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William Miller and Maxine Miller, Individually and Derivatively On Behalf v. Michael Harris and Kenneth Hoxie

February 21, 2013

WILLIAM MILLER AND MAXINE MILLER, INDIVIDUALLY AND DERIVATIVELY ON BEHALF
OF CLAIMSCO INTERNATIONAL, INC., AS SHAREHOLDERS AND RIGHTFUL DIRECTORS, PLAINTIFFS-APPELLANTS,
v.
MICHAEL HARRIS AND KENNETH HOXIE, DEFENDANTS (JOHN VERCHOTA AND MILLER VERCHOTA, INC., ) HOFFMAN, DEFENDANTS-APPELLEES).



Appeal from the Circuit Court of Lake County. No. 07-CH-2803 Honorable Mitchell L. Judge, Presiding.

The opinion of the court was delivered by: Justice Schostok

JUSTICE SCHOSTOK delivered the judgment of the court, with opinion. Justices McLaren and Zenoff concurred in the judgment and opinion.

OPINION

¶ 1 The plaintiffs, William and Maxine Miller, who were two of the founders and shareholders of the closely held corporation Claimsco International, Inc., filed this action against the other shareholders, the defendants Michael Harris and Kenneth Hoxie, and the accountant who worked for all of them, the defendants John Verchota and his firm, Miller Verchota, Inc. (collectively referred to as Verchota). At issue in this appeal is count II of the fourth amended complaint, which alleged that Verchota breached his fiduciary duty toward the plaintiffs. (The remaining defendants settled with the plaintiffs, and the claims against them are not at issue here.) The trial court dismissed count II under section 2-615 of the Code of Civil Procedure (Code) (735 ILCS 5/2-615 (West 2010)) on the ground that it failed to state a claim upon which relief could be granted. The plaintiffs appealed. We reverse and remand.

¶ 2 BACKGROUND

¶ 3 The following facts are drawn from the allegations of the fourth amended complaint (complaint) which, for purposes of a motion pursuant to section 2-615 of the Code, we must take as true. Khan v. Deutsche Bank AG, 2012 IL 112219, ¶ 47 ("In reviewing the sufficiency of a complaint, we accept as true all well-pleaded facts in the complaint and all reasonable inferences that may be drawn therefrom.").

¶ 4 William Miller was an insurance claims adjuster who worked throughout his life for numerous independent insurance companies. Miller operated his claims adjusting business primarily in Toronto, Canada, but he became interested in expanding his business to include a similar company in the United States. About this time he met Michael Harris, and the two eventually decided to form a new company, Claimsco International, Inc., to operate in the United States. Miller's Canadian business provided almost $100,000 to commence operation of the new company. Shortly after Claimsco began doing business, Harris and Miller entered into a shareholders' agreement (the 1990 Agreement). Under that agreement, Miller would act as chairman of the company and would own 1,000 of the 1,250 shares of the company; Harris would act as president and own 125 shares. (The remaining 125 shares were owned by Thomas Miles, who is not relevant to this case.)

¶ 5 In 1990, Claimsco (acting through Miller) hired Verchota as its tax accountant to handle necessary government filings and related duties. The complaint alleges that Verchota was retained under an oral agreement, the terms of which included the proviso that, in performing accounting duties for Claimsco, he would follow the terms of the 1990 Agreement.

¶ 6 In 1992, Miller and his wife, Maxine, hired Verchota to do their own tax-related accounting. Again, the complaint alleges that Verchota was retained via an oral agreement under which Verchota "agreed to use his best efforts to minimize taxation" to the Millers. The complaint also alleges that an implied term of the contract was that Verchota "agreed, as part of the duties any accountant would owe, to avoid any type of conflict with any other clients and further to avoid favoring any other client over the Millers." The complaint asserts that the Millers "subsequently" learned that Verchota had continued to perform tax accounting for Claimsco after 1992 and, upon information and belief, that he also did personal accounting work for Harris and perhaps Hoxie (a minority shareholder who became vice president of Claimsco between late 2001 and early 2002).

¶ 7 The complaint asserts that Verchota owed the Millers a duty of loyalty that required him "to remain free of any conflict with other clients and to follow" the Millers' instructions regarding the shareholders' agreements to be applied when doing his accounting for Claimsco "or, alternatively, *** to withdraw from continued representation as the accountant of all parties, including Claimsco, Harris, and [the] Millers." The complaint also asserts that Verchota's duty of loyalty required him to disclose to the Millers any conflicts that might develop with other clients.

¶ 8 In 2001, Miller transferred 500 of his 1,000 Claimsco shares to his wife as part of their estate planning. The 1990 Agreement provided that any shareholder could transfer shares to a spouse or child so long as the transferee agreed in writing to be bound by the 1990 Agreement.

¶ 9 In September 2002, approximately 10 years after the Millers first hired Verchota as their personal accountant, Harris asked Miller to attend a Claimsco business meeting. The complaint alleges that, unbeknownst to Miller, the purpose of the meeting was to seize control of Claimsco. At dinner the first night, Miller, Harris, and Hoxie were joined by a lawyer, a friend of Harris's with whom Harris and Hoxie had been consulting, allegedly to assist them in seizing control of Claimsco. The lawyer "coercively informed" Miller that the lawyer and Verchota had determined that Miller was personally liable to Claimsco for a "great deal of money," that the money would have to be repaid or else Claimsco and Miller would owe the Internal Revenue Service (IRS) a lot of money, and that the lawyer and Harris would "see to William's financial and personal downfall" unless Miller accepted the proposition about to be made. The proposition included the demand that Miller immediately surrender control of Claimsco to Harris through the execution of a new shareholders' agreement (2002 Agreement), under which Harris would own the majority of the shares and Hoxie's shares would be increased.

¶ 10 The complaint alleges that no consideration was given for the 2002 Agreement. The complaint acknowledges that, at the same time he signed the 2002 Agreement, Miller also signed a second agreement (Executive Agreement) under which he would continue as an employee of Claimsco (the chairman) for five years and would receive a $75,000 annual salary, the use of a car, and insurance. However, the complaint also alleges that none of the benefits granted to Miller under the Executive Agreement "can truly serve as consideration," because Miller already "had the right to these advantages as a majority shareholder" of Claimsco. The complaint states that Miller was reluctant to execute these two agreements, but he was "further coerced and pressured" by the lawyer, who told him that his transfer of 500 shares to his wife was "illegal" and "would get him in further trouble." Accordingly, "at the insistence" of the lawyer and the "considerable badgering" from the lawyer and Harris, Miller signed the two agreements and also signed his wife's name to them. The complaint states, however, that the Millers "maintain that all Shareholder Agreements subsequent to *** 1990 were void for want of consideration and the only valid Shareholder Agreement is" the 1990 Agreement.

ΒΆ 11 The complaint alleges that, after the 2002 Agreement was signed, Harris and Hoxie, "assisted by Verchota, *** began a course of conduct to eliminate the Millers from any involvement in Claimsco *** and eliminate them from any corporate participation" as was their right as shareholders. The complaint alleges that this course of action included: conducting corporate directors' meetings and shareholders' meetings without notice to the Millers; canceling (without notice) the credit cards held by Maxine Miller since 1990; changing the corporate health insurance program "in such a way as to deprive [the Millers] of their health insurance"; notifying Maxine Miller about the termination of her health insurance benefits in a manner that negatively affected her "opportunity to convert or take any action to maintain" those benefits; reporting distributions to Harris, Hoxie, and the Millers, despite the fact that the Millers received no distributions while Harris and Hoxie did; creating K-1 statements showing those nonexistent distributions and reporting those distributions to the IRS, while withholding issuance of tax reporting forms and K-1s to the Millers; and adjusting Claimsco's records and accounts to reflect that the Millers owed the corporation a ...


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