Stamp v. Touche Ross & Co.

• Decision Date: 26 February 1993
• Docket Number: No. 1-89-3214,1-89-3214
• Citation: 263 Ill.App.3d 1010,636 N.E.2d 616,201 Ill.Dec. 184
• Parties: , 201 Ill.Dec. 184 Zack STAMP, Director of Insurance for the State of Illinois, as Liquidator of Pine Top Insurance Company, Plaintiff-Appellant, v. TOUCHE ROSS AND COMPANY et al., Defendants (Ralph E. Batastini et al., Defendants-Appellees).
• Court: United States Appellate Court of Illinois

Page 616

636 N.E.2d 616

263 Ill.App.3d 1010, 201 Ill.Dec. 184

Zack STAMP, Director of Insurance for the State of Illinois, as Liquidator of Pine Top Insurance Company, Plaintiff-Appellant, v. TOUCHE ROSS AND COMPANY et al., Defendants (Ralph E.

Batastini et al., Defendants-Appellees).

No. 1-89-3214.

Appellate Court of Illinois,

First District, Fifth Division.

Feb. 26, 1993.

Rehearing Denied March 26, 1993.

Sidley & Austin, James R. Stinson, Richard J. O'Brien Robert T. Biskup (Garry L. Smith, Chief Gen. Counsel, Office of the Sp. Deputy, of counsel), for plaintiff-appellant.

Fox and Grove, Chicago (Shayle P. Fox, Wm. Henry Barrett, Joshua D. Holleb, of counsel), for defendants-appellees.

Presiding Justice GORDON delivered the opinion of the court. ^*

Plaintiff, as Director of Insurance for the State of Illinois and as Liquidator of Pine Top Insurance Company ("Pine Top"), appeals from the trial court's dismissal under section 2-615 (Ill.Rev.Stat.1987, ch. 110, par. 2-615), of his action for negligence and breach of fiduciary duty against the defendants who were outside, i.e., non-management, directors of Pine Top.

This action arises from the insolvency of the Pine Top Insurance Company, a stock property, casualty and fire insurance company organized under the laws of the State of Illinois. Plaintiff, as Director of Insurance for the State of Illinois and as Liquidator for Pine Top, brought an action against, among others, the former officers and directors of Pine Top, alleging negligence and breach of fiduciary duty in the management of Pine Top. The defendants who are parties to this appeal are former Pine Top directors. None were officers of the company.

In count I of his complaint, plaintiff alleged that each of the defendants owed a fiduciary duty to Pine Top "to administer Pine Top's affairs for the common benefit of its policyholders, claimants, and other creditors, and to exercise his best care, skill, and judgment in the management of the corporate business solely in the interest of Pine Top." Specifically, plaintiff alleged that the defendants failed to discharge their fiduciary duty in that they:

"(a) Failed to develop and implement adequate underwriting procedures and controls;

(b) Consistently underpriced reinsurance and insurance business written by Pine Top;

(c) Failed to develop and implement adequate procedures and controls with respect to establishing reserves (d) Failed to increase reserves when loss experience demonstrated the inadequacy of reserves;

(e) Failed to set appropriate reserve liabilities for incurred but not reported claims;

(f) Understated the reserves that were necessary to satisfy claims and claims administration expenses in Pine Top's Annual Statements for the years ending December 31, 1981, 1982, 1983, 1984, and 1985;

(g) Failed to plan for or control a large premium growth, both through lack of management controls and inadequate staffing;

(h) Paid excessive commissions to managing general agents;

(i) Failed to oversee the performance of managing general agents and to monitor the quality of underwriting performed on Pine Top's behalf by such agents or the quality of reinsurance placed on Pine Top's behalf;

(j) Failed to develop and implement adequate procedures for the collection of balances due from managing general agents;

(k) Failed to require managing general agents to maintain adequate books and records;

(l ) Failed to place Pine Top's ceded reinsurance book of business with financially secure reinsurers;

(m) Failed to develop and implement adequate procedures for the collection of balances due from reinsurers;

(n) Failed timely to draw down on letters of credit posted by reinsurers on Pine Top's behalf;

(o) Abdicated or wrongfully delegated to Pine Top's parent corporations (Greyhound and Whitney) the management responsibilities of Pine Top and its subsidiaries Pine Top Services and Pine Top Syndicate;

(p) Failed to properly manage and supervise the affairs of Pine Top's subsidiaries, Pine Top Services and Pine Top Syndicate;

(q) Failed to keep correct and accurate books and records of accounts for Pine Top in violation of * * * Ill.Rev.Stat. ch. 73, __ 745;

(r) Failed to report accurately the foregoing acts, omissions and circumstances to the Illinois Department, as required by Ill.Rev.Stat. ch. 73, __ 613 et seq., and particularly Ill.Rev.Stat. ch. 73, __ 745, 746, and 748;

(s) Failed to accurately disclose Pine Top's true financial condition in its Annual Statements, as required by Ill.Rev.Stat. ch. 73, __ 748."

As a result of these breaches of fiduciary duties, the plaintiff alleged that damages in excess of $100,000,000 were suffered.

In count II, entitled "Negligent Mismanagement," plaintiff alleged that each of the defendants owed a duty to Pine Top to use ordinary care in the discharge of his management duties. Plaintiff further alleged that this duty was breached by the acts enumerated above in regard to count I. Damages caused by defendants' negligence were again alleged to be in excess of $100,000,000.

Defendants Faber and Seith filed a motion to dismiss plaintiff's complaint against them pursuant to section 2-615 of the Code of Civil Procedure. (Ill.Rev.Stat.1987, ch. 110, par. 2-615.) Faber and Seith sought dismissal on two independent grounds. First, the duties allegedly owed by them were not, as a matter of law, duties owed by outside, i.e., non-management, directors to an Illinois insurance company. The second ground was that even if they owed such duties the business judgment rule protected them from any liability.

In arguing their motion to dismiss before the trial court, defendants postured their arguments attacking the legal sufficiency of the complaint in the following manner:

"More significantly than what is pled in this case is what is not pled. There is no allegation of fraud, illegality, or self-dealing. It is nowhere in the complaint. What we have in reading from what has been pled and what has not been pled is that the inattention to details of operation are claimed to subject disinterested and honest directors to $150 million worth of liability.

* * * * * *

We do not dispute the contention that Faber and Seith owed a fiduciary duty to Pine Top. At this point in the proceedings The court, relying upon Shlensky v. Wrigley (1968), 95 Ill.App.2d 173, 237 N.E.2d 776, held that since the complaint did not charge defendants with any wrongdoing bordering on fraud, illegality, or conflict of interest, the business judgment rule protected defendants from liability for honest errors or mistakes in judgment. Accordingly, the court granted the motion and dismissed Faber and Seith as defendants on October 2, 1989. In its dismissal, the trial court never addressed whether plaintiffs' complaint was factually sufficient to establish a cause of action for negligence.

[201 Ill.Dec. 188] we are bound by the complaint allegations that they were inattentive in those areas charged in the complaint."

On November 6, 1989, six additional defendants, Ralph C. Batastini, W. Carroll Bumpers, James R. Grimm, Frank L. Nageotte, David A. Nielsen, and John W. Teets, the other appellees here, filed their motion to dismiss the action as to them. These defendants adopted the arguments previously made by Faber and Seith, and plaintiff stood on the arguments opposing dismissal previously advanced against Faber and Seith. This motion was granted on November 9, 1989, by an order which also provided that the court found no just reason to delay enforcement or appeal of the November 9, 1989, order or of the order it had entered on October 2, 1989, in regard to Faber and Seith. At no time did plaintiffs seek leave to file an amended complaint in the trial court.

Plaintiff appeals the trial court's decision and asks this court to reverse and remand this case for further proceedings "with leave to amend if appropriate."

OPINION

There are two issues before this court on appeal. The first is whether plaintiff's complaint states a cause of action against these defendants. The second is whether plaintiff should be allowed to amend his complaint even though he failed to offer an amended complaint in the trial court.

Upon review of a ruling dismissing a complaint under section 2-615, we must determine whether the complaint has alleged facts sufficient to state a cause of action. (Dilanjian Taxi Services, Inc. v. City of Chicago (1990), 203 Ill.App.3d 300, 148 Ill.Dec. 598, 560 N.E.2d 1195.) In examining plaintiff's complaint, we must accept as true all well-pleaded facts and reasonable inferences therefrom, but not conclusions or inferences of the pleader unless supported by specific facts. (Knox College v. Celotex Corp. (1981), 88 Ill.2d 407, 426-27, 58 Ill.Dec. 725, 430 N.E.2d 976.) "The complaint is deficient when it fails to allege the facts necessary for the plaintiff to recover." (People ex rel. Fahner v. Carriage Way West, Inc. (1981), 88 Ill.2d 300, 308, 58 Ill.Dec. 754, 430 N.E.2d 1005; Fanning v. LeMay (1967), 38 Ill.2d 209, 212, 230 N.E.2d 182.) Accordingly, we must determine what facts are necessary to state a cause of action against corporate directors for breach of fiduciary duty and negligent mismanagement.

Directors owe a fiduciary duty to their corporations and to its shareholders. (Graham v. Mimms (1982), 111 Ill.App.3d 751, 760-61, 67 Ill.Dec. 313, 444 N.E.2d 549.) "It is their duty to administer the corporate affairs for the common benefit of all the stockholders and exercise their best care, skill and judgment in the management of the corporate business solely in the interest of the corporation. * * * It is a breach of duty for the directors to place themselves in a position where their personal interests would prevent them from acting for the best interests of those they represent." (Emphasis in original.) Shlensky v. South Parkway Building Corp. (1960), 19 Ill.2d 268, 278, 166 N.E.2d 793, quoting Dixmoor Golf Club, Inc. v. Evans (1927)...