Title: Schirmer v. Bear

State: illinois

Issuer: Illinois Supreme Court

Document:

NOTICE: Under Supreme Court Rule 367 a party has 21 days after the 
filing of the opinion to request a rehearing. Also, opinions are 
subject to modification, correction or withdrawal at anytime prior 
to issuance of the mandate by the Clerk of the Court. Therefore, 
because the following slip opinion is being made available prior to 
the Court's final action in this matter, it cannot be considered 
the final decision of the Court. The official copy of the following 
opinion will be published by the Supreme Court's Reporter of 
Decisions in the Official Reports advance sheets following final 
action by the Court. 
 
                 Docket No. 79097--Agenda 8--March 1996. 
        TIMOTHY J. SCHIRMER, Appellee, v. WILLIAM F. BEAR et al., 
                               Appellants. 
                     Opinion filed October 18, 1996. 
 
 
     JUSTICE McMORROW delivered the opinion of the court: 
     The question presented in this appeal is whether, under 
section 12.55 of the Illinois Business Corporations Act of 1983 
(the Act) (805 ILCS 5/12.55 (West 1992)), a plaintiff shareholder 
in a close corporation must prove grounds which would justify 
dissolving the corporation as a prerequisite to receiving the 
statutory remedy of having the corporation purchase his or her 
shares. The appellate court concluded that a plaintiff does not 
have to establish that dissolution is justified before a 
corporation may be forced to buy a complaining shareholder's 
corporate stock. 271 Ill. App. 3d 778. We allowed defendants' 
petition for leave to appeal. 155 Ill. 2d R. 315. For the reasons 
which follow, we affirm the judgment of the appellate court. 
 
                                Background 
     Defendant William R. Bear Agency, Inc. (the Agency), is an 
independent insurance agency located in Freeport, Illinois. The 
Agency was incorporated in 1979, at which time 1,000 shares of 
common stock were issued. Of these 1,000 shares, 750 were retained 
by Mr. William R. Bear, previously the Agency's sole owner, and his 
wife, Mrs. Jean M. Bear. The remaining 250 shares were purchased by 
Mr. and Mrs. Bear's son, defendant William F. Bear (William), who 
was also an employee of the Agency. 
     On May 1, 1982, the plaintiff, Timothy Schirmer, began working 
for the Agency as an insurance broker. On that same date, two stock 
purchase agreements were entered into. In the first, Mr. and Mrs. 
Bear agreed to sell William 44 of their shares in the Agency and to 
sell plaintiff 187 of their shares. In return for the 187 shares, 
plaintiff made a $10,000 down payment and agreed to pay the 
remaining balance of $66,670 in monthly installments at an interest 
rate of 9.25% per annum. Plaintiff's total obligation for the 
shares, including principal and interest, was approximately 
$106,000. Also, under the first agreement, plaintiff received an 
option to buy 53 additional shares of the Agency at $410 per share, 
with further conditions of the sale to be decided at the time of 
purchase. 
     Under the terms of the second stock purchase agreement, the 
Agency bought back all of Mr. and Mrs. Bear's remaining 519 shares 
for $212,790. This amount was to be paid in monthly installments of 
$3,450.65, which reflected a 9.25% annual interest rate. The 
Agency's total obligation for the shares was approximately 
$290,000. William and plaintiff guaranteed payment for the 519 
shares both individually and jointly. Because of the two stock 
purchase agreements, as of May 1, 1982, plaintiff and William 
became the sole shareholders of the Agency. William owned 294 
shares, representing 61.1% of the outstanding stock, and plaintiff 
owned 187 shares, representing 38.9%. 
     From May 1, 1982, until July 1990, plaintiff had a good 
working relationship with William. During this time, plaintiff 
earned an annual income from the Agency, plus annual bonuses for 
increasing revenues by developing new accounts. The gross annual 
commissions of the Agency, with plaintiff's help, increased from 
$180,653 to $285,000. In addition, during this period, plaintiff 
served as a corporate director of the Agency. William and defendant 
Lawrence Peck, a retired accountant and friend of Mr. Bear, also 
served as corporate directors. 
     The final installment payments under both of the 1982 stock 
purchase agreements were due at the beginning of July 1990. At a 
meeting held on July 2, 1990, William and plaintiff presented the 
final payments to Mr. and Mrs. Bear and, in return, received their 
stock certificates. At the same meeting, William and plaintiff, 
acting in their capacity as shareholders, elected the board of 
directors for the Agency. As in the past, this board consisted of 
William, plaintiff, and Lawrence Peck. The directors' term of 
office was to be for one year. Also during the same meeting, 
William and plaintiff agreed to extend the terms of the first stock 
purchase agreement until such time as a new agreement between 
William and plaintiff could be completed. In addition, the value of 
the corporation, later contested at trial, was declared to be 
$500,000. 
     On July 18, 1990, plaintiff wrote to William expressing a 
desire to exercise his option to purchase 53 additional shares of 
the Agency pursuant to the terms of the first stock purchase 
agreement. Plaintiff enclosed a proposed payment plan with his 
letter which stated that payment amounts and payment dates were to 
be left to the discretion of the buyer. Two days later, on July 20, 
1990, William met with plaintiff and rejected the offer. At the 
same time, William informed plaintiff that, for business reasons, 
he had closed the books of the Agency, thereby forgoing any bonuses 
or profit sharing for the year. 
     On August 10, 1990, plaintiff wrote William a letter in which 
he strongly protested William's decision to close the books of the 
Agency and declared that doing so was not in the best interest of 
the stockholders. Plaintiff further alleged that William had wasted 
corporate assets. Plaintiff stated that he could not see himself 
continuing with the Agency under current conditions and requested 
that the Agency pay him $195,000 for his shares. This figure was 
based on his percentage interest in the Agency and the $500,000 
valuation established at the July 2, 1990, meeting. Plaintiff also 
stated that once his shares were purchased, he would be willing to 
either terminate his relationship with the Agency or continue on as 
an employee with an annual salary equal to William's. The next day, 
August 11, 1990, William wrote plaintiff a letter in which he 
rejected plaintiff's proposals and advised plaintiff to have his 
attorney contact William's attorney, John B. Whiton. 
     On August 20, 1990, William sent plaintiff a letter notifying 
him of an annual directors' meeting to be held on August 30, 1990. 
The letter did not contain any notice of intent to hold a 
shareholders' meeting, to amend the bylaws, or to reduce the size 
of the board of directors. 
     On August 27, 1990, Whiton, who also served as counsel for the 
Agency, wrote to plaintiff, stating that plaintiff's letter of 
August 10 was deemed a resignation effective no later than 
September 15, 1990. Whiton also rejected plaintiff's asking price 
for his stock and instead offered the price of $76,670. This figure 
was derived from the first stock purchase agreement, which 
permitted Mr. and Mrs. Bear to reacquire plaintiff's shares for the 
principal price he paid if plaintiff resigned from the Agency or 
was discharged for his conduct. Whiton's letter also noted that if 
plaintiff refused to sell his stock, he faced the possibility of 
remaining, for quite some time, a minority shareholder with no 
input into how the Agency was run. 
     On August 30, 1990, at a meeting of the board of directors at 
which plaintiff was present, William moved to amend the Agency's 
bylaws to reduce the number of directors from three to one. William 
voted his 61.1% of the Agency's shares in favor of the motion and 
plaintiff voted his 38.9% against. The motion passed. William then 
nominated himself as sole director of the Agency and was elected, 
again on the strength of his ownership of 61.1% of the Agency's 
shares. As sole director, William appointed himself president and 
treasurer of the Agency, and appointed his wife secretary. William 
also removed plaintiff's name from all corporate accounts and set 
plaintiff's termination date for September 15, 1990. After that 
date, plaintiff received no further income, bonuses, or other 
benefits from the Agency. 
     On December 7, 1990, plaintiff filed the instant lawsuit in 
the circuit court of Stephenson County, alleging that the 
defendants wasted corporate assets and acted in an illegal, 
oppressive, or fraudulent manner. No allegations were made 
regarding corporate deadlock. At trial, plaintiff argued that he 
had been exploited by William. Plaintiff maintained that William 
had used him to finance the stock purchase agreements and then, 
once the payments required under the agreements were completed, 
illegally removed him from the Agency. Plaintiff prayed for 
dissolution of the corporation or, in the alternative, an order 
directing the Agency to buy plaintiff's shares. 
     After trial, the court concluded that plaintiff's removal as 
corporate director and officer at the August 30, 1990, meeting was 
"obviously illegal, but the record is devoid of any evidence that 
plaintiff was harmed thereby." The court noted that the decision to 
dissolve a corporation is discretionary, even when a finding of 
illegal conduct has been made. 805 ILCS 5/12.50 (West 1992) ("A 
Circuit Court MAY dissolve a corporation: ***" (emphasis added)). 
The court declined to exercise its discretion, concluding that 
plaintiff had failed to prove that defendants engaged in conduct 
which justified dissolving the Agency. However, the court held that 
plaintiff could recover the fair value of his shares pursuant to 
section 12.55 (805 ILCS 5/12.55 (West 1992)). The court then 
ordered a hearing to be held to assess the value of plaintiff's 
stock. Subsequently, upon defendant's motion to reconsider, the 
court reversed itself, based solely upon the first district of the 
appellate court's ruling in Coduti v. Hellwig, 127 Ill. App. 3d 279 
(1st Dist. 1984). The Coduti court held that the Act's alternative 
remedy of a purchase of plaintiff's shares could not be awarded 
unless the plaintiff proved all of the elements necessary to 
warrant dissolving the corporation. Coduti, 127 Ill. App. 3d at 
294. 
     On appeal, the second district of the appellate court 
essentially agreed with the circuit court's original ruling and 
findings. The appellate court acknowledged, but declined to follow, 
the interpretation of section 12.55 that was adopted in Coduti. 
Instead, the appellate court held that a plaintiff does not have to 
establish that dissolution is justified before the alternative 
remedy of a forced purchase of shares may be granted under section 
12.55. The appellate court reversed the circuit court's decision 
refusing to order the Agency to purchase plaintiff's shares and 
remanded the cause for a hearing to determine the fair value of 
plaintiff's shares. This appeal followed. 
 
                                 Analysis 
     The provision at issue in this appeal, section 12.55 of the 
Act, provides in pertinent part: 
               "(a) In either an action for dissolution pursuant to 
          Section 12.50 or in an action which alleges the grounds 
          for dissolution set forth in Section 12.50 but which does 
          not seek dissolution, the Circuit Court, in lieu of 
          dismissing the action or ordering dissolution, may retain 
          jurisdiction and: 
                                   * * * 
               (3) In an action by a shareholder, order a purchase 
          of the complaining shareholder's shares as provided in 
          subsections (f) and (g) below. 
                                   * * * 
               (f) The court, at any time during the pendency of 
          the action and upon the motion of the complaining 
          shareholder, may order the corporation to purchase the 
          shares of the complaining shareholder at a fair price 
          determined by the court ***. 
               (g) Either the corporation or any shareholder or 
          group of shareholders may, any time after filing of an 
          action for dissolution pursuant to subsection (b) of 
          Section 12.50, petition the court to purchase the shares 
          of a complaining shareholder ***." 805 ILCS 5/12.55 (West 
          1992). 
     Section 12.50 of the Act provides in pertinent part: 
               "12.50. Grounds for judicial dissolution. A Circuit 
          Court may dissolve a corporation: 
               *** 
               (b) In an action by a shareholder, if it is 
          established that: 
               *** 
               (2) The directors or those in control of the 
          corporation have acted, are acting, or will act in a 
          manner that is illegal, oppressive or fraudulent; or 
               (3) The corporate assets are being misapplied or 
          wasted." 805 ILCS 5/12.50(b) (West 1992). 
     Plaintiff argues that section 12.55 does not require, as a 
condition precedent to relief, proof of conduct which would entitle 
him to corporate dissolution under section 12.50. Plaintiff notes 
that by its express terms, section 12.55 permits alternative 
remedies not only in actions brought solely under section 12.50, 
but also in actions "which allege[ ] the grounds for dissolution 
set forth in Section 12.50 but which [do] not seek dissolution." 
805 ILCS 5/12.55(a) (West 1992). In addition, plaintiff notes that 
the circuit court is given the discretion to order alternative 
remedies "in lieu of dismissing the action or ordering dissolution" 
(805 ILCS 5/12.55(a) (West 1992)) and, further, that under 
subsection (f) the court may order a forced purchase of shares "at 
any time during the pendency of the action" (805 ILCS 5/12.55(f) 
(West 1992)). Based on this language, plaintiff maintains that the 
filing of "an action which alleges the grounds for dissolution set 
forth in Section 12.50" (805 ILCS 5/12.55(a) (West 1992)) is 
essentially a threshold requirement for obtaining the alternative 
remedies available under section 12.55. Once this requirement is 
met, the court need only be apprised of the relevant facts. 
Thereafter, if equity requires the awarding of an alternative 
remedy, the court is permitted to grant one. Continuing, plaintiff 
argues that because he filed an action which alleged grounds for 
dissolution under section 12.50, i.e., waste, illegality and 
oppression, and because the equities were in his favor, the trial 
judge properly acted within his discretion when he initially 
awarded the buyout of plaintiff's shares. 
     In contrast, defendants argue that the only way to effectuate 
fair and uniform results under section 12.55 is to require a 
plaintiff to prove all of the elements necessary to justify 
dissolving the corporation under section 12.50. Defendants point 
out that the decision to grant dissolution under section 12.50 
remains discretionary even when it has been established that the 
defendants engaged in illegal or oppressive acts, or wasted 
corporate assets. 805 ILCS 5/12.50 (West 1992) ("A Circuit Court 
may dissolve a corporation: ***"). Thus, defendants maintain that 
in order to prove all the elements for dissolution in this case, 
plaintiff must establish both that defendants engaged in the 
alleged misconduct and that the conduct was severe enough to 
warrant judicial dissolution. Because the trial court concluded 
that dissolution was not warranted in the case at bar, despite the 
finding of illegal conduct, defendants argue that the alternative 
remedy of a buyout of plaintiff's shares should not be available. 
     Defendants also note that plaintiff's construction of section 
12.55 does not provide an explicitly defined basis for awarding 
relief. Defendants express concern that if this court approves 
plaintiff's analysis of the statute, trial courts will have 
"unfettered discretion to order the corporation to purchase the 
minority shareholder's shares." Defendants urge this court to 
follow the interpretation of section 12.55 adopted by the Coduti 
court, which held that the provision "contemplates only an 
alternative remedy, rather than a distinct action. Consequently, 
the right to that remedy depends upon proof of ALL OF THE ELEMENTS 
which would have entitled the party to a judicial dissolution ***." 
(Emphasis added.) Coduti, 127 Ill. App. 3d at 294. 
     We agree with plaintiff that the plain language of section 
12.55 provides a basis for relief independent of proof of grounds 
for dissolution under section 12.50. The statute contemplates broad 
discretion in the trial court in deciding to award a forced 
purchase of shares, and unambiguously "provides for a separate and 
distinct cause of action from Section 12.50." Kimmel v. Wirtz,  793 F. Supp. 818 , 820 (N.D. Ill. 1992). Therefore, plaintiff's failure 
to prove grounds entitling him to judicial dissolution does not 
foreclose the availability of the alternative remedy of a forced 
purchase of his shares. 
     However, we disagree with the remainder of plaintiff's 
interpretation of section 12.55. Plaintiff's contention is that 
section 12.55 gives the circuit courts the discretionary authority 
to order the alternative remedy of a forced purchase of shares 
without first making any findings of corporate waste, illegality or 
other clearly specified wrongdoing. Defendants correctly point out 
that plaintiff's interpretation of section 12.55 leaves the 
elements of proof required under the statute completely undefined. 
Thus, under plaintiff's interpretation, the circuit courts would be 
left with no guidelines for determining what type of behavior 
warrants awarding the forced purchase of shares, and reviewing 
courts would have no way of determining when, if ever, a circuit 
court had abused its discretion in awarding that remedy. Similarly, 
under plaintiff's analysis of the statute, defendant corporations 
would have no notice respecting what actions taken by the 
corporation would justify ordering the forced purchase of a 
shareholder's stock. We presume that in enacting section 12.55, the 
legislature did not intend to produce an absurd, inconvenient or 
unjust result. Baker v. Miller,  159 Ill. 2d 249 , 262 (1994). 
Accordingly, because plaintiff's proposed construction of section 
12.55 poses unavoidable problems of application and raises 
substantial questions of fundamental fairness, that construction 
must be rejected. 
     We must also, however, reject defendants' explanation of what 
proof is required under section 12.55. Defendants argue that all of 
the elements which would entitle a plaintiff to judicial 
dissolution must be proved in order for an alternative remedy under 
section 12.55 to be available. In other words, defendants argue, a 
plaintiff must establish both that the defendants engaged in the 
alleged misconduct and that the misconduct was so wrongful as to 
justify dissolving the corporation. This interpretation of section 
12.55 would provide clarity and guidance for the courts, but it is 
also illogical: plaintiffs would be required to prove that a 
defendant's conduct was sufficiently egregious to warrant judicial 
dissolution in order to receive the far less drastic remedy of a 
buyout. 
     Moreover, defendants' interpretation of section 12.55 is 
contrary to the legislative intent behind that provision. Judicial 
dissolution is an extreme remedy which courts are properly 
reluctant to order. See Coduti, 127 Ill. App. 3d at 283; Central 
Standard Life Insurance Co. v. Davis,  10 Ill. 2d 566 , 576 (1957). 
Prior to the enactment of section 12.55, minority shareholders 
seeking redress were left without a remedy in those instances where 
the defendant's conduct, even though wrongful, did not justify 
dissolving the corporation. Section 12.55 was specifically enacted 
to correct this problem by increasing the remedies available to 
minority shareholders and by enlarging the discretionary authority 
of the circuit courts to award relief in situations which do not 
warrant dissolution but which do warrant some other, less severe 
remedy. See, e.g., Official Comments of the Advisory Committee to 
the Secretary of State on the Illinois Business Corporation Act of 
1983, Section 12.55 reprinted in 2 Corporation Law Committee, 
Chicago Bar Association, The Illinois Business Corporation Act 
Annotated 429 (3d ed. Supp. 1984) ("The Advisory Committee 
perceived a need for [alternative] remedies less Draconian than 
dissolution, whenever anyone sought dissolution of a corporation"). 
Requiring plaintiffs to prove not only that the defendants engaged 
in misconduct but also that the misconduct was so extreme as to 
justify dissolution of the corporation defeats this legislative 
intent by severely curtailing the discretion invested in the 
circuit courts to order the alternative remedies. Therefore, we 
decline to adopt defendants' proposed construction of section 
12.55. 
     We hold that when a plaintiff seeks relief under section 12.55 
by filing an action which alleges illegal, oppressive or fraudulent 
conduct (805 ILCS 5/12.50(b)(2) (West 1992)), or the misapplication 
or wasting of corporate assets (805 ILCS 5/12.50(b)(3) (West 
1992)), the plaintiff must establish that the defendant engaged in 
the alleged statutory misconduct. However, the plaintiff need not 
prove that defendant's wrongdoing was so severe that it would 
justify dissolving the corporation. Once the predicate misconduct 
is established, the court may, in its discretion, determine which, 
if any, remedy is equitable and appropriate for plaintiff under the 
statute. We believe this construction of section 12.55 fully 
effectuates the legislative intent to increase shareholder remedies 
while, at the same time, providing adequate guidance for the 
courts. We further note that this construction comports with the 
current statutory scheme regulating shareholder remedies for 
nonpublic corporations. See 805 ILCS 5/12.56 (West Supp. 1995). 
     In the instant case, the trial judge found that the removal of 
plaintiff as a corporate officer and director at the August 30, 
1990, meeting was "obviously illegal" and specifically noted that 
the notice for the meeting "failed to comply with the law." In 
addition, while the trial judge did not further identify 
defendants' illegal acts, the record supports plaintiff's 
contentions that the removal of plaintiff was done in violation of 
section 10.20 of the Act, which requires "the affirmative vote of 
the holders of at least two-thirds of the outstanding shares 
entitled to vote" to amend the bylaws (see 805 ILCS 5/10.20(c) 
(West 1992)), and section 8.10, which prohibits the shortening of 
an incumbent director's term of office (see 805 ILCS 5/8.10(d) 
(West 1992)). Here, William was able to amend the Agency's bylaws 
with only 61.1% of the shares and plaintiff's one-year term as 
corporate director was ended less than two months after it began. 
     Defendants do not contest the trial judge's finding of 
illegality but instead emphasize the judge's additional statement 
that plaintiff was not damaged by his illegal removal as corporate 
director and officer. Defendants conclude that even under the 
construction of section 12.55 adopted herein, and even with the 
finding of illegality by the trial judge, the buyout should not 
have been ordered because the plaintiff suffered no injury. 
     It is unclear from the record exactly what the trial judge 
meant by his statement that the plaintiff was not damaged by the 
events at the August 30, 1990, meeting. The statement was made in 
the context of concluding that plaintiff was not entitled to 
dissolution of the corporation under section 12.50. Thus, the 
statement may simply have meant that plaintiff had not been 
sufficiently damaged to warrant the drastic remedy of dissolution. 
Clearly, the trial judge did not believe that plaintiff was not 
damaged at all; otherwise he would not have ordered the buyout. 
Indeed, the judge expressly noted during comments made at the 
conclusion of trial that any award which he entered would "reflect 
what, if any, injury [had been] inflicted." 
     Regardless of the precise meaning of the statement, the facts 
indicate that plaintiff was forced out of any participation in the 
Agency by the actions of an illegally elected sole director. The 
parties agree that the decision to order remedies under section 
12.55 is left to the sound discretion of the trial judge. We 
conclude, based on the record before us, that the trial judge did 
not exceed the scope of his discretionary authority when he 
initially ordered the Agency to purchase plaintiff's shares. The 
judge's subsequent reversal of that decision was based solely on 
the Coduti court's interpretation of section 12.55, which today has 
been overruled. Therefore, the trial judge's ultimate decision not 
to order the Agency to purchase plaintiff's shares must be 
reversed. 
     For the foregoing reasons, the appellate court's judgment 
reinstating the trial court's initial order and remanding the cause 
for a hearing to determine the fair value of plaintiff's shares is 
affirmed. 
 
Affirmed. 
 
     JUSTICE HARRISON, specially concurring: 
     I agree with the result reached by the majority, but write 
separately because I disagree with my colleagues' construction of 
section 12.55 of the Illinois Business Corporation Act of 1983 (805 
ILCS 5/12.55 (West 1992)).  
     Under the plain language of section 12.55, the court may order 
the corporation to purchase the shares of a complaining shareholder 
at any time during the pendency of a dissolution action if the 
complaining shareholder has moved for such relief. As the appellate 
court correctly held, the statute does not require grounds for 
dissolution to be proven before this alternative remedy may be 
applied. 271 Ill. App. 3d at 787. The remedy is available whenever 
the appropriate allegations have been made to state a claim under 
section 12.50 of the Act (805 ILCS 5/12.50 (West 1992)) and the 
shareholder asks to be bought out, as was the case here. There is 
no basis in the law for requiring a petitioning shareholder to do 
anything more.