No. 2--02--1289

Plaintiff, TruServ Corporation, appeals from the judgment of the circuit court of McHenryCounty granting summary judgment in favor of defendant, Bess Hardware and Sports, Inc., d/b/aBess True Value, on defendant's counterclaim. For the reasons that follow, we affirm in part andreverse in part.

I. BACKGROUND

Plaintiff, a Delaware corporation with its principal place of business in Chicago, Illinois, is ahardware cooperative whose members operate retail outlets nationwide, primarily as True Valuestores. Members of the cooperative sign contracts (member agreements) enabling them to use theTrue Value trademark and to benefit from the group buying power, group billing procedures, andother benefits that plaintiff offers its members. Members' relationships with plaintiff are governed byTruServ's certificate of incorporation, TruServ's bylaws⁽¹⁾, the member agreements, and members'subscriptions to shares. To join the cooperative, each member must purchase 60 shares of TruServ'sclass A common stock, with a par value of $100 per share, for each store owned. In a year in whichplaintiff makes a profit, it distributes a portion of its earnings to each member in the form of"patronage dividends." The annual patronage dividends are paid in proportion to each member'saggregate purchases from plaintiff during a particular fiscal year and generally consist of acombination of cash, promissory notes, and TruServ's class B common stock.

Article VII, section 6(a), of TruServ's bylaws requires the corporation to redeem the member'scapital stock in the corporation upon termination of its member agreement subject to the terms andconditions set forth in article VII, section 7, of the bylaws. Article VII, section 7(a), provides inrelevant part:

"Upon the effective date of the termination of a Member Agreement *** all of thisCorporation's stock owned by such stockholder (hereinafter referred to as 'TerminatedStockholder') shall be deemed to be and shall be and become the property of this Corporation;from and after such date all rights and privileges incident to the ownership of the shares(including but not limited to the right to dividends thereon) shall cease, except only the rightto receive the purchase price (as hereinafter provided) plus a sum equal to any dividendsdeclared but unpaid at said date and accrued Patronage Dividends for the relevant year orportion thereof *** all without interest and subject to the Corporation's liens and right ofsetoff."

In addition, article VII, section 7(b), requires TruServ to remit the redemption price to the terminatedstockholder "immediately upon receipt of properly endorsed certificates representing all of aTerminated Stockholder's stock of the Corporation." However, pursuant to article VII, section 7(c),of the bylaws, if:

"the funds of the Corporation legally available for such purpose are insufficient forimmediate payment of all or any part of the redemption price, an agreement for purchase andsale of the stock shall be executed by the Corporation and the Terminated Stockholderpursuant to which the Corporation shall unqualifiedly undertake to pay all or the balance, asthe case may be, of the redemption price as soon as funds are legally available for thatpurpose."

On or about March 1, 1963, and again on March 7, 1983, defendant signed memberagreements with plaintiff. Defendant operated one True Value store in Northfield, Illinois, and onein Glenview, Illinois. Because defendant operated two True Value stores, it purchased 120 sharesof TruServ's class A common stock for $12,000.

In fiscal year 1999, plaintiff suffered a loss totaling $131 million. A special meeting ofplaintiff's board of directors was held on March 17, 2000. At that meeting, the board learned that,as a result of the $131 million loss, the book value of plaintiff's stock had been reduced to $35.60 pershare. According to the minutes of the meeting, the difference between the par value of the stock andthe book value of the stock was critical because the company "cannot have Members redeeming theirstock for a par value of $100, while book value is as [sic] $35.60, without impairment." As a result,the Board unanimously adopted the following resolution (hereinafter, moratorium):

"RESOLVED, that a moratorium on redemption of A Stock and B Stock be andhereby is adopted and the appropriate officers of the Company be and hereby are directed torefrain from redemption of such stock.

FURTHER RESOLVED, the Board of Directors shall monitor this matter and fromtime to time shall review whether it is appropriate to resume redemption of A Stock and BStock."

At the time the moratorium was adopted, all but one of the directors of TruServ's board weremembers of the cooperative.

Then, on August 28, 2000, the board passed a resolution adopting a "Loss Allocation Plan"to allocate the 1999 loss among its members. The Loss Allocation Plan divided almost $114 millionof the loss among "each current TruServ Stockholder." The remaining loss was not specificallyallocated, but borne by the cooperative as a whole. Plaintiff allocated the loss to members basedupon the percentage that each member's class B nonvoting common stock holdings bore to suchholdings of all stockholders. According to the plan, each member would satisfy its "loss allocationaccount" by application of future patronage dividends. If a member left the cooperative prior to thesatisfaction of its loss allocation account, any unsatisfied portion of such account would be offsetagainst the redemption price otherwise due to the terminated member. Plaintiff announced the lossallocation plan to its members in a letter dated September 5, 2000. Plaintiff issued a loss allocationstatement to defendant apportioning to it a percentage of TruServ's 1999 loss.

Meanwhile, on February 29, 2000, defendant formally notified plaintiff of its decision toterminate its membership in the cooperative. Under the terms of the member agreement, saidtermination would have been effective on April 30, 2000. However, on April 10, 2000, plaintiffterminated defendant's membership in the cooperative due to defendant's failure to pay for certainmerchandise and services provided by plaintiff. As a result of the moratorium, plaintiff refused toredeem defendant's stock in TruServ.

On May 5, 2000, plaintiff filed suit against defendant seeking to collect for the unpaid formerchandise and services. On September 25, 2000, defendant filed an answer and affirmative defenseto plaintiff's suit. Defendant was subsequently granted leave to withdraw count I of its affirmativedefense and refile it as a counterclaim. In its counterclaim, defendant contended that the lossallocation plan did not apply to it because it was not a member of the cooperative at the time that theloss allocation plan was adopted. Specifically, defendant noted that pursuant to article VII, section6(a), of TruServ's bylaws, plaintiff was required to redeem defendant's stock at par value upon thetermination of its member agreement. Further, relying on the provisions of article VII, section 7, ofthe bylaws, defendant reasoned that any loss allocated to it under the loss allocation plan should havebeen allocated to plaintiff since defendant's membership in the cooperative was terminated effectiveApril 10, 2000, and the loss allocation plan was not adopted until August 28, 2000. Finally,defendant alleged that it was entitled to a setoff against any amount due to plaintiff for the fullredemption value of defendant's class A and class B stock in TruServ.

Thereafter, plaintiff filed a motion for summary judgment on its claim. Defendant filed amotion for declaratory judgment and partial summary judgment with respect to its counterclaimagainst plaintiff, and plaintiff filed a cross-motion for summary judgment with respect to defendant'scounterclaim. On June 21, 2002, the trial court granted summary judgment in plaintiff's favor on itsclaim against defendant. The court also granted defendant's motion for summary judgment on itscounterclaim. Specifically, the court concluded that defendant was entitled to a credit for the parvalue of its class A and class B stock against the monies owed plaintiff without any reduction for theloss allocation plan. The court therefore denied plaintiff's cross-motion for summary judgment. Subsequently, the trial court denied the parties' posttrial motions. In its order, the trial court entered a written finding that there was no just reason for delaying either enforcement or appeal of its order. See 155 Ill. 2d R. 304(a). This appeal ensued. We review a grant of summary judgment de novo. Basselen v. General Motors Corp., 341 Ill. App. 3d 278, 282 (2003). In addition, we note thatbecause plaintiff is a Delaware corporation, Delaware law governs the resolution of the issuespresented herein. See Foley v. Santa Fe Pacific Corp., 267 Ill. App. 3d 555, 559 (1994); Seinfeld v.Bays, 230 Ill. App. 3d 412, 420 (1992).

II. ANALYSIS

We are presented with two principal issues. First, we must determine whether the moratoriumadopted by TruServ's board of directors on March 17, 2000, was adopted in accordance withTruServ's governing documents or if the board's action was otherwise required by Delaware law. Second, we must determine whether the loss allocation plan was applicable to defendant.

On appeal, plaintiff advances three reasons in support of its argument that this court shouldreverse the trial court's order finding the moratorium invalid. First, plaintiff asserts that the board ofdirectors' decision in adopting the moratorium was protected by the business-judgment rule. Second,plaintiff contends that because the moratorium was adopted in accordance with the corporation'sgoverning documents regarding bylaw amendments, the moratorium constituted a valid amendmentof the bylaws. Third, plaintiff argues that, under the Delaware General Corporation Law (Del. CodeAnn. tit. 8,