Selcke v. Bove

• Decision Date: 04 February 1994
• Docket Number: No. 1-92-1510,1-92-1510
• Citation: 629 N.E.2d 747,196 Ill.Dec. 202,258 Ill.App.3d 932
• Parties: , 196 Ill.Dec. 202 Stephen F. SELCKE, Director of Insurance for the State of Illinois, as Liquidator of Pine Top Insurance Company, Plaintiff-Appellant, v. Richard A. BOVE; Frederick G. Emerson; Robert M. Egner; Kenneth H. Hanson; H. Loren Hawley; Glenn G. Herbst; F. Edward Lake; Wayne L. Murray; E. James Noren; Barbara Oliver, as Executrix of the Estate of James Oliver; James J. Vaughan; Paul Watts; and Richard B. Zoller, Defendants-Appellees-Cross-Appellants (Touche Ross & Company; The Whitney Financial Group, Inc.; Terrence S. Cassidy; H. Loren Hawley; and Glenn G. Herbst, Defendants).
• Court: United States Appellate Court of Illinois

Page 747

629 N.E.2d 747

258 Ill.App.3d 932, 196 Ill.Dec. 202

Stephen F. SELCKE, Director of Insurance for the State of Illinois, as Liquidator of Pine Top Insurance Company, Plaintiff-Appellant, v. Richard A. BOVE; Frederick G. Emerson; Robert M. Egner Kenneth H. Hanson; H. Loren Hawley; Glenn G. Herbst; F Edward Lake; Wayne L. Murray; E. James Noren; Barbara Oliver, as Executrix of the Estate of James Oliver; James J. Vaughan; Paul Watts; and Richard B. Zoller Defendants-Appellees-Cross-Appellants (Touche Ross &amp Company; The Whitney Financial Group, Inc.; Terrence S. Cassidy; H. Loren Hawley; and Glenn G. Herbst, Defendants).

No. 1-92-1510.

Appellate Court of Illinois, First District, Fifth Division.

Feb. 4, 1994.

Robinson, Curley & Clayton, P.C., and Peter G. Gallanis, Office of the Sp. Deputy Receiver, Chicago, for plaintiff-appellant.

Paul V. Esposito and Thomas E. Brabec, Lewis, Overbeck & Furman, Chicago, for appellees and cross-appellants Wayne L. Murray and Paul Watts.

Shayle P. Fox and William Henry Barrett, Fox and Grove, Chtd., Chicago, for appellees and cross-appellants.

No appearance for appellee H. Loren Hawley.

Justice GORDON delivered the opinion of the court:

On January 16, 1987, the Pine Top Insurance Company (Pine Top), an Illinois property and casualty insurer was declared insolvent. In June 1988, the Illinois Director of Insurance, the plaintiff in this action, brought suit on behalf of Pine Top's policyholders and creditors against Touche Ross & Co., The Whitney Financial Group and 23 individuals who served as directors and/or officers of Pine Top in the 1970's and early 1980's. Count I of the plaintiff's original complaint alleged that the directors and officers of Pine Top had breached their fiduciary duty to Pine Top and count II alleged negligent mismanagement on the part of the individual directors and officers.

In November 1989, the trial court granted a motion to dismiss filed pursuant to section 2-615 by defendants who were "outside" (non-management) directors of Pine Top and consequently dismissed counts I and II of plaintiff's complaint with respect to those defendants. The trial court determined that since these counts did not allege any fraud, illegality or conflict of interest, the business judgment rule protected those defendants for honest mistakes in judgment. After obtaining the appropriate Rule 304(a) language in the trial court's order, plaintiff filed an appeal from that ruling without requesting from the trial court that he be granted leave to amend his pleadings to cure any deficiency.

While the appeal with respect to the directors was pending, the trial court dismissed all claims contained in counts I and II with respect to defendants who were corporate officers of Pine Top with the exception of plaintiff's claim that the officers had caused Pine Top to file inaccurate financial statements with the Department of Insurance. The court reasoned that this surviving claim could arguably be premised upon fraud, illegality or self dealing and therefore remained actionable. After the trial court denied plaintiff's request for Rule 304(a) language on the order which dismissed the allegations with respect to the officers, plaintiff and defendant officers proceeded with pretrial motions and discovery on the inaccurate financial information claim.

In an opinion filed on March 13, 1992, we affirmed the trial court in Stamp v. Touche Ross & Co. (1st Dist. Feb. 26, 1993), No. 1-89-3214, 1993 WL 56149). In that opinion, we held that the trial court had erred in construing the business judgment rule too broadly to encompass all business judgments not involving fraud, illegality, or conflict of interest even where those judgments are the result of negligence or inattention. (Stamp v. Touche Ross & Co. (1st Dist. Feb. 26, 1993), No. 1-89-3214, slip op. at 10.) However, while we held that the trial court erred in finding the complaint to be legally insufficient, we determined that the complaint was factually insufficient as it failed to allege facts to sufficiently demonstrate that defendants "did not make informed judgments or use due care in arriving at those judgments." Stamp v. Touche Ross & Co. (1st Dist. Feb. 26, 1993), No. 1-89-3214, slip op. at 12.

In his appeal, plaintiff requested for the first time that he be given leave to amend his complaint and that the case be remanded to the trial court for that purpose. We initially denied that request because plaintiff did not seek leave to amend at the trial court level. Plaintiff subsequently filed a petition for rehearing in Stamp, contending among other things that he should be given leave to amend his complaint since defendants did not challenge the factual sufficiency of his complaint before the trial court and that the rationale for the trial court's dismissal purported to exempt business judgments even if arrived at through negligence and inattention. Plaintiff contended that in the face of the trial court's rationale, any attempt to amend would have been futile.

While plaintiff's petition for rehearing in Stamp was pending before us on appeal, the defendant officers filed a motion asking the trial court to dismiss the remaining cause of action against them based upon the inaccurate financial information allegation of plaintiff's complaint. In April 1992, the trial court granted that motion, construing our original decision in Stamp to compel the dismissal of plaintiff's complaint against the officers. The trial court also denied plaintiff's motion for leave to file an amended complaint, reasoning that since plaintiff had not been given leave to amend by the appellate court with respect to the defendant directors, leave to amend with respect to the officers should similarly be denied. The trial court explained:

"It seems to me whatever rule is going to apply should apply to everyone. And if the Appellate Court has ruled in regards to amending, and has ruled as to the complaint, I don't see how I can make exception in that ruling. I mean I really have to follow what they said. * * * [I]t seems to me that consistency would dictate that I follow that opinion in every respect."

Subsequently, we modified our original opinion in Stamp. In our revised opinion, we granted plaintiff's request for leave to amend, relying on Illinois Supreme Court Rule 366 (134 Ill.2d R. 366), and Johnson v. Lincoln Christian College (1986), 150 Ill.App.3d 733, 103 Ill.Dec. 842, 501 N.E.2d 1380, because "the climate in the trial court was inhospitable to plaintiff's theory of action [and] the opposing party virtually conceded * * * the factual sufficiency of the pleading with respect to that theory." Stamp v. Touche Ross & Co. (1st Dist. Feb. 26, 1993), No. 1-89-3214, slip op. at 17; see Geaslen v. Berkson, Gorov & Levin, Ltd. (1993), 155 Ill.2d 223, 184 Ill.Dec. 385, 613 N.E.2d 702; Scala/O'Brien Porsche Audi, Inc. v. Volkswagen of America (1980), 87 Ill.App.3d 757, 43 Ill.Dec. 205, 410 N.E.2d 205 (appellate court excused plaintiff's failure to offer proposed amended pleading below or on appeal where trial court in response to plaintiff's question as whether leave to amend would be allowed, responded that "such action would be fruitless in this instance").

Plaintiff's present appeal is from the trial court's April 1992 dismissal of counts I and II of his complaint with respect to the defendant officers and the trial court's refusal to grant him leave to amend that complaint. Plaintiff also appeals the trial court's April 1990 order which dismissed all of the allegations of counts I and II against the defendant officers with the exception of the claim based on the filing of inaccurate financial information.

After briefs were filed and oral arguments were held in this appeal, all but one of defendants-appellees reached a settlement with plaintiff. The remaining defendant, H. Loren Hawley, did not file a brief in this court and was not represented in oral argument. We nevertheless proceed with this appeal pursuant to Standard Management Realty Co. v. Johnson (1987), 157 Ill.App.3d 919, 109 Ill.Dec. 918, 510 N.E.2d 986 (appellate court has authority to address the merits of a case on appeal in spite of appellee's failure to file a brief, but is not obligated to act as the appellee's advocate), and People ex rel. Holland v. Halprin (1975), 30 Ill.App.3d 254, 332 N.E.2d 501 (appellee's failure to file a brief vests the appellate court with discretion to hear the case on the merits).

In this appeal, plaintiff first contends that the trial court erred in dismissing his complaint against the officers because the business judgment rule applies only to the conduct of corporate directors and not to the conduct of corporate officers. This position, however, is clearly contrary to the substantial body of corporate case law which has developed on this issue.

As stated by the leading scholarly treatise in the area:

"It is too well settled to admit of controversy that ordinarily neither the directors nor the other officers of a corporation are liable for mere mistakes or errors of judgment, either of law of fact. * * *. This rule is commonly referred to as the 'business judgment rule,' and applies to decisions of executive officers as well as those of directors. The business judgment rule is premised on the notion that those to whom the management of the corporation has been entrusted are primarily responsible for judging whether a particular act or transaction is one which is helpful to the conduct of corporate affairs."

3A Fletcher, Cyclopedia of Corporations § 1039, at 45 (Perm rev. ed. 1986) and § 1039, at 4 (Supp.1992).

We note that no Illinois case has expressly addressed this issue. A substantial number of courts from other jurisdictions, however, have clearly articulated that the business judgment rule protects corporate officers as well as corporate directors. See, e.g., McDonnell v. American Leduc Petroleums, Ltd. (2nd Cir.1...