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Hagshenas v. Gaylord - 199 Ill. App. 3d 60, 145 Ill. Dec. 546, 557 N.E.2d 316 (1990)

Rule:

The standard of duty owed by partners to one another is the utmost good faith and loyalty. Stockholders in close corporations must discharge their management and stockholder responsibilities in conformity with this strict good faith standard. They may not act out of avarice, expediency or self-interest in derogation of their duty of loyalty to the other stockholders and to the corporation.

Facts:

Imperial Travel, Ltd. (Imperial), is an Illinois corporation engage in the travel agency business, Imperial’s outstanding shares were equally divided between Plaintiff Bruce Hagshenas (Bruce) and Defendant Robert Gaylord (Robert). Robert later conveyed one-half of its shares to his wife, Virginia. The case was initiated in April 29, 1982, when Bruce sued for dissolution of Imperial based on the dissension and corporate deadlock between himself, a 50% shareholder, and Robert and Virginia, the other 50% shareholders. Robert and Virginia Gaylord filed a counterclaim alleging breach of fiduciary duties and sought damages. Four months laters, the Gaylords filed a motion for a temporary restraining order regarding the day-to-day operations of Imperial and for appointment of a receiver.  In October of 1982, Bruce and his wife, Barbara, resigned from Imperial as officers and directors. The following day they purchased a new agency and began competing with Imperial. The trial court then entered a preliminary injunction that ordered Bruce to deliver an irrevocable voting proxy of his stock and barred him from personally soliciting travel business from Imperial for one year.

The cause proceeded on Bruce's amended complaint for dissolution and on the Gaylords' amended complaint for damages for breach of fiduciary duty. The trial court ruled Bruce failed to prove his case and found in favor of the Gaylords on their complaint for breach of fiduciary duty but found that damages were too inexact to be determined. Therefore, the trial court fashioned an equitable remedy requiring Bruce to forfeit his shares of Imperial stock to Imperial and pay court costs. On appeal, Robert and Virginia Gaylord argue that damages were not too uncertain to be awarded. Bruce filed a cross-appeal contesting liability, contending the court erred in finding that Bruce breached a fiduciary duty in establishing a competing business even though he had resigned as an officer and director of Imperial.

Issue:

  1. Did Bruce Hagshenas breach his fiduciary duty by directly competing with Imperial?
  2. Did the trial court err in finding that the damages were too inexact to be determined?

Answer:

1) Yes. 2) Yes.

Conclusion:

The Illinois appellate court affirmed the finding of liability but reversed the decision on damages. According to the appellate court, 50 percent shareholders of a company owe a fiduciary duty to each other similar to that of partners. Anent the second issue, the court concluded that the manifest weight of the evidence provided a reasonable basis for the lower court to award damages. Experts testified based on accepted financial practice. The evidence of the company's value before Bruce left the company and its reduction in value afterwards provided a reasonable basis for damages based on the reduction in the company's value.

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