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12/21/89 Patrick J. Forkin, Indiv. v. Kenneth G. Cole

December 21, 1989







548 N.E.2d 795, 192 Ill. App. 3d 409, 139 Ill. Dec. 410 1989.IL.2009

Appeal from the Circuit Court of Sangamon County; the Hon. John W. Russell, Judge, presiding.


JUSTICE SPITZ delivered the opinion of the court. STEIGMANN and McCULLOUGH, JJ., concur.


This appeal concerns a shareholder's derivative action involving the misappropriation of corporate funds and other improper actions by directors. Defendants Kenneth G. Cole, Sr. (Cole Sr.), Kenneth G. Cole, Jr. (Cole Jr.), Gregory T. Rossi, and Harrison Park Development, Inc. , appeal from a judgment order of the circuit court of Sangamon County entered on July 20, 1988, in favor of plaintiffs Patrick Forkin individually and on behalf of HPDI.

Prior to June 23, 1986, Cole Sr. had been engaged in real estate development, real estate sales and brokerage, natural gas sales and brokerage and related businesses through corporations owned and controlled by him. He has also been a real estate broker for some 35 years. Cole Sr. operates a sole proprietorship named Cole Development Company, which handles the real estate business. Cole Energy Development Company, Inc., handles the natural gas business, and Cole Sr. is the sole shareholder. He also owns 25% of Professional Development Corporation, which invests and holds real estate. Employed by Cole Development Company and Cole Energy Development Company were his son, Cole Jr., and his son-in-law Gregory T. Rossi (Rossi). Clifford Cole (Cole Sr.'s nephew) was employed by Cole Energy.

Plaintiff Forkin is a graduate of St. Louis University and is a certified public accountant . He was also an employee of Price, Waterhouse from 1952 to 1963. He then became vice-president of Mississippi River Corporation. For six months in 1971, he was vice-president of corporate development for Diversey Corporation, where he worked on mergers, acquisitions, and corporation management. He then became vice-president of finance of the Amedco Corporation until May 1984. At Amedco he helped bring the company public and assisted in mergers and acquisitions. When he left Amedco, he began his own firm dealing in general management, consulting, mergers, acquisitions, and corporate consulting. In 1985, he moved into the building where the Cole businesses were located. Forkin served on the board of directors previously, including the board of Amedco for 12 years and the board of Mississippi River for nine years; and when this action was below, he served on the Southern Illinois University Foundation and had for the past five years.

Prior to the organization of HPDI, Cole Sr. had an option to purchase approximately 64 acres of real estate for the purpose of developing it as a subdivision. In order to obtain the $100,000 down payment to purchase the real estate, Cole Sr. borrowed funds from Magna Bank and Security Federal as collateral for which Cole Sr. pledged his shares in Professional Development Corporation. This provided the equity required by Security Federal to make the total loan commitment of over $1,200,000. About nine months prior to the formation of HPDI, around October 1985, Forkin occupied a space in an office building housing the Cole corporations. His purpose for so doing was to associate with Cole Sr. for joint business prospects. With regard to HPDI, Forkin first became involved regarding the land-purchase option. He discussed with Cole Sr. the feasibility of a project, the timing and the market place, among other factors. Forkin drafted the option for the acquisition of the property. Shortly after the option was entered into, HPDI was formed on June 23, 1986, and Forkin prepared the documents necessary for the incorporation. The real estate was subsequently deeded to HPDI. Before the corporation took title, work had begun on clearing the land.

One hundred shares of stock in HPDI were to be issued as shown on the articles of incorporation. Cole Sr., as well as Cole Jr., Rossi, Forkin, and Clifford Cole, were named as directors in the initial minutes. These minutes did not show the actual issuance of any stock. At the initial meeting of the directors on June 23, 1986, Cole Sr. was elected president; Forkin was elected executive vice-president and secretary-treasurer; Cole Jr. was elected vice-president; and Rossi was elected assistant secretary. According to Forkin, Cole Sr. told him who the officers and directors would be and Forkin prepared the documents accordingly. Forkin's duties included overseeing all of the financial activities of HPDI, including the reconciliation of bank accounts.

The bylaws which were adopted provide in section 6.5 that no contract or transaction between the corporation and one or more of its directors or officers shall be void or voidable solely for that reason or solely because the director or officer is present or participates in the meeting of the board of directors, if (1) the material facts as to the relationship or interest and as to the control or transaction are disclosed to or known by the board and the board in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (2) if the material facts as to this relationship or interest and as to the contract or transaction are disclosed or known to the stockholders entitled to vote thereon and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (3) the contract or transaction is fair as to the corporation at the time it is authorized, approved or ratified, by the board or a committee thereof or the stockholders. It is also provided that interested directors may be counted in determining the presence of a quorum at a meeting of the board authorizing the contract or transaction. The HPDI corporate offices are shown to be located at the same address as the Cole businesses.

Forkin prepared and signed a subchapter "S" election (see 26 U.S.C.A. 1361 (West 1982)) for HPDI dated July 1, 1986. This subchapter "S" form shows ownership of Forkin in the amount of 12.50 shares; and stock issued to Clifford Cole (5 shares); Cole Sr. (40.75 shares); Cole Sr., as trustee for Janet Grimm (13.95 shares); Cole Jr. (13.95 shares); and Gregory and Wynn-Anne Rossi (13.85 shares).

Cole Sr. testified the decision as to share distribution was not made until December 1986, or early January 1987. The stock certificates were not actually issued until January 14, 1987. Cole Sr. paid $40.75 for his 40.75 shares. Cole Jr. stated he bought 12 1/2 shares in December 1986 and an additional 1.45 shares in January. Clifford Cole also paid for his shares in December 1986, and received the certificate in January 1987. On the subchapter S election form dated July 1, 1986, each of the corporate shareholders signed a consent to the election, and the form indicates the shares were acquired on June 27, 1986. Clifford Cole testified he did not receive his certificate for another six or seven months.

Forkin introduced a photocopy of a stock certificate dated June 27, 1986, issued to himself for 12.5 shares, which certificate is numbered No. 1 and signed by Forkin and Cole Sr. Forkin maintained the books, records, and minutes. It was Forkin's understanding, by reason of a memorandum signed by him on August 6, 1988, that he would be receiving a 12 1/2% interest. However, the memorandum also shows that there would be 1,000 shares issued and that he would be issued 125 shares for payment of $125. The tax documents and the checks produced show that only 100 shares of stock were issued for $1 per share. The only checks produced for the issuance of the stock were those by Cole Jr. and Rossi, both of whom produced checks dated December 2, 1986, for $12.50 for a 12 1/2% interest in HPDI.

On July 7, 1986, Forkin and Cole Sr. signed an application for a loan of $1,255,000 to HPDI for the development of the land. In this document it was stated Cole Sr. is the "100%" owner and Forkin, Cole Jr., and Rossi are "0%" owners. The original corporate record book was introduced into evidence containing the corporate records relating to issuance of stock, and defendants' attorney was given leave to withdraw the original upon assurance that copies would be resubmitted. The record on appeal does not contain a copy of the corporate records, although the record does contain defendants' exhibits Nos. 7 and 8, the minutes of the board meeting of January 30, 1987.

The verified complaint in this case outlined the issuance of capital stock held by the various stockholders "since the inception of the corporation in 1986" and set forth the various percentages owned by each of the parties, including 12.5% by Forkin. In response to the verified complaint, defendants filed a verified answer admitting the allegation in paragraph 12 of the complaint. The answer was verified by Cole Sr., Cole Jr., Rossi, and Janet Brewer.

On July 31, 1986, Cole Sr. submitted a personal financial statement to the First National Bank of Springfield and did so again on November 30, 1986. Both showed as one of the assets the Harrison Park real estate, along with various other assets. On October 15, 1986, Cole Sr. and his wife Kathleen entered into a mortgage with the First National Bank. Among the real estate made subject to the mortgage was the Harrison Park property. According to Wayne Liken, vice-president of First National Bank in the business lending department, every time HPDI sold a lot, the bank gave a release for that lot. HPDI did not pay for the releases, but the bank did not pay for the recording of the releases. The mortgage was fully released as to Harrison Park on May 1, 1987. Cole Sr. was unsure whether HPDI or Cole Energy paid to have the releases recorded when each lot was sold.

During August through December 1986, land was being developed and subdivided, streets were being put in, sewers were being laid, and the lots were being prepared for sale. Commencing in January 1987, the lots began to be sold by Cole Development, by Cole Jr. and Rossi, as shown by plaintiffs' exhibit No. 29, which itemizes the payment of commissions to Cole Development commencing on February 4, 1987. That exhibit lists approximately 117 commission checks being paid to Cole Development from February 4, 1987, through April 31, 1988. The amounts on the checks ranged from $1,000 to more than $5,000.

At the January 30, 1987, regular board meeting, the directors discussed the corporate objectives and the corporate backing and financing needs. As a result, a resolution was adopted unanimously to authorize the following persons to sign checks from the HPDI general account at Capitol Bank & Trust Company of Springfield: not to exceed $500 to any payee or $2,500 to Cole Development from any one of Cole Sr., Forkin or Rossi; not to exceed $1,000, Cole Sr. or Forkin; and in excess of $1,000, including checks drawn to the order of an individual signer, Cole Sr. and Forkin.

On April 9, 1987, check No. 387 was issued to Larry and Janet Brewer for $16,829 for their interest in lot 56. This check was signed by Forkin and Cole Sr. Janet is an employee of Cole Energy who also worked for HPDI in such jobs as typing bylaws, letters of incorporation, and landowner association paperwork, issuing checks and doing closings. Cole Sr. stated lot 56 was given to Janet "for good services from the people that work for me, including those to Mr. Forkin." She was given the lot "for ongoing work, loyalty and hard work." She had received bonuses prior to that time. Because a controversy developed, a special meeting of the board of directors was held on June 29, 1987, with all directors present. At that time "it was unanimously agreed that the net proceeds from . . . the sale of Lot 56, after payment of commissions, would be distributed to Janet Brewer for her services and obligations met regarding Harrison Park. This distribution is for services rendered on a contractual basis for a non employee." Cole Sr. and Cole Jr. signed the minutes of that meeting. Not only is the corporate minute book not part of the record on appeal, but these minutes did not appear as an entry in the corporate minute book until after the deposition of Cole Sr., on October 6, 1987.

Janet Brewer testified she is regularly employed by Cole Energy and is on its payroll. She, however, also worked for HPDI under the direction of Forkin. She did secretarial work primarily and assisted him in closing the lot sales. From mid-February through June 1, 1987, 90% of her time was devoted to HPDI. It was at that time that the majority of the lots in Phase I of the development were being sold, and there were days when they would have five or six closings per day. During February, March, April, and May she was doing this work under the direction of Forkin. The checkbook and stubs were available to Forkin through July 23, 1987. Forkin would, on occasion, pre-sign checks, but whenever he did so, they were always made payable to Security Federal. Those checks were used for closings.

Brewer testified Forkin did not pre-sign the $16,829 check. He signed the check in her office, and Cole Sr.'s signature was already on the check at that time. Forkin did not question the check at that time. Subsequently, Forkin called her on a Sunday evening at her home and asked her what the check was for. She told him it was for lot 56.

Plaintiff stated that when he signed the check it was not filled in, and when he became aware of it in May 1987, he called Brewer on it. When he asked Cole Sr. about it, Cole Sr. told Forkin he gave it to her because "she worked harder around here than anyone else." Forkin ...

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