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Hagen v. Distributed Solutions

February 08, 2002


The opinion of the court was delivered by: Presiding Justice Gallagher


Appeal from the Circuit Court of Cook County Honorable DOROTHY KIRIE KINNAIRD Judge Presiding.

Plaintiff, Jeffrey Hagen, filed an action for a writ of mandamus to allow plaintiff to inspect the books and records of defendant corporation Distributed Solutions, Inc. (DSI). Plaintiff now appeals from the trial court's order granting summary judgment to DSI and defendant Craig Johnson (Johnson)(collectively, defendants) and denying plaintiff's motion for reconsideration. We reverse and remand.

DSI, founded by Johnson in 1991, manufactured computer systems software and provided consulting services which included payroll services for small companies. Johnson was the sole officer and director of DSI, as well as the majority shareholder with approximately 74% of the total shares. Plaintiff was a minority shareholder with approximately 26% of the total shares, as well as an employee of the corporation. Plaintiff resigned in early 1992 after which he had no day-to-day involvement with the corporation. Plaintiff received financial statements of DSI on a quarterly basis.

In 1993, Johnson sold a portion of DSI's business -- its payroll services for small companies -- to himself and a few other minority shareholders and established a company called Distributed Payroll Solutions, Inc. (DPSI). As part of the sales contract, DSI became a shareholder in DPSI. This investment was carried on the books of DSI and valued at $45,000. Johnson subsequently operated DSI and DPSI out of the same location.

In 1994, plaintiff filed an action in Lake County seeking to force a buyout of plaintiff's shares or seeking the dissolution of DSI. Plaintiff apparently was unsuccessful.

In 1996, Johnson brought suit against plaintiff alleging that plaintiff had not paid full value for his shares. Plaintiff, acting pro se, attempted to file a countersuit claiming oppressive actions by Johnson, but apparently failed to adequately state a cause of action. Johnson lost his suit in arbitration, rejected the arbitrator's decision and requested a trial in which the court ultimately ruled in favor of plaintiff.

In or about October 1997, plaintiff requested and was given access to review the books and records of DSI. The records revealed that DSI reportedly had sales revenues of $739,034 and listed $541,168 in assets on its balance sheet in 1996. DSI's total revenues in 1997 were reported as being $934,532.16.

At some point in 1998, Johnson notified plaintiff that an investment in Lilly Software, which had been carried on DSI's books, actually belonged to Johnson and had been mistakenly placed on DSI's books. Johnson removed the asset from the books and also reversed a $30,000 dividend paid by the Lilly investment to DSI. Plaintiff questioned Johnson, who explained that the investment had only been on DSI's books for less than a year. Plaintiff wrote a letter to Johnson questioning this explanation. Apparently, plaintiff believed that Johnson's statement was contradicted by DSI's financial statements showing the investment had been carried on DSI's books for approximately two years. Johnson did not respond to plaintiff's letter.

In a letter dated July 28,1998, however, plaintiff was notified that Johnson, as the sole officer and majority shareholder, had adopted a resolution to dissolve DSI. Plaintiff was also provided with an income statement and balance sheet which showed that all of the assets of DSI had been sold or written off. The investment in DPSI had been sold to Johnson for $267.50 and a write-off of $44,732.50 was charged to DSI. The reasons contained in the resolution to dissolve DSI, signed by Johnson, were threefold: (a) that the corporation conducted no business; (b) that the corporation had no prospects for future business; and (c) that there were no employees of the corporation.

On or about August 20, 1998, a special meeting of the shareholders took place which was attended by Johnson, plaintiff and plaintiff's attorney. Plaintiff voted against the dissolution of the corporation and Johnson voted for dissolution. Thus, the resolution was passed by a majority vote of the shareholders. DSI was dissolved thereafter; DPSI still exists with Johnson as the majority shareholder.

At some point during the meeting of August 20, 1998, however, plaintiff verbally requested corporate records showing how the various assets of the corporation were valued and to whom they were transferred. These apparently were not provided to plaintiff during the meeting. Instead, Johnson told plaintiff to put his request in writing.

Within two weeks, by way of a certified letter dated August 31, 1998, plaintiff made a written request pursuant to section 7.75 of the Business Corporation Act of 1983 (805 ILCS 5/7.75 (West 1992)) (the Act). Plaintiff reiterated his request, made during the special shareholder's meeting, to review the corporate books and records. Plaintiff received no response to his request.

On October 26, 1998, plaintiff's attorney sent another certified letter to Johnson again reiterating plaintiff's request. Again, there was no response to this letter.

On March 17, 1999, plaintiff filed a complaint for a writ of mandamus in the circuit court of Lake County. Unbeknownst to plaintiff, however, DSI had moved to a location near the border of Lake and Cook Counties. DSI was actually headquartered in Cook County. On August 13, 1999, plaintiff refiled his original complaint for a writ of mandamus in the circuit court of Cook County; plaintiff filed an amended complaint on October 25, 1999. In his amended complaint, plaintiff alleged that his purpose in seeking relief pursuant to section 7.75 of the Act was, as set forth in his letter, threefold: (a) to aid in the determination of the present value of the shareholders' shares in the corporation; (b) to determine the financial condition of the corporation; and (c) to determine whether unauthorized and oppressive acts had occurred in connection with the operation of the corporation which impacted the value of the shareholders' shares so as to justify remedies under the Act.

On November 19, 1999, defendants filed a motion to dismiss the amended complaint, pursuant to section 2-615 of the Code of Civil Procedure (735 ILCS 5/2-615 (West 1998)), arguing that plaintiff failed to sufficiently plead a proper purpose in his complaint. The trial court denied the motion to dismiss on December 10, 1999. On December 30, 1999, defendants filed their answer and affirmative defenses to plaintiff's amended complaint.

Subsequently, several status hearings transpired with respect to the pending litigation between January 2000 through July 2000. The record reveals that a series of correspondence ensued between the parties during this period. On February 23, 2000, defendants' counsel sent a letter to Hagen's counsel stating: "[O]ur client has no objection, nor has it ever objected, to Mr. Hagen's reasonable examination of the books and records of [the corporation]." The letter further stated that defendants objected to plaintiff's demands for narrative answers and requested a written response informing them "exactly which corporate books and records" that plaintiff was seeking to examine. Plaintiff's attorney responded in writing on February 28, 2000, in which he took issue with defendants' delayed assertion that it did not object to plaintiff's examination of the records. Plaintiff's counsel noted that before the litigation began, two separate demands were made and were not responded to, forcing the litigation. Plaintiff's counsel again explained that plaintiff was seeking to review DSI's books and records - as the statute expressly permitted. Defendant's attorney responded in writing on March 2, 2000; plaintiff's counsel replied in writing on April 28, 2000.

On June 12, 2000, defendants filed a motion for summary judgment asserting that, as a matter of law, plaintiff could not maintain his action for a writ of mandamus. Defendants again argued that plaintiff did not have a proper purpose for requesting the records. Defendants additionally contended that plaintiff's written request to inspect the corporation's records failed to meet the requirements of section 7.75(b) of the Act because plaintiff failed to specify the documents he wanted to review. In response, on July 17, 2000, plaintiff filed a cross-motion for summary judgment to compel defendants by mandamus to produce the entirety of the corporation's books and records. On July 24, 2000, the trial court heard oral arguments on both motions. The trial court, however, did not rule on either motion for summary judgment, but continued them to August 21, 2000.

Instead, the court ordered plaintiff to submit a revised request by August 3, 2000, and ordered defendants to respond by August 17, 2000. On August 3, 2000, plaintiff sent his revised written request in which he listed 47 items. On August 9, 2000 , defendants indicated that some of the documents would be made available, further indicated that some of the documents did not exist, and further objected that some of the requested items were not stated with sufficient particularity.

On August 21, 2000, at a status hearing on the pending motions for summary judgment, the trial court entered an order that on August 25, 2000, plaintiff review the records made available by defendants. Again, the trial court did not rule on the pending motions for summary judgment, but again continued them until September 6, 2000.

Finally, on August 25, 2000, approximately two years after plaintiff's original request, plaintiff and his attorney were allowed to physically review corporate documents. Plaintiff, in his brief, states that the entirety of the corporation's records ...

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