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12/11/96 FERRIS ELEVATOR COMPANY v. NEFFCO

December 11, 1996

FERRIS ELEVATOR COMPANY, INC., AN IOWA CORPORATION, AND LAHARPE FEED AND GRAIN CO., AN ILLINOIS CORPORATION, PLAINTIFFS,
v.
NEFFCO, INC., A CORPORATION, ESTEL NEFF, DEFENDANTS, AND ESTEL NEFF, COUNTERCLAIM PLAINTIFF APPELLANT, V. LEHARPE FEED & GRAIN CO., AN ILLINOIS CORPORATION, AND LAWRENCE HARRELL AND ELDON HARRELL, COUNTERCLAIM DEFENDANTS APPELLEES.



Appeal from the Circuit Court of the Ninth Judicial Circuit, Hancock County, Illinois. No. 88-L-6. Honorable Stephen Evans, Judge Presiding.

Released for Publication January 16, 1997.

Present - Honorable Peg Breslin, Presiding Justice, Honorable Tom M. Lytton, Justice, Honorable Michael P. Mccuskey, Justice. Presiding Justice Breslin delivered the opinion of the court. Lytton and McCUSKEY, JJ., concur.

The opinion of the court was delivered by: Breslin

PRESIDING JUSTICE BRESLIN delivered the opinion of the court:

Appellant, Estel Neff filed a counterclaim asserting a shareholder's derivative action on behalf of LeHarpe Feed & Grain Company (LFG) against two of its directors, appellees Lawrence Harrell and Eldon Harrell. He also filed a claim against LFG on a promissory note. The jury found in favor of the Harrells on the shareholder derivative claim and for Neff on the promissory note claim. Neff appeals both verdicts alleging that the trial court improperly employed the business judgment rule and that the jury erroneously calculated the damages related to the note. For the reasons which follow we hold that the court's employment of the business judgment rule was not reversible error. Additionally, we hold that the jury miscalculated the damages with respect to the note. Thus, we affirm in part, reverse in part and remand.

Estel Neff, Lawrence Harrell and Eldon Harrell were the shareholders and directors of LFG. LFG was a licensed grain dealer and grain warehouse under the Illinois Grain Dealer's Act 225 ILCS 630/1 et seq. (West 1994), and the Public Grain Warehouse and Warehouse Receipts Act 240 ILCS 15/1 et seq. (West 1994) (collectively -- "Acts"). The Illinois Department of Agriculture (IDOA) is responsible for conducting annual field examinations of grain dealers and warehouse licensees to confirm that they are complying with the Acts.

In 1985, the IDOA alleged three violations of the Acts, but LFG was able to take action to avoid having its license revoked. However, in 1986, the IDOA again alleged several deficiencies, and also alleged that the Harrells, who farmed 1,500 acres, purchased corn from LFG and obtained a nonrecourse price support loan from the federal government in violation of federal law. Thereafter the Harrells concluded that LFG's licenses should be surrendered. Lawrence Harrell testified that this decision followed an investigation into each of the allegations.

Neff, however, alleged that the Harrells did not sufficiently investigate the IDOA allegations or take sufficient actions to defend against the IDOA. Neff presented evidence that 22 of the 23 IDOA allegations were curable deficiencies. He alleged that the failure to properly inquire into the possibility of remedying the alleged violations was a breach of the duty of care owed to the corporation. Neff alleged that the remaining deficiency, the acquisition of the nonrecourse price support loan, was solely attributable to the Harrells, not the corporation. He also alleged that the failure to defend the corporation following this activity amounted to a breach of the directors' duty of care.

The promissory note at issue in this case was made out to Neff in 1979 in the amount of $40,000. Neff testified that LFG owed $87,095.07 at the beginning of the trial based on the outstanding principal balance of $33,750 plus the interest which had accrued. On behalf of LFG, the Harrells suggested that based on corporate financial statements, Neff voluntarily reduced the principal balance to $27,750 and then to $16,150 in November of 1985. Additionally, the Harrells attempted to elicit testimony at trial concerning amounts owed by Neff to the corporation, but they failed to plead an affirmative defense of set-off. The court did not allow the testimony concerning Neff's alleged debt because of this failure to plead a set-off. During deliberations the jury made inquiries to the judge concerning Neff's debt to the corporation. The judge responded that the jury could return a verdict in any amount supported by the evidence.

Additionally, after denying the Harrells' motion for directed verdict and despite Neff's arguments that the business judgment rule did not apply, the court instructed the jury that directors are presumed to have acted with due care when making decisions on behalf of the corporation. The instruction stated:

In your deliberations on Counts I and II of the counterclaim you should consider the following:

Directors and officers of a corporation must be diligent and careful in performing the duties they have undertaken, and must make independent and informed business decisions. Actions of directors and officers made on an informed basis, in good faith, without corrupt motive, and in the honest belief that the actions are in the best interests of the corporation, are presumed valid. Actions of directors and officers that constitute self-dealing, fraud, or bad faith are presumed invalid, and the directors and officers have the burden of proving that the actions were fair and reasonable.

The jury rendered a verdict against Neff on the shareholder's derivative claim and for Neff in the amount of $23,926.94 on the promissory note. Thereafter, Neff made a motion for a judgment notwithstanding the verdict, or in the alternative, a new trial. The motion was denied. Neff appeals.

The first issue is whether the business judgment rule is available to corporate directors accused of violating the ...


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