Coronet Ins. Co. v. Seyfarth

• Decision Date: 16 July 1987
• Docket Number: No. 86 C 1935.,86 C 1935.
• Citation: 665 F. Supp. 661
• Parties: CORONET INSURANCE COMPANY, an Illinois insurance company, Plaintiff, v. Henry E. SEYFARTH, Robert E. Field, Fred W. Mansfield, and Vincent C. Yager, as Directors of Great Lakes Financial Resources, Inc.; Vincent C. Yager, Robert E. Field, Edward K. Aldworth, and Fred W. Mansfield, as Administrators of First National Bank of Blue Island Employees Stock Ownership Plan; Seyfarth, Shaw, Fairweather & Geraldson, an Illinois partnership, including professional corporations; First National Bank of Blue Island Employees Stock Ownership Plan; Great Lakes Financial Resources, Inc., a Delaware corporation, and Harris Trust & Savings Bank, an Illinois banking corporation, Defendants.
• Court: U.S. District Court — Northern District of Illinois

665 F. Supp. 661

CORONET INSURANCE COMPANY, an Illinois insurance company, Plaintiff, v. Henry E. SEYFARTH, Robert E. Field, Fred W. Mansfield, and Vincent C. Yager, as Directors of Great Lakes Financial Resources, Inc.; Vincent C. Yager, Robert E. Field, Edward K. Aldworth, and Fred W. Mansfield, as Administrators of First National Bank of Blue Island Employees Stock Ownership Plan; Seyfarth, Shaw, Fairweather & Geraldson, an Illinois partnership, including professional corporations; First National Bank of Blue Island Employees Stock Ownership Plan; Great Lakes Financial Resources, Inc., a Delaware corporation, and Harris Trust & Savings Bank, an Illinois banking corporation, Defendants.

No. 86 C 1935.

United States District Court, N.D. Illinois, E.D.

July 16, 1987.

Nathan H. Dardick, Morton Denlow, Carolyn J. Gallagher, Dardick & Denlow, Chicago, Ill., for plaintiff.

Michael W. Coffield, Kevin M. Flynn, Steven J. Roeder, Coffield Ungaretti Harris & Slavin, Chicago, Ill., for defendant Great Lakes Financial Resources, Inc.

J. Samuel Tenenbaum, David J. Eckert, Becker & Tenenbaum, Chicago, Ill., for defendant First Nat. Bank of Blue Island Employee Stock Ownership Plan.

Frank J. Dolan, Frank J. Dolan and Associates, Chicago, Ill., for defendants Henry E. Seyfarth, Robert E. Field, Fred W. Mansfield, Vincent C. Yager, and Edward K. Aldworth.

Francis D. Morrissey, Thomas F. Bridgman, Thomas A. Doyle, Baker & McKenzie, Chicago, Ill., for defendant Seyfarth, Shaw, Fairweather & Geraldson.

Ann Acker, Rick D. Bailey, John Weiss, Chapman & Cutler, Chicago, Ill., for defendant Harris Trust & Savings Bank.

MEMORANDUM OPINION AND ORDER

NORDBERG, District Judge.

Plaintiff Coronet Insurance Company ("Coronet") brings this action for declaratory and injunctive relief, recission and damages alleging that defendants have acquired a controlling interest in defendant Great Lakes Financial Resources, Inc. ("Great Lakes"), a multibank holding company, in violation of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), Securities Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5, Section 14(e) of the Exchange Act, 15 U.S.C. § 78n(e), the Racketeering Influence and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq., Section 144 of the Delaware General Corporation Law, 8 Del.Code § 144, and Delaware common law regarding breach of fiduciary duty. In addition to Great Lakes, Coronet has named as defendants Great Lakes' directors, the First National Bank of Blue Island Employee Stock Ownership Plan ("Blue Island ESOP") and its administrators, the law firm of Seyfarth, Shaw, Fairweather and Geraldson ("Seyfarth, Shaw"), and Harris Trust and Savings Bank ("Harris").

This matter is now before the court on the defendants' various motions to dismiss. For the reasons set forth below, the court grants defendants' motions to dismiss all counts of the complaint. However, the court grants Coronet twenty-one days from the date of this order in which to file an amended complaint, and grants defendants twenty-one days from the date the amended complaint is due in which to file answers to the amended complaint, if filed.

I. Facts

Coronet is an Illinois insurance company which currently owns approximately 19,264 shares, or 8%, of Great Lakes' outstanding common stock. Great Lakes is a bank holding company organized under Delaware Law. Great Lakes owns 100% of the outstanding common stock of First National Bank of Blue Island ("Blue Island Bank") and 97.89% of the outstanding common stock of Community Bank of Homewood-Flossmoor ("Community Bank"). As of February 10, 1986, Great Lakes itself had 238,928 outstanding shares of common stock. Blue Island ESOP is a trust organized under the Internal Revenue Code and the Employment Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1104 et seq. Seyfarth, Shaw is an Illinois partnership engaged in the practice of law. Seyfarth, Shaw represents and advises Great Lakes, Blue Island Bank, Homewood Bank and Blue Island ESOP in legal matters related to this action, as well as other matters. Harris is an Illinois banking corporation.

Henry E. Seyfarth ("Seyfarth") is the chairman of the board of directors of Great Lakes and Great Lakes' largest shareholder, owning or controlling approximately 30.58% of Great Lakes' outstanding common stock. He is also the senior partner of Seyfarth, Shaw. Robert E. Field ("Field") is a member of Great Lakes' board of directors, and he owns or controls 1,196 shares, or approximately one-half of 1% of Great Lakes' outstanding common stock. Field is also an administrator of Blue Island ESOP and a partner at Seyfarth, Shaw. Vincent C. Yager ("Yager") is a member of the boards of directors of Great Lakes and Blue Island Bank, and an administrator of Blue Island ESOP. Yager is also the president and chief executive officer of Great Lakes and Blue Island Bank, and Yager owns or controls 2,689 shares, or approximately 1.1% of Great Lakes' outstanding stock. Fred W. Mansfield ("Mansfield") is a member of the boards of directors, and a high-ranking officer, of Great Lakes and Blue Island Bank. Mansfield owns or controls 1,200 shares, or approximately one-half of 1% of Great Lakes' outstanding common stock. Edward K. Aldworth ("Aldworth") is an administrator of Blue Island ESOP and the senior vice president and chief credit officer of Blue Island Bank.

In September, 1984, the directors of Great Lakes created Blue Island ESOP. The directors chose four administrators for Blue Island ESOP, three from their own ranks: Field, Yager and Mansfield. In addition, Yager, Mansfield and the fourth administrator, Aldworth, are salaried officers of Great Lakes and/or Blue Island Bank.

In November, 1984, Seyfarth, Harry G. Robertson, a Great Lakes director, and Leslie I. McCord, a Blue Island Bank director, all Great Lakes shareholders, entered into a stock purchase agreement with Blue Island ESOP. Under the agreement, Blue Island ESOP would purchase 54.1% of Great Lakes outstanding common stock from the three shareholders, at $87.50 per share. However, in August, 1985, the Board of Governors of the Federal Reserve System ("Board") denied Blue Island ESOP's application to purchase these shares. The Seventh Circuit affirmed the Board's decision in First National Bank of Blue Island Employee Stock Ownership Plan v. Board of Governors of the Federal Reserve System, 802 F.2d 291 (7th Cir. 1986) (holding that the Blue Island ESOP is a "company" subject to regulation under the Bank Holding Company Act, 12 U.S.C. §§ 1841-50).

In November and December of 1985, the Great Lakes Directors received two letters of intent, one offering to purchase 100% of Great Lakes' outstanding common stock at $88 per share, and the other offering to purchase 100%, but not less than 80%, of Great Lakes' stock at $90 per share.¹ Coronet alleges that Seyfarth vetoed these offers, and the board of directors failed to make a recommendation on, or call a special meeting of the shareholders with regard to, these offers.

Coronet contends that the "Seyfarth group," which consists of the directors, the administrators and Seyfarth, Shaw, then "embarked on a secret scheme to entrench its control of Great Lakes, without investing any of its own money." See Complaint ¶ 37. The "Seyfarth group" allegedly caused Blue Island ESOP to extend a tender offer to purchase 20% of Great Lakes' outstanding common stock at $76 per share. The "Seyfarth group" obtained a four-million dollar loan from Harris for Blue Island ESOP to finance the tender offer. In order to induce Harris to make this loan, the "Seyfarth group" "secretly arranged for Great Lakes to guarantee the debt and to pledge substantially all of the common stock of its subsidiary banks, Blue Island Bank and Homewood Bank, as collateral for the loan." See Complaint ¶ 37.

On February 18, 1986, Blue Island ESOP issued its tender offer, which consisted of a written offer and a letter from Yager to Great Lakes shareholders. See Exhibits "A" and "B" to Complaint. According to Coronet, the "Seyfarth group" made many material misrepresentations and omissions in the offering papers which were designed to "disguise" the "true, unlawful" purpose of the tender offer — to place the "Seyfarth group" in control of Great Lakes. See Complaint ¶ 46.

On or about March 15, 1986, Coronet purchased 19,384 Great Lakes shares at $77 per share.² On that same date, Coronet, in response to Blue Island ESOP's tender offer, tendered 120 shares at $76 per share. The tender offer expired on March 17, 1986 at 4:00 p.m. At that time, Blue Island ESOP began to accept, on a pro rata basis, 47,786 of the tendered shares. The tender offer was oversubscribed.

Two days after the tender offer expired, on March 19, 1986, Coronet filed this complaint. Coronet alleges that it has suffered, and will continue to suffer, irreparable injury, in that (1) the value of its stock will be diminished because it will be permanently deprived of its ability to join together with other shareholders to vote effectively on proposals affecting corporate actions; (2) the value of its stock will also decrease because Great Lakes will lose its competitive position in the Illinois banking community as a result of the greater degree of investment risk inherent in the high level of debt secured by Great Lakes' assets; and (3) the value of its stock will also decrease because of Great Lakes' exposure to statutory fines and penalties, and possible loss of good will with the federal regulators, by virtue of its violation of federal banking laws and ERISA. Coronet asks the court to declare Great Lakes' guarantee and pledge of stock securing Blue Island ESOP's debt to be null and void, to order Harris to return to Great Lakes any and all instruments evidencing Great Lakes' pledge of assets, to enjoin defendants from using shares acquired in the tender offer to effect any...