Graham, Rodgers, and Mimms were experienced condominium salesmen who went into business together in April 1976 so they could: (a) convert rental buildings into condominiums; (b) obtain “project sales” listing agreements to sell the units in rental buildings which were being converted into condominiums by other developers; and (c) broker the resale of individual units in existing condominiums. Their enterprise was named Mimms & Co. (“Mimco”) and they were the sole shareholders.
The shareholders agreed all business decisions were to be made by a two-out-of-three vote, but that profits and salaries were to be apportioned under a formula which gave 40% to Mimms, 35% to Graham and 25% to Rodgers. Since Mimms was the only one of the three who was licensed as a broker, they agreed he would initially receive 51% of the Mimco stock, in addition to becoming president, treasurer, secretary, and sole director of the corporation.
Based on their business objectives, Mimco was divided into three divisions. Graham was placed in charge of the Project Division because of his experience in managing the mass “project sales” required when rental buildings are converted to condominiums. Mimms was placed in charge of the Acquisition Division because he believed he had the ability to obtain project listings and acquire suitable rental buildings for conversion. Rodgers was placed in charge of the Brokerage Division, which was to handle the sales of miscellaneous condominium units.
The firm grew rapidly, and had more than 20 employees within a few months. During the first eight months of business, the Project and Brokerage Divisions accounted for more than $5,000,000 in sales. During the same period, Mimms and his Acquisition Division actively investigated, researched and developed plans and proposals for potential condominium conversion projects, including the building located at 100 E. Walton in Chicago.
Mimms began calling Graham at home in early November 1976 to discuss restructuring Mimco According to Graham, Mimms told him Rodgers should not share in the profits from conversion projects because the Brokerage Division would never be a big profit maker. Mimms also said he was working on the acquisition of several rental buildings for Mimco, including the 100 E. Walton building, but that he did not want to purchase these buildings on behalf of Mimco until the corporation was restructured.
On November 24, 1976, Mimms visited Graham at home and again reported that he was ready to purchase several buildings for Mimco, but that he would not proceed with these projects until Graham agreed to a reorganization. Graham refused to sign the proposal until he discussed it with Rodgers. Rodgers read the proposal and refused to sign it. According to Graham, when Rodgers rejected the proposal, Mimms told Rodgers that “. . . you either sign it or I am going to fire you and pay you off the bottom line and there is not going to be a bottom line.” According to Rodgers, Mimms also threatened that if they refused to sign the reorganization proposal, he would “clean the company of its assets and walk away from its remains.
Graham subsequently consulted an attorney and then told Mimms he would not agree with any proposal because he believed it would violate Rodgers’ rights. Mimms responded by calling Graham “a vacillating son of a bitch,” and, as president and sole director of Mimco, fired Graham, and then later fired Rodgers. Mimms then established a new company and, in August 1977, Mimms and a group of partners obtained bank financing which permitted them to purchase the building at 100 E. Walton for $10,500,000 and convert it into condominiums.
Graham and Rodgers, acting individually and on behalf of Mimco, filed suit against Mimms and his new company for usurping corporate opportunities and for other breaches of fiduciary duty.
After a bench trial, the court found Mimms usurped multiple corporate opportunities, including the 100 E. Walton project, and imposed a constructive trust on the profits Mimms generated from the usurped opportunities. Using the previously agreed formula whereby Graham and Rodgers were entitled to 35% and 25%, respectively, of Mimco’s profits, the court ordered Mimms to pay $810,950 to Graham and $579,257 to Rodgers as restitution.
The court stated the law in Illinois is that the individuals who control corporations owe a fiduciary duty to their corporation and its shareholders; that one of the basic rules evolved by the courts in this area of corporate law is the principle that a corporation’s fiduciary is not permitted to use corporate assets for his or her own personal gain. Therefore, when a corporation’s fiduciary uses corporate assets to develop a business opportunity, the fiduciary is estopped from denying that the resulting opportunity belongs to the corporation whose assets were misappropriated, even if it was not feasible for the corporation to pursue the opportunity or it had no expectancy in the project.
In reaching its decision, the court found compelling evidence that Mimms used Mimco employees, and his own time as a Mimco executive, to research and investigate potential conversion projects; to pursue financing for these projects; and to develop comprehensive conversion plans and proposals. The overwhelming evidence that the 100 E. Walton project was researched, investigated, and developed by Mimms with Mimco assets and Mimms’ conduct in aggressively pursuing this opportunity with Mimco assets constituted an implied assertion (upon which the corporation, at his direction, relied) that the project constituted a corporate opportunity of Mimco.
Mimms said the results in this case – the restitution payments to Graham and Rodgers – were harsh because he greatly added to the value of the misappropriated property. The court responded as follows:
“ . . . in the corporate context, courts have been inveterate and uncompromising in applying the constructive trust remedy to fiduciaries who have misappropriated corporate property or usurped corporate opportunities . . . that, for the purpose of removing all temptation, extinguishes all possibility of profit flowing from a breach of confidence imposed by the fiduciary relation.”
The bottom line: In Illinois, when a corporation’s fiduciary wants to take advantage of a business opportunity which is in the corporation’s line of business, the fiduciary must first disclose and tender the opportunity to the corporation, notwithstanding the fact that the fiduciary may believe that the corporation is legally or financially incapable of taking advantage of the opportunity.