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03/29/96 KATHLEEN V. MAGEE v. ROCHELLE A.

March 29, 1996

KATHLEEN V. MAGEE, INDIVIDUALLY, AND DERIVATIVELY ON BEHALF OF CHEFWEAR, INC., AN OREGON CORPORATION, PLAINTIFF-APPELLEE,
v.
ROCHELLE A. HUPPIN-FLECK AND GARY L. FLECK, DEFENDANTS-APPELLANTS.



Appeal from the Circuit Court of Cook County. No. 95-CH-2086. Honorable Margaret S. McBride, Judge Presiding.

The Honorable Justice Theis delivered the opinion of the court: Hoffman, P.j., and Cahill, J., concur.

The opinion of the court was delivered by: Theis

The Honorable Justice THEIS delivered the opinion of the court:

This is an interlocutory appeal pursuant to Supreme Court Rule 307(a)(1) (134 Ill. 2d R. 307(a)(1)), from an order granting preliminary injunctive relief in favor of the plaintiff, Kathleen Magee. The defendants, Rochelle A. Huppin-Fleck ("Huppin-Fleck") and Gary L. Fleck ("Fleck"), challenge the circuit court's order enjoining Fleck's nonvoting shares of common stock in Chefwear, Inc., from converting to voting shares pursuant to the corporation's articles of amendment. In rendering its ruling, the court only considered the question of whether Fleck's shares were issued in violation of the Oregon Business Corporation Act ("Oregon Act"). Or. Rev. Stat. ยง 60.010 et seq. (1993). The court permitted testimony concerning the meaning of the Act, but did not hear any testimony concerning controverted factual issues raised in the plaintiff's amended complaint and motion for a preliminary injunction, as well as the defendants' answer and response to the motion. On appeal, we are asked to determine (1) whether we should adhere to an abuse of discretion or de novo standard of review in examining the propriety of the court's order, (2) whether the court failed to hold a proper and complete evidentiary hearing, and (3) whether the trial court erred in finding that the plaintiff established the elements entitling her to a preliminary injunction. We hold that although an abuse of discretion standard of review applies to the court's factual determinations, we are permitted to interpret the Oregon Business Corporation Act according to a de novo standard of review. Further, we find that the plaintiff failed to meet her burden of demonstrating the need for a preliminary injunction. Therefore, for the reasons which follow, we remand this case for proceedings consistent with this opinion.

The plaintiff, and one of the defendants, Huppin-Fleck ("Huppin-Fleck"), started Chefwear, Inc., in the fall of 1990, in Los Angeles, California. Chefwear manufactures and sells clothing for chefs and restaurant workers. In the summer of 1992, Chefwear's operations moved to Chicago, Illinois. That year, Chefwear became incorporated under the laws of Oregon.

In 1993, Chefwear experienced cash-flow problems. In order to combat the situation, Magee and Huppin-Fleck decided to sell 86 shares to Huppin-Fleck's husband, Gary L. Fleck ("Fleck"), for $50,000.

The record on appeal contains an undated handwritten agreement pertaining to Fleck's shares. Under the terms of the agreement, Fleck's nonvoting shares were to convert to voting shares. The agreement states, in relevant part:

"It has been agreed by the principle [sic] partners of Chefwear Inc. that if the company has not been sold by partners KATHLEEN MAGEE, and ROCHELLE Huppin within 2 years from April 1, 1993, the 86 non-voting shares held by GARY L. FLECK, will be transferred to voting shares of common stock."

The two signatures on the document appear to be those of Huppin-Fleck and Magee. However, during her deposition, Magee denied that she signed the agreement. The defendants then retained a handwriting expert, who stated that Magee's signature was genuine. Nothing in the record before us refutes this testimony.

The parties stipulated that on May 4, 1993, the amended articles of incorporation were filed with the Oregon Secretary of State. The amended articles authorized the conversion of Fleck's nonvoting shares into voting shares by March 31, 1995, if certain conditions were present.

On March 8, 1995, Magee filed a complaint against the defendants seeking injunctive and other relief on the grounds that the defendants committed fraud in relation to Fleck's stock purchase. Magee maintained that she never agreed to give Fleck nonvoting shares which would convert to voting shares.

Then, on March 22, 1995, Magee filed an amended complaint alleging, in part, that Fleck's shares were issued in violation of Oregon law, and were therefore void. Specifically, count I alleges fraud and a violation of the Oregon Business Corporation Act as grounds for injunctive relief. Count II requests declaratory relief that the stocks are void because they were issued in violation of the Oregon Act. The remaining counts seek rescission based on fraud, rescission based on unilateral mistake, rescission based on unconscionability, breach of fiduciary duty and intentional infliction of emotional distress.

On March 22, 1995, the plaintiff also filed a renewed motion for a preliminary injunction. In her motion, the plaintiff maintained that there was a reasonable likelihood that she would succeed on the merits of her claims that the company never issued shares to Fleck, that the shares which purportedly were issued were void under Oregon law, that Fleck undervalued the company when he offered to purchase shares, that Fleck offered no consideration for his conversion rights, and that Huppin-Fleck had no authority to revise the articles of amendment.

On March 27, 1995, the defendants filed a verified answer to the plaintiff's complaint refuting many of the allegations, including the charge of fraud. Specifically, the defendants claimed that Magee agreed to the articles of amendment and signed a unanimous written consent regarding the amendment which permitted Fleck's shares to convert on March 31, 1995. The defendants also filed a response to the plaintiff's motion stating that Fleck's shares were not issued in violation of the Oregon Act.

At the outset of the hearing on the plaintiff's motion for preliminary injunctive relief, the court stated that in order to simplify the proceedings, it would proceed first on the issue of whether Fleck's shares were issued in violation of Oregon law. The court stated that if the plaintiff succeeded on this issue, then the court would not necessarily have a "full-blown hearing on all of the other claims made by [the] Plaintiff."

Then, over the defendant's objection, the court allowed the plaintiff to present testimony concerning the proper interpretation of the Oregon Act. Ultimately, the defendant also offered testimony concerning the provisions at issue in order to refute statements made by the plaintiff's witness. After hearing the testimony, the court stated that it did not intend to decide the issue whether or not Fleck's stocks were issued in violation of Oregon law. The court indicated that based on the documents presented, its own understanding of Oregon law and its understanding of general principles of corporate law, the plaintiff demonstrated a fair question of a likelihood of success on the merits ...


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