fluid was substantially computerized and Mid-America was operating its production scheduling, inventory controls, payroll, material acquisition and billing. In 1978 Flick-Reedy purchased Mid-America from Pros, Callas and O'Toole for approximately $1.6 million and the assumption of liabilities of Mid-America; part of the consideration included a loan by Flick-Reedy to Callas for $125,000. Pros, Callas and James O'Toole, as one-third owners of Mid-America, each received installment notes of $425,490 and $54,000 in cash for their respective interests in the company, and it was then liquidated for tax purposes and Mid-America Computer Corporation, a Delaware corporation, was formed.

Pros became president and a board member of the new Mid-America and Callas vice-president of administration. The company commenced an expansion program to develop computer hardware and software for use by Flick-Reedy and other companies, including Simpson Electric, Tokheim, Imperial Oil and for Texas Instruments minicomputers. A new shop floor control data processing plan was set up for Miller Fluid. The parent company, Flick-Reedy, and Miller Fluid developed cash flow difficulties caused, in part, by the substantial costs of funding Mid-America operations.

In October 1980, dissident directors of Flick-Reedy sought to assume control of that company from Frank Flick and remove him from office. The group included Flick's son-in-law and others who had acquired Flick-Reedy stock from certain of Flick's children without his knowledge, and on October 9 the Flick-Reedy board of directors voted to remove Flick as president. On October 12, Pros and Callas held a meeting with Mid-America computer employees and requested they sign letters saying they would resign if Flick were not reinstated; several did so. On October 13 a meeting was held attended by employees of Miller Fluid, Flick-Reedy and Mid-America with Flick, Pros and Callas. Flick requested the employees support him by signing letters of resignation if he did not remain president; several did so and gave them to Pros. On that day, Pros received $15,666.64 and Callas $4,166.66, described as vacation pay, and other sums of money from Mid-America. On October 24, Pros and Callas each took checks from Mid-America for $10,000, designated for travel advancement purposes, and used the funds for employment of attorneys. Evidence was presented that Pros advised Mid-America employees of a meeting to be held October 25, and 30 of them attended in the company cafeteria, together with Pros and Callas. Pros advised the employees that Flick was losing his effort to regain control of Flick-Reedy and, in negotiating with the board of directors, the computer unit could control the functions of the company and they could force the board to negotiate with Pros whatever terms were necessary. Pros told the employees that Mid-America produced the daily sales reports of Miller Fluid, which were required by Flick-Reedy's lenders for continued financing, and the computer unit could close Miller Fluid if it did not have the reports. There was testimony that Pros also stated at the meeting that if the negotiations with the board broke down and the employees saw Pros and Callas leave their offices, the employees should also walk out as they should stick together.

On October 26, Pros and Callas held another meeting with employees in the plant cafeteria when they announced they would resign if Flick was removed and they should stand behind him. Lawyers employed by Pros and Callas also spoke, advising the employees they should make up their own minds whether to tender resignations. On October 27, Pros discussed with certain employees the departure of all systems personnel from Mid-America. On October 28, Pros and Callas formed a partnership, designated as Pros and Associates, to engage in computer services with offices in Naperville. On that day also the board removed Flick as president of Flick-Reedy.

On October 30, Pros and Callas met with employees of Mid-America in the computer offices. They prepared letters of resignation which they delivered and then left the building; employees of the computer department followed them out and met with Pros and Callas in a nearby restaurant. By the end of that day most employees of that department had left and the computers were unattended.

Officers of Flick-Reedy met with Pros and Callas on the evening of October 30 seeking to find a way to resume computer operations. Pros and Callas made an offer to purchase Mid-America (Del.) in exchange for cancellation of the notes they had received when they sold the original company to Flick-Reedy in 1978; the note balances then totaled approximately $560,000. Pros and Callas wanted Flick-Reedy to also pay Mid-America $200,000 per month for computer services plus a subsidy of $150,000 each month for a year. There was testimony Pros and Callas stated that unless their offer was accepted that night, Miller Fluid would get no further computer services from Mid-America and they would shut it down. The offer was rejected by Flick-Reedy representatives.

After the walkout of most of the personnel of the computer department, Pros and Callas continued to meet with them and with officers of Flick-Reedy. The remaining Mid-America employees sought to get the computers into operation, but with limited success. Essential records relating to computer operations were missing, including logs, job schedules, operator's notes, rerun procedures and program documentation and could not be located. On November 2, Pros and Callas met in the offices of Pros and Associates with 30 or 35 Mid-America employees, both persons who remained on the job and those who had walked out, and discussed the situation. Pros stated he wanted the experienced employees to remain away from the computers and that everyone would eventually be able to return to the company. An employee who inquired whether he should return to work was advised by Pros that if he did the employee would not work for Pros when he got back in there.

On November 7, Pros and Callas submitted another offer to purchase Mid-America to the officers of Flick-Reedy. It provided that Pros and Callas would assume ownership of the company which would provide computer services to Flick-Reedy for $135,000 per month and for Flick-Reedy to assume sole responsibility for certain Mid-America debts. The Flick-Reedy board also rejected this offer.

The remaining employees of the computer department, together with new persons who were brought in, worked to restore operations. Although not shut down, Miller Fluid's operations were adversely affected and it took three to four months for it to resume normal business. The ongoing projects worked upon by Mid-America were halted. In January 1981, Templeton, Kenly & Co. purchased a majority of the Flick-Reedy stock for $4,800,000, and it determined, in part by reason of the walkout, that Mid-America had no future as a computer software company; most of its contracts with outside customers were in default and it was losing $100,000 per month. Outside consultants were employed to minimize the losses and by February 1981, some recovery had taken place. Pros sought to persuade the new owners of Flick-Reedy to take back the employees who had walked out as vital to operation of Mid-America, stating the walkout had been a mistake damaging to the companies; the owners declined to do so.

When Flick-Reedy subsequently refused to honor the promissory notes given Pros and Callas in 1978 to purchase the assets of Mid-America, this action was commenced by them to recover on the notes and the counterclaim was filed.

CALLAS' APPEAL

We consider first whether the trial court erred in its instruction to the jury as to the issues of the case under count IV of the counterclaim, requiring reversal and a new trial.

Counterplaintiffs' instruction No. 15, given to the jury over objection, stated, inter alia:

"Turning now to Count IV of the claims by Flick-Reedy Corporation and Mid-America Computer Corporation, the issues to be decided by you are as follows:

a. Mid-America Computer Corporation and Flick-Reedy Corporation claim that Pros and Callas breached their fiduciary duties owed as officers of Mid-America Computer Corporation by misappropriating corporate funds for personal use, by engaging in mismanagement, or by encouraging or failing to discourage a walkout of Mid-America Computer Corporation employees on October 30, 1980 that could have shutdown operations at Mid-America Computer Corporation or Miller Fluid Power Corporation; and

b. Mid-America Computer Corporation and Flick-Reedy Corporation further claim that these actions proximately caused injury to Mid-America Computer Corporation, Flick-Reedy ...


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