Main Bank of Chicago v. Baker

• Decision Date: 30 September 1981
• Docket Number: No. 54095,54095
• Parties: , 56 Ill.Dec. 14, 32 UCC Rep.Serv. 470 MAIN BANK OF CHICAGO, Appellee, v. Jerome BAKER et al. (Baker, Bourgeois and Associates et al., Appellants; Main Automated Services, Inc., et al., Appellees).
• Court: Illinois Supreme Court

Page 94

427 N.E.2d 94

86 Ill.2d 188, 56 Ill.Dec. 14, 32 UCC

Rep.Serv. 470

MAIN BANK OF CHICAGO, Appellee, v. Jerome BAKER et al. (Baker, Bourgeois and Associates et al Appellants; Main Automated Services, Inc., et al Appellees).

No. 54095.

Supreme Court of Illinois.

Sept. 30, 1981.

Gilbert Feldman, of Cornfield & Feldman, Chicago, for appellants.

Darryl M. Fohrman and Joel M. Hurwitz, both of Fohrman, Lurie, Sklar & Cottle, Ltd., Chicago, for appellees.

UNDERWOOD, Justice:

The plaintiff, Main Bank of Chicago, brought an action in the circuit court of Cook County against the defendants, Jerome Baker and Lee Bourgeois, to recover on a note. The defendants, together with their wholly owned corporation Baker, Bourgeois and Associates, Inc. (BB&A), counterclaimed against plaintiff and Main Automated Services, Inc. (MAS), seeking recovery on a lease with MAS. MAS is a subsidiary of Main Corporation, which is also the parent corporation of the plaintiff bank. The defendants presented before the jury evidence offered to show that the Main corporations acted as a single entity, and that there were other agreements between the parties upon the performance of which defendants' note payments were conditioned. It was stipulated that Lee Bourgeois, who had declared bankruptcy, had signed the note, that it was valid, and that he had defaulted. Following defendant Baker's testimony in which he also admitted executing the note and defaulting on it, the trial judge directed a verdict for the plaintiff bank in the amount of $81,122.36 and costs plus $18,000 in attorney fees. The trial court also directed a verdict against the defendants on the counterclaim. On appeal by defendants, the appellate court initially reversed the trial court, but modified that opinion on rehearing, affirming the directed verdicts, but reversing and remanding for further consideration of the attorney fees granted by the trial court. (88 Ill.App.3d 28, 43 Ill.Dec. 681, 410 N.E.2d 681.) The issues before us are whether the trial court correctly directed a verdict for the plaintiff on the note and against the defendants on the counterclaim, and we thus are obliged to view the evidence in its aspects most favorable to the defendants. Pedrick v. Peoria & Eastern R.R. Co. (1967), 37 Ill.2d 494, 510, 229 N.E.2d 504.

Defendant Baker met the president of Main Bank, Sidney Taylor, in 1970 to discuss the possibility of setting up a computer-service bureau for commercial customers. Following negotiations, it was agreed that Baker and Bourgeois, who were in the business of providing data-processing services, would organize and operate the computer-service bureau incorporated by Taylor as MAS. The defendants owned 20% of the stock of MAS but were to receive 50% of its profits. Main Corporation held the remaining 80% of the stock and received 50% of the profits. This arrangement was to allow the expected losses from MAS's first three years of operation to be offset by the profits of Main Bank in a consolidated tax return for a substantial tax savings. Baker became president and chief operating officer of MAS, and Taylor became its chairman. Taylor was a principal shareholder of Main Corporation and both president and chairman of the board of Main Bank.

Negotiations culminated in a 1971 management agreement between MAS, signed by Taylor, and BB&A, signed by Bourgeois, which provided that BB&A would utilize its computer expertise to manage and operate the data-processing activities of MAS. Specific functions of BB&A and its compensation were set out. BB&A was considered an independent contractor under the agreement, which was to remain in effect for 10 years.

MAS operated for more than two years by leasing computer time from other businesses after normal working hours. Baker testified that following a feasibility study the parties then agreed to purchase a computer which would be installed on the second floor of the bank. On July 20, 1973, Main Bank loaned Baker and Bourgeois money to purchase the computer at a cost of $283,096. They personally executed the note promising to pay Main Bank $382,180 in 78 monthly payments of $4,549.76, with a final balloon payment of $27,298.72. On July 27 defendants entered into a lease agreement with MAS by which MAS leased the computer equipment for $4,692.62 per month with an option to purchase the equipment at the end of the lease for $28,000. The lease covered the same period as the note, with the lease payments due on the 28th day of each month and the note payments due on the 10th day of the following month. The computer equipment and the lease agreement were pledged as collateral security for the note. Baker testified that, though there was an integration clause in the lease stating that it was the only agreement between the parties and their note to the bank made no reference to the payments thereon being connected with the lease agreement, the note and lease were part of what was essentially a single transaction designed to gain a tax advantage for Baker and Bourgeois in the purchase of the computer equipment.

In a letter on Main Bank stationery dated November 26, 1973, Taylor, as chairman of the board of MAS, notified BB&A that the management agreement would be terminated by MAS as of November 30 because BB&A had "been for some time in default in the performance of the contract in several substantial and serious areas." The record is unclear as to the nature of the "default," but in an affidavit referred to by the appellate court in a related suit by Baker on that agreement (Baker, Bourgeois & Associates, Inc. v. Taylor (1980), 84 Ill.App.3d 909, 43 Ill.Dec. 55, 410 N.E.2d 55), Baker stated that MAS was having a cash-flow problem, and the defendants were told by Taylor that they would have to contribute $50,000 to alleviate the problem. Defendants were unable to do so, and Taylor shortly thereafter sent the letter terminating the management agreement. Baker testified in the present action that BB&A was instructed to turn over all financial and other records of MAS to Cushman Gray, vice-president of the bank. Gray had no affiliation with MAS.

In the related Baker action, which had been filed in 1974 following termination of the management agreement, the appellate court affirmed the grant of summary judgment against BB&A, but provided that all defendants in that action remain parties upon retrial of the counterclaim issues in this case. (Baker, Bourgeois & Associates, Inc. v. Taylor (1980), 84 Ill.App.3d 909, 43 Ill.Dec. 55, 410 N.E.2d 55.) The Baker case is not relevant to our consideration of this action, except to note that the appellate court's modified opinion in this case, in which it affirmed the directed verdicts in favor of Main Bank and MAS, was inconsistent with its opinion in the Baker case, because no petition for rehearing was filed in Baker.

Though the management agreement was terminated and Baker had sued thereon, MAS continued to make payments under the lease agreement until October 1977. The defendants alleged in their counterclaim that MAS was in default under the terms of the lease on November 2, five days after the October 28 payment had been due. Defendants had continued their note payments to that time. The procedure previously followed by defendants was to deposit the lease payment in their account and then write a check for the note payment, and when the lease payments stopped, they had insufficient funds to make the note payments.

In their answer to the complaint, defendants admitted defaulting on the note, but alleged affirmatively that the note payments were conditioned upon receipt of the lease payments, and they were therefore no longer obligated on the note. In their counterclaim defendants alleged that the Main corporations, through their agents, acted and represented themselves to defendants as a single entity, and that the management agreement, the lease agreement and the note were all parts of a single transaction. They further alleged breach of the lease agreement and sought the unpaid balance. Plaintiff, answering the counterclaim, denied that it acted as a single entity with the Main corporations, denied entering into any agreement with defendants except for the note, and alleged that MAS was the only party obligated on the lease. Plaintiff admitted that MAS stopped making its payments on the lease, but alleged affirmatively that pursuant to the security agreement in which defendants pledged the lease as collateral for the note, plaintiff now possessed the sole right to receive the payments under the lease. Defendants replied, admitting executing the security agreement but denying that they unconditionally pledged the lease agreement as collateral.

The plaintiff's evidence consisted of the testimony by its president, James Tosto, who succeeded Sidney Taylor as president and chief operating officer of the bank in 1973. The note and security agreement were introduced in evidence, and it was established that the amount due on the loan was reduced by the proceeds of the computer sale by the bank pursuant to the security agreement. The stipulation by Lee Bourgeois in which he admitted the validity of the note and his default thereon was also introduced by the bank. Bourgeois admitted the validity of the lease and security agreement as well, but he did not recall any discussions with officials of Main Corporation concerning the purchase of the computer. The tax deductions he was able to take for depreciation of the computer and interest payments on the note were also stipulated.

Baker was the only witness presented on behalf of defendants. He testified concerning the negotiations with Taylor to set up MAS and later to purchase the computer. The lease was admitted into evidence, and Baker testified that when MAS defaulted and defendants were unable to continue their payments, the computer was sold at auction by the bank. The only testimony by Baker concerning a...