Miller v. Thomas

• Decision Date: 22 September 1995
• Docket Number: No. 1-94-0131,1-94-0131
• Citation: 275 Ill.App.3d 779,656 N.E.2d 89
• Parties: , 211 Ill.Dec. 897 Bertha MILLER and Fred Steinlauf, Derivatively on Behalf of Commonwealth Edison Company, Plaintiffs-Appellants, v. Bide L. THOMAS; James J. O'Connor; Byron Lee, Jr.; George E. Johnson; Jean Allard; Donald P. Jacobs; Harvey Kapnick; Edward A. Mason; Patrick G. Ryan; James W. Compton; Lando W. Zech, Jr.; Thomas G. Ayers; Commonwealth Edison Company, an Illinois Corporation; Gordon R. Corey; Wallace B. Behnke, Jr.; Albert B. Dick III; Norris A. Aldeen; A. Dean Swift; William Wood Prince; Brooks McCormick; Joseph S. Wright; John A. Barr; Edward Byron Smith; Eugene P. Wilkinson; and Thomas L. Martin, Jr., Defendants-Appellees.
• Court: United States Appellate Court of Illinois

Page 89

656 N.E.2d 89

275 Ill.App.3d 779, 211 Ill.Dec. 897

Bertha MILLER and Fred Steinlauf, Derivatively on Behalf of Commonwealth Edison Company, Plaintiffs-Appellants, v. Bide L. THOMAS; James J. O'Connor; Byron Lee, Jr.; George

E. Johnson; Jean Allard; Donald P. Jacobs; Harvey

Kapnick; Edward A. Mason; Patrick G. Ryan; James W.

Compton; Lando W. Zech, Jr.; Thomas G. Ayers;

Commonwealth Edison Company, an Illinois Corporation;

Gordon R. Corey; Wallace B. Behnke, Jr.; Albert B. Dick

III; Norris A. Aldeen; A. Dean Swift; William Wood

Prince; Brooks McCormick; Joseph S. Wright; John A. Barr;

Edward Byron Smith; Eugene P. Wilkinson; and Thomas L.

Martin, Jr., Defendants-Appellees.

No. 1-94-0131.

Appellate Court of Illinois,

First District, Fifth Division.

Sept. 22, 1995.

Much, Shelist, Freed, Denenberg & Ament, P.C., Chicago (Michael J. Freed, Edith F. Canter and William H. London, of counsel), Chimicles, Jacobsen & Tikellis, Haverford, PA (Michael Gottsch, of counsel), for appellants.

Kevin M. Forde, Ltd., Chicago (Kevin M. Forde, of counsel), Pope, Cahill & Devine, Chicago (William R. Quinlan, of counsel), Jenner & Block, Chicago (Nicholas D. Chabraja, David C. Bohan and Robert L. Denby, of counsel), for appellees.

Presiding Justice COUSINS delivered the opinion of the court:

The plaintiffs, Bertha Miller and Fred Steinlauf, filed a shareholder derivative suit on behalf of Commonwealth Edison Company (Edison) against the defendants--present and former directors of Edison since 1975--alleging breaches of duty in their management of the construction of nuclear power plants. The complaint also alleged that the current directors (board) breached their fiduciary duties by failing to bring any action against the defendants. Two weeks before filing the complaint, the plaintiffs made a demand on the board to bring suit against the defendants. After the board investigated the charges, the board refused the demand and sought to dismiss the complaint, arguing that the board controlled the derivative suit We affirm.

[211 Ill.Dec. 899] after addressing the plaintiffs' demand. The trial court granted the motion, from which the plaintiffs appeal.

BACKGROUND

On November 8, 1991, plaintiffs' counsel wrote a letter to the board on behalf of Mr. Steinlauf. The letter demanded that the board file suit against the directors and officers responsible for the mismanagement which led to a disallowance of plant construction costs from Edison's rate base. The letter also stated, "Mr. Steinlauf realizes there is a need to conduct an investigation before filing a lawsuit, but the Board of Directors should already know much of this information." Edison responded to Mr. Steinlauf's letter on December 18, 1991, and stated that the Illinois Supreme Court had just remanded the issue of the rate base back to the Illinois Commerce Commission for reconsideration. Edison also disputed Mr. Steinlauf's charges and sent him materials for him to review. Edison's letter concluded, "Commission action will probably take some months. * * * After you have had an opportunity to review these materials, the Board would appreciate hearing from you as to whether you still believe you have a basis for the charges underlying your claim and, if so, what that basis might be."

On September 15, 1992, plaintiffs' counsel, now representing both plaintiffs, sent a letter to the board demanding suit against Edison's current and former directors. This letter stated:

"Since Mr. Dellsey [Edison's general counsel] wrote to us, the Illinois Supreme Court has ruled that substantial costs incurred in the construction of Byron 1 were unreasonable and must be excluded from Commonwealth Edison's rate base. * * * Therefore, we reiterate our demand that the current Board bring an action against those responsible for incurring these unreasonable costs. The Board has now had ample time to investigate this matter and file suit, if such was the intent of the Board. Unless we hear from you by September 22, 1992 that a suit has been filed or that Commonwealth Edison intends to file suit promptly, Ms. Miller and the other shareholders we represent shall feel free to commence a derivative action."

Mr. Dellsey, responded by letter on September 17, 1992, stating:

"Your letter * * * was directed to me today. I will bring it to the attention of the Directors at the next scheduled meeting on October 16. I am sure you will receive a reply promptly after that meeting. While I recognize that this is after the September 22 date mentioned in your letter, October 16 is the first practical opportunity for the Board to consider your letter, and I cannot see any possible prejudice to your client accruing between September 22 and October 16."

On September 24, 1992, the plaintiffs wrote to Edison's president, Bide Thomas, stating:

"On September 22, 1992, we wrote to Mr. Dellsey asking if there was any reason to believe that the Board may in fact act on our demands when it meets and initiate suit. Mr. Dellsey called us today and indicated he can make no such assurances.

Given the lack of action and response to our demands the first time we sent them to the board, that no new events have transpired since the April Supreme Court decisions, which afforded the Board more than adequate time to act if they were so inclined, we are disinclined to wait an entire month to have the Board once again summarily refuse our demands. * * * We need your response no later than Monday, September 28, 1992 by 12:00 p.m."

Mr. Thomas wrote back on September 28, 1992, assuring the plaintiffs that the board would not "summarily refuse" any stockholder demand and requesting the plaintiffs to wait until the October board meeting.

The plaintiffs filed their complaint against the defendants on October 1, 1992. Count I of the complaint alleged breaches of fiduciary duty by the defendants in their failure to properly manage the construction of nuclear power plants and weigh their necessity. Count II alleged breaches of duty by the defendants through their waste of corporate assets. Count III alleged breaches of fiduciary duty by the current board members in The demand allegations of the complaint included exhibits and summaries of the letters between the plaintiffs and the board. The plaintiffs then concluded their demand allegations by stating:

[211 Ill.Dec. 900] their failure to bring any action against the defendants for the violations alleged in counts I and II. Edison was also named as a defendant in all the counts for the purpose of recovering attorney fees.

"Further demand by Mrs. Miller or Mr. Steinlauf on Comed's Board of Directors would be futile. The claims alleged herein arise from a long and continuous pattern of mismanagement, breaches of fiduciary duty and waste of corporate assets by the very directors and officers who would consider the demand. All of the current members of Comed's Board of Directors are defendants in this action and actively participated in the misconduct alleged herein, including the current President and Chairman of Comed and three former Comed officers. By virtue of defendants' participation in the wrongful acts alleged, there is inherent conflict of interest which would make it impossible for these Directors to make a disinterested business judgment concerning the bringing of this action against themselves."

On November 23, 1992, the defendants filed a joint motion to dismiss or, in the alternative, to stay the proceedings to allow the board to adequately investigate the plaintiffs' claims. The defendants argued for dismissal by alleging that the plaintiffs' letters were not specific enough to make a valid demand on the board. In asking for the stay, the defendants presented minutes from the Edison board meeting of October 16, 1992, in which the board resolved to conduct an inquiry as to whether the complaint's allegations disclosed a legal cause of action which Edison should pursue. The board also resolved at the meeting to retain separate counsel for conducting the investigation.

At a hearing on November 25, 1992, the trial court granted a stay of 60 days. The plaintiffs asked for limited discovery at the hearing, but before the court could rule, the defendants voluntarily offered three transfer cartons of audits to the plaintiffs. The plaintiffs agreed that would be satisfactory until the next hearing. On February 5, 1993, the court granted another stay after the defendants reported that they were nearing completion of their investigation. At that hearing, plaintiffs' counsel indicated that he was satisfied with the discovery that the defendants had voluntarily presented.

The board wrote to the plaintiffs on April 19, 1993, that their demand had been refused. The resolution of the board explained:

"WHEREAS: The board has now completed its review of the facts and has determined that (i) the allegations of Mr. Steinlauf and Ms. Miller are without merit; (ii) no present or former officer or director of the company breached a legal duty to Edison in connection with the Company's construction of Byron 1 and 2 and Braidwood 1 and 2; and (iii) consequently, it is not in Edison's best interests to pursue the litigation initiated by Mr. Steinlauf or Ms. Miller, or to permit that litigation to proceed on behalf of the Company * * *."

Accordingly, the board resolved to refuse the plaintiffs' demand and to have their complaint dismissed with prejudice.

On April 20, 1993, the defendants filed a joint motion to dismiss under sections 2-619(a)(2) and 2-619(a)(9) of the Code of Civil Procedure. (735 ILCS 5/2-619(a)(2), (a)(9) (West 1992).) Because of the board's decision to terminate the litigation, the motion alleged that the plaintiffs lacked the "legal capacity to sue" under section 2-619(a)(2) and were also "barred by other affirmative matter avoiding the legal effect of or defeating the claim" under section 2-619(a)(9). (735 ILCS 5/2-619(a)(2), (a)(9) (West 1992).) The...