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Truserv Corp. v. Bess Hardware and Sports

January 21, 2004


[6] Appeal from the Circuit Court of McHenry County. No. 00-LA-119 Honorable Maureen P. McIntyre, Judge, Presiding.

[7] The opinion of the court was delivered by: Justice Grometer

[8]  Plaintiff, TruServ Corporation, appeals from the judgment of the circuit court of McHenry County granting summary judgment in favor of defendant, Bess Hardware and Sports, Inc., d/b/a Bess True Value, on defendant's counterclaim. For the reasons that follow, we affirm in part and reverse in part.


[10]   Plaintiff, a Delaware corporation with its principal place of business in Chicago, Illinois, is a hardware cooperative whose members operate retail outlets nationwide, primarily as True Value stores. Members of the cooperative sign contracts (member agreements) enabling them to use the True Value trademark and to benefit from the group buying power, group billing procedures, and other benefits that plaintiff offers its members. Members' relationships with plaintiff are governed by TruServ's certificate of incorporation, TruServ's bylaws *fn1 , the member agreements, and members' subscriptions to shares. To join the cooperative, each member must purchase 60 shares of TruServ's class A common stock, with a par value of $100 per share, for each store owned. In a year in which plaintiff makes a profit, it distributes a portion of its earnings to each member in the form of "patronage dividends." The annual patronage dividends are paid in proportion to each member's aggregate purchases from plaintiff during a particular fiscal year and generally consist of a combination of cash, promissory notes, and TruServ's class B common stock.

[11]   Article VII, section 6(a), of TruServ's bylaws requires the corporation to redeem the member's capital stock in the corporation upon termination of its member agreement subject to the terms and conditions set forth in article VII, section 7, of the bylaws. Article VII, section 7(a), provides in relevant part:

[12]   "Upon the effective date of the termination of a Member Agreement *** all of this Corporation's stock owned by such stockholder (hereinafter referred to as 'Terminated Stockholder') shall be deemed to be and shall be and become the property of this Corporation; from and after such date all rights and privileges incident to the ownership of the shares (including but not limited to the right to dividends thereon) shall cease, except only the right to receive the purchase price (as hereinafter provided) plus a sum equal to any dividends declared but unpaid at said date and accrued Patronage Dividends for the relevant year or portion thereof *** all without interest and subject to the Corporation's liens and right of setoff."

[13]   In addition, article VII, section 7(b), requires TruServ to remit the redemption price to the terminated stockholder "immediately upon receipt of properly endorsed certificates representing all of a Terminated Stockholder's stock of the Corporation." However, pursuant to article VII, section 7(c), of the bylaws, if:

[14]   "the funds of the Corporation legally available for such purpose are insufficient for immediate payment of all or any part of the redemption price, an agreement for purchase and sale of the stock shall be executed by the Corporation and the Terminated Stockholder pursuant to which the Corporation shall unqualifiedly undertake to pay all or the balance, as the case may be, of the redemption price as soon as funds are legally available for that purpose."

[15]   On or about March 1, 1963, and again on March 7, 1983, defendant signed member agreements with plaintiff. Defendant operated one True Value store in Northfield, Illinois, and one in Glenview, Illinois. Because defendant operated two True Value stores, it purchased 120 shares of TruServ's class A common stock for $12,000.

[16]   In fiscal year 1999, plaintiff suffered a loss totaling $131 million. A special meeting of plaintiff's board of directors was held on March 17, 2000. At that meeting, the board learned that, as a result of the $131 million loss, the book value of plaintiff's stock had been reduced to $35.60 per share. According to the minutes of the meeting, the difference between the par value of the stock and the book value of the stock was critical because the company "cannot have Members redeeming their stock for a par value of $100, while book value is as [sic] $35.60, without impairment." As a result, the Board unanimously adopted the following resolution (hereinafter, moratorium):

[17]   "RESOLVED, that a moratorium on redemption of A Stock and B Stock be and hereby is adopted and the appropriate officers of the Company be and hereby are directed to refrain from redemption of such stock.

[18]   FURTHER RESOLVED, the Board of Directors shall monitor this matter and from time to time shall review whether it is appropriate to resume redemption of A Stock and B Stock."

[19]   At the time the moratorium was adopted, all but one of the directors of TruServ's board were members of the cooperative.

[20]   Then, on August 28, 2000, the board passed a resolution adopting a "Loss Allocation Plan" to allocate the 1999 loss among its members. The Loss Allocation Plan divided almost $114 million of the loss among "each current TruServ Stockholder." The remaining loss was not specifically allocated, but borne by the cooperative as a whole. Plaintiff allocated the loss to members based upon the percentage that each member's class B nonvoting common stock holdings bore to such holdings of all stockholders. According to the plan, each member would satisfy its "loss allocation account" by application of future patronage dividends. If a member left the cooperative prior to the satisfaction of its loss allocation account, any unsatisfied portion of such account would be offset against the redemption price otherwise due to the terminated member. Plaintiff announced the loss allocation plan to its members in a letter dated September 5, 2000. Plaintiff issued a loss allocation statement to defendant apportioning to it a percentage of TruServ's 1999 loss.

[21]   Meanwhile, on February 29, 2000, defendant formally notified plaintiff of its decision to terminate its membership in the cooperative. Under the terms of the member agreement, said termination would have been effective on April 30, 2000. However, on April 10, 2000, plaintiff terminated defendant's membership in the cooperative due to defendant's failure to pay for certain merchandise and services ...

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