E.J. McKernan Co. v. Gregory

• Decision Date: 17 November 1993
• Docket Number: No. 2-92-0735,2-92-0735
• Parties: , 191 Ill.Dec. 391 E.J. McKERNAN COMPANY et al., Plaintiffs-Appellees and Cross-Appellants, v. Joseph J. GREGORY et al., Defendants-Appellants and Cross-Appellees.
• Court: United States Appellate Court of Illinois

Page 981

623 N.E.2d 981

252 Ill.App.3d 514, 191 Ill.Dec. 391

E.J. McKERNAN COMPANY et al., Plaintiffs-Appellees and Cross-Appellants, v. Joseph J. GREGORY et al., Defendants-Appellants and Cross-Appellees.

No. 2-92-0735.

Appellate Court of Illinois,

Second District.

Nov. 17, 1993.

Rathje, Woodward, Dyer & Burt, Gary L. Taylor, argued, Wheaton, for Joseph J. Gregory, and Donald Beardsworth, Litho-Off Inc.

Schwartz & Freeman, Est. of Mark S. Gregory, James Arvey, Chicago, for Estate of Mark S. Gregory.

Tressler, Soderstrom, Maloney & Priess, Jay H. Tressler, argued, Chicago, John P. Lynch, Jr., Tressler, Soderstrom, Maloney & Priess, Wheaton, for E.J. McKernan Co.

Justice COLWELL delivered the opinion of the court:

Defendants Joseph J. Gregory, Mark Gregory, Gregory Associates, Inc., Donald Beardsworth, Douglas Beardsworth, D.A. Beardsworth Associates, Inc., LITHO-OFF, Inc., and CAN-ERASE, Inc., appeal from the jury's decision in favor of plaintiffs', E.J. McKernan Company's and Edward J. McKernan's, claims of breach of fiduciary duty and tortious interference with a business expectancy. Defendants also appeal the jury's verdict against them on their counterclaim alleging breach of contract. Plaintiffs appeal from the trial court's order denying a jury trial on their patent claim and claim for attorney fees. We affirm in part and reverse in part.

I. FACTUAL BACKGROUND

Edward J. McKernan incorporated E.J. McKernan Company (the Company) in 1960 to manufacture, sell, and distribute aerosol products. He hired Joseph Gregory in 1964, a man he had known since 1946 and had previously worked with. Edward had recently contracted with Union Carbide to become an exclusive manufacturer's representative in California. Joseph agreed to run the Midwest sales accounts from the Illinois office. He was made secretary of the Company and became a member of the board of directors and a registered agent in 1965. Joseph received a salary and bonuses based on the Company's profits, which were equally shared between him and Edward.

Edward started the "Clearing House" business at or around 1969 on the West Coast. The Clearing House began as a division of the Company, distributing used or surplus aerosol products and packaging equipment which were purchased from one company and sold to another. In addition to other aerosol products, the Clearing House sold a large amount of "prime cans," which are aerosol cans without lithography that can be sold on the surplus market.

Edward hired Donald Beardsworth in 1970 to represent the Company on the East Coast. Donald owned a manufacturer's representative company in Connecticut. Donald became vice-president and a director of the Company in 1974 and began sharing the Company's profits in 1977.

The Clearing House published a monthly catalogue and a master list of buyers and sellers dealing with aerosol products. The information in the catalogue was kept confidential in order to discourage companies from buying and selling directly to each other without going through the Clearing House. Both Joseph and Donald were entrusted with the master list which contained the identity of the buyers and sellers as well as other sales information. The master list was later changed to an "800" telephone number which Joseph and Donald were authorized to call.

The Company moved to La Grange Park, Illinois, and became a tenant of a building at 1013 East 31st Street that Joseph and Edward bought with their wives in 1970. The Company remained in this building until May 1981.

Joseph came into contact with Jack Randolph in 1971. Randolph was using a process to remove lithography from aerosol cans by heating them and then brushing off the paint. Edward and Joseph decided to acquire Randolph's rights to this process and use it for the Company since it would make more cans available for sale. An agreement was drawn up in which Randolph assigned his rights in the process to Joseph and Edward. Randolph was to receive 15% of the net profits from the use of the process and was paid $500 when the assignment was executed. Edward and Joseph have differing opinions on the assignment of the process, and this issue is the basis for plaintiffs' appeal. Edward contends that the assignment was intended to be to Edward and Joseph for the benefit of the Company. Joseph claims the assignment transferred ownership to Edward and himself as individuals. The delitho process was used exclusively by the Company after the assignment. Both Joseph and Randolph were designated as co-inventors of the patent when it was issued.

Joseph worked to make the delitho process commercially feasible for the Company. Expenses for development of the process were paid for by the Company. When the process became operational, Joseph began to manage the "Delitho Division" of the Company in 1972 in Illinois. Delitho Midwest, as it was later known, became involved with removing lithography from aerosol "prime" cans and reselling them on the surplus market.

Edward and Joseph entered into another agreement on December 4, 1974, whereby they individually as partners obtained title to the delitho equipment for $1. The agreement stated that the Company was to pay Edward and Joseph $200 per month "on a retainer basis and other expenses incurred on behalf of the Company." The evidence indicates these payments were never made. The agreement was to be renewable on a year-to-year basis and could be cancelled on a 90-day written notice.

After Donald was hired, the Company was run out of three locations with Edward on the West Coast, Joseph at Delitho Midwest, and Donald at Delitho East, which was developed in 1977. The manufacturer's representative business, the Clearing House, Delitho Midwest, and Delitho East all had separate bank accounts and were run as separate entities under the Company's corporate umbrella. Edward, Joseph, and Donald would convene each year at the Chemical Specialties Manufacturer's Association Convention in Illinois to talk about business and the distribution of Company profits.

Timothy McKernan, Edward's son, began working for the Company in July 1977. He eventually became treasurer. Mark Gregory, Joseph's son, began working for the Company in April 1976. He became assistant treasurer in 1977. Douglas Beardsworth, Donald's son, worked summers for the Company and began working full-time in 1980. He was a signatory on the Delitho East account.

The Company changed from a cash basis to an accrual system of accounting in or around late 1978. This change added equity to the Company and caused the net worth to rise considerably. Joseph and Donald became concerned that they would not be entitled to share in this newly accumulated net worth; therefore, they expressed a desire to purchase stock in order to become actual partners. Edward, Joseph, and Donald met on May 17, 1979, in Illinois at the Company accountant's office. The three entered into a stock purchase agreement whereby Edward allegedly agreed to sell one-third of the Delitho Division to Joseph and Donald each for $39,013, based on the belief that there were only 100 shares outstanding. Edward testified he was pushed to sign the agreement and only agreed to when he realized the agreement did not convey 33% of the shares to each person. The manufacturer's representative businesses and the Clearing House were not part of the consideration. The deal was abandoned after it was determined that there were 1,000 shares of the Company actually listed and Edward refused to revise the agreement. Edward denies ever agreeing to sell one-third of any part of his corporation.

The parties entered into another agreement in October 1979 regarding future operation of the Company. Up to this point, Edward, Joseph, and Donald had worked only for the Company and drew salaries plus year-end bonuses from net profits. This new agreement provided that Joseph and Donald now would start their own manufacturer's representative companies in their respective territories. Joseph and Donald would continue to represent the Clearing House. Their companies, Gregory Associates and Beardsworth Associates, would manage Delitho Midwest and Delitho East, respectively. In return, their companies would receive a management fee of $2,500 a month and commissions on each account for which they were responsible. Joseph and Donald were still eligible to receive year-end profits of the Company. If Joseph or Donald developed a listing for the Clearing House, he was to receive one-third of the gross profit. If either also sold an item for the Clearing House, he would receive an additional one-third. The remaining one-third would go to the Clearing House.

The Delitho Division was to continue as a separate entity under this agreement. Year-end profits from Delitho East were to be 50% to Donald, 25% to Edward, and 25% to Joseph. Year-end profits from Delitho Midwest were to be 60% to Joseph and 40% to Edward. Although the parties acted autonomously in their respective territories, they remained as officers and directors of the Company.

Timothy became concerned over the financial condition of Delitho East early in 1980. He discovered that labor costs were going up but sales were down dramatically. Edward and Timothy met with Donald and Douglas during July 1980 in Connecticut and asked them to sign a secrecy agreement regarding the confidentiality of the Clearing House information. Donald and Douglas refused to sign, saying they were friends and it was not necessary.

Joseph notified Edward in February 1981 that he was going to take a profit distribution of $15,600. Edward testified he was not notified of the withdrawal until after Joseph had taken the money. Joseph received a letter on or around April 3, 1981, from Timothy asking Joseph not to take any further distributions of profits until the parties met on May 12, 1981, and the profits could be determined. Nonetheless, Joseph took a further distribution, through Gregory...