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August 1, 1994

CSFM CORPORATION, formerly known as CHICAGO STEEL CORPORATION, a Wisconsin corporation, and FM PROPERTIES OF WISCONSIN, INC., Plaintiffs,

The opinion of the court was delivered by: REBECCA R. PALLMEYER

 Plaintiffs in this case are FM Properties of Wisconsin, Inc. and its wholly-owned subsidiary CSFM *fn2" Corporation (originally Chicago Steel Corporation). FM Properties is a wholly-owned subsidiary of First Wisconsin National Bank ("FWNB"). FM Properties created CSFM to acquire and hold the assets of a steel fabrication plant in Melrose Park, Illinois, when the former owner of the plant defaulted on a loan from PWNB.

 Defendants are Phillip 0. Elbert, William W. McKee, their partnership of Elbert & McKee Company, their colleague Raymond Jasica, and their wholly-owned corporation Chicago Steel Corporation. Plaintiffs are suing Defendants for breach of fiduciary duty (Count I) and breach of contract (Count II). Plaintiffs' claims arose out of Defendants' purchase of the Melrose Park steel plant and its assets from Plaintiffs and Defendants' subsequent sale of the plant and assets to a third party. *fn3"

 Both FM Properties and CSFM are Wisconsin corporations, with their principal places of business in Milwaukee, Wisconsin. At the time of the filing of the complaint, Defendants Elbert and Jasica were both citizens of Illinois and residents of the Northern District of Illinois. Defendant McKee was a citizen of Pennsylvania. Elbert and McKee (but not Jasica) were partners in Elbert & McKee Company, a consulting firm to the steel industry with its principal place of business in California. Jasica is the former president of Chicago Steel/CSFM. Defendant Chicago Steel Corporation (here, Chicago Steel/Illinois) is incorporated in Illinois and has its principal place of business in Illinois.

 This case is properly before the federal court under its diversity jurisdiction. All Plaintiffs are citizens of different states from all Defendants, and the amount in controversy is in excess of $ 50,000, exclusive of interest and costs. 28 U.S.C. § 1332(a) (1994).


 Plaintiffs filed their initial Complaint on September 29, 1987 and an Amended Complaint on February 11, 1988, in which they alleged that Defendants had breached fiduciary duties (Count I) and contractual duties (Count II) owed to Plaintiffs. *fn4" Defendants subsequently filed a motion to dismiss Plaintiff's Count I.

 Judge Suzanne Conlon, to whom the case was then assigned, denied Defendants' motion to dismiss Count I. CSFM Corp. v. Elbert & McKee Co., No. 87 C 8495, 1988 U.S. Dist. LEXIS 9993 (N.D. Ill. 1988). The threshold issue in Count I, according to Judge Conlon, was when Defendants' fiduciary duties to Plaintiffs ended; specifically, whether Defendants' duties ended in August 1986 when the parties signed an agreement to sell the steel plant and all of its assets to Defendants, or in December 1986 when the parties closed the deal and ownership of the assets actually passed to Defendants. Id. at 6.

 Judge Conlon concluded that the August 1986 agreement did not terminate Defendants' fiduciary duties. The agreement was a contract to buy and sell, nothing more. Id. at 9. Judge Conlon based her conclusion in part on the general rule under Wisconsin law that officers of a corporation may not, by contract, lawfully divest themselves of their fiduciary obligations. *fn5" Id. at 8.

 After denial of their motion to dismiss, Defendants filed an answer to the complaint and affirmative defenses to the breach of fiduciary duty and breach of contract claims. In November 1989, both parties moved for summary judgment on both Counts I and II. On March 2, 1994, the parties' motions were referred to these chambers pursuant to Local Rule 2.41(b).


 The following factual background is supported by the parties' Local Rule 12(m) and 12(n) statements. *fn6" Citations are also provided to other materials relied upon by the parties.

 First Wisconsin National Bank (FWNB) and its wholly-owned subsidiary FM Properties, Inc. acquired the assets of a steel fabricating plant located in Melrose Park, Illinois through a deed in lieu of foreclosure when the plant's former owner proved unable to repay a loan to FWNB. (Plaintiffs' Rule 12(m) Statement on Count I, PP 7, 10.) FM Properties created a wholly-owned subsidiary, Chicago Steel Corp. (here Chicago Steel/CSFM) to hold the assets.

 A. Roles of Elbert, McKee, and Jasica

 FWNB had no experience in the operation of a steel plant. Accordingly, in October 1984, FWNB entered into an Agreement for the Performance of Personal Services (hereinafter "Personal Services Agreement") with the consulting firm of Elbert & McKee Company. *fn7" (Plaintiffs' Rule 12(m) Statement on Count I P 11.) The Agreement provided that Elbert and McKee would serve initially as chief executive officers of Chicago Steel/CSFM with the authority, subject to Board approval, to formulate company policies; administer the company; hire and fire personnel; and enter into contracts. (Personal Services Agreement § 1, Ex. PX-2 to Plaintiffs' Rule 12(m) Statement on Count I.) Specifically, Elbert and McKee would serve as President and Executive Vice President, or in any other executive officer position designated by the company's Board of Directors. (Id.)

 The Board of Directors formally elected Elbert and McKee to their respective positions on October 2, 1984 (Plaintiffs' Rule 12(m) Statement on Count I P 13) and filed notice to this effect with the Wisconsin Secretary of State on October 22. (Chicago Steel Corporation Certificate of Newly Elected Officers/Directors of 10/22/84, Ex. PX-24 to Plaintiffs' Rule 12(m) Statement on Count I.) Thereafter, the minutes of the board meetings consistently listed Elbert and McKee among the "officers present. " (See, e.g., Minutes of monthly meetings of Chicago Steel/CSFM's Board of Directors (hereinafter "Board Minutes") of 1/15/85 through 11/14/86 Ex. PX-30-39, PX-42-45, PX-52, PX-68, PX-151, and PX-154 of Plaintiffs' Rule 12(m) Statement on Count I.)

 Plaintiffs claim they understood from the beginning that Elbert and McKee were to run the company. (Ehle Dep. *fn8" at 133-139, 167-169.) They further contend that the personnel of FWNB and the directors of Chicago Steel/CSFM and FM Properties believed that Elbert and McKee were officers of the company and relied upon them as such. (Plaintiffs' Rule 12(m) Statement P 20; Stark Dep. *fn9" at 201.) In addition, in a letter from Defendants' own attorney John Jeffries to Edwin Hochman, Vice President of Near North Insurance Agency, Jeffries described Defendants Elbert and McKee as being "in charge of operations of Chicago Steel Corporation . . . ." (Letter from Jeffries to Hochrnan of 11/1/85, Ex. PX-206 to Plaintiffs' Rule 12(m) Statement on Count I.) Jeffries went on to write that Elbert and McKee were involved in "managing" other steel facilities across the United States and would likely acquire Chicago Steel/CSFM by the second quarter of 1986. (Id.)

 Defendants Elbert and McKee, however, strongly deny they were officers of Chicago Steel/CSFM. They assert that they repeatedly refused to serve as officers or employees of Chicago Steel/CSFM because to have done so would have harmed their business as independent consultants to the steel industry. (Elbert Dep., at 205-107; McKee Dep., at 122-24; Elbert Aff. P 7; McKee Aff. P 6.) They further contend that their initial appointments as President and Executive Vice President were intended solely to meet certain technical incorporation requirements and thus were not substantive positions. (Elbert Aff. P 4; McKee Aff. P 4.) In addition, McKee denies knowing he was included in the list of "officers present" in the board minutes (McKee Dep., at 140), and both he and Elbert deny knowing of the election notice filed with the Wisconsin Secretary of State's office. (Elbert Aff. P 4; McKee Aff. P 4.) *fn10"

 More significantly, in late 1984 Elbert and McKee recruited Raymond Jasica to be the company's President and Chief Executive Officer -- the "highest level full-time employee of the Chicago Steel Company," in Elbert's words. (Letter from Elbert to Jasica of 11/4/84, Ex. DX-16 to Plaintiffs' Rule 12(m) Statement on Count I.) In a letter to Jasica on November 4, Elbert wrote that he, Jasica, and McKee would initially serve as an executive committee for Chicago Steel/CSFM, make the necessary decisions, and then divide up the assignments. (Id.)

 On December 1, 1984, the Board of Directors elected Jasica President of Chicago Steel/CSFM and removed Elbert and McKee from their positions as president and executive vice president. (Chicago Steel Corporation Directors' Consent Action of 12/1/84, Ex. PX-21 to Plaintiffs' Rule 12(m) Statement on Count I.) At the same time, the Board elected McKee and Elbert to the newly created position of "Vice Chairman." (Id.) Defendants Elbert, McKee, and Jasica remained in these respective positions for the remainder of the time they were employed by Chicago Steel/CSFM. (Plaintiffs' Rule 12(m) Statement P 15.)

 As stated above, Defendants Elbert and McKee assert that they were not officers of Chicago Steel/CSFM and claim that the position of "Vice Chairman" was a purely nominal title. (Elbert Dep., at 205-207; McKee Dep., at 122-124; Elbert Aff. P 6; McKee Aff. P 5.) Defendants do not offer any evidence, however, that Jasica's role as President and CEO of Chicago Steel/CSFM was anything but substantive.

 B. Defendants Were Aware That Plaintiffs Wanted to Sell Chicago Steel/CSFNI

 The record shows that from a time early in their relationship with Plaintiffs, Defendants were aware that Plaintiffs wanted to sell the Melrose Park steel plant. In their initial offer to serve as consultants, Elbert wrote that he and McKee were uniquely qualified to determine whether the plant could be sold as an operating company. (Letter from Elbert to Pattinson *fn12" of 7/30/84, Ex. PX-20 to Plaintiffs' Rule 12(n) Reply on Count I.) In December 1984, Defendants offered to assist FWNB in finding a buyer, which Defendants recognized was the Bank's "primary thrust." (Letter from Elbert to Ehle on 12/12/84, Ex. PX-27 to Plaintiffs' Rule 12(m) Statement on Count I; see also Elbert Aff. P 8.) Both Elbert and McKee contacted a number of potential buyers in the steel industry (McKee Dep., at 128-134), and Elbert described the prospects for the sale of the company to the Board of Directors on several occasions. (Board Minutes of 1/15/85 and 2/19/85, Exs. PX-30 and PX-3 1, respectively, to Plaintiffs' Rule 12(m) Statement on Count I.)

 C. Defendants' Purchase of Chicago Steel/CSFM

 Defendants eventually decided to purchase the assets of Chicago Steel/CSFM themselves. In March 1985 Defendants notified Plaintiffs of their interest (Board Minutes of 3/14/85, Ex. PX-32 to Plaintiffs' Rule 12(m) Statement on Count I), and in March 1986 sent a letter of intent offering to purchase the stock of Chicago Steel/CSFM from Plaintiffs. (Letter from Elbert, McKee, and Jasica to First Wisconsin National Bank of 3/12/86, Ex. PX-46 to Plaintiffs' Rule 12(m) Statement on Count I.)

 Defendants assert that from the time they first expressed interest in purchasing the company, it was understood by all parties that they were in a potentially adversarial relationship. (Defendants' Rule 12(m) Statement on Count I PP 8-11.) Defendants further claim that Plaintiffs subsequently took steps to protect their interests and verify any representations made by Defendants, such as obtaining outside appraisals of the property; actively searching for other potential buyers; requiring monthly financial reports from Defendants; and prohibiting Defendants from binding Chicago Steel/CSFM or entering into any contracts on its behalf. (Defendants' Rule 12(m) Statement on Count I, at 14.)

 Defendants also contend that during this time Plaintiffs had identified another prospective buyer interested in purchasing Chicago Steel/CSFM's assets. (Defendants' Rule 12(m) Statement on Count I PP 47, 48.) Defendants claim this other buyer was willing to pay significantly more than what was paid by Defendants, but the record shows only that the prospective buyer offered some $ 3,000,000, which was comparable to what Defendants eventually paid. (Ehle Dep., at 118, 473-74, 477-79.) Moreover, the record shows that the buyer entered at the "eleventh hour" of Plaintiffs' negotiations with Defendants, and Plaintiffs put the second buyer on hold pending resolution of their negotiations with Elbert, McKee, and Jasica. (Ehle Dep., at 481-83.)

 Plaintiffs and Defendants finally reached an agreement for the purchase and sale of Chicago Steel/CSFM. ("Purchase and Sale Agreement," found in Letter from Ehle, Fitzsimonds, and Giese *fn13" to Elbert, McKee, and Jasica of August 19, 1986, Ex. PX-5 to Plaintiffs' Rule 12(m) Statement on Count I.) *fn14" The Purchase and Sale Agreement included the following terms relevant to Count I:

* The purchase price would consist of $ 2,500,000 payable in cash at closing; plus $ 1,776,000 payable in cash in closing, but which amount would be decreased (or increased) by any amounts received by (or from) FWNB from (or to) the Buyers prior to closing; plus 1,500,000 shares of preferred stock, par value of $ 1.00 per share, in the new corporation. (Id. PP l(a-c).)
* The closing of the purchase and sale was scheduled for December 15, 1986. (Id. P5.)
* Either Buyers or Seller could terminate the agreement in the event that Buyers failed to obtain a financing commitment by October 15, 1986 or otherwise failed to purchase the company by December 15, 1986. (Id. P 10.)
* From the period of time covering the signing of the agreement to the final closing of the sale, Plaintiffs could not seek to sell, sell, or permit the sale of Chicago Steel/CSFM to another buyer, unless one or both parties terminated the agreement as provided above. (Id. P 7.)

 On or about October 15, 1986, Defendants obtained a financing commitment from American National Bank ("ANB") for $ 4,500,000, consisting of a $ 3,500,000 term loan and a $ 1,000,000 revolving line of credit. (Plaintiff's Rule 12(m) Statement on Count I P 30; Letters from American National Bank to Elbert, McKee, and Jasica of 9/23/86 and 10/8/86, Exs. PX-69 and PX-100, respectively, to Plaintiffs' Rule 12(m) Statement.) It was unclear, however, whether ANB's financing would be sufficient to close the deal; Defendants planned to rely on the plant's income and assets to purchase the company, but the plant was experiencing a cash shortfall. (Plaintiffs' Rule 12(m) Statement on Count I PP 30, 31.) Defendants contend Plaintiffs had anticipated the shortfall and had agreed to provide any additional financing required to close the deal. (Defendants' Rule 12(m) Statement on Count I PP 44-46; Elbert Dep., at 294-95.)

 Whatever the understanding of the parties, FWNB did loan Defendants some $ 1,500,000 in October and November of 1986 in order to proceed with the transaction. (Plaintiffs' Rule 12(m) Statement on Count I PP 30, 31; Chicago Steel Corporation Directors' Consent Action of 10/5/86, Ex. PX-71 to Plaintiffs' Rule 12(m) Statement; Letter from Schulz to Elbert of 11/26/86, Ex. PX-81 to Plaintiffs' Rule 12(m) Statement on Count I.) In addition, on December 11, 1986, the parties determined that FWNB would also have to provide a short-term note for $ 2,800,000 to Defendants. (Plaintiffs' Rule 12(m) Statement on Count I P 33; Ireland Dep., at 505-506; Jasica Dep., at 187-206.) A dispute between FWNB and ANB over the security for FWNB's loan delayed the closing until the next day. (Plaintiffs' Rule 12(m) Statement on Count I P 34; Stark Dep., at 773.)

 Plaintiffs and Defendants finally closed the purchase and sale on December 12, 1986. (Id.) Although the closing occurred nearly two months after the deadline agreed upon by the parties by which Defendants were to have secured financing, neither side had taken advantage of the financing contingency in the Purchase and Sale Agreement to terminate the deal.

 D. Defendants' Negotiations with PDM Prior to Closing

 While engaged in negotiations with Plaintiffs in 1986, Defendants also were having discussions with senior officials of Pitt-Des Moines, Inc. ("PDM") about employment prospects and a possible sale of the company's assets. During the previous several years, Elbert and John Long, Chairman and Chief Executive Officer of PDM, had had discussions about PDM's management needs. (Plaintiffs' Rule 12(m) Statement on Count I P 38.) PDM faced serious managerial problems; in particular, the major active directors of PDM were all in their seventies or eighties; PDM's financial condition was deteriorating rapidly; and its directors were unhappy with the company's current management. (Plaintiffs' Rule 12(m) Statement on Count I P 38; Long Dep., at 3, 18-20; Jackson Sr. Dep., at 3; Paddock Dep., at 3, 9.) *fn15"

 Elbert and Long discussed this situation on October 22 and 23, 1986, only one week after Defendants were supposed to have met their financing commitment to Plaintiffs. (Plaintiffs' Rule 12(m) Statement on Count I PP 38, 39.) At that time Elbert told Long that "PDM and Chicago Steel complemented each other. (Id.) The two men discussed proposals ranging from joint ventures and other business arrangements between their two companies to having McKee and Elbert go to work for PDM. (Elbert Dep., at 302-307.) Indeed, at about that same time, Long asked Elbert whether Defendants would be available to work for PDM. (Long Dep., at 17-18.) Defendants advised Long and other PDM officials, however, that they were contractually obligated to purchase and manage Chicago Steel, and even if they wanted to work for PDM they would be unable to do so because they would be involved in running their own new ...

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