Zack Co. v. Sims

• Decision Date: 16 July 1982
• Docket Number: No. 80-3266,80-3266
• Citation: Zack Co. v. Sims, 108 Ill.App.3d 16, 438 N.E.2d 663, 63 Ill.Dec. 732 (Ill. App. 1982)
• Parties: , 63 Ill.Dec. 732, Blue Sky L. Rep. P 71,782 ZACK COMPANY, an Illinois corporation, Christine Zack Dezutel, and Isabell A. Zack, Plaintiffs-Appellants, v. William E. SIMS and Terre Haute Industries, Inc., an Indiana corporation, Defendants-Appellees.
• Court: Appellate Court of Illinois

Page 663

438 N.E.2d 663

108 Ill.App.3d 16, 63 Ill.Dec. 732, Blue

Sky L. Rep. P 71,782

ZACK COMPANY, an Illinois corporation, Christine Zack Dezutel, and Isabell A. Zack, Plaintiffs-Appellants, v. William E. SIMS and Terre Haute Industries, Inc., an Indiana corporation, Defendants-Appellees.

No. 80-3266.

Appellate Court of Illinois First District, Fifth Division.

July 16, 1982.

Supplemental Opinion on Denial of Rehearing Aug. 20, 1982.

Donald R. Harris, Joseph G. Bisceglia and Jon D. Botsford, Jenner & Block, Chicago, for plaintiffs-appellants.

William J. Harte, Ltd., Joseph N. Casciato & Karen Hamity, and Richard J. Prendergast, Ltd., Chicago (William J. Harte and Richard J. Prendergast, Chicago, of counsel), for defendants-appellees.

MEJDA, Justice:

This is an action by the Zack Company, Christine Zack DeZutel (hereinafter "Christine") and Isabell A. Zack (hereinafter "Mrs. Zack") against William E. Sims and Terre Haute Industries, Inc. (hereinafter "THI"), claiming that plaintiffs were entitled under a number of different legal grounds, to recover certain corporate stock and other assets from defendant Sims. The eight-count complaint in chancery was filed on January 30, 1976. An amended complaint was filed on September 26, 1978. ¹

The trial commenced on March 5, 1979, and, after a number of adjournments, was concluded on October 2, 1979. The parties filed written briefs, suggesting appropriate findings, and on July 2, 1980, the trial court heard oral argument. On October 3, 1980, the trial court issued an oral ruling indicating that judgment would be entered for defendants on a number of issues. Then, on December 2, 1980, the trial court entered its findings of fact and conclusions of law, entering judgment in favor of defendants and against plaintiffs on all counts of the amended complaint.

Plaintiffs appeal, contending that: (1) the trial court's findings are contrary to the overwhelming weight of the evidence, and in some cases contrary to undisputed evidence or based on no evidence at all; (2) the trial court erred in according credibility to certain witnesses; and (3) the trial court erred in limiting discovery, and in admitting and excluding certain evidence at trial.

The parties herein have submitted extensive factual summaries in their respective briefs tracing the history of the Zack Company and the Zack family and the circumstances under which Sims became the owner of the common stock of THI and 44% (186 shares) of the stock of Zack Company. The evidence adduced at trial consisted of testimony of an array of witnesses and substantial documentary evidence. Facts necessary for determination of this appeal are set forth below. Additional facts will be referred to in this opinion only as they are necessary for the determination of particular issues presented.

The Zack Company is an Illinois corporation engaged in sheet metal fabrication and contracting. The company was founded in 1922 by Hans J. Zack, husband of plaintiff Mrs. Zack, and father of plaintiff Christine. Defendant THI is an Indiana corporation also in the business of metal fabrication. Defendant Sims, president of THI, is the former husband of Christine ² and former son-in-law of Mrs. Zack.

In 1946 Hans set up the "Christine Zack Trust" for his daughter's benefit, placing in trust 200 of Zack Company's 500 outstanding shares of stock, other stock and approximately $150,000 in cash, notes and bonds. Under the terms of the Christine Zack Trust, Christine was to receive 25% of the trust corpus at age 21 (1960), another one-third at age 25 (1964), and the balance at age 30 (1969). Christine was also beneficiary of a guardianship account, containing about $85,000, which was distributed to her in 1958 after her 18th birthday.

Hans Zack died in October 1956. After his death Mrs. Zack became president of Zack Company and Charles Howard became general manager. Two additional trusts, a marital trust and a residuary trust, were created by Hans Zack's will. Mrs. Zack was the trustee and life beneficiary with a power of appointment over the marital trust, and also trustee and life beneficiary of the residuary trust, with Christine the vested remainderman after her death. One hundred eighty-six shares of Zack Company stock were put into the marital trust and 33 shares into the residuary trust. The balance of 200 shares remained in the Christine Zack Trust, of which Mrs. Zack became trustee.

In 1959 Christine married Sims. Immediately after their marriage Sims became an employee of Zack Company, remaining a continuous employee from 1960 until January 1976 when he was terminated. During the first few years of their marriage, Christine and Sims maintained one joint checking account and deposited monies they received from any source into that account. Later Sims opened up a "special" checking account into which he deposited his salary checks, while Christine continued to maintain the joint checking account with her salary from Zack Company. She paid all routine family household expenses out of that account and Sims would contribute when she became low in funds. Sims' Zack Company compensation increased from $12,600 in 1964 to $70,000 in 1971. Three children were born to the Sims family during their marriage.

THE THI TRANSACTIONS

In 1967 Howard learned of the availability of an old boiler works plant in Terre Haute, Indiana, which he thought could serve as a production facility for Zack Company. Mrs. Zack, however, rejected any such expansion. Sims, on the other hand, became interested in the Terre Haute facility and formulated the idea of making a separate corporation. Sims testified that early in 1967 he asked Mrs. Zack if it would be possible to acquire some equipment from the Zack Detroit operation for the Terre Haute company. He said she indicated that the stockholders were not interested in investing any more money but that "if it was such a great opportunity, why didn't he do it himself," and that there were funds available for him to borrow.

After Mrs. Zack gave Howard and Sims approval, the building in Terre Haute was purchased in late 1967. The Zack Company paid the $25,000 earnest money deposit on behalf of the new company. Later, in January 1968, the Hans Zack residuary trust took title to the property, reimbursed the Zack Company for the earnest money deposit, and paid the balance of approximately $155,000 for the property. The residuary trust eventually took back a note from the new company (THI) for the purchase price, at 4% interest.

In early 1968, Howard drafted the details of the proposed incorporation. This document indicated that the "beginning shareholders" were to be "William E. Sims and Christine Zack Sims" with an 80% interest, "Charles L. Howard" with a 10% interest, and "Stephan W. Duncan" with a 10% interest. This document was approved by Howard and Sims who then presented it to Mrs. Zack, who in turn referred the matter to her attorney, Andrew Gatenbey. Following assurance by either Sims or Howard that the joint ownership arrangement was acceptable to everyone, Gatenbey indicated his approval of the incorporation details by initialing the document. A few weeks later a Terre Haute attorney, Sam Beecher, sent to Howard for final signature typed incorporation papers still showing Christine as an incorporator and shareholder. Howard took no further action with respect to the documents, however, until months later in September 1968.

During the above period, THI went into full operation using various assets and benefits obtained from the Zack Company and other Zack family sources. These assets included the purchase by THI of the Zack Detroit operation, including all work-in-progress, inventory, accounts receivable and the transfer of key personnel. The Zack Company in turn received a note for $198,000 at 4% interest for these items, which was subsequently paid by THI. In addition, other assets were leased from Zack Company for an annual rental, and administration services were provided by Zack Company, for which THI paid $10,000 per year. The amounts charged for administrative services, leasing of equipment and the sale of work-in-progress by Zack Company to THI, as well as other matters involving Zack Company's relationship with THI, were determined by Howard, as general manager of Zack Company. Zack family sources, including the residuary trust and the Zack Foundation, also provided long-term loans to THI totaling $678,983, and guaranteed without consideration another $371,000 in bank loans. The Zack Company also guaranteed THI's credit with its suppliers, and its performance under numerous contracts, and provided other services and intangible benefits to the new company.

In September 1968 Howard and Sims reviewed the incorporation documents which had been forwarded by Beecher, and began to make some necessary revisions, most notably the deletion of Stephan Duncan's name as 10% shareholder due to Duncan's withdrawal from the enterprise. At that time Sims told Howard to also eliminate Christine's name as a subscriber and joint shareholder. Howard had the documents retyped to reflect the changes and mailed them to Beecher with instructions to proceed with the incorporation. Actual THI stock certificates were not prepared by Howard until January 1973. Christine testified that at all times Sims represented to her that THI was a venture for their mutual benefit and not for himself alone, and that she did not learn otherwise until late in 1975 when a divorce was contemplated.

THE USE OF CHRISTINE'S MONEY TO

PURCHASE THE THI STOCK

In 1961 Christine, on Sims' advice, placed $55,000 which she received from the Christine Zack Trust into joint certificates of deposit at Olympic Savings & Loan. In 1966 she agreed to let Sims close the accounts. Sims testified that he put the money into their joint safety deposit box in 1966. In November 1967 Christine deposited approximately $28,000 she received from the above...