Appeal from the Circuit Court of Cook County. The Honorable Monica Reynolds, Judge Presiding.
Rehearing Denied December 21, 1994. Released for Publication January 13, 1995.
The opinion of the court was delivered by: Egan
PRESIDING JUSTICE EGAN delivered the opinion of the court:
Kenneth Levy, the plaintiff, sued several defendants, including Victor Gust, Jr., and Robert Bakal. After a lengthy bench trial, the trial Judge found that Gust and Bakal had breached their fiduciary duties to Levy and to the corporations in which all three men owned stock. The Judge awarded Levy $3,000,000 in punitive damages and approximately $2,000,000 in compensatory damages. Gust and Bakal raise many issues on appeal, including contentions that most of the trial Judge's determinations are against the manifest weight of the evidence and that the Judge erred as a matter of law when awarding damages.
The parties dispute virtually every relevant fact in this case. The voluminous record on appeal provided by the defendants in support of their assertions that the trial Judge made incorrect findings of fact includes eight volumes of common law record, three boxes of unbound, randomly ordered trial exhibits, and several boxes of nonconsecutively paginated reports of proceedings. The reports of proceedings, memorializing a trial that spanned 14 months, are bound by date and time only, with a different binder for each morning and afternoon court session. The facts as recited in the parties briefs are often in conflict; consequently, we have been required to examine the record. Because of the great disagreement between the parties, we will extensively recite the facts as we have independently found them.
Levy testified that he and two partners founded Markal in 1960 to serve as a sales representative for electronics manufacturers. Markal represented CB radio manufacturers, consumer electronic component manufactures and audio equipment manufacturers, including Pioneer Corporation and Sony Corporation. Levy owned 40% of the Markal stock and served as a Markal officer and director. Markal hired Gust and Bakal as salespeople, and they were later promoted to corporate officer positions. Eventually, both Gust and Bakal became directors of Markal and purchased Markal stock. Gust owned 40% and Bakal owned 20% of the Markal stock.
In 1977, over Levy's objection, Gust, Bakal and Levy divided their Markal responsibilities by product type. Levy was placed in charge of the CB and parts businesses, which soon dwindled when the CB radio became less popular. Levy also remained in charge of all Markal administrative matters. Gust became solely responsible for Pioneer, a client procured by Levy, which became a large portion of Markal's business. Bakal testified that in 1977, Gust told both Bakal and Levy that he wanted to take the Pioneer business and start his own company, without Levy and Bakal. Bakal also testified that Gust's son Tom, who was employed as a salesperson at Markal, complained to Gust that he could not obtain a higher position as long as he worked at Markal. A monetary settlement for dissolution of Markal was discussed, but Gust, Bakal and Levy remained in business together.
After dividing responsibilities at Markal, Gust, Bakal and Levy executed a stock repurchase agreement providing for the valuation and sale of any shareholder's stock. Levy placed this agreement into evidence, and the trial Judge used the agreement to determine a value for the Markal stock.
On August 1, 1980, without Levy's knowledge, Gust and Bakal entered into an agreement with Markal. Gust, as President, signed on behalf of Markal Corporation; he also signed for himself individually. The agreement gave Bakal a written employment contract with Markal until 1985 and explained: "It is understood that you [Bakal] will devote substantially all of your time, attention and energies to the business of [Markal]." Gust also explicitly agreed "to remain as a full-time employee of [Markal] during the term of [Bakal's] employment" and to "not retire or otherwise reduce the scope of his employment with [Markal]." Gust promised that, if Bakal offered his stock for sale to Markal and Markal did not exercise its option to buy the stock, Gust would purchase the stock.
At the November 12, 1980 shareholder's meeting, the shareholders re-elected Levy as a director of Markal. At the directors' meeting following the shareholder's meeting, Gust and Bakal voted to terminate Levy's employment with Markal. Gust and Bakal told Levy to remove his personal belongings from the office and excluded him from participation in the daily activities of Markal. After making several requests to Gust and Bakal to reconsider, Levy formally resigned from Markal on December 4, 1980. Gust and Bakal did not advise Levy of their August 1, 1980 agreement until after they fired him from Markal. Gust admitted that he did not tell Levy about this agreement because he did not want to "tip him off" to Gust and Bakal's plans. Levy was 58 years-old when he was fired.
After Levy was fired from Markal, Markal became interested in representing computer hardware manufacturers. Bakal testified that "Markal was interested in investigating the opportunities" of a computer sales business, and admitted that Markal wanted to become a manufacturer's representative for computer companies.
Gust was contacted by Mark Folley, a regional sales manager for Apple Computers, in 1981. Folley was responsible for procuring sales representatives for Apple in the Midwest. Gust testified that he and Bakal began negotiating with Folley. Bakal testified that he and Gust decided not to offer the Apple opportunity to Markal because Folley told them Apple would not permit its products to be marketed by Markal.
Folley testified that he told Bakal and Gust "that they had to set up a separate and distinct corporation from the existing Markal Sales." Folley's supervisor, Lawrence Pape, also testified that he told Gust and Bakal that he "wanted a completely separate company to focus on Apple." Gene Carter, Apple's Vice President for Sales, testified in his evidence deposition that Folley had the authority to require a separate entity and that Apple representatives were "not allowed to sell other [stereo] lines." Gust and Bakal did not offer Markal the chance to represent Apple, but established G/oB Marketing for the express purpose of serving as an Apple representative. When G/oB was formed on July 29, 1981, its sole officers, directors, and shareholders were Gust and Bakal. G/oB began actively working as an Apple representative on October 1, 1981.
On cross-examination Folley admitted that he did not inquire about the stockholders of G/oB because he "didn't deem it necessary." Folley also admitted that he chose G/oB "based in part on the stability of Markal." Similarly, Pape did not ask who owned the stock in G/oB because he "didn't think it was pertinent." Carter also admitted that he "didn't care" whether the representative's existing salespeople had sold consumer electronics in the past as long as they focused on computers once they contracted with Apple; he also "didn't expect them to give up their line [of other products], but did expect them to set up a separate entity."
Levy introduced several memos written by Folley. One memo is a handwritten list of what Folley testified were possible representatives for Apple. This list includes the names "Markal" and "Markal (MI)" with "G/oB" written in the margin beside Markal. Also, in September 1981, Folley wrote a memo to Pape on the subject "G/oB Marketing (Markal Sales)," which recommended that Apple employ "this firm." In the memo, Folley explained:
"I have checked their references and find that all who are or have been associated with Markal Sales have high praise for the organization, Additionally, my personal contacts with the account have all been positive. I feel that they will do whatever is necessary to sell to and serve the trade."
According to the evidence deposition of David Bowman, an Apple national sales manager, the regional managers were supposed to find sales representatives who had previously sold computers and who would sell only computers. But due to the rapid expansion of the computer industry, in several locations consumer electronics firms such as Markal were Apple's best alternative. Bowman testified that at least five sales representatives hired by Apple had previous experience in the consumer electronics field, no experience in the computer field and retained their consumer electronics lines in addition to Apple. Levy and the Apple employees who testified agreed, based in part on a trade organization manual introduced into evidence, that the firm Apple chose to represent it in Minneapolis was a consumer electronics firm which jointly represented both Apple and Pioneer.
In defense of their assertion that the Apple opportunity was not available to Markal, Bakal and Gust presented testimony by Pioneer and Sony. James McManus, a regional sales manager for Pioneer, testified that he was upset when Gust informed him that "there was a possibility of [Markal] acquiring Apple computers." McManus told Gust that, if Markal chose to represent Apple, he would recommend that Markal be terminated as the Pioneer representative. Similarly, Robert Elman, a sales manger at Sony, testified that he was unhappy when Bakal told him Markal might add Apple as a client. Bakal asked Elman if he would be satisfied if Gust and Bakal formed a separate company to represent Apple, and Elman explained that a separate company with a separate sales staff would be acceptable.
Both Gust and Bakal testified that they were not involved in the daily operations of G/oB and that two former Markal salespeople, Tom Gust and Bill Rychel, actually did the majority of the G/oB work. Tom Gust is the son of the defendant Victor Gust. Gust and Bakal testified that they devoted the majority of their time and effort to Markal. Gust, Bakal, and Tom claimed that Tom Gust and Rychel signed many agreements on behalf of G/oB and wrote most G/oB correspondence. However, Tom Gust testified that he could not produce any documents supporting these claims.
The plaintiff presented extensive testimony and exhibits showing that Gust and Bakal were actively engaged in G/oB business and ceased to give their full-time efforts to Markal once G/oB was formed. The evidence that best supports the plaintiff's position consists of two document groups. First, on the 1981 and 1982 federal income tax forms for G/oB, Gust and Bakal each stated that they devoted "ALL" of their time to G/oB in the box for "percentage of time devoted to business." Second, when Gust and Bakal formed a corporation named Micro to handle Apple sales in Michigan, Bakal signed an employment contract with Micro promising to devote "substantial time, attention and energies to [Micro]." Also, Gust testified that Bakal was responsible for running Micro. Micro ceased operations in September, 1982.
Several documents prepared by Gust and by others at G/oB showed that Tom Gust and Rychel, while having G/oB officer titles, were actually serving only as salespeople for G/oB while Gust oversaw operations. Further, according to memos written by Gust and G/oB, expense reports submitted by Bakal, Bakal was given a sales quota and was the salesperson for G/oB who served its two largest clients, in addition to several other clients. Gust wrote many memos as the administrative head of G/oB, explaining and implementing policies. According to their federal income tax records, both Gust and Bakal received $3,500-per-year automobile allowances for the use of their cars on G/oB business. Folley, Pape and Bowman all testified that Gust and Bakal attended out-of-state training seminars for Apple in addition to local training sessions and spent time corresponding with and acting on behalf of Apple. Bowman testified that Gust and Bakal "met the requirements of [devoting] better than 60 percent" of their time to Apple, although Carter testified that there were no time requirements for Apple representatives.
Moreover, according to several witnesses and to documents obtained in discovery, Gust and Bakal performed many activities on behalf of G/oB while they were Markal employees, including: attending several week-long meetings that involved travel outside the United States; negotiating a loan, an insurance policy and a lease for G/oB; negotiating the agreement with Apple to service northern Illinois and southern Wisconsin and continuing their negotiations for the downtown Chicago sales area; interviewing and hiring a large G/oB sales staff; signing every one of the thousands of checks G/oB issued from 1981 until 1984; meeting with and writing to Apple employees in California and frequently corresponding with Folley; setting and monitoring the sales quotas of G/oB employees; accepting and monitoring clients; holding and attending monthly G/oB sales meetings; and entertaining potential and existing G/oB customers.
Additionally, there was extensive evidence showing that Markal assets were used to benefit G/oB and Micro. Several G/oB salespeople remained on the Markal payroll while they worked for G/oB or charged expenses to Markal while they worked for G/oB. For example, Gust testified that he and Bakal did not go onto the G/oB payroll until January 31, 1982, despite the fact that they worked for G/oB beginning with its formation in July, 1981. Tom Gust visited computer dealers with Bakal in 1981, while Tom Gust was a Markal salesperson. He and Bakal billed their expenses from these visits to Markal. A Micro employee, James Mallekoote, received Micro paychecks from March until September, 1982, but also filed expense reports with Markal charging Markal for his Micro expenses. Gust's secretary, Mary Naselli, was paid by Markal but testified that she typed most of Gust's G/oB correspondence and answered all of Gust's G/oB phone calls on the G/oB phone lines at her desk. Markal's Office Manager, Sheldon Pestine, was never on the G/oB payroll but handled some correspondence for G/oB and responded to G/oB employee requests regarding office issues such as keys. Gust admitted that Tom Gust and another Markal employee, George Kriza, were interviewed by G/oB and trained to be Apple representatives while on the Markal payroll. Similarly, the Markal Sales Manager, Dave Hallett, attended an Apple training session and interviewed with Folley while on the Markal payroll.
To supplement the testimony about G/oB employees being paid by or receiving support from Markal, Levy presented evidence showing that the Markal and G/oB sales forces were never truly separate. For example, G/oB's Cash Receipts Journal lists the payment of many commissions to G/oB by Markal. According to Bakal, this indicates that G/oB employees were working for Markal and receiving commissions from Markal clients. This Journal contains several deleted entries and whited-out entries, which Bakal admitted probably noted commission payments by Markal to G/oB and rent payments from G/oB to Markal. Additionally, Gust testified that the G/oB and Micro employees were part of Markal's pension plan, and Bakal explained that G/oB employees were part of Markal's employee insurance plan.
Levy also presented evidence that G/oB underpaid rent to Markal. G/oB was located in the same office space as Markal, as was Micro during its short existence. Bakal testified that G/oB and Markal shared many common areas in the offices, including a large conference room, a library, storage areas and a lunch room. At one point, Gust testified that G/oB used only 233 square feet of the 8500 square foot office space. Earlier in the trial, however, he explained that G/oB generally occupied the lower half of the space while Markal occupied the upper half. G/oB's insurance agent testified that G/oB paid the premiums on an insurance policy covering 3,750 square feet in the office, and Levy introduced G/oB's December, 1981 policy stating that it occupied 3,750 square feet.
Gust testified that Markal's cost for the office space rent and other building expenses was between $3,700 and $4,000 each month. Beginning in August, 1981, G/oB paid Markal $100 monthly rent; Gust set this rent amount. The rent amount increased later, with G/oB eventually paying approximately one third of the office space cost. At Gust's deposition, he explained that he did not know the basis for the $100 rent amount, but in the trial he stated that G/oB paid its proportionate share based on space used. In part, his testimony that only 233 square feet were used by G/oB included the assertion that only 5% of his time, and thus only 5% of his large office, was used for G/oB business. Bakal testified that what appeared to be many months of $100 rent payments to Markal had been whited-out of the G/oB Cash Receipts Journal.
After G/oB began full operation, Markal of Michigan went out of business. Gust admitted that Markal of Michigan had accounted for 20% of Markal's revenues. Further, according to Gust, Markal was unable to completely meet its payroll and pay automobile allowances after G/oB began operating and lost a great deal of revenue in Illinois.
At the Conclusion of the testimony, the trial Judge entered a lengthy written order. She found that Levy was legally fired, although she stated that "the termination was lacking in good faith, [and was] underhanded, deceitful and sly." She found that Gust and Bakal used Markal corporate assets, including their time and Markal office space, to further G/oB, thus estopping them from arguing that Markal could not take the Apple opportunity. She also determined that, as fiduciaries, Gust and Bakal were required to offer the opportunity to Markal because she found that computers were reasonably incident to Markal's possible future business. She awarded Levy, as a stockholder and individually, 40% of the G/oB expenses wrongly charged to Markal including the rent underpayment and the time Markal employees were paid when working for G/oB, the value of his stock, the salary and pension funds paid by Markal to Gust and Bakal while they were breaching their fiduciary duties, and punitive damages. She denied the defendant's counterclaim which alleged that Levy had breached his fiduciary obligation to the corporation.
The defendants appeal the trial Judge's findings that they violated their fiduciary duties and her imposition of compensatory and punitive damages. Levy has filed a cross-appeal. We granted the parties joint motion to dismiss G/oB Marketing from the appeal, leaving Bakal, Gust, and Markal as defendants-appellants. Gust and Bakal argue that the Judge incorrectly applied the law and made factual determinations "against the overwhelming weight of the evidence" when she found that they breached their fiduciary duties. They recognize that we may not assess the credibility of witnesses and will reverse the trial Judge's factual determinations only if they are "clearly against the manifest weight of the evidence." Graham v. Mimms (1982), 111 Ill. App. 3d 751, 767, 444 N.E.2d 549, 560, 67 Ill. Dec. 313.
As Levy notes, "it is undisputed that the individuals who control corporations owe a fiduciary duty to their corporation and its shareholders." ( Graham, 111 Ill. App. 3d at 761; see also Kerrigan v. Unity Savings Association (1974), 58 Ill. 2d 20, 27, 317 N.E.2d 39; Shlensky v. South Parkway Building Corp. (1960), 19 Ill. 2d 268, 278, 166 N.E.2d 793.) Gust, Bakal, and Levy's "mutual obligations were similar to those of partners" and they had a fiduciary duty "to deal openly and honestly" with each other ( Illinois Rockford Corp. v. Kulp (1968), 41 Ill. 2d 215, 222, 242 N.E.2d 228), and to "exercise the utmost good faith ...