Rauh v. Rockford Products Corp.
| Decision Date | 30 May 1991 |
| Docket Number | No. 70592,70592 |
| Citation | 158 Ill.Dec. 523,143 Ill.2d 377,574 N.E.2d 636 |
| Parties | , 158 Ill.Dec. 523, 124 Lab.Cas. P 57,312, 6 IER Cases 796 John J. RAUH, Appellee, v. ROCKFORD PRODUCTS CORPORATION, Appellant. |
| Court | Illinois Supreme Court |
Charles R. Kaufman, John A. Relias, C. Elizabeth Belmont, Vedder, Price, Kaufman & Kammholz, Chicago, for appellant.
Jeremiah Marsh, Michael M. Conway, Nancy Townsend Beggs, Hopkins & Sutter, Chicago, for appellee.
John J. Rauh (Rauh) filed a complaint in the circuit court of Cook County pursuant to the Uniform Arbitration Act () to vacate or modify an arbitration award which upheld Rauh's discharge as chairman, president, and chief executive officer of Rockford Products Corporation (Rockford Products). Rockford Products filed a counterclaim for attorney fees and costs. The circuit court affirmed the arbitrator's award in all respects. The appellate court reversed and remanded the matter, ordering that the award be vacated. (201 Ill.App.3d 361, 147 Ill.Dec. 73, 559 N.E.2d 73.) The appellate court held that the arbitrator exceeded her powers by upholding the discharge under section 8.0, a section of the parties' employment agreement not specifically cited by Rockford Products in discharging Rauh. Further, the appellate court stated that the arbitrator misconstrued section 8.0 so seriously as to constitute manifest disregard of the agreement. The appellate court also held that the trial court properly denied Rockford Products' claim for attorney fees. 201 Ill.App.3d at 367, 147 Ill.Dec. 73, 559 N.E.2d 73.
Rockford Products appeals to this court, asserting that the appellate court erred in holding that the arbitrator exceeded her powers and misinterpreted section 8.0 of the employment agreement, and also erred in denying attorney fees and costs. Rauh responds by asserting that he is entitled to attorney fees. For the reasons stated below, we reverse the appellate court's holding except as to Rockford Products' claim for attorney fees, and affirm the circuit court's order upholding the arbitrator's award in all respects.
At the arbitration hearing, the parties presented documentary evidence in addition to the testimony of Rauh and nine other witnesses. The evidence revealed that Rauh was hired as president of Rockford Products in 1984 by Rexnord, Inc., Rockford Products' parent company at the time. In June 1985, after learning that Rexnord planned to sell Rockford Products, Rauh proposed to the other officers of Rockford Products that they purchase Rockford Products, in order to avoid a buyout by unknown outsiders. The other officers agreed, and on December 5, 1985, they and Rauh finalized the purchase of Rockford Products. Rauh was elected chairman, president and chief executive officer.
As part of the purchase of the company, Rauh bought 12,500 shares of company stock for $250,000, and the other officers purchased lesser amounts of shares. Rockford Products also entered into loan agreements with outside lenders, BT Commercial Corporation, AMCORE Bank of Rockford, and Old Stone Bank of Providence, Rhode Island. These lenders provided Rockford Products a term loan of $10 million and a $12 million revolving line of credit. The loan agreements contained earnings covenants, pursuant to which Rockford Products was expected, among other things, to earn approximately $2.6 million to $2.8 million during fiscal year 1986. The lenders had liens on Rockford Products' assets, and it was agreed that the lenders could request that the entire loan be made due upon a default under the earnings covenants.
On November 15, 1985, Rauh executed an employment agreement with Rockford Products providing for a five-year term of employment, with successive one-year terms under specified conditions. The agreement also contained an arbitration provision that "[a]ny controversy or claim arising out of or relating to this Agreement or any alleged breach hereof shall, upon request by either party, be submitted to arbitration."
Several witnesses testified that Rockford Products suffered from financial difficulties during fiscal year 1986. AMCORE Bank's Robert Mueleman testified that Rockford Products' financial performance in fiscal year 1986 was "severely disappointing"; the company's sales and earnings violated covenants in the loan agreements; and Rockford Products was in default of the loan agreements in several areas. On December 3, 1986, the lenders conferred with Rockford Products' senior management. Mueleman testified that the lenders expressed concern over the "seriousness of the shortfall" in earnings and financial performance, and revised their projections for fiscal year 1987. Mueleman stated that Rockford Products' officers were not prepared to answer the lenders' questions. Further, the lenders were disappointed that when asked questions, Rauh deferred to other officers. Mueleman believed that the company failed to convey confidence regarding future financial performance.
Mueleman stated that "[a]s a group, the bankers thought the company was in crisis." At a meeting on December 10, 1986, the lenders again expressed their concern over the financial condition of the company and developed a revised budget. Mueleman was disappointed when Rauh apologized to the other officers for their getting involved in the company, taking a financial risk, and putting their time and money into the company. Mueleman stated that Rauh gave the impression that the company was a failure and that "it was time to give up." Further, Rauh showed a lack of leadership. The other officers, when asked individually, expressed their continued confidence in the company. Mueleman suggested to Rauh that he receive training for building confidence and making effective presentations.
On December 12, 1986, the lenders again met with Rockford Products' officers. The lenders agreed to waive the company's violations for fiscal year 1986, and proposed covenants for 1987 based upon a plan to be submitted by Rockford Products.
At the regular directors and officers' meeting of Rockford Products in January 1987, Rauh again was unanimously voted in as chairman, president, and chief executive officer. Also during that month, the lenders again met with the officers. Rockford Product's Dennis Schaer testified that the lenders had lost confidence in the management group. At the request of the lenders, Rockford Products hired Buccino & Associates, an outside consulting firm, which prepared a report containing specific proposals to cut inventory and reduce employee wages. On February 18, 1987, all of the officers agreed that the proposed cuts were too drastic and that a modified plan should be submitted to the lenders. The officers agreed to review their own departments for making suggested cuts.
Later on Wednesday, February 18, Rauh left for California to attend a trade show that would take place the following Monday, February 23. Prior to Rauh's leaving, one officer stated that perhaps it would be better if Rauh did not go. Rauh responded that he would attend the show, and that the officers in the meantime had the opportunity to develop their proposed departmental cuts. On Friday, February 20, Rauh telephoned and spoke with all of the officers regarding the proposed cuts. Not all of the officers were prepared with their proposals. Rauh was told that one of the lenders had again expressed concern over the urgency of the situation. Rauh called the lender and they agreed to discuss the proposed cuts on the following Tuesday. Rauh again telephoned the officers at Rockford Products, and informed them that he would review the proposed cuts with them when he returned to the office on Tuesday.
On Saturday, February 21, three of the officers had a "spontaneous meeting" during which they discussed their concern over the financial condition of the company and that Rauh had left during a critical time. They agreed that Rauh should be discharged. The officers then spoke to counsel for the company and the other officers regarding the discharge. On Monday, February 23, the officers met with one of the company's outside directors. It was agreed that a directors' meeting would be held on Thursday, February 26, with notice to all directors. On February 24, Rauh returned to the office and was told that the meeting was scheduled to discuss his discharge.
On February 26, the board of directors unanimously voted to discharge Rauh. The minutes of the meeting indicate that Rauh's termination was being considered because of his "failure to fulfill effectively the duties of his office" and his lack of "competen[ce] to provide the leadership to the Corporation needed to achieve the improvements * * * to satisfy lenders to the Corporation and place it on a sufficiently profitable footing." Further, Rauh charged personal expenses to the company and appeared to be under the influence of alcohol at a company meeting. The company's secretary determined that section 8.1 of the employment agreement was the relevant section for the termination of Rauh. One of the board's resolutions provides that Rauh was terminated "for cause on 10 days' notice pursuant to Section 8.1 of said Agreement." On February 26, Rauh received written notice of his discharge in accord with the board's resolutions and pursuant to section 8.1 of the employment agreement.
Rauh filed a demand for arbitration alleging that his dismissal was without cause and therefore was in breach of the employment agreement. The arbitrator initially found that the "perks" Rauh enjoyed were known and authorized by the company officers at the time of Rauh's reelection, and therefore could not sustain a finding of cause or serve as grounds for termination. The arbitrator then turned to the question of whether Rauh's alleged lack of leadership was cause for termination. The arbitrator found that...
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