Caulfield v. The Packer Group, Inc. , 2016 IL App (1st) 151558 ( 2016 )

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Appellate Court Date: 2016.08.29
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Caulfield v. The Packer Group, Inc., 2016 IL App (1st) 151558
Appellate Court EDWARD M. CAULFIELD and MICHAEL G. KOEHLER,
Caption Derivatively and on Behalf of The Packer Group, Inc., and Packer
Engineering, Inc., Plaintiffs-Appellants, v. THE PACKER GROUP,
INC.; PACKER ENGINEERING, INC.; and PACKER
TECHNOLOGIES INTERNATIONAL, INC., Defendants (Kenneth
F. Packer; Charlotte A. Sartain; Warren K. Denniston; David Packer;
Deborah Hockman; Russ Johnson; and William Carroll,
Defendants-Appellees).
District & No. First District, Sixth Division
Docket No. 1-15-1558
Filed June 24, 2016
Decision Under Appeal from the Circuit Court of Cook County, No. 10-CH-28475; the
Review Hon. Rita M. Novak and the Hon. Neil Cohen, Judges, presiding.
Affirmed as modified in part, reversed in part, and remanded.
Judgment
Counsel on Locke Lord LLP, of Chicago (Michael H. King, Bilal Zaheer, and
Appeal Aaron J. Hersh, of counsel), for appellants.
Tressler LLP, of Chicago (James Borcia, of counsel), for appellees
Kenneth F. Packer and Charlotte A. Sartain.
Coman & Anderson, P.C., of Lisle (Jeffrey R. Platt, of counsel), for
appellee David Packer.
Huck Bouma, PC, of Wheaton (Kathleen R. Ryding, of counsel), for
appellee Russell Johnson.
Ice Miller LLP, of Chicago (John D. Burke and Heather L. Maly, of
counsel), for appellees Deborah Hockman and William Carroll.
Panel PRESIDING JUSTICE ROCHFORD delivered the judgment of the
court, with opinion.
Justice Hall and Justice Delort concurred in the judgment and opinion.
OPINION
¶1 Plaintiffs, Dr. Edward M. Caulfield and Dr. Michael G. Koehler, brought a shareholders’
derivative action on behalf of The Packer Group, Inc. (TPG), and Packer Engineering, Inc.
(PEI), against defendants, Dr. Kenneth F. Packer, Charlotte A. Sartain, Warren K. Denniston,
and David Packer (collectively referred to as the inside directors), who were officers and/or
directors of TPG. Plaintiffs sought recovery against the inside directors for breach of their
fiduciary duties to TPG and its subsidiaries and also sought recovery of their attorney fees.
Plaintiffs later amended their complaint to add additional directors, defendants Dr. Deborah
Hockman, Dr. Russell Johnson, and Dr. William Carroll (collectively referred to as the outside
directors). The circuit court ultimately entered four orders: (1) striking plaintiffs’ request for
attorney fees in their second amended complaint; (2) dismissing plaintiff’s claims in their
second amended complaint against the outside directors; (3) dismissing the claims in
plaintiffs’ third amended complaint against the inside directors; and (4) denying plaintiffs
leave to add additional shareholders as plaintiffs. Plaintiffs appeal the four orders. We reverse
in part, affirm in part as modified, and remand for further proceedings.
¶2 I. BACKGROUND
¶3 TPG was a closely held corporation comprised of three wholly owned subsidiaries: (1)
PEI; (2) Packer Environmental and Facility Consultants, Inc.; and (3) Packer Technologies
International, Inc. (collectively referred to as the Packer Companies). On July 1, 2010,
plaintiffs, Dr. Caulfield, the president and chief technical officer of PEI, and Dr. Koehler, the
chief executive officer (CEO) of PEI, filed a shareholders’ derivative action on behalf of TPG
and PEI against the inside directors: Dr. Kenneth Packer, TPG’s founder and chairman of the
board of directors; Charlotte A. Sartain, TPG’s executive vice president of finance and
secretary of the board of directors; and Warren K. Denniston and David Packer, members of
TPG’s board of directors.
¶4 Plaintiffs alleged the inside directors misappropriated and wasted TPG’s assets for their
own benefit.
¶5 Specifically, plaintiffs alleged that Dr. Packer purchased an Illinois company, New
Vermillion Ironworks (New Vermillion), in 2007. Dr. Packer financed his purchase of New
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Vermillion from his personal line of credit, secured by his personal assets. Dr. Packer became
president of New Vermillion, and Ms. Sartain became New Vermillion’s corporate treasurer.
¶6 During 2008, the value of Dr. Packer’s personal assets declined to the point where they
were no longer sufficient to secure his personal line of credit. In response to the declining value
of Dr. Packer’s personal assets, the bank holding his personal line of credit demanded
additional security. Rather than provide the additional security, Dr. Packer transferred
approximately $357,550 of the outstanding balance on his personal line of credit to TPG’s line
of credit, in effect switching the debt from himself to TPG. Dr. Packer and Ms. Sartain
transferred the debt to TPG without the prior knowledge or approval of the board of directors,
Dr. Koehler or Dr. Caulfield.
¶7 In March/April 2009, Ms. Sartain admitted to Dr. Koehler that she was concerned about
TPG’s cash flow. In response, Dr. Koehler began reviewing TPG’s financial records and
learned that from 2007 to 2009, Dr. Packer and Ms. Sartain often sent PEI employees to work
at New Vermillion. Some of these PEI employees worked almost full time at New Vermillion
for multiple months while on the PEI payroll. TPG also made a series of unidentified payments
on behalf of New Vermillion amounting to more than $1.2 million.
¶8 In August 2009, Dr. Packer, Ms. Sartain, and Dr. Koehler attended a meeting with a
representative of the bank issuing TPG’s line of credit. The bank said that TPG’s line of credit
was nearly exhausted at $3 million and that the bank would not renew the line of credit unless
TPG paid it down and immediately discontinued all payments on behalf of New Vermillion. In
September 2009, Dr. Packer, Ms. Sartain, and Dr. Koehler held a meeting with the senior
leadership of PEI to discuss controlling costs. During the meeting, Ms. Sartain and Dr. Koehler
stated that TPG would stop making payments on behalf of New Vermillion.
¶9 However, TPG continued to make unidentified payments on behalf of New Vermillion.
Employees on TPG’s payroll continued to perform work on behalf of New Vermillion at Dr.
Packer’s instruction.
¶ 10 In October 2009, TPG’s board of directors held a meeting at which Dr. Packer attempted to
fire Dr. Koehler from his position as CEO. Dr. Koehler was not allowed to attend this board
meeting. Despite Dr. Packer’s efforts, the board refused to fire Dr. Koehler.
¶ 11 In December 2009, TPG’s board of directors held a meeting to review the independent
audit report for TPG for the fiscal years 2007 and 2008 prepared by Sikich LLP. The 2007
audit showed that Dr. Packer owed TPG $870,285; the 2008 audit showed that Dr. Packer
owed TPG $748,261. The monies Dr. Packer owed TPG “related to New Vermillion.” Sikich
LLP prepared an addendum to the 2008 audit, which Dr. Packer and Ms. Sartain deliberately
withheld from the board. That addendum provided recommendations for TPG, including that
TPG should incorporate certain checks and balances to prevent the ongoing misuse of its
finances.
¶ 12 At the December 2009 board meeting, Dr. Koehler relayed his concerns about the
significant New Vermillion-related expenses and debt that TPG, at Dr. Packer’s direction, had
assumed.
¶ 13 In March 2010, Mr. Denniston had a conversation with Dr. Caulfield regarding the New
Vermillion debt and expenses. Mr. Denniston told Dr. Caulfield that Dr. Packer would never
repay the debt and that the board should declare it a “bad debt” and “write it off” as a tax
deduction.
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¶ 14 On March 16, 2010, plaintiffs sent a letter to TPG demanding that it form a special
committee of the board to investigate Dr. Packer’s involvement with New Vermillion. On
April 6, 2010, the board appointed an independent special committee of the board, comprised
of the outside directors, Dr. Hockman, Dr. Carroll, and Dr. Johnson. The independent special
committee contacted Sikich LLP to conduct an audit investigation of TPG, but Dr. Packer
refused to guarantee that the auditors would have complete access to all of TPG’s books and
records.
¶ 15 Dr. Packer then attempted to shut down the investigation, claiming it was not necessary
because he had repaid his debt to New Vermillion through two payments, totaling $180,000,
and a stock transfer.
¶ 16 The outside directors became concerned that Dr. Packer would control the information
provided to the auditors and would not allow a complete and accurate audit of TPG’s
financials, and they requested that Dr. Packer and Ms. Sartain resign from their positions as
officers and directors of TPG. Dr. Packer and Ms. Sartain refused to resign. On April 26, 2010,
the outside directors resigned from the board because they believed “it would be futile” to
continue their investigation of Dr. Packer’s involvement with New Vermillion as long as Dr.
Packer and Ms. Sartain continued in their positions within TPG.
¶ 17 On July 1, 2010, plaintiffs filed their shareholders’ derivative action against the inside
directors. In addition to the allegations set forth above regarding Dr. Packer’s dealings with
New Vermillion, plaintiffs further alleged: Ms. Sartain has prevented TPG’s officers,
directors, and shareholders from having access to documents showing Dr. Packer’s improper
corporate dealings over a number of years; Ms. Sartain has forged employees’ signatures on
checks and has written checks from TPG’s account in order to avoid PEI’s requirement that
there be two signatories on checks over $5000; the inside directors caused TPG to acquire a
product development firm, PTI, of which Dr. Packer was a partial owner, at an inflated price;
the inside directors caused TPG to take a $2 million loan for the purpose of paying incentive
compensation and paid Mr. Denniston $250,000 from this loan even though he was not a
full-time TPG employee; TPG has paid above-market rent to Dr. Packer and David Packer for
use of a building that TPG built; TPG is paying for a life insurance policy on Dr. Packer for
which it is not the beneficiary; the inside directors have removed the trustee of the employee
stock ownership plan (ESOP) and have manipulated the ESOP shares for their own benefit;
and the inside directors have improperly awarded themselves additional shares of TPG stock
and “manipulated” the value of TPG’s assets for the fiscal year 2008 to inflate the value of
TPG in the fair market value appraisal report.
¶ 18 Plaintiffs’ six-count complaint asserted claims against the inside directors for: (1) breach
of fiduciary duties; (2) corporate waste; (3) abuse of control; (4) gross mismanagement; (5)
unjust enrichment; and (6) injunctive relief.
¶ 19 On November 19, 2010, plaintiffs moved to file an amended complaint adding 16 other
shareholders as additional named plaintiffs. On March 1, 2011, the circuit court denied
plaintiffs’ motion.
¶ 20 All the Packer Companies went out of business in January 2012. Thereafter, an assignment
for the benefit of their creditors was made in May 2012. The assignee, Ronald Mrofka,
subsequently sold the Packer Companies’ assets and distributed the proceeds to their secured
lender, JP Morgan Chase. After that distribution, JP Morgan Chase was still owed more than
$1 million by the Packer Companies.
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¶ 21 On April 18, 2012, plaintiffs filed a second amended complaint, again asserting a
shareholders’ derivative action against the inside directors and adding the outside directors as
additional defendants. Plaintiffs repeated the allegations of the original complaint and
consolidated their claims into one count of breach of fiduciary duties against all defendants and
one count of negligence against Ms. Sartain. Plaintiffs also added in count III, a claim of
breach of fiduciary duties, against the outside directors for their decision to resign from the
board instead of completing the independent special committee’s investigation into the inside
directors’ alleged financial misconduct.
¶ 22 On April 5, 2013, the circuit court dismissed plaintiff’s claims against the outside directors
in count III of the second amended complaint with prejudice, finding that their resignation
from the board did not constitute a breach of their fiduciary duties.
¶ 23 On May 16, 2013, the circuit court struck plaintiffs’ demand for attorney fees from the
second amended complaint because they did not identify any agreement or statute allowing
them to recover such fees.
¶ 24 On October 1, 2014, plaintiffs filed their third amended complaint in which they realleged
the claims from the second amended complaint against the inside directors, realleged the
claims against the outside directors in order to preserve them for review, and added a request
for punitive damages and for attorney fees based on the common fund doctrine.
¶ 25 On March 5, 2015, the circuit court dismissed the third amended complaint’s claims
against the inside directors on two separate grounds pursuant to section 2-619 of the Code of
Civil Procedure (735 ILCS 5/2-619 (West 2012)). First, the court found that as the Packer
Companies are all insolvent, only their creditors can pursue a derivative claim. Since plaintiffs’
third amended complaint was brought as a shareholders’ derivative action only, and not as a
creditors’ derivative action, plaintiffs lacked standing to assert their claims. However, the court
stated that plaintiffs could bring an amended action basing their standing on their status as
creditors, thereby “resolv[ing] the issue of standing.” 1 Second, the court found that since
plaintiffs have obtained substantial individual judgments against the corporate and individual
defendants in other litigation and have been actively pursuing defendants’ assets to satisfy
those individual judgments, plaintiffs have a significant conflict of interest between their
individual interests and the interests of defendants’ other creditors and thus cannot adequately
represent the interests of the other creditors.
¶ 26 The circuit court ordered defendants to “give notice to the other creditors of the dismissal
so that they may intervene and pursue the litigation if they desire.” No other creditors
intervened.
¶ 27 The circuit court subsequently entered a final order on May 12, 2015, requiring plaintiffs to
pay Dr. Packer and Ms. Sartain certain costs in the amount of $409 within seven days, and
dismissed the case with prejudice.
¶ 28 Plaintiffs appeal the circuit court’s orders: (1) dismissing their third amended complaint
against the inside directors; (2) denying their request to add additional shareholders as named
plaintiffs; (3) dismissing their claims in the second amended complaint against the outside
directors; and (4) striking their prayer in the second amended complaint for attorney fees.
1
Plaintiffs never amended their complaint to base their standing on their status as creditors; all of
plaintiffs’ complaints based their standing on their status as shareholders.
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¶ 29 II. ANALYSIS
¶ 30 A. The Dismissal of Plaintiffs’ Third Amended Complaint
¶ 31 First, we address the dismissal of plaintiff’s third amended complaint against the inside
directors for lack of standing pursuant to section 2-619(a)(9) of the Code of Civil Procedure
(735 ILCS 5/2-619(a)(9) (West 2012)). We review de novo the circuit court’s decision on a
motion to dismiss that is based on lack of standing, and we consider whether dismissal was
proper as a matter of law. Matthews v. Chicago Transit Authority, 2016 IL 117638, ¶ 39.
¶ 32 Plaintiffs’ third amended complaint was brought as a shareholders’ derivative action. “A
derivative action is an action that a corporate shareholder brings on behalf of a corporation to
seek relief for injuries done to that corporation, where the corporation either cannot or will not
assert its own rights.” Davis v. Dyson, 387 Ill. App. 3d 676, 682 (2008). Derivative actions
“ ‘are one of the remedies which equity designed for those situations where the management
through fraud, neglect of duty or other cause declines to take the proper and necessary steps to
assert the rights which the corporation has. The stockholders are then allowed to take the
initiative and institute the suit which the management should have started had it performed its
duty.’ ” Id. (quoting Meyer v. Fleming, 327 U.S. 161, 167 (1946)).
¶ 33 The issue here is whether the corporation’s insolvency during the pendency of the
shareholders’ derivative action divests the shareholders of standing to pursue that action. This
is an issue of first impression in Illinois, and thus we look to the decisions of other jurisdictions
for guidance and, in particular, to Delaware law. See Wieboldt Stores, Inc. v. Schottenstein, 94
B.R. 488, 509 n.29 (N.D. Ill. 1988) (“Illinois courts have often looked to Delaware law for
guidance in deciding previously undecided corporate law issues.”).
¶ 34 Production Resources Group, L.L.C. v. NCT Group, Inc., 863 A.2d 772 (Del. Ch. 2004) ,
and North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, 930
A.2d 92 (Del. 2007), as well as cases citing Production Resources and Gheewalla, are
informative.
¶ 35 In Production Resources, the Delaware chancery court addressed whether the plaintiff
there, a creditor of an insolvent company, could bring a direct claim of breach of fiduciary duty
against the company. The chancery court stated:
“The fact that the corporation has become insolvent does not turn [derivative] claims
into direct creditor claims, it simply provides creditors with standing to assert those
claims. At all times, claims of this kind belong to the corporation itself because even if
the improper acts occur when the firm is insolvent, they operate to injure the firm in the
first instance by reducing its value, injuring creditors only indirectly by diminishing the
value of the firm and therefore the assets from which the creditors may satisfy their
claims.” 863 A.2d at 776.
¶ 36 The Delaware chancery court further stated “regardless of whether they are brought by
creditors when a company is insolvent, these claims remain derivative, with either
shareholders or creditors suing to recover for a harm done to the corporation.” Id. at 792. The
fact of insolvency “does not transform the nature of the claim; it simply changes the class of
those eligible to press the claim derivatively, by expanding it to include creditors.” Id. at 793.
¶ 37 In Gheewalla, the Delaware Supreme Court addressed whether creditors of an insolvent
corporation could bring direct claims against that corporation for breach of fiduciary duties.
The Delaware Supreme Court stated:
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“It is well settled that directors owe fiduciary duties to the corporation. When a
corporation is solvent, those duties may be enforced by its shareholders, who have
standing to bring derivative actions on behalf of the corporation because they are the
ultimate beneficiaries of the corporation’s growth and increased value. When a
corporation is insolvent, however, its creditors take the place of the shareholders as the
residual beneficiaries of any increase in value.
Consequently, the creditors of an insolvent corporation have standing to maintain
derivative claims against directors on behalf of the corporation for breaches of
fiduciary duties. The corporation’s insolvency makes the creditors the principal
constituency injured by any fiduciary breaches that diminish the firm’s value.
Therefore, equitable considerations give creditors standing to pursue derivative claims
against the directors of an insolvent corporation. Individual creditors of an insolvent
corporation have the same incentive to pursue valid derivative claims on its behalf that
shareholders have when the corporation is solvent.” (Emphases in original and internal
quotation marks omitted.) Gheewalla, 930 A.2d at 101-02.
¶ 38 The Delaware Supreme Court further held that individual creditors of an insolvent
corporation have no right to assert direct claims for breach of fiduciary duties against corporate
directors, but that creditors “may nonetheless protect their interest by bringing derivative
claims on behalf of the insolvent corporation.” Id. at 103.
¶ 39 Subsequent to Production Resources and Gheewalla, the Delaware chancery court in
Quadrant Structured Products Co. v. Vertin, 102 A.3d 155 (Del. Ch. 2014) (Quadrant I), and
Quadrant Structured Products Co. v. Vertin, 115 A.3d 535 (Del. Ch. 2015) (Quadrant II),
again addressed the issue of creditors’ standing to bring a derivative suit upon the
corporation’s insolvency. In Quadrant I, the Delaware chancery court stated in pertinent part:
“As residual claimants and the ultimate beneficiaries of the fiduciary duties that
directors owe to the corporation, stockholders have standing in equity to bring claims
derivatively on behalf of the corporation for injury that the corporation has suffered.
When a corporation is insolvent, its creditors become the beneficiaries of any initial
increase in the corporation’s value. [Gheewalla, 930 A.2d at 101.] The stockholders
remain residual claimants, but they can benefit from increases in the corporation’s
value only after the more senior claims of the corporation’s creditors have been
satisfied. ‘The corporation’s insolvency makes the creditors the principal constituency
injured by any fiduciary breaches that diminish the firm’s value.’ [Gheewalla, 930
A.2d at 101-02] (internal quotation marks omitted). Because the creditors of an
insolvent corporation join the class of residual claimants, ‘equitable considerations
give creditors standing to pursue derivative claims against the directors of an insolvent
corporation.’ [Gheewalla, 930 A.2d at 102.]” Quadrant I, 102 A.3d at 172.
¶ 40 In Quadrant II, the Delaware chancery court stated in pertinent part:
“In my view, Gheewalla holds that at the point of [insolvency], standing to sue
derivatively does not shift from stockholders to creditors. Stockholders do not lose
their ability to pursue derivative claims. Rather, the universe of potential plaintiffs
expands to include creditors.” Quadrant II, 115 A.3d at 556.
¶ 41 In accordance with Gheewalla, Production Resources, Quadrant I, and Quadrant II, the
majority of non-Delaware cases addressing the issue hold that shareholders maintain standing,
along with creditors, to bring derivative claims on behalf of insolvent corporations. See
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Hedback v. Tenney (In re Security Asset Capital Corp.), 396 B.R. 35 (Bankr. D. Minn. 2008);
Metcoff v. Lebovics, 977 A.2d 285 (Conn. Super. Ct. 2007); Patel v. Patel (In re Patel), No.
7-10-12627 JA, 2012 WL 2514891 (Bankr. D.N.M. June 25, 2012); Fleet National Bank v.
Boyle, No. Civ.A. 04CV1277LLD, 2005 WL 2455673 (E.D. Pa. 2005).
¶ 42 We similarly take the majority view and hold, in accordance with Delaware precedent, that
a corporation’s insolvency expands the class of those eligible to bring a derivative claim to
include creditors in addition to shareholders. We find further support for our holding in Paul
H. Schwendener, Inc. v. Jupiter Electric Co., 358 Ill. App. 3d 65 (2005), in which we held that
although corporate officers generally owe a fiduciary duty only to the corporation and its
shareholders, “once a corporation becomes insolvent, the fiduciary duty of an officer is
extended to the creditors of the corporation.” (Emphasis added.) Id. at 75. Schwendener’s
holding that the corporation’s insolvency extends (i.e., enlarges) the corporate officer’s
fiduciary duties to both shareholders and creditors indicates that both the creditors and the
shareholders have standing to bring a derivative suit for breach of those duties. See also A.G.
Cullen Construction, Inc. v. Burnham Partners, LLC, 2015 IL App (1st) 122538, ¶ 46; In re
Berman, 629 F.3d 761, 766 (7th Cir. 2011); In re Doctors Hospital of Hyde Park, Inc., 474
F.3d 421, 428 (7th Cir. 2007) (holding that upon the corporation’s insolvency, the corporate
officer’s duty extends from the shareholders to the creditors).
¶ 43 Given our holding that the corporation’s insolvency extended the class of those eligible to
bring a derivative claim to include creditors as well as shareholders, we reverse the circuit
court’s finding that plaintiffs here lacked standing to bring their shareholders’ derivative action
against the inside directors.
¶ 44 Defendants argue, though, that plaintiffs lack standing because the assignment of the
Packer Companies’ assets for the benefit of their creditors in May 2012 gave the assignee (Mr.
Mrofka) the exclusive right to pursue those claims. In a bankruptcy case, the right to bring a
derivative action “vests exclusively to the trustee.” In re RNI Wind Down Corp., 348 B.R. 286,
293 (Bankr. D. Del. 2006). However, the present case involves an assignment, not a
bankruptcy. See First Bank v. Unique Marble & Granite Corp., 406 Ill. App. 3d 701, 707
(2010) (“A debtor may choose to make an assignment for the benefit of creditors, which is an
out-of-court remedy, rather than to petition for bankruptcy, because assignments are less costly
and completed more quickly.”). Defendants cite no cases similarly holding that a derivative
action vests exclusively to the assignee when an assignment of assets is made for the benefit of
the creditors, so we are not persuaded by defendants’ arguments in this regard.
¶ 45 Next, we address the section 2-619 dismissal of plaintiffs’ third amended complaint against
the inside directors due to their conflicts of interest with the parties they represent. The circuit
court determined that plaintiffs had standing to bring the derivative action only as a creditors’
derivative action and proceeded to examine whether plaintiffs’ interests conflicted with the
other creditors. Having determined that plaintiffs had standing to bring their lawsuit as a
shareholders’ derivative action, we consider whether plaintiffs’ interests conflicted with the
other shareholders.
¶ 46 A section 2-619 motion to dismiss admits the legal sufficiency of the complaint and raises
defects, defenses, or other affirmative matters appearing on the face of the complaint or that are
established by external submissions that act to defeat the claim. Krilich v. American National
Bank & Trust Co. of Chicago, 334 Ill. App. 3d 563, 569-70 (2002). Our review of an order
granting a section 2-619 motion to dismiss is de novo. Id. at 569.
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¶ 47 A plaintiff in a shareholders’ derivative action “must be qualified to serve in a fiduciary
capacity as a representative of the class of stockholders, whose interest is dependent upon the
representative’s adequate and fair prosecution of the action.” Emerald Partners v. Berlin, 564
A.2d 670, 673 (Del. Ch. 1989) A derivative plaintiff may be disqualified where there is a
conflict between his interests and the interests of the parties he represents. See Sax v. Sax, 48
Ill. App. 3d 431, 435 (1977).
¶ 48 The parties here have found no Illinois case law setting forth the factors to consider when
determining whether such a conflict exists, but they have cited Delaware case law on the issue,
which we may look to for guidance. Wieboldt Stores, Inc. v. Schottenstein, 94 B.R. at 509 n.29.
Among the elements to be considered are: economic antagonisms between the representative
and the shareholders; the remedy sought by the plaintiff in the derivative action; indications
that the named plaintiff was not the driving force behind the litigation; the plaintiff’s
unfamiliarity with the litigation; other litigation pending between the plaintiff and the
defendants; the relative magnitude of the plaintiff’s personal interests as compared to his
interest in the derivative action itself; the plaintiff’s vindictiveness toward the defendants; and
the degree of support the plaintiff was receiving from the shareholders he purported to
represent. Emerald Partners, 564 A.2d at 673. A combination of these factors can form the
basis of the dismissal of the plaintiff, but a strong showing of one factor is sufficient if it shows
a conflict of interest between the plaintiff and the persons he is supposed to represent fairly and
adequately. Id.
¶ 49 In the present case, other litigation between plaintiffs and defendants, and the relative
magnitude of plaintiffs’ personal interests as compared to their interest in the derivative action,
show that the circuit court committed no error in dismissing plaintiffs’ third amended
complaint against the inside directors on the basis that there were conflicts between plaintiffs’
interests and the interests of the parties they represented.2
¶ 50 Specifically, plaintiffs each won individual lawsuits against TPG and PEI at the same time
they were pursuing the derivative action. Dr. Koehler was terminated from PEI in May 2010
and subsequently won a $100,000 verdict against TPG and PEI for breach of contract, as well
as a verdict in the amount of $1.92 million against Dr. Packer, $355,000 against Ms. Sartain,
and $175,000 against Mr. Denniston for tortious interference with contract. The appellate court
affirmed. Koehler v. The Packer Group, Inc., 2016 IL App (1st) 142767. Meanwhile, Dr.
Caulfield was terminated from PEI in April 2011 and subsequently won a $988,777 verdict
against TPG and PEI for breach of contract, as well as a verdict and damages for retaliatory
discharge. The appellate court affirmed the judgment and $988,777 award for breach of
contract but reversed the judgment for retaliatory discharge and vacated the damages awarded
thereon. Caulfield v. Packer Engineering, Inc., 2015 IL App (1st) 140463-U.
¶ 51 Plaintiffs note that in Illinois, “a shareholder may bring a derivative action and an
individual claim at the same time if he has suffered a different injury from his fellow
shareholders” (Levy v. Markal Sales Corp., 268 Ill. App. 3d 355, 371 (1994)), and, thus,
plaintiffs argue that the filing of their individual lawsuits here do not, in and of themselves,
2
In arguing on appeal that there were conflicts between plaintiffs’ interests and the interests of the
parties they represented, defendants make certain statements about plaintiffs’ finances and employment
that are unsupported in the appellate record. We have disregarded those statements and consider only
the undisputed facts underlying the conflicts issue.
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indicate an impermissible conflict with their fellow shareholders. However, once the
judgments were entered, a conflict arose because Dr. Koehler issued a citation and turnover
request against Federal Insurance Company (Federal), which had been providing a defense in
both the individual lawsuit and the derivative lawsuit. See Caulfield v. Packer Engineering,
Inc., 2016 IL App (1st) 151329-U.
¶ 52 The Federal policy excludes claims brought by shareholders in an individual capacity. Dr.
Koehler asserted throughout the shareholders’ derivative case that he was and remains a TPG
shareholder. However, when Federal raised the shareholder exclusion in response to Dr.
Koehler’s motion for turnover in his individual case, he claimed for the first time that he was
not a TPG shareholder in order to recover under the policy. This action was taken by Dr.
Koehler to further his individual interests over those of the Packer Companies and his fellow
shareholders.
¶ 53 In his individual lawsuit, Dr. Koehler also served citations to discover assets on Dr. Packer,
Ms. Sartain, and Mr. Denniston, the primary defendants in the derivative lawsuit. In doing so,
Dr. Koehler again attempted to collect the same funds that otherwise would have been
available in the derivative lawsuit. Dr. Koehler settled his individual claim against Mr.
Denniston, with Federal paying $100,000 and Mr. Denniston paying $54,000. All this money
went to Dr. Koehler, and none of it went to the insolvent Packer Companies or to any of its
shareholders. Additionally, Dr. Caulfield was granted a turnover of the entire remaining limits
of Federal’s insurance policy for the 2011 time period.
¶ 54 Thus, plaintiffs each have a direct conflict with their fellow shareholders in the derivative
lawsuit, as they are acting in their individual cases to collect the remaining assets of the
insolvent corporate defendants TPG and PEI at the expense of the shareholders in the
derivative action. Accordingly, we affirm the order dismissing plaintiffs’ third amended
complaint against the inside directors. However, we also modify the dismissal order to require
that defendants notify the other stockholders of record on the date of the dismissal and that they
be given a time limit within which they may intervene and carry on the litigation. See Sax, 48
Ill. App. 3d at 436 (holding that the circuit court has the sua sponte duty to condition the
dismissal for conflict of interest upon the requirement that notice of the dismissal and an
opportunity to intervene be given to the other stockholders). In the present case, the circuit
court required that defendants notify the other creditors of the dismissal and their right to
intervene; the court never required defendants to so notify the other shareholders.
¶ 55 B. Plaintiffs’ Appeal of the Order Denying Their
Motion to Add Additional Shareholders
¶ 56 Plaintiffs appeal the March 1, 2011, order denying them leave to file an amended
complaint, adding 16 other shareholders as additional plaintiffs. Our standard of review is for
an abuse of discretion. People v. Allen, 2016 IL App (1st) 142125, ¶ 18.
¶ 57 Plaintiffs filed their motion for the addition of the 16 shareholders in November 2010, at a
time when plaintiffs had not yet filed their individual lawsuits against defendants and had not
yet obtained judgments against them and sought collection of those judgments. In response to
plaintiffs’ motion, defendants filed a response noting that a party is necessary when its
presence is required to: (1) protect an interest in the controversy that would be materially
affected by a judgment entered in its absence; (2) protect the interests of those who are before
the court; or (3) enable the court to make a complete determination of the controversy. See
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Boyd Electric v. Dee, 356 Ill. App. 3d 851, 859 (2005). Defendants argued that any additional
plaintiffs were unnecessary at that time, noting that plaintiffs’ amended complaint did not
contain any new or different counts, the proposed additional plaintiffs could easily be called as
witnesses and did not need to be added to protect their interests or the interests of the other
shareholders, and they were not necessary for the court to make a complete determination of
the controversy. The circuit court denied plaintiffs’ motion. We find no abuse of discretion.
¶ 58 As discussed earlier in this opinion, though, plaintiffs have since developed a conflict with
the shareholders they purport to represent requiring dismissal of their third amended complaint
against the inside directors; we are affirming the dismissal order but modifying it to require
that notice be given to the other shareholders of record on the date of dismissal and that they be
given a time limit within which they may intervene and carry on the litigation against the inside
directors.
¶ 59 C. Plaintiffs’ Appeal of the Order Dismissing Their
Claims Against the Outside Directors
¶ 60 The circuit court dismissed plaintiffs’ breach of fiduciary duties claims against the outside
directors in count III of their second amended complaint pursuant to section 2-615 of the Code
of Civil Procedure (735 ILCS 5/2-615 (West 2010)). In ruling on a section 2-615 motion, the
circuit court must accept as true all well-pled facts in the complaint and all reasonable
inferences therefrom. Tucker v. Soy Capital Bank & Trust Co., 2012 IL App (1st) 103303,
¶ 17. The critical inquiry is whether the allegations of the complaint, when construed in the
light most favorable to plaintiffs, are sufficient to establish a cause of action upon which relief
may be granted. Id. Our standard of review is de novo. Id.
¶ 61 To state a claim for breach of fiduciary duties, plaintiffs must allege the existence of a
fiduciary duty, a breach of that duty, and damages proximately caused by the breach. Id. ¶ 21.
In a corporate setting, a fiduciary has the duty to act with utmost loyalty and good faith when
managing the corporation. Tully v. McLean, 409 Ill. App. 3d 659, 682 (2011).
¶ 62 In count III of their second amended complaint, plaintiffs alleged that the outside directors
breached their fiduciary duties to the Packer Companies and to the shareholders by resigning
from the board. However, the Business Corporation Act of 1983 provides that “[a] director
may resign at any time by giving written notice to the board of directors, its chairman, or to the
president or secretary of the corporation.” 805 ILCS 5/8.10(g) (West 2010). Plaintiffs cite no
Illinois case law holding that a director’s mere resignation from the board, without more,
constitutes a breach of fiduciary duty, nor have plaintiffs made any arguments that we should
be the first Illinois case to so hold.
¶ 63 Rather, plaintiffs alleged in their second amended complaint, and argue on appeal, that the
outside directors’ act of resignation constituted a breach of their fiduciary duties under the
unique facts of this case, because by resigning they failed to complete the independent special
committee’s investigation into the inside directors’ alleged financial misconduct, thereby
enabling Dr. Packer to continue exercising his control over the Packer Companies and to
ultimately terminate Dr. Koehler’s employment.3
3
On appeal, plaintiffs argue for the first time that the outside directors breached their fiduciary
duties prior to their resignation from the board. Plaintiffs forfeited review by failing to plead these
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¶ 64 Plaintiffs cite out-of-state and federal cases holding that officers and directors of a
corporation breach their fiduciary duties by resigning and electing successors who they know
will loot the corporation (Gerdes v. Reynolds, 28 N.Y.S.2d 622 (Sup. Ct. 1941)) and by taking
no steps prior to resignation to prevent a transaction they know will be dangerous to the
corporation (Xerox Corp. v. Genmoora Corp., 888 F.2d 345 (5th Cir. 1989)).
¶ 65 The circumstances of this case are entirely different from those in Gerdes and Xerox.
Plaintiffs here pled that Dr. Koehler first informed the board in December 2009 about the
significant New Vermillion-related expenses and debt that TPG, at Dr. Packer’s direction, had
assumed. There is no allegation that the outside directors knew of these expenses prior to the
December 2009 board meeting. On March 16, 2010, plaintiffs sent a letter to TPG demanding
the formation of a special committee of the board to investigate Dr. Packer’s involvement with
New Vermillion. Two days later, on March 18, 2010, Dr. Hockman, in her capacity as
vice-chair of the board, sent a letter to plaintiffs stating she had discussed the March 16
demand letter with TPG’s senior management and they were convening a special meeting of
the board at which she would recommend an independent investigation of Dr. Packer’s
financial dealings with New Vermillion. On April 6, 2010, the board appointed an independent
special committee comprised of the outside directors (including Dr. Hockman). The outside
directors pursued the investigation by contacting auditors to conduct an audit investigation of
TPG, but Dr. Packer refused to guarantee that the auditors would have complete access to all
the necessary books and records, and he attempted to shut down the investigation. The outside
directors responded by demanding Dr. Packer’s and Ms. Sartain’s resignation; however, they
refused to resign. Concerned that Dr. Packer was controlling the information provided to the
auditors and would not allow an accurate audit of TPG’s financials, the outside directors
resigned from the board.
¶ 66 Plaintiffs did not allege in their second amended complaint that the outside directors had
any knowledge that imminent harm to plaintiffs or the Packer Companies would be caused by
their resignation or that Dr. Koehler would be terminated. Nor were there any allegations that
the outside directors engaged in any conduct which caused plaintiffs or the Packer Companies
harm after their resignation. On these facts, we agree with the circuit court’s finding that
plaintiffs failed to state a cause of action for breach of fiduciary duties against the outside
directors, and affirm the dismissal of their claims in count III of the second amended complaint
against the outside directors.
¶ 67 Plaintiffs contend that the dismissal should not have been with prejudice and that they
should have been given an opportunity to amend their second amended complaint against the
outside directors. The decision whether to dismiss an action with or without prejudice rests
within the sound discretion of the court and will not be disturbed absent an abuse of discretion.
Swanson v. Board of Police Commissioners, 197 Ill. App. 3d 592, 609 (1990). The circuit court
committed no abuse of discretion in dismissing count III of the second amended complaint
against the outside directors with prejudice, where plaintiffs offered the circuit court no
potential amendments that would have cured its defects. See Bellik v. Bank of America, 373 Ill.
App. 3d 1059, 1066 (2007).
allegations in their second amended complaint. Keefe-Shea Joint Venture v. City of Evanston, 332 Ill.
App. 3d 163, 170 (2002).
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¶ 68 D. Plaintiffs’ Appeal of the Order Striking Their
Prayer for Attorney Fees
¶ 69 Although plaintiffs’ notice of appeal states that they are appealing the May 16, 2013, order
striking their request for attorney fees in their second amended complaint, plaintiffs
acknowledge on appeal that the circuit court allowed them to file a third amended complaint in
which they sought recovery of their attorney fees under the common fund doctrine. The
common fund doctrine provides that if a plaintiff in a shareholders’ derivative action is
successful and the benefit goes to the corporation, the plaintiff is entitled to recover his
necessary expenses and disbursements, including attorney fees. See De Fontaine v. Passalino,
222 Ill. App. 3d 1018, 1033-34 (1991). The circuit court dismissed plaintiffs’ third amended
complaint (including its request for attorney fees), finding that plaintiffs lacked standing and
were disqualified due to their conflicts of interest with the parties they purported to represent.
Plaintiffs’ only argument on appeal with regard to attorney fees is that, in the event of reversal
of the dismissal of their third amended complaint, they again should be allowed to seek
recovery of their attorney fees under the common fund doctrine. As discussed earlier in this
opinion, we are reversing the finding that plaintiffs lacked standing and affirming the finding
that plaintiffs had a disqualifying conflict of interest but modifying the dismissal order to
require that notice be given to the other shareholders of record on the date of dismissal and that
they be given a time limit within which they may intervene and carry on the litigation against
the inside directors. In the event new shareholders intervene to carry on the litigation against
the inside directors, they may seek attorney fees under the common fund doctrine. We make no
finding regarding the merits of the attorney fees claim.
¶ 70 For the foregoing reasons, we reverse the finding of lack of standing, affirm the dismissal
order as modified, and remand for further proceedings.
¶ 71 Affirmed as modified in part, reversed in part, and remanded.
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