Sims v. Tezak
Annotate this Case
FIRST DIVISION
April 13, 1998
No. 1-96-3887
WILLIAM A. SIMS, MARILYN SIMS, MICHAEL
SIMS, DAVID SIMS, and MAUREEN SIMS,
Plaintiffs-Appellants,
v.
ROBERT TEZAK, JOSEPH CUSIMANO, QUENTIN
ROBERT TEZAK, SANDRA TEZAK, WILLIAM
APPLE, EDWIN AKEMAN, and JOHN D'ARCY,
Defendants-Appellees. )
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Appeal from the
Circuit Court of
Cook County
Honorable
Ian H. Levin,
Judge Presiding.
JUSTICE GALLAGHER delivered the opinion of the court:
William Sims, Marilyn Sims, Michael Sims, David Sims, and
Maureen Sims (plaintiffs) filed their five-count, second amended
complaint against Robert Tezak, Joseph Cusimano, Quentin Robert
Tezak, Sandra Tezak, William Apple, Edwin Akeman and John D'Arcy
(defendants) on April 28, 1995, alleging, inter alia, defendants
defrauded them and breached various fiduciary duties in
connection with the repurchase of stock from certain closely held
corporations. The trial court dismissed four counts of the
second amended complaint, including plaintiffs' breach of
fiduciary duty claim (count I). The trial court also granted
summary judgment in favor of defendants on the fraud claim (count
IV). Plaintiffs next filed this appeal, challenging only the
dismissal of count I and the decision to grant summary judgment
on count IV. We affirm in part, reverse in part and remand for
proceedings consistent with this opinion.
FACTS
As the present case comes to us after the trial court's
dismissal and entry of summary judgment, we present the facts as
plaintiffs have alleged them in their pleadings. Plaintiffs were
minority shareholders in certain closely held corporations
incorporated under Delaware law--International Games, Inc. (IGI),
Hallnox International Games (Hallnox) and IGI, Ltd.[fn1]
Defendants were the majority shareholders, officers and directors
of the aforementioned corporations.
In 1981, plaintiffs filed personal and derivative claims in
a federal lawsuit against both the corporations and the present
defendants. The federal lawsuit alleged that defendants
committed various types of fraud, breached their fiduciary
duties, and violated multiple securities acts. Ultimately, in
1986, the parties settled the federal lawsuit pursuant to two
written agreements under the captions "Settlement Agreement" and
"Stock Sale Agreement," both of which were entered into on
October 30, 1986. Under the Settlement Agreement, plaintiffs
agreed to release all of their claims in the federal
lawsuit.[fn2] Under the Stock Sale Agreement, each corporation
agreed to repurchase its respective shares from plaintiffs.
Plaintiffs received $1.25 million for their IGI shares, $175,000
for their Hallnox shares and $425,000 for their shares in IGI,
Ltd. Plaintiffs owned shares in two classes of IGI stock: class
A and class B. As part of the Stock Sale Agreement, plaintiffs
accepted IGI's proposal that it repurchase their class A shares
at $35,000 per share and their class B shares at $30,000 per
share. The validity of the Settlement Agreement disposing of the
federal litigation was expressly conditioned upon the timely
payment of the purchase price for plaintiffs' shares.
Plaintiffs later discovered that at the time of the
settlement their IGI stock had been worth significantly more than
the amount IGI paid to repurchase it. Accordingly, they
commenced suit in April 1994 and filed their second amended
complaint on April 28, 1995. In that complaint, plaintiffs set
forth the factual allegations forming the basis of their fraud
and breach of fiduciary duty claims.
Plaintiffs allege that, during settlement negotiations in
February 1985, defendants' counsel orally represented to
plaintiffs that the financial condition of IGI was deteriorating
and that the fair market value of the corporation was little more
than its book value--which was approximately $9 million. Under a
$9 million valuation, each share of IGI would be worth less than
$36,000. Although the federal litigation did not settle until
October of 1986, plaintiffs assert that their ultimate decision
to accept the repurchase prices proposed by IGI in the Stock Sale
Agreement ($35,000 per class A share and $30,000 per class B
share) was premised upon the representation that IGI's market
value was only $9 million.
Plaintiffs further allege that defendants intentionally
concealed the following information while negotiating for the
repurchase of plaintiffs' stock in 1986: (1) IGI was planning an
extensive corporate recapitalization; (2) several potential
buyers had approached IGI expressing their interest in purchasing
the corporation; (3) a valuation company retained by IGI,
Valuemetrics, Inc., informed IGI that its fair market value
substantially exceeded its book value; (4) IGI had consulted with
an investment banker regarding an initial public offering and
that banker valued the corporation at between $33 and $39
million; and (5) IGI was projecting 1986 sales of approximately
$20 million, which constituted a 50% increase over its 1985
sales. Plaintiffs contend that defendants held all of the
aforementioned material information within their exclusive
control. Moreover, plaintiffs allege that they had no notice of
said information until after 1992 when it was reported in the
press.
As further evidence of defendants' alleged deception,
plaintiffs point to the fact that, by December 19, 1987,
defendants' retained investment banker confirmed the fair market
value of IGI to be $37 million. According to the second amended
complaint, defendants effectuated IGI's recapitalization through
an employee stock ownership plan (ESOP), which came into being on
January 1, 1987; this ESOP valued IGI at $45 million. Even under
the (lesser) $37 million valuation, IGI's per-share value equals
approximately $175,000--at least five times the amount per share
tendered to plaintiffs under the Stock Sale Agreement.
Defendants filed several motions seeking to dismiss the
second amended complaint and, alternatively, summary judgment.
With respect to the issues presented in this appeal, defendants
essentially argued that: (1) they owed no fiduciary duty of
complete disclosure to plaintiffs in connection with the Stock
Sale Agreement because that agreement arose in the litigation
settlement context; and (2) because plaintiffs had already
accused defendants of dishonesty in the earlier federal
litigation, plaintiffs could not justifiably rely upon any
representations made by defendants as a matter of law. On
December 27, 1995, the trial court dismissed count I (the breach
of fiduciary duty claim) pursuant to section 2-615 of the
Illinois Code of Civil Procedure (Code)(735 ILCS 5/2-615 (West
1994)). The trial court also granted summary judgment in favor
of the defendants on count IV (the fraud claim) pursuant to
section 2-1005 of the Code. 735 ILCS 5/2-1005 (West 1994). This
appeal followed.
ANALYSIS
Plaintiffs first charge that the trial court erred in
dismissing count I of the second amended complaint when it held
that defendants did not owe a fiduciary duty of complete
disclosure to plaintiffs in connection with the Stock Sale
Agreement. When ruling on a motion to dismiss under section 2-
615 of the Code of Civil Procedure, the trial court must accept
as true all well-pleaded facts in the complaint and interpret all
of the pleadings and supporting documents in the light most
favorable to the nonmoving party. People v. Claar, 293 Ill. App.
3d 211, 687 N.E.2d 557 (1997); Stephen L. Winternitz, Inc. v.
National Bank, 289 Ill. App. 3d 753, 683 N.E.2d 492 (1997).
Dismissal is appropriate only if the plaintiff can establish no
set of facts that would support a cause of action. Stephen L.
Winternitz, Inc., 289 Ill. App. 3d at 755, 683 N.E.2d at 494.
Appellate courts apply a de novo standard of review to dismissals
under section 2-615 of the Code. Toombs v. City of Champaign,
245 Ill. App. 3d 580, 615 N.E.2d 50 (1993).
Both sides agree that because IGI is a Delaware corporation,
Delaware corporate law applies to the present case. In their
brief, plaintiffs contend that defendants, as the officers and
directors of IGI, operated under a duty to disclose all
information material to plaintiffs' decision whether to sell
their IGI stock. Under plaintiffs' view of Delaware law, in all
corporate transactions where minority shareholders must decide
whether to sell or retain their stock, the board of directors has
a duty of candor relating to that decision. To support their
interpretation of the duty to disclose, plaintiffs rely upon
Lynch v. Vickers Energy Corp., 383 A.2d 278 (Del. 1977), rev'g
351 A.2d 570 (Del. Ch. 1976), and Smith v. Van Gorkam, 488 A.2d 858 (Del. 1985).
We agree with plaintiffs that the Delaware courts have
imposed upon corporate directors a fiduciary duty to disclose
fully and fairly all material information within the board's
control when it seeks shareholder action. Zirn v. VLI Corp., 681 A.2d 1050, 1056 (Del. 1996); Lynch, 383 A.2d at 279. However, we
cannot agree with the proposition, espoused by plaintiffs, that
Delaware law clearly imposes this duty whenever a corporation
repurchases its own shares. As defendants point out, the
Delaware cases considering the duty of disclosure all do so in
the circumscribed context of shareholder votes and proxy
solicitation materials. See generally Stroud v. Grace, 606 A.2d 75, 86 (Del. 1992)("[a]ll of our previous decisions involving
disclosure requirements, and subsequent shareholder ratification,
involved proxy solicitations"); Zirn, 681 A.2d at 1053-54
(corporation solicited proxies for shareholder approval of tender
offer and merger); In re Santa Fe Pacific Corp. Shareholder
Litigation, 669 A.2d 59 (Del. 1995)(same); Van Gorkam, 488 A.2d
at 890 (same); Lynch, 383 A.2d 278 (same).
In their reply brief, plaintiffs acknowledge that Delaware
courts have addressed the duty of disclosure only with respect to
the following five scenarios: mergers, proxy solicitations,
tender offers, self-tender offers and stockholder votes. Nothing
in the record before us suggests that this case falls into any
such scenario. While IGI did repurchase its stock from
plaintiffs, this repurchase did not constitute a self-tender
offer. Cf. Eisenberg v. Chicago Milwaukee Corp., 537 A.2d 1051
(Del. Ch. 1987)(corporation conducted a self-tender offer to
repurchase entire class of preferred stock). None of the
pleadings indicate that IGI's offer to repurchase plaintiffs'
shares was open to all holders of its class A and class B shares,
as required by Securities and Exchange Commission regulations.
17 C.F.R. 240.14d-10(a)(1987). Rather, as noted above, IGI
extended an offer to repurchase its shares only to plaintiffs and
intrinsically linked that offer to the settlement of the federal
lawsuit. We decline plaintiffs' invitation to extend Delaware's
director disclosure requirements to the facts of the case at
hand. Therefore, we hold that defendants did not owe plaintiffs
a fiduciary duty of candor with respect to IGI's repurchase of
plaintiffs' shares and affirm the trial court's dismissal of
count I of the second amended complaint.
We next consider the trial court's decision to grant summary
judgment in favor of defendants on count IV of the second amended
complaint, plaintiffs' fraud claim. Appellate review of orders
granting summary judgment is de novo. Bank One, Milwaukee, N.A.
v. Loeber Motors, Inc., 293 Ill. App. 3d 14, 20, 687 N.E.2d 1111,
1115 (1997). In applying this de novo standard of review, the
appellate court must consider anew the facts and law related to
the case and determine whether the trial court was correct. Bank
One, Milwaukee, N.A., 293 Ill. App. 3d at 20, 687 N.E.2d at 1115.
Because we disagree with the trial court's ruling--that
plaintiffs were legally precluded from justifiably relying upon
the representations made by defendants' counsel during settlement
negotiations--we reverse that portion of the trial court's order
granting summary judgment in favor of defendants.
To sustain a cause of action for fraud, plaintiffs must
plead the following basic elements: statements of material facts
were made; defendants must have known or believed such statements
to be untrue; plaintiffs had a right to rely or were justified in
relying upon those statements; the statements were made for the
purpose of inducing plaintiffs to act or rely upon them;
plaintiffs were damaged as a result of their reliance upon said
statements. Siegel v. Levy Organization Development Co., 153 Ill. 2d 534, 607 N.E.2d 194 (1992), rev'g in part 219 Ill. App.
3d 579, 579 N.E.2d 1112 (1991); In re Witt, 145 Ill. 2d 380, 583 N.E.2d 526 (1991).
When the trial court granted defendants' motion for summary
judgment on December 27, 1995, the court reiterated its reasoning
from an earlier disposition of the fraud claim:
"[I]n the underlying [federal] fraud litigation
which went on for about five years, there was *** an
array of allegations against these defendants for such
things as corporate dismissal, attempted tax evasion,
concealing information, lying to the plaintiffs,
violation of federal and state laws trying to prevent
the plaintiff[s] from obtaining the fair value of their
stock investment and acting to increase the defendants'
value of their stock at the expense or prejudice of the
plaintiffs. I think the law *** is that when parties
negotiating a controversy in which they allege fraud,
dishonesty, and self-dealing by other parties, it is
unreasonable to rely upon the alleged representations
of the allegedly dishonest parties. I think in those
circumstances, you would have to say there can be no
justifiable reliance on the representation of those
parties and no right to rely as a matter of law."
The trial court then went on to state:
"The court is mindful *** that usually justifiable
reliance is a question of fact, but I think in this
particular area of law there is a litany of cases that
show that it's an issue of--can be an issue as a matter
of law and I think would be an issue as a matter of law
in this case."
The "litany of cases" relied upon by the trial court was made up
of the case law cited by defendants. However, because no
Illinois case was among this litany, we find the present case to
be one of first impression in this jurisdiction.
One of the cases relied upon by the trial court (and
championed by defendants before this court) was a case factually
similar to the case at bar, Metrocall of Delaware, Inc. v.
Continental Cellular Corp., 246 Va. 365, 437 S.E.2d 189 (1993).
In Metrocall, the plaintiffs were minority partners in a mobile
telephone company who had filed suit against the majority partner
group alleging several types of fraud and improper acts. 246 Va.
at 367, 437 S.E.2d at 189-90. This litigation settled pursuant
to an agreement amongst the parties by which the majority
interest bought out the minority partners; in return, the
minority released their claims against the majority. 246 Va. at
367, 437 S.E.2d at 190. Shortly thereafter, the majority group
sold the entire concern to a third party at a unit price greater
than the unit price the majority had paid to the minority group.
246 Va. at 367, 437 S.E.2d at 190. The minority group filed
another suit, this time alleging that during the settlement
negotiations the majority had fraudulently concealed and
misrepresented (1) their intention to sell the concern, and (2)
the existence of negotiations designed to effect such sale. 246
Va. at 373, 437 S.E.2d at 193. The trial court granted the
defendants' motion for judgment on the pleadings, finding, inter
alia, that the plaintiffs' action was barred by the prior
release. The appellate court rejected the plaintiffs' argument
that the release should be rescinded based upon the defendants'
fraud and held that "when negotiating or attempting to compromise
an existing controversy over fraud, dishonesty, and self-dealing,
it is unreasonable to rely on the representations of the
allegedly dishonest party." 246 Va. at 375, 437 S.E.2d at 195.
In reaching its decision in Metrocall, the Virginia Supreme
Court relied upon the eleventh circuit's decision in Pettinelli
v. Danzig, 722 F.2d 706 (11th Cir. 1984)(interpreting Florida
law). The Pettinelli court stated, "[w]hen negotiating or
attempting to compromise an existing controversy over fraud and
dishonesty it is unreasonable to rely on representations made by
the allegedly dishonest parties." 722 F.2d at 710. The eleventh
circuit, in turn, premised its decision upon an earlier ruling by
the Florida Supreme Court, Columbus Hotel Corp. v. Hotel
Management Co. 156 So. 893 (Fla. 1934), wherein that court found
no right to rely upon the defendants' representations, where all
parties were represented by counsel and in an adversarial
relationship. 156 So. at 899, 901.
In support of their position (and that of the trial court),
defendants cite several cases from the eleventh and second
circuits that have adopted the rule set forth in Pettinelli.
Finn v. Prudential Bache Securities, Inc., 821 F.2d 581 (11th
Cir. 1987); Zelman v. Cook, 616 F. Supp. 1121 (S.D. Fla. 1985);
Finz v. Schlesinger, 957 F.2d 78 (2d Cir. 1992); Red Ball
Interior Demolition Corp. v. Palmadessa, 874 F. Supp. 576
(S.D.N.Y. 1995).
In Illinois, public policy favors the settlement of claims,
and where a claim has been fairly resolved it should not be
resurrected; nevertheless, Illinois courts should not permit
litigants to defraud one another through the use of settlement
agreements. Carlile v. Snap-on Tools, 271 Ill. App. 3d 833, 648 N.E.2d 317 (1995). We think that the aforestated rule applies
even where such settlement agreements stem from disputes
involving fraud or dishonesty. Clearly, as defendants point out,
this is not the case in some other jurisdictions, notably
Virginia, Florida, and in the eleventh and second circuits. As
stated above, we are not bound by the authorities cited by
defendants from outside this jurisdiction.
This court is reluctant to pronounce a broad rule of law
whereby parties, accused of myriad types of fraud and dishonesty,
are set loose to live up to the allegations leveled against them
while attempting to settle the original dispute. The likely
effect of such a rule would be to encourage dishonesty and to
drastically reduce the willingness of plaintiffs to settle their
fraud claims, because plaintiffs could never hold defendants
accountable for any misrepresentations of fact made during
settlement negotiations. Illinois law has long held that,
where the representation is made as to a fact actually or
presumptively within the speaker's knowledge, and contains
nothing so improbable as to cause doubt of its truth, the hearer
may rely upon it without investigation, even though the means of
investigation were within the reach of the injured party and the
parties occupied adversary positions toward one another. Pattiz
v. Semple, 12 F.2d 276, 278 (E.D. Ill. 1926)(interpreting
Illinois law), aff'd, 18 F.2d 955 (7th Cir. 1927). "[T]he fraud-
feasor will not be heard to say that he is a person unworthy of
belief, and that plaintiff was negligent in trusting him, and was
cheated through his own credulity." Pattiz, 12 F.2d at 278.
We hold that the justifiable reliance element of fraud is a
question of fact and should remain so even in cases like the one
sub judice. The facts may very well show that plaintiffs were
unjustified in relying upon the representations made by
defendants during the settlement negotiations that occurred in
1986; the facts may also show that plaintiffs never actually
relied upon the representations made by defendants at that time.
Our holding today merely announces the Illinois rule that such
questions are to be determined by the finder of fact and not by
the trial court as a matter of law.
For the reasons stated, we affirm the trial court's
dismissal of count I of the second amended complaint, reverse
that portion of the trial court's order granting summary judgment
and remand this case for proceedings consistent with this
opinion.
Affirmed in part, reversed in part and remanded.
Campbell, P.J., and Buckley, P.J., concur.
[fn1]It is worth noting that neither plaintiffs nor
defendants assert that IGI was a "close corporation" as defined
under Delaware law. Del. Code Ann. tit. 8, 342 (1983).
Consequently, as minority shareholders in a closely held, but not
statutory "close corporation," plaintiffs are barred from
receiving any special relief not afforded to minority
shareholders in a publicly traded corporation. Nixon v.
Blackwell, 626 A.2d 1366, 1380 (Del. 1993).
[fn2]All parties acknowledge that the release provision to
the Settlement Agreement contained the following language:
"However, this release shall not release or affect any rights or
claims which may arise under the terms of the Stock Sale
Agreement." Because the present case arises out of the Stock
Sale Agreement, plaintiffs have not released the claims they
assert here.
April 13, 1998
No. 1-96-3887
WILLIAM A. SIMS, MARILYN SIMS, MICHAEL
SIMS, DAVID SIMS, and MAUREEN SIMS,
Plaintiffs-Appellants,
v.
ROBERT TEZAK, JOSEPH CUSIMANO, QUENTIN
ROBERT TEZAK, SANDRA TEZAK, WILLIAM
APPLE, EDWIN AKEMAN, and JOHN D'ARCY,
Defendants-Appellees. )
)
)
)
)
)
)
)
)
)
)
)
Appeal from the
Circuit Court of
Cook County
Honorable
Ian H. Levin,
Judge Presiding.
JUSTICE GALLAGHER delivered the opinion of the court:
William Sims, Marilyn Sims, Michael Sims, David Sims, and
Maureen Sims (plaintiffs) filed their five-count, second amended
complaint against Robert Tezak, Joseph Cusimano, Quentin Robert
Tezak, Sandra Tezak, William Apple, Edwin Akeman and John D'Arcy
(defendants) on April 28, 1995, alleging, inter alia, defendants
defrauded them and breached various fiduciary duties in
connection with the repurchase of stock from certain closely held
corporations. The trial court dismissed four counts of the
second amended complaint, including plaintiffs' breach of
fiduciary duty claim (count I). The trial court also granted
summary judgment in favor of defendants on the fraud claim (count
IV). Plaintiffs next filed this appeal, challenging only the
dismissal of count I and the decision to grant summary judgment
on count IV. We affirm in part, reverse in part and remand for
proceedings consistent with this opinion.
FACTS
As the present case comes to us after the trial court's
dismissal and entry of summary judgment, we present the facts as
plaintiffs have alleged them in their pleadings. Plaintiffs were
minority shareholders in certain closely held corporations
incorporated under Delaware law--International Games, Inc. (IGI),
Hallnox International Games (Hallnox) and IGI, Ltd.[fn1]
Defendants were the majority shareholders, officers and directors
of the aforementioned corporations.
In 1981, plaintiffs filed personal and derivative claims in
a federal lawsuit against both the corporations and the present
defendants. The federal lawsuit alleged that defendants
committed various types of fraud, breached their fiduciary
duties, and violated multiple securities acts. Ultimately, in
1986, the parties settled the federal lawsuit pursuant to two
written agreements under the captions "Settlement Agreement" and
"Stock Sale Agreement," both of which were entered into on
October 30, 1986. Under the Settlement Agreement, plaintiffs
agreed to release all of their claims in the federal
lawsuit.[fn2] Under the Stock Sale Agreement, each corporation
agreed to repurchase its respective shares from plaintiffs.
Plaintiffs received $1.25 million for their IGI shares, $175,000
for their Hallnox shares and $425,000 for their shares in IGI,
Ltd. Plaintiffs owned shares in two classes of IGI stock: class
A and class B. As part of the Stock Sale Agreement, plaintiffs
accepted IGI's proposal that it repurchase their class A shares
at $35,000 per share and their class B shares at $30,000 per
share. The validity of the Settlement Agreement disposing of the
federal litigation was expressly conditioned upon the timely
payment of the purchase price for plaintiffs' shares.
Plaintiffs later discovered that at the time of the
settlement their IGI stock had been worth significantly more than
the amount IGI paid to repurchase it. Accordingly, they
commenced suit in April 1994 and filed their second amended
complaint on April 28, 1995. In that complaint, plaintiffs set
forth the factual allegations forming the basis of their fraud
and breach of fiduciary duty claims.
Plaintiffs allege that, during settlement negotiations in
February 1985, defendants' counsel orally represented to
plaintiffs that the financial condition of IGI was deteriorating
and that the fair market value of the corporation was little more
than its book value--which was approximately $9 million. Under a
$9 million valuation, each share of IGI would be worth less than
$36,000. Although the federal litigation did not settle until
October of 1986, plaintiffs assert that their ultimate decision
to accept the repurchase prices proposed by IGI in the Stock Sale
Agreement ($35,000 per class A share and $30,000 per class B
share) was premised upon the representation that IGI's market
value was only $9 million.
Plaintiffs further allege that defendants intentionally
concealed the following information while negotiating for the
repurchase of plaintiffs' stock in 1986: (1) IGI was planning an
extensive corporate recapitalization; (2) several potential
buyers had approached IGI expressing their interest in purchasing
the corporation; (3) a valuation company retained by IGI,
Valuemetrics, Inc., informed IGI that its fair market value
substantially exceeded its book value; (4) IGI had consulted with
an investment banker regarding an initial public offering and
that banker valued the corporation at between $33 and $39
million; and (5) IGI was projecting 1986 sales of approximately
$20 million, which constituted a 50% increase over its 1985
sales. Plaintiffs contend that defendants held all of the
aforementioned material information within their exclusive
control. Moreover, plaintiffs allege that they had no notice of
said information until after 1992 when it was reported in the
press.
As further evidence of defendants' alleged deception,
plaintiffs point to the fact that, by December 19, 1987,
defendants' retained investment banker confirmed the fair market
value of IGI to be $37 million. According to the second amended
complaint, defendants effectuated IGI's recapitalization through
an employee stock ownership plan (ESOP), which came into being on
January 1, 1987; this ESOP valued IGI at $45 million. Even under
the (lesser) $37 million valuation, IGI's per-share value equals
approximately $175,000--at least five times the amount per share
tendered to plaintiffs under the Stock Sale Agreement.
Defendants filed several motions seeking to dismiss the
second amended complaint and, alternatively, summary judgment.
With respect to the issues presented in this appeal, defendants
essentially argued that: (1) they owed no fiduciary duty of
complete disclosure to plaintiffs in connection with the Stock
Sale Agreement because that agreement arose in the litigation
settlement context; and (2) because plaintiffs had already
accused defendants of dishonesty in the earlier federal
litigation, plaintiffs could not justifiably rely upon any
representations made by defendants as a matter of law. On
December 27, 1995, the trial court dismissed count I (the breach
of fiduciary duty claim) pursuant to section 2-615 of the
Illinois Code of Civil Procedure (Code)(735 ILCS 5/2-615 (West
1994)). The trial court also granted summary judgment in favor
of the defendants on count IV (the fraud claim) pursuant to
section 2-1005 of the Code. 735 ILCS 5/2-1005 (West 1994). This
appeal followed.
ANALYSIS
Plaintiffs first charge that the trial court erred in
dismissing count I of the second amended complaint when it held
that defendants did not owe a fiduciary duty of complete
disclosure to plaintiffs in connection with the Stock Sale
Agreement. When ruling on a motion to dismiss under section 2-
615 of the Code of Civil Procedure, the trial court must accept
as true all well-pleaded facts in the complaint and interpret all
of the pleadings and supporting documents in the light most
favorable to the nonmoving party. People v. Claar, 293 Ill. App.
3d 211, 687 N.E.2d 557 (1997); Stephen L. Winternitz, Inc. v.
National Bank, 289 Ill. App. 3d 753, 683 N.E.2d 492 (1997).
Dismissal is appropriate only if the plaintiff can establish no
set of facts that would support a cause of action. Stephen L.
Winternitz, Inc., 289 Ill. App. 3d at 755, 683 N.E.2d at 494.
Appellate courts apply a de novo standard of review to dismissals
under section 2-615 of the Code. Toombs v. City of Champaign,
245 Ill. App. 3d 580, 615 N.E.2d 50 (1993).
Both sides agree that because IGI is a Delaware corporation,
Delaware corporate law applies to the present case. In their
brief, plaintiffs contend that defendants, as the officers and
directors of IGI, operated under a duty to disclose all
information material to plaintiffs' decision whether to sell
their IGI stock. Under plaintiffs' view of Delaware law, in all
corporate transactions where minority shareholders must decide
whether to sell or retain their stock, the board of directors has
a duty of candor relating to that decision. To support their
interpretation of the duty to disclose, plaintiffs rely upon
Lynch v. Vickers Energy Corp., 383 A.2d 278 (Del. 1977), rev'g
351 A.2d 570 (Del. Ch. 1976), and Smith v. Van Gorkam, 488 A.2d 858 (Del. 1985).
We agree with plaintiffs that the Delaware courts have
imposed upon corporate directors a fiduciary duty to disclose
fully and fairly all material information within the board's
control when it seeks shareholder action. Zirn v. VLI Corp., 681 A.2d 1050, 1056 (Del. 1996); Lynch, 383 A.2d at 279. However, we
cannot agree with the proposition, espoused by plaintiffs, that
Delaware law clearly imposes this duty whenever a corporation
repurchases its own shares. As defendants point out, the
Delaware cases considering the duty of disclosure all do so in
the circumscribed context of shareholder votes and proxy
solicitation materials. See generally Stroud v. Grace, 606 A.2d 75, 86 (Del. 1992)("[a]ll of our previous decisions involving
disclosure requirements, and subsequent shareholder ratification,
involved proxy solicitations"); Zirn, 681 A.2d at 1053-54
(corporation solicited proxies for shareholder approval of tender
offer and merger); In re Santa Fe Pacific Corp. Shareholder
Litigation, 669 A.2d 59 (Del. 1995)(same); Van Gorkam, 488 A.2d
at 890 (same); Lynch, 383 A.2d 278 (same).
In their reply brief, plaintiffs acknowledge that Delaware
courts have addressed the duty of disclosure only with respect to
the following five scenarios: mergers, proxy solicitations,
tender offers, self-tender offers and stockholder votes. Nothing
in the record before us suggests that this case falls into any
such scenario. While IGI did repurchase its stock from
plaintiffs, this repurchase did not constitute a self-tender
offer. Cf. Eisenberg v. Chicago Milwaukee Corp., 537 A.2d 1051
(Del. Ch. 1987)(corporation conducted a self-tender offer to
repurchase entire class of preferred stock). None of the
pleadings indicate that IGI's offer to repurchase plaintiffs'
shares was open to all holders of its class A and class B shares,
as required by Securities and Exchange Commission regulations.
17 C.F.R. 240.14d-10(a)(1987). Rather, as noted above, IGI
extended an offer to repurchase its shares only to plaintiffs and
intrinsically linked that offer to the settlement of the federal
lawsuit. We decline plaintiffs' invitation to extend Delaware's
director disclosure requirements to the facts of the case at
hand. Therefore, we hold that defendants did not owe plaintiffs
a fiduciary duty of candor with respect to IGI's repurchase of
plaintiffs' shares and affirm the trial court's dismissal of
count I of the second amended complaint.
We next consider the trial court's decision to grant summary
judgment in favor of defendants on count IV of the second amended
complaint, plaintiffs' fraud claim. Appellate review of orders
granting summary judgment is de novo. Bank One, Milwaukee, N.A.
v. Loeber Motors, Inc., 293 Ill. App. 3d 14, 20, 687 N.E.2d 1111,
1115 (1997). In applying this de novo standard of review, the
appellate court must consider anew the facts and law related to
the case and determine whether the trial court was correct. Bank
One, Milwaukee, N.A., 293 Ill. App. 3d at 20, 687 N.E.2d at 1115.
Because we disagree with the trial court's ruling--that
plaintiffs were legally precluded from justifiably relying upon
the representations made by defendants' counsel during settlement
negotiations--we reverse that portion of the trial court's order
granting summary judgment in favor of defendants.
To sustain a cause of action for fraud, plaintiffs must
plead the following basic elements: statements of material facts
were made; defendants must have known or believed such statements
to be untrue; plaintiffs had a right to rely or were justified in
relying upon those statements; the statements were made for the
purpose of inducing plaintiffs to act or rely upon them;
plaintiffs were damaged as a result of their reliance upon said
statements. Siegel v. Levy Organization Development Co., 153 Ill. 2d 534, 607 N.E.2d 194 (1992), rev'g in part 219 Ill. App.
3d 579, 579 N.E.2d 1112 (1991); In re Witt, 145 Ill. 2d 380, 583 N.E.2d 526 (1991).
When the trial court granted defendants' motion for summary
judgment on December 27, 1995, the court reiterated its reasoning
from an earlier disposition of the fraud claim:
"[I]n the underlying [federal] fraud litigation
which went on for about five years, there was *** an
array of allegations against these defendants for such
things as corporate dismissal, attempted tax evasion,
concealing information, lying to the plaintiffs,
violation of federal and state laws trying to prevent
the plaintiff[s] from obtaining the fair value of their
stock investment and acting to increase the defendants'
value of their stock at the expense or prejudice of the
plaintiffs. I think the law *** is that when parties
negotiating a controversy in which they allege fraud,
dishonesty, and self-dealing by other parties, it is
unreasonable to rely upon the alleged representations
of the allegedly dishonest parties. I think in those
circumstances, you would have to say there can be no
justifiable reliance on the representation of those
parties and no right to rely as a matter of law."
The trial court then went on to state:
"The court is mindful *** that usually justifiable
reliance is a question of fact, but I think in this
particular area of law there is a litany of cases that
show that it's an issue of--can be an issue as a matter
of law and I think would be an issue as a matter of law
in this case."
The "litany of cases" relied upon by the trial court was made up
of the case law cited by defendants. However, because no
Illinois case was among this litany, we find the present case to
be one of first impression in this jurisdiction.
One of the cases relied upon by the trial court (and
championed by defendants before this court) was a case factually
similar to the case at bar, Metrocall of Delaware, Inc. v.
Continental Cellular Corp., 246 Va. 365, 437 S.E.2d 189 (1993).
In Metrocall, the plaintiffs were minority partners in a mobile
telephone company who had filed suit against the majority partner
group alleging several types of fraud and improper acts. 246 Va.
at 367, 437 S.E.2d at 189-90. This litigation settled pursuant
to an agreement amongst the parties by which the majority
interest bought out the minority partners; in return, the
minority released their claims against the majority. 246 Va. at
367, 437 S.E.2d at 190. Shortly thereafter, the majority group
sold the entire concern to a third party at a unit price greater
than the unit price the majority had paid to the minority group.
246 Va. at 367, 437 S.E.2d at 190. The minority group filed
another suit, this time alleging that during the settlement
negotiations the majority had fraudulently concealed and
misrepresented (1) their intention to sell the concern, and (2)
the existence of negotiations designed to effect such sale. 246
Va. at 373, 437 S.E.2d at 193. The trial court granted the
defendants' motion for judgment on the pleadings, finding, inter
alia, that the plaintiffs' action was barred by the prior
release. The appellate court rejected the plaintiffs' argument
that the release should be rescinded based upon the defendants'
fraud and held that "when negotiating or attempting to compromise
an existing controversy over fraud, dishonesty, and self-dealing,
it is unreasonable to rely on the representations of the
allegedly dishonest party." 246 Va. at 375, 437 S.E.2d at 195.
In reaching its decision in Metrocall, the Virginia Supreme
Court relied upon the eleventh circuit's decision in Pettinelli
v. Danzig, 722 F.2d 706 (11th Cir. 1984)(interpreting Florida
law). The Pettinelli court stated, "[w]hen negotiating or
attempting to compromise an existing controversy over fraud and
dishonesty it is unreasonable to rely on representations made by
the allegedly dishonest parties." 722 F.2d at 710. The eleventh
circuit, in turn, premised its decision upon an earlier ruling by
the Florida Supreme Court, Columbus Hotel Corp. v. Hotel
Management Co. 156 So. 893 (Fla. 1934), wherein that court found
no right to rely upon the defendants' representations, where all
parties were represented by counsel and in an adversarial
relationship. 156 So. at 899, 901.
In support of their position (and that of the trial court),
defendants cite several cases from the eleventh and second
circuits that have adopted the rule set forth in Pettinelli.
Finn v. Prudential Bache Securities, Inc., 821 F.2d 581 (11th
Cir. 1987); Zelman v. Cook, 616 F. Supp. 1121 (S.D. Fla. 1985);
Finz v. Schlesinger, 957 F.2d 78 (2d Cir. 1992); Red Ball
Interior Demolition Corp. v. Palmadessa, 874 F. Supp. 576
(S.D.N.Y. 1995).
In Illinois, public policy favors the settlement of claims,
and where a claim has been fairly resolved it should not be
resurrected; nevertheless, Illinois courts should not permit
litigants to defraud one another through the use of settlement
agreements. Carlile v. Snap-on Tools, 271 Ill. App. 3d 833, 648 N.E.2d 317 (1995). We think that the aforestated rule applies
even where such settlement agreements stem from disputes
involving fraud or dishonesty. Clearly, as defendants point out,
this is not the case in some other jurisdictions, notably
Virginia, Florida, and in the eleventh and second circuits. As
stated above, we are not bound by the authorities cited by
defendants from outside this jurisdiction.
This court is reluctant to pronounce a broad rule of law
whereby parties, accused of myriad types of fraud and dishonesty,
are set loose to live up to the allegations leveled against them
while attempting to settle the original dispute. The likely
effect of such a rule would be to encourage dishonesty and to
drastically reduce the willingness of plaintiffs to settle their
fraud claims, because plaintiffs could never hold defendants
accountable for any misrepresentations of fact made during
settlement negotiations. Illinois law has long held that,
where the representation is made as to a fact actually or
presumptively within the speaker's knowledge, and contains
nothing so improbable as to cause doubt of its truth, the hearer
may rely upon it without investigation, even though the means of
investigation were within the reach of the injured party and the
parties occupied adversary positions toward one another. Pattiz
v. Semple, 12 F.2d 276, 278 (E.D. Ill. 1926)(interpreting
Illinois law), aff'd, 18 F.2d 955 (7th Cir. 1927). "[T]he fraud-
feasor will not be heard to say that he is a person unworthy of
belief, and that plaintiff was negligent in trusting him, and was
cheated through his own credulity." Pattiz, 12 F.2d at 278.
We hold that the justifiable reliance element of fraud is a
question of fact and should remain so even in cases like the one
sub judice. The facts may very well show that plaintiffs were
unjustified in relying upon the representations made by
defendants during the settlement negotiations that occurred in
1986; the facts may also show that plaintiffs never actually
relied upon the representations made by defendants at that time.
Our holding today merely announces the Illinois rule that such
questions are to be determined by the finder of fact and not by
the trial court as a matter of law.
For the reasons stated, we affirm the trial court's
dismissal of count I of the second amended complaint, reverse
that portion of the trial court's order granting summary judgment
and remand this case for proceedings consistent with this
opinion.
Affirmed in part, reversed in part and remanded.
Campbell, P.J., and Buckley, P.J., concur.
[fn1]It is worth noting that neither plaintiffs nor
defendants assert that IGI was a "close corporation" as defined
under Delaware law. Del. Code Ann. tit. 8, 342 (1983).
Consequently, as minority shareholders in a closely held, but not
statutory "close corporation," plaintiffs are barred from
receiving any special relief not afforded to minority
shareholders in a publicly traded corporation. Nixon v.
Blackwell, 626 A.2d 1366, 1380 (Del. 1993).
[fn2]All parties acknowledge that the release provision to
the Settlement Agreement contained the following language:
"However, this release shall not release or affect any rights or
claims which may arise under the terms of the Stock Sale
Agreement." Because the present case arises out of the Stock
Sale Agreement, plaintiffs have not released the claims they
assert here.
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