CSFM CORP. v. Elbert & McKee Co.
| Decision Date | 02 November 1994 |
| Docket Number | No. 87 C 8495.,87 C 8495. |
| Citation | 870 F. Supp. 819 |
| Parties | CSFM CORPORATION, formerly known as Chicago Steel Corporation, a Wisconsin corporation, and FM Properties of Wisconsin, Inc., Plaintiffs, v. ELBERT & McKEE COMPANY, a partnership, William W. McKee, Jr., Phillip O. Elbert, Raymond Jasica, Chicago Steel Corporation, an Illinois corporation, Defendants. |
| Court | U.S. District Court — Northern District of Illinois |
COPYRIGHT MATERIAL OMITTED
John J. Voortman, Alana L. Helverson, Edward J. Finn, Schiff, Hardin & Waite, Chicago, IL, for plaintiffs.
Stephen Novack, Donald A. Tarkington, Novack & Macey, Chicago, IL, for defendants.
Having reviewed de novo the objected to portions of Magistrate Judge Pallmeyer's report and recommendation, the court overrules the objections and accepts the report and recommendation. The parties' cross-motions for summary judgment on count one are denied.
Plaintiffs in this case are FM Properties of Wisconsin, Inc. and its wholly-owned subsidiary CSFM2 Corporation (originally Chicago Steel Corporation). FM Properties is a wholly-owned subsidiary of First Wisconsin National Bank ("FWNB"). FM Properties created CSFM to acquire and hold the assets of a steel fabrication plant in Melrose Park, Illinois, when the former owner of the plant defaulted on a loan from FWNB.
Defendants are Phillip O. Elbert, William W. McKee, their partnership of Elbert & McKee Company, their colleague Raymond Jasica, and their wholly-owned corporation Chicago Steel Corporation. Plaintiffs are suing Defendants for breach of fiduciary duty (Count I) and breach of contract (Count II) 870 F.Supp. 841. Plaintiffs' claims arose out of Defendants' purchase of the Melrose Park steel plant and its assets from Plaintiffs and Defendants' subsequent sale of the plant and assets to a third party.3
Both FM Properties and CSFM are Wisconsin corporations, with their principal places of business in Milwaukee, Wisconsin. At the time of the filing of the complaint, Defendants Elbert and Jasica were both citizens of Illinois and residents of the Northern District of Illinois. Defendant McKee was a citizen of Pennsylvania. Elbert and McKee (but not Jasica) were partners in Elbert & McKee Company, a consulting firm to the steel industry with its principal place of business in California. Jasica is the former president of Chicago Steel/CSFM. Defendant Chicago Steel Corporation (here, Chicago Steel/Illinois) is incorporated in Illinois and has its principal place of business in Illinois.
This case is properly before the federal court under its diversity jurisdiction. All Plaintiffs are citizens of different states from all Defendants, and the amount in controversy is in excess of $50,000, exclusive of interest and costs. 28 U.S.C. § 1332(a) (1994).
Plaintiffs filed their initial Complaint on September 29, 1987 and an Amended Complaint on February 11, 1988, in which they alleged that Defendants had breached fiduciary duties (Count I) and contractual duties (Count II) owed to Plaintiffs.4 Defendants subsequently filed a motion to dismiss Plaintiff's Count I.
Judge Suzanne Conlon, to whom the case was then assigned, denied Defendants' motion to dismiss Count I. CSFM Corp. v. Elbert & McKee Co., No. 87 C 8495, 1988 WL 93957, 1988 U.S.Dist. LEXIS 9993 (N.D.Ill. 1988). The threshold issue in Count I, according to Judge Conlon, was when Defendants' fiduciary duties to Plaintiffs ended; specifically, whether Defendants' duties ended in August 1986 when the parties signed an agreement to sell the steel plant and all of its assets to Defendants, or in December 1986 when the parties closed the deal and ownership of the assets actually passed to Defendants. Id. 1988 WL 93957 at *2.
Judge Conlon concluded that the August 1986 agreement did not terminate Defendants' fiduciary duties. The agreement was a contract to buy and sell, nothing more. Id. 1988 WL 93957 at *3. Judge Conlon based her conclusion in part on the general rule under Wisconsin law that officers of a corporation may not, by contract, lawfully divest themselves of their fiduciary obligations.5 Id. 1988 WL 93957 at *3.
After denial of their motion to dismiss, Defendants filed an answer to the complaint and affirmative defenses to the breach of fiduciary duty and breach of contract claims. In November 1989, both parties moved for summary judgment on both Counts I and II. On March 2, 1994, the parties' motions were referred to these chambers pursuant to Local Rule 2.41(b).
The following factual background is supported by the parties' Local Rule 12(m) and 12(n) statements.6 Citations are also provided to other materials relied upon by the parties.
First Wisconsin National Bank (FWNB) and its wholly-owned subsidiary FM Properties, Inc. acquired the assets of a steel fabricating plant located in Melrose Park, Illinois through a deed in lieu of foreclosure when the plant's former owner proved unable to repay a loan to FWNB. (Plaintiffs' Rule 12(m) Statement on Count I, ¶¶ 7, 10.) FM Properties created a wholly-owned subsidiary, Chicago Steel Corp. (here Chicago Steel/CSFM) to hold the assets.
FWNB had no experience in the operation of a steel plant. Accordingly, in October 1984, FWNB entered into an Agreement for the Performance of Personal Services (hereinafter "Personal Services Agreement") with the consulting firm of Elbert & McKee Company.7 (Plaintiffs' Rule 12(m) Statement on Count I ¶ 11.) The Agreement provided that Elbert and McKee would serve initially as chief executive officers of Chicago Steel/ CSFM with the authority, subject to Board approval, to formulate company policies; administer the company; hire and fire personnel; and enter into contracts. (Personal Services Agreement § 1, Ex. PX-2 to Plaintiffs' Rule 12(m) Statement on Count I.) Specifically, Elbert and McKee would serve as President and Executive Vice President, or in any other executive officer position designated by the company's Board of Directors. (Id.)
The Board of Directors formally elected Elbert and McKee to their respective positions on October 2, 1984 (Plaintiffs' Rule 12(m) Statement on Count I ¶ 13) and filed notice to this effect with the Wisconsin Secretary of State on October 22. (Chicago Steel Corporation Certificate of Newly Elected Officers/Directors of 10/22/84, Ex. PX-24 to Plaintiffs' Rule 12(m) Statement on Count I.) Thereafter, the minutes of the board meetings consistently listed Elbert and McKee among the "officers present." (See, e.g., Minutes of monthly meetings of Chicago Steel/CSFM's Board of Directors (hereinafter "Board Minutes") of 1/15/85 through 11/14/86, Ex. PX-30-39, PX-42-45, PX-52, PX-68, PX-151, and PX-154 of Plaintiffs' Rule 12(m) Statement on Count I.)
Plaintiffs claim they understood from the beginning that Elbert and McKee were to run the company. (Ehle Dep.8, at 133-139, 167-169.) They further contend that the personnel of FWNB and the directors of Chicago Steel/CSFM and FM Properties believed that Elbert and McKee were officers of the company and relied upon them as such. (Plaintiffs' Rule 12(m) Statement ¶ 20; Stark Dep.9, at 201.) In addition, in a letter from Defendants' own attorney John Jeffries to Edwin Hochman, Vice President of Near North Insurance Agency, Jeffries described Defendants Elbert and McKee as being "in charge of operations of Chicago Steel Corporation. ..." (Letter from Jeffries to Hochman of 11/1/85, Ex. PX-206 to Plaintiffs' Rule 12(m) Statement on Count I.) Jeffries went on to write that Elbert and McKee were involved in "managing" other steel facilities across the United States and would likely acquire Chicago Steel/CSFM by the second quarter of 1986. (Id.)
Defendants Elbert and McKee, however, strongly deny they were officers of Chicago Steel/CSFM. They assert that they repeatedly refused to serve as officers or employees of Chicago Steel/CSFM because to have done so would have harmed their business as independent consultants to the steel industry. (Elbert Dep., at 205-107; McKee Dep., at 122-24; Elbert Aff. ¶ 7; McKee Aff. ¶ 6.) They further contend that their initial appointments as President and Executive Vice President were intended solely to meet certain technical incorporation requirements and thus were not substantive positions. (Elbert Aff. ¶ 4; McKee Aff. ¶ 4.) In addition, McKee denies knowing he was included in the list of "officers present" in the board minutes (McKee Dep., at 140), and both he and Elbert deny knowing of the election notice filed with the Wisconsin Secretary of State's office. (Elbert Aff. ¶ 4; McKee Aff. ¶ 4.)10
Despite their objections, the record shows that Defendants did perform a number of important managerial tasks for Chicago Steel/CSFM. These tasks, which were consistent with if not necessarily specified in the Personal Services Agreement, included assisting Plaintiffs in finding a buyer for the company (Letter from Elbert to Ehle on 12/12/84, Ex. PX-27 to Plaintiffs' Rule 12(m) Statement on Count I; Elbert Aff. ¶ 8.); reporting regularly to the company's Board of Directors on the status of various projects and bids for contracts (Board Minutes of 1/15/85 through 11/14/86, Ex. PX-30-39, PX-42-45, PX-52, PX-68, PX-151, and PX-154 of Plaintiffs' Rule 12(m) Statement on Count I); and signing checks drawn on the company's account with FWNB. (Board Minutes of 3/14/85, Ex. PX-32 to Plaintiffs' Rule 12(m) Statement on Count I.)11
More significantly, in late 1984 Elbert and McKee recruited Raymond Jasica to be the company's President and Chief Executive Officer — the "highest level full-time employee of the Chicago Steel Company," in Elbert's words. (Letter from Elbert to Jasica of 11/4/84, Ex. DX-16 to Plaintiffs' Rule 12(m) Statement on Count I.) In a letter to Jasica on November 4, Elbert wrote that he, Jasica, and McKee would initially...
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