Shanahan v. Schindler

• Decision Date: 21 July 1978
• Docket Number: No. 77-1183,77-1183
• Citation: 379 N.E.2d 1307,20 Ill.Dec. 239,63 Ill.App.3d 82
• Parties: , 20 Ill.Dec. 239 Herbert J. SHANAHAN, Plaintiff-Appellant, v. William E. SCHINDLER, Defendant-Appellee.
• Court: United States Appellate Court of Illinois

Page 1307

379 N.E.2d 1307

63 Ill.App.3d 82, 20 Ill.Dec. 239

Herbert J. SHANAHAN, Plaintiff-Appellant, v. William E. SCHINDLER, Defendant-Appellee.

No. 77-1183.

Appellate Court of Illinois, First District, Fifth Division.

July 21, 1978.

[20 Ill.Dec. 241] Hoffman & Davis, Chicago (Maurice L. Davis, Chicago, of counsel), for plaintiff-appellant

Martin C. Ashman, Chicago (William J. Harte, Chicago, of counsel), for defendant-appellee.

MEJDA, Justice:

Plaintiff, Herbert J. Shanahan, brought this action against defendant, William E. Schindler, to recover the sum remaining unpaid upon a promissory note. Judgment was entered by confession; however, defendant filed a timely motion to open the judgment. The court subsequently granted defendant leave to appear and defend, with the judgment by confession standing as security. A trial was then had before the court, without a jury, resulting in a judgment for defendant. It is from this judgment that plaintiff appeals.

We affirm. The following facts, upon which the parties essentially agree, have been gleaned from the record and illustrate the circumstances out of which the present action arose.

The note involved in this case is a "replacement" or "substitute" for a note signed in connection with a 1968 sale of stock transaction. At that time both plaintiff and defendant were officers of the Western Transportation Company (Western). Shanahan was president of Western, and Schindler was its secretary and treasurer. James Gottlieb was Western's chairman of the board, as well as its sole shareholder.

Some 15 corporations were affiliated with Western, serving as operating companies, real estate holding companies, and equipment companies. Shanahan, Schindler, and Gottlieb all held shares in various of these companies; however, of import, to this case are the facts concerning one particular affiliate, General Leasing Company (General Leasing). When General Leasing was incorporated Gottlieb held 75% Of the shares and Shanahan held 25%. In 1967 General Leasing redeemed all of Gottlieb's shares for $1,100,000 thus leaving plaintiff as its sole shareholder.

Early in 1968, Gottlieb and Schindler entered into negotiations with Continental Connector Corporation (Continental) for the exchange of all the shares of Western and its affiliates in return for shares of Continental. Since Gottlieb held all of Western's shares, as well as substantial interests in many of its affiliated companies, his was by far the major interest in the proposed exchange of shares with Continental. However, the transaction could not be completed without all the shares of Western and its affiliates. Shanahan refused to participate in the exchange transaction.

At this point, defendant's and plaintiff's versions of the events that occurred differ substantially. Schindler's affidavit in support of his motion to open the judgment states that Shanahan's position made it necessary for Gottlieb to purchase Shanahan's stock in General Leasing, and that these two agreed "that said stock would be acquired by James Gottlieb for the amount of $415,000." The affidavit avers that

"(a) hindrance to said transaction, however, was that if James Gottlieb would acquire the stock of General Leasing Company said James Gottlieb would have been liable to pay large and substantial amounts of income tax to the Internal Revenue Service of the United States because said James Gottlieb had previously owned said shares and had sold said shares to the General Leasing Company within ten (10) years of the proposed transaction."

In order to overcome this problem Gottlieb and Shanahan arranged a plan whereby Schindler would act as Gottlieb's nominee in the purchase, and plaintiff would receive an additional $128,500 for his participation in the scheme. Both men assured Schindler that he would incur no personal liability on the purchase note; that Shanahan would look to Gottlieb for payment, and that Gottlieb would actually pay the purchase price.

In addition, the affidavit states that following Gottlieb's death in 1972, and within the time for filing claims on his estate, Shanahan orally agreed to release and cancel the note. These averments, which Shanahan denied in his counter-affidavit, form the basis for Schindler's proffered defenses of (1) lack of consideration, (2) illegality, (3) fraud, and (4) oral release of the note.

At trial, Schindler testified that he had been associated with Western in various capacities since 1952. In 1968 he participated in perhaps 15 meetings with the principals of Continental or their lawyers, negotiating the terms of the proposed stock exchange transaction. He kept Shanahan informed of the gist of these negotiations.

In view of Shanahan's refusal to participate in the transaction, several conversations occurred concerning the purchase of Shanahan's various interests. Gottlieb told Schindler that he had offered Shanahan $750,000 and then $850,000 for his interests. Subsequently, in the presence of Shanahan, Gottlieb told Schindler that an agreement had been reached for $1,000,000. However, Schindler was then told that if Gottlieb bought all of Shanahan's stock in the various companies, it would have substantial tax consequences which could have serious effects on the whole reorganization of the companies involved. Gottlieb then asked Schindler to help him out by taking the shares in General Leasing, and Schindler responded that he did not have that kind of money. Gottlieb said, "Don't worry about the money. I will furnish you the money."

Schindler testified that he then started to tell Gottlieb that such a guarantee was inadequate. However, Shanahan interrupted him and said, "Don't worry about it. There won't be any liability on your part, because Gottlieb is going to furnish the money for it." On this basis Schindler agreed to purchase the General Leasing stock.

Approximately two days later Schindler was again called into a meeting with Gottlieb and Shanahan. He was informed that the total purchase price for all of Shanahan's interests was now $1,089,000 and that he would still have to take the General Leasing stock for Gottlieb. Schindler stated that he could only do so if Gottlieb furnished the money and if plaintiff agreed there would be no liability on Schindler's part. Otherwise he could not do it because he did not have the means. Shanahan said, "That's exactly what it is going to be."

On July 22, 1968, Schindler and Shanahan executed an agreement for the sale of the outstanding stock of General Leasing to Schindler at a price of $544,500. The agreement provided for payment to Shanahan of $140,000 at closing and delivery of Schindler's promissory installment note for $404,500, to be secured by a pledge of the General Leasing stock and deposit of the pledged Also on July 22, 1968, Shanahan and Gottlieb entered similar agreements for the sale of Shanahan's shares in the other Western affiliates. The total price to be paid under these agreements also amounted to $544,500, with $140,000 being paid at closing and the remainder due under Gottlieb's promissory installment notes.

[20 Ill.Dec. 243] stock in escrow with the Central National Bank of Chicago. The sale was consummated on these terms on that same day.

The $140,000 paid by Schindler at closing was furnished to him through a bank loan arranged by Gottlieb. Similarly, the money used to meet the installment payments of principal and interest was supplied to Schindler by Gottlieb. Gottlieb gave the money to Schindler, who deposited it in his own account, and then drew on it by check to pay Shanahan.

Schindler stated that a February 5, 1972, letter from Gottlieb accurately set out the terms of the 1968 transaction. Schindler had given this letter to the Internal Revenue Service in connection with inquiries made concerning the transaction. The letter states in part:

"In view of Herb's refusal to go along with the proposed exchange offered by Continental Connector Corporation, the only way that exchange could be kept alive and feasible of completion was to purchase the shares in these affiliates from Herb and his wife.

"Accordingly, you (Schindler) agreed to purchase from Herb his shares in General Leasing Company for $544,500.00 and I agreed to buy from Herb his 25% Interest in the above named five terminal companies for $217,800.00 and I agreed also to buy from Herb and his wife, Hazel, all of the shares of Mikat, Inc. for an additional $326,700.00.

"These transactions contemplated that each of us would pay $140,000.00 in cash on our respective purchase prices and the balance of the purchase price by our promissory notes, each secured by the respective shares of the companies we were buying with the right to substitute Continental Connector Corporation shares therefor as collateral when the contemplated exchange with Continental Connector Corporation was completed.

"I arranged for each of us to borrow on his personal note $140,000.00 from Central National Bank in Chicago for these downpayments under an arrangement whereby each of us collateralized his own note with the stock being acquired, such collateral also securing the other's note on a cross collateral arrangement.

"If you would agree to undertake the purchase of Herb's shares in General Leasing Company, I agreed to advance you from time to time without interest all amounts necessary for the making of the principal and interest payments to Herb Shanahan pursuant to your promissory note given to him in that connection, all upon the understanding that you would only be required to repay to me the amount I was so to advance to you from time to time for the making of your installment payments on your note to Herb out of the net proceeds, after all expenses of sale, received by you from the eventual sale by you of the Continental Connector Corporation preferred shares which you were to receive in exchange for your General Leasing shares (or the common shares of Continental...