Smith-Shrader Co., Inc. v. Smith

• Decision Date: 19 August 1985
• Docket Number: No. 83-2500,SMITH-SHRADER,83-2500
• Citation: 91 Ill.Dec. 1,136 Ill.App.3d 571,483 N.E.2d 283
• Parties: , 91 Ill.Dec. 1 COMPANY, INC., an Illinois corporation, and Earl C. Shrader, Plaintiffs-Appellees-Cross-Appellants, v. Robert S. SMITH and R.S. Valve Corporation, Defendants-Appellants, and Saunders Valve, Inc., and William Reid, Defendants-Cross-Appellees, and Conbraco Industries, Inc., Defendant.
• Court: United States Appellate Court of Illinois

Page 283

483 N.E.2d 283

136 Ill.App.3d 571, 91 Ill.Dec. 1

SMITH-SHRADER COMPANY, INC., an Illinois corporation, and Earl C. Shrader, Plaintiffs-Appellees-Cross-Appellants, v. Robert S. SMITH and R.S. Valve Corporation, Defendants-Appellants and Saunders Valve, Inc., and William Reid, Defendants-Cross-Appellees and Conbraco Industries, Inc., Defendant.

No. 83-2500.

Appellate Court of Illinois First District, First Division.

Aug. 19, 1985.

Rehearing Denied Oct. 4, 1985.

Shepp & Hellman, Chicago, and William J. Harte, Ltd., Chicago (William J. Harte, Chicago, of counsel), for defendants-appellants.

Coles & Griffin, Ltd, Chicago (Arthur M. Solomon, Lois Solomon and Evan M. Kjellenberg, Chicago, of counsel), for plaintiffs-appellees-cross-appellants.

CAMPBELL, Justice:

Plaintiffs, Earl C. Shrader ("Shrader") and Smith-Shrader Company, Inc. ("S-S"), filed a six-count complaint against defendants, Robert S. Smith ("Smith"), R.S. Valve Corporation ("R.S. Valve"), Conbraco Industries, Inc. ("Conbraco"), Saunders Valve, Inc. ("Saunders Valve"), and William Reid ("Reid"), alleging breach of fiduciary duty, tortious interference with contract, common law conspiracy, unfair competition, and federal and state antitrust violations. Smith filed a counterclaim seeking dissolution of S-S and an accounting. During pre-trial proceedings, the court dismissed Conbraco as a defendant by agreed order, dismissed the federal antitrust and common law conspiracy counts, and granted summary judgment to Saunders Valve and Reid on the remaining counts. Following plaintiffs' case-in-chief, the court further granted defendants' ¹ motion for a directed verdict as to the state antitrust count. At the conclusion of the bench trial, the trial court found for plaintiffs on all counts and ordered an accounting on all profits earned by R.S. Valve since February 1, 1981; imposed a constructive trust on those profits; enjoined defendants from doing business with any former customers of S-S until 1990; ordered Smith to repay any compensation he had received from S-S since February 1, 1981, and assessed attorney's fees and punitive damages against Smith, individually. In addition, the court denied Smith's counterclaim for dissolution of S-S.

On appeal, defendants contend that: (1) the trial court erred in concluding that Smith had breached his fiduciary duty as officer, director and shareholder of S-S; (2) the trial court's finding that Smith tortiously interfered with the contractual relations of S-S was against the manifest weight of the evidence; (3) the trial court improperly awarded punitive damages and attorney's fees; (4) the trial court erroneously ordered Smith to repay compensation received from S-S since February 1, 1981; and (5) the trial court erred in denying Smith's counterclaim. Plaintiffs filed a notice of cross appeal regarding the trial court's order granting summary judgment to Reid and Saunders Valve. ² For the following reasons, we affirm the trial court's judgment.

The record discloses that S-S was engaged in business as a manufacturers' representative for companies which produced industrial valves, fittings and related products. In this capacity, S-S received sales commissions from its client companies based upon the volume of products S-S sold to wholesalers and distributors in the industry. Shrader and Smith each owns fifty per cent of the stock of S-S and prior to Smith's resignation, received equal salaries and equal contributions to their profit sharing accounts.

For approximately 23 years prior to April 1981, Shrader and Smith had been business associates, first as partners, then as the two principal officers, directors and sole shareholders of S-S. The record indicates that for many years prior to 1981, Shrader and Smith had disagreements as to how the business should be run. Eventually, these disagreements culminated in Smith's resignation in April 1981, as officer, director and employee of S-S, and formation of R.S. Valve, a competing business. However, Smith remains a 50 percent shareholder of S-S. Prior to Smith's resignation, S-S represented, under contract, the product lines of five principal manufacturers: Conbraco, Saunders Valve, Hollaender Manufacturing, Inc., Mohawk Valve, Inc. and Mephisto. In addition to those manufacturers under contract, S-S also promoted the products of Burke Stainless Steel Paint, Westran and Clow. Prior to Smith's resignation, Smith, Shrader, Fred Fahlstrom, Bill Nemanich and Charles Shrader comprised the outside sales force of S-S, and Lorraine Jones and Renee Mutschler were employed as secretaries and inside client contacts.

The pertinent facts which plaintiffs contend support their cause of action are as follows. In February 1981, Smith, while acting on behalf of S-S, attended the annual Conbraco sales meeting. In his evidence deposition, Carl Mosack, president of Conbraco, stated that Smith told him at the sales meeting that he was planning to resign from S-S and asked Mosack if he could have Conbraco coverage. Mosack told Smith that that decision had to be made by John Yopp, Conbraco's national sales manager. Although Mosack stated that he had not placed much importance on Smith's statement about leaving S-S, apparently he placed enough importance on it to discuss changing manufacturers' representatives with Yopp, despite the fact that Mosack thought that S-S had done a "good job" as Conbraco's representative.

Charles Eastman, former vice president of marketing and sales for Saunders Valve, stated in his evidence deposition that he had worked for Saunders Valve from March 1, 1980 through July 31, 1981 and reported directly to Loren Casper, president of Saunders Valve. Pursuant to a written contract, S-S represented Saunders Valve's products in the Chicago territory. In February or March 1981, Eastman discussed S-S's representation of Saunders Valve with Casper, advising that a change in representatives be made due to a drop in sales performance. Casper told Eastman to wait until after the Petrochemical Show in April 1981, because he had heard that Smith would be "doing something" in Chicago. Toward the end of March 1981, Casper told Eastman in confidence that Smith was going out on his own and had requested the Saunders Valve line. Smith had also told Casper that William Reid, Bill Nemanich and Lorraine Jones would be joining his new business.

Eastman further stated that in conversations he had had with Smith at the Petrochemical Show in April 1981, Smith reiterated that Reid, Nemanich and Jones would be joining him. In mid-April, when Eastman asked Casper what the latest developments were regarding Smith, Casper stated that if Conbraco went with Smith, Saunders Valve would also give Smith a chance. Casper then telephoned John Yopp of Conbraco and asked him if Conbraco planned to terminate its contract with S-S. Although Yopp said he had not yet decided, when Casper hung up the telephone, he told Eastman that Saunders Valve would go with Smith. Later that week when Eastman asked Smith about his break with S-S, Smith said that, under the advice of his attorney, he could not talk about it until after April 24, 1981, the effective date of his resignation. In May, Saunders Valve terminated its contract with S-S and entered into an agreement with R.S. Valve.

William Reid, sales representative for R.S. Valve, testified that in May 1981, Smith talked to Reid about joining him in a new business and further stated that he had information that Conbraco was going to terminate its contract with S-S. Reid agreed to join Smith and thereafter approached Bill Nemanich, Lorraine Jones and Renee Mutschler, S-S employees, about joining R.S. Valve. Reid denied that Smith had asked him to solicit their employment and claimed that Smith did not have knowledge that Reid had done so until after the initial contacts had been made.

Lorraine Jones testified that she met Reid for lunch on June 15, 1981, to discuss an employment opportunity with R.S. Valve. Reid told Jones to contact Smith if she was interested because, due to legal problems, Smith could not contact her directly. Later that month, Reid called Jones at S-S and asked for the telephone numbers of Nemanich and Mutschler.

Renee Mutschler testified that Reid contacted her after Smith's resignation and told her that Smith had indicated to Reid that he would like to have Mutschler working for R.S. Valve. Both Jones and Mutschler chose to remain with S-S.

William Nemanich, former sales representative for S-S, currently working in the same capacity for R.S. Valve, stated that he did not learn of Smith's resignation until after the effective date. In mid-May, Reid contacted him regarding employment with R.S. Valve. Nemanich stated that he had been contemplating leaving S-S before the offer from R.S. Valve because he had heard that Shrader's son would be assuming control of the company. Prior to Nemanich's meeting with Reid, he learned that Conbraco had terminated its contract with S-S. Nemanich resigned from S-S in mid-June, and joined R.S. Valve on July 1, 1981.

Fred Fahlstrom, former sales representative for S-S, currently working in the same capacity for R.S. Valve, testified that he learned of Smith's resignation in late April when he received a copy of Smith's resignation in the mail from an anonymous source. In early June 1981, after Conbraco had notified S-S that it was cancelling its contract, Fahlstrom discussed his future at S-S with Shrader. Fahlstrom was particularly concerned because 90 percent of his income had been attributable to commissions earned on sales of Conbraco's products. Shrader told Fahlstrom that he could not promise him anything definite, but felt that S-S could employ him at least until the end of the year. Because of the instability of his future employment with S-S, Fahlstrom contacted Smith about employment with R.S. Valve. No one from R.S. Valve had contacted him. Fahlstrom joined R.S....