Small v. Sussman

• Decision Date: 30 June 1999
• Docket Number: No. 1-98-1113.,1-98-1113.
• Parties: Richard A. SMALL, Plaintiff-Appellant, v. Paul SUSSMAN and Day Surgicenters, INC., Defendants-Appellees.
• Court: United States Appellate Court of Illinois

713 N.E.2d 1216

306 Ill. App.3d 639

239 Ill.Dec. 366

Richard A. SMALL, Plaintiff-Appellant, v. Paul SUSSMAN and Day Surgicenters, INC., Defendants-Appellees.

No. 1-98-1113.

Appellate Court of Illinois, First District, Sixth Division.

June 30, 1999.

Plotkin, Jacobs & Orlofsky, Ltd., Chicago (Jonah Orlofsky, Karl Leinbeger, of counsel), for Appellant.

Katten Muchin & Zavis, Chicago (Bonita L. Stone, Paul A. Haskins, of counsel), for Appellees.

Justice ZWICK delivered the opinion of the court:

Plaintiff, Richard Small, was a minority shareholder in defendant, Day Surgicenters, Inc. (DSI). Defendant Paul Sussman was DSI's principal shareholder and was alleged in plaintiff's amended complaint to have controlled DSI as its dominant director and officer. The question presented in this appeal is whether the circuit court properly dismissed, pursuant to section 2-615 of the Code of Civil Procedure, plaintiff's various claims against the defendants.

Small's complaint alleged that DSI is an Illinois corporation founded in 1989. The corporation owned and operated two outpatient surgical centers in Chicago and Oak Brook. Defendant Sussman was the majority shareholder of DSI. Small was a DSI shareholder who, at one time, owned as much as 10% of DSI's shares.

While the complaint alleges a series of wrongdoing on the part of DSI and Sussman, this appeal focuses on two primary assertions that form the nucleus of Small's claims. First, Small alleged that there was a waste of corporate assets through improper payments made by DSI to outside businesses owned by Sussman. In particular, Small alleged that Sussman, in addition to his controlling share in DSI, held an ownership interest in a dozen or more separate corporations that transacted business with DSI. It is alleged that those corporations were paid by DSI for services without value, such as for brokering equipment purchases. Small also alleged that Sussman paid excessive amounts for minimal services, the purpose of which was to funnel assets to himself. Small alleged that he was injured, individually as a DSI shareholder, by diversion of DSI assets to other entities solely for Sussman's benefit.

Second, Small alleged that DSI and Sussman improperly acted to eliminate Small's ownership in order to reserve for Sussman the fruits of a profitable sale of DSI's stock to Premier Ambulatory Systems, Inc. (PASI), a California corporation. Sussman was alleged to have done so by (1) making false statements in connection with a 1992 Recission Letter and a 1994 Redemption Letter in which DSI offered to buy Small's shares for less than their fair value, (2) improperly reducing DSI's board of directors from three directors to one, which allowed Sussman to improperly dominate DSI's management and (3) causing the corporation to undertake a reverse stock split creating one new share for every 200 shares of outstanding DSI stock. Following the reverse stock split, DSI was alleged to have canceled all fractional shares and offered settlement to the fractional shareholders in the form of a cash payment. This was done in preparation of the sale of DSI to PASI. Small alleged that Sussman's conduct in this regard was part of an unlawful scheme to defraud him of his rightful ownership share in DSI. Small also alleged that Sussman's acts of unlawfully withdrawing assets from DSI over time resulted in Small becoming DSI's sole remaining shareholder.

As we noted, defendants' motion to dismiss Small's amended complaint was brought pursuant to section 2-615 of the Code of Civil Procedure. 735 ILCS 5/2-615 (West 1996). Under that section, a trial court should dismiss a complaint only when it clearly appears that no set of facts that would entitle plaintiff to relief could be proved under the pleadings. Ogle v. Fuiten, 102 Ill.2d 356, 360-61, 80 Ill.Dec. 772, 466 N.E.2d 224 (1984). A section 2-615 motion admits all well-pleaded facts but not conclusions of law or factual conclusions unsupported by allegations of specific facts. Talbert v. Home Savings of America, F.A., 265 Ill. App.3d 376, 379, 202 Ill.Dec. 708, 638 N.E.2d 354 (1994). We review the granting of a section 2-615 motion de novo. Schiffner v. Motorola, Inc., 297 Ill.App.3d 1099, 1103, 232 Ill.Dec. 126, 697 N.E.2d 868 (1998)

.

In this case, the circuit court properly dismissed Small's amended complaint. As the court recognized in making its order, Illinois law is well settled that a shareholder seeking relief for an injury to the corporation, rather than a direct injury to the shareholder himself, must bring his suit derivatively on behalf of the corporation:

"A stockholder of a corporation does not acquire standing to maintain an action in his own right, as a shareholder, when the alleged injury is inflicted upon the corporation and the only injury to the shareholder is the indirect harm which consists in the diminution in value of his corporate shares resulting from the impairment of corporate assets. In this situation, it has been consistently held that the primary wrong is to the corporate body and, accordingly, that the shareholder, experiencing no direct harm, possesses no primary right to sue." Mann v. Kemper Financial Companies, Inc., 247 Ill.App.3d 966, 975-76, 187 Ill. Dec. 726, 618 N.E.2d 317 (1992), quoting from Kauffman v. Dreyfus Fund, Inc., 434 F.2d 727, 732 (3d Cir. 1970).

See also Lower v. Lanark Mutual Fire Insurance Co., 151 Ill.App.3d 471, 473, 104 Ill.Dec. 341, 502 N.E.2d 838 (1986)("Where an officer, director or controlling shareholder breaches a duty to the corporation, a shareholder has no standing to bring a civil action at law against faithless directors and managers because the corporation and not the shareholder suffered the injury"); Poliquin v. Sapp, 72 Ill.App.3d 477, 480, 28 Ill.Dec. 615, 390 N.E.2d 974 (1979) (because a breach of fiduciary duty by directors alleged injury to the corporation, shareholders did not have a right to recover damages in their own names).

Small argues that an exception should be drawn in Illinois allowing minority shareholders the right to bring a direct action against co-shareholders when the corporation is closely held. Small relies on a proposal by the American Law Institute's Principals of Corporate Governance: Analysis and Recommendations, sec. 7.01(d)(1992). The proposal states, "the court in its discretion may treat an action raising derivative claims as a direct action." See Frank v. Hadesman and Frank, Inc., 83 F.3d 158, 161-62 (7th Cir. 1996)(discussing the proposal). However, as defendants argue, no Illinois cases have adopted the rule of law proposed by the ALI. Most states still adhere to the traditional rule. See Frank, 83 F.3d at 162. Nor has the General Assembly adopted the ALI's proposal as part of our Business Corporation Act. In the absence of any palpable indication that such a proposal is particularly necessary or wise, we choose to follow the historical rule that it is the corporation as a legal entity that must seek redress when all shareholders are injured uniformly.

The alleged diversion of DSI profits to other entities is a classic injury to the corporation. In his complaint, Small treats Sussman and DSI as if they are one and the same entity. The law controlling whether an action is derivative or direct, however, requires a strict focus on the nature of the alleged injury, i.e., whether it is to the corporation or to the individual shareholder that injury has been done. See Weil v. Northwest Industries, Inc., 168 Ill.App.3d 1, 5, 118 Ill.Dec. 717, 522 N.E.2d 172 (1988)(the court must preliminarily determine if the gravamen of the pleadings states an injury to the plaintiff upon an individual claim, as distinguished from an injury which indirectly affects the shareholder, or affects shareholders as a whole).

With respect to the claim that Sussman wasted DSI assets by diverting them to his outside businesses or to himself, Small stands in the same shoes as the plaintiffs in the Frank case who complained that the only other primary shareholder diverted all of the company's assets to his other business, for the sole purpose of excluding the plaintiff. Frank, 83 F.3d at 159. Other cases are in accord. See Cashman v. Coopers & Lybrand, 251 Ill.App.3d 730, 735-36, 191 Ill.Dec. 317, 623 N.E.2d 907 (1993)(when "real damage suffered by plaintiffs * * * is that * * * stock becomes worthless due to * * * alleged mistakes," claim is derivative); Borgsmiller v. Burroughs, 187 Ill.App.3d 1, 7,134 Ill.Dec. 774, 542 N.E.2d 1281 (1989); In re Knight, 60 Ill.App.2d 457, 460, 208 N.E.2d 679 (1965). See also Kramer v. Western Pacific Industries, Inc., 546 A.2d 348, 353 (Del. 1988)("claim of mismanagement resulting in corporate waste, if proven, represents a direct wrong to the corporation * * * [and] is entirely derivative in nature"). Such a diversion would affect a company's performance generally, and would affect all shareholders only indirectly.

That Small has pursued an improper individual remedy is underscored by the fact that the complaint demands that Small alone recover all alleged damages caused by the defendants' conduct. This ignores the fact that the corporation's records, by Small's own admission, shows him to be only a 10% shareholder. Small's argument that Sussman's self-dealings should be treated as withdrawals by him of his capital from the corporation, as opposed to the payment of illegal dividends, is unsupported by cited legal precedent-and is not particularly logical. The fact that Small has conceded DSI had been wildly profitable under Sussman's direction makes Small's suggestion in this regard implausible.

Neither can Small prevail by arguing that he has an individual claim based upon injury from the freezeout merger that resulted in the termination of his stock position. Clearly, the effect of a freezeout merger is not a cognizable legal injury of any sort. The type of freezeout executed by DSI (a reverse stock split and elimination of...