Rule 23 Order filed

September 4, 2002;

Motion to publish granted

November 21, 2002.

JUSTICE RARICK delivered the opinion of the court:

On January 21, 2000, Michael and Diane Witters filed, in the circuit court ofLawrence County, a shareholders action, individually and derivatively, against Hal Hicksand Midwest Transit, Inc. (MWT). MWT transports United States mail under contractsobtained from the United States Postal Service. Count I was brought pursuant to section12.56 of the Business Corporation Act of 1983 (Act) (805 ILCS 5/12.56 (West 1998)) andalleged that Hicks had engaged in fraudulent and illegal acts and that a misapplication andwaste of MWT's assets had occurred. Count I requested that Hicks be removed as an officerand director and that a custodian be appointed to manage MWT. On April 20, 2000, the trialcourt issued a temporary restraining order (TRO), providing that no monies be paid ortransferred to Hicks. The TRO subsequently became a preliminary injunction, whichremains in effect. In November 2000, a default judgment was entered against Hicks as aresult of numerous and repeated discovery violations.

On March 21, 2001, the Witters filed an amended motion for the appointment of acustodian/receiver. During the hearing thereon, the Witters filed a motion to waive bond,asking the court to allow the receiver to act without requiring the Witters to post a bond.

Several hearings on the amended motion to appoint a custodian/receiver were held. During one of these hearings, Hicks requested the trial court to enforce his election, pursuantto section 12.56(f) of the Act (805 ILCS 5/12.56(f) (West 1998)), to purchase the Witters'shares of stock. The trial court rejected Hicks' request. On July 24, 2001, the trial courtfiled a letter constituting its findings and rulings on the issue and directing the Witters toprepare a proposed order in accordance therewith. The trial court found "largelyuncontradicted *** evidence" that Hicks had committed fraud, illegal and oppressiveactivities, a misapplication of corporate assets, self-dealing, and conflicts of interest. OnJuly 25, 2001, the trial court entered the order prepared by the Witters' counsel, appointingDon Hoagland as the receiver and waiving bond.

Hicks immediately filed a motion requesting a clarification of the trial court's order. Hicks alleged that there were critical differences between the July 24, 2001, letter and theJuly 25, 2001, order. Specifically, Hicks alleged that the July 24, 2001, letter made nomention of the Witters' motion to waive bond or the fact that no hearing was held thereon. The order prepared by the Witters' counsel and entered by the trial court stated that a hearingwas held on the motion to waive bond. Further, while the July 24, 2001, letter states that the"court waives any bond on the part of the interim receiver" (emphasis added), the July 25,2001, order states that the "court waives any bond on the parties of interim receiver"(emphasis added).

On July 26, 2001, the trial court appointed Terry Sharp as the attorney for the receiverand held an ex parte hearing with the receiver and his attorney. The receiver filed a motionasking the trial court to waive the attachment bond and for prejudgment attachments againstHicks. The trial court granted the motion waiving the attachment bond and entered fiveorders of prejudgment attachment.

On August 6, 2001, Hicks filed a motion to vacate the orders of attachment, arguingthat the trial court did not have jurisdiction to enter those orders until an attachment bondwas filed and that those orders were void in the absence of the filing of an attachment bond. The trial court denied Hicks' motion.

Hicks appealed the trial court's order appointing Hoagland as receiver. He also filedan interlocutory appeal of the trial court's order denying his motion to vacate the orders ofattachment. This court ordered the appeals to be consolidated for purposes of the record,argument, and disposition.

In No. 5-01-0631, Hicks argues that the trial court erred in appointing an interimreceiver because adequate legal remedies were available to the plaintiffs and because undersection 12.56 the plaintiffs failed to meet their burden of proving that the appointment of areceiver was the most appropriate relief.

Section 12.56(a) of the Act provides that a shareholder may petition the circuit courtfor a variety of remedies if any of the following is established:

"(1) The directors are deadlocked, whether because of even division in thenumber of directors or because of greater than majority voting requirements in thearticles of incorporation or the by[]laws or otherwise, in the management of thecorporate affairs; the shareholders are unable to break the deadlock; and eitherirreparable injury to the corporation is thereby caused or threatened or the businessof the corporation can no longer be conducted to the general advantage of theshareholders; or

(2) The shareholders are deadlocked in voting power and have failed, for aperiod that includes at least 2 consecutive annual meeting dates, to elect successorsto directors whose terms have expired and either irreparable injury to the corporationis thereby caused or threatened or the business of the corporation can no longer beconducted to the general advantage of the shareholders; or

(3) The directors or those in control of the corporation have acted, are acting,or will act in a manner that is illegal, oppressive, or fraudulent with respect to thepetitioning shareholder whether in his or her capacity as a shareholder, director, orofficer; or

(4) The corporation assets are being misapplied or wasted." 805 ILCS5/12.56(a) (West 1998).

Section 12.60(d) of the Act (805 ILCS 5/12.60(d) (West 1998)) provides that in anaction brought pursuant to section 12.56, the circuit court may appoint an interim receiverwith such power and duties as the court, from time to time, may direct. An application forthe appointment of a receiver is addressed to the sound discretion of the trial court, althoughthe standards by which the court exercises its discretion are stringent. Poulakidas v.Charalidis, 68 Ill. App. 3d 610, 386 N.E.2d 405 (1979). The appointment of a receiver isan extraordinary and drastic remedy and is appropriate only in cases of urgent necessitywhen there is a present danger to the interests of the investors, consisting of a serioussuspension of the business and an imminent danger of waste or dissipation of corporateassets. Poulakidas, 68 Ill. App. 3d at 614, 386 N.E.2d at 408.

In the present case, the circuit court found that MWT's directors were deadlocked andthat irreparable injury to it is being caused or threatened by its inability to obtain financingand the commencement of litigation against it by its largest creditor. The court further foundthat Hicks had acted and was acting in a manner that was illegal, oppressive, and fraudulentand that corporation assets were being misapplied or wasted. With respect to illegal,oppressive, and fraudulent activity, the court found as follows:

"A. Fraud has been perpetuated by Hal D. Hicks inasmuch as he has receivedmonies from fuel supplier rebate checks that were to be paid to the corporationbut were siphoned into his own personal accounts for his own personal use. Further, rent checks for the Colorado Auto Auction have been paid to Hal D.Hicks and not the corporation.

• Illegal activities have occurred inasmuch as no records were or are keptrelating to interest charged to employees on employee loans, rendering recordsupon which tax information is compiled and resulting tax returns inaccurate. Further, payroll tax deposits have not and are not being made in a timelymanner according to law.
• Hal D. Hicks has caused oppressive activity to occur by the payment to himindividually, and not the corporation, of rebate checks and Colorado AutoAuction rents. Further, Hicks, while a corporate officer and director ofMidwest Transit, Inc., has submitted bids for mail routes for his owncompeting company (Mail-A-Way) while ceasing submission of such bids forMidwest and while using a Midwest employee to prepare and submit the bids. Other use has been made by Hicks of Midwest's corporate employees forHicks' private use while on the corporate payroll. Additionally, Hicks treatsthe Buffalo Route as his own business and does not deposit the revenuesreceived from said route into Midwest's accounts. Finally, Midwest has beenpaying Hicks' company, Sumner Mobile Homes, rent of $20,000.00 per monthwithout corporate authority or authority from the Plaintiffs to do so."

With respect to the misapplication or wasting of corporate assets, the court found asfollows:

"The above-mentioned checks retained by Hicks and not deposited into Midwest'scorporate accounts, the use of corporate employees for non[]company business whileon company time[,] and the payment of rent to Hicks' company without authorityconstitute misapplication of corporate assets."

In addition to the foregoing, the court found that Hicks was receiving large sums from MWTfor trailers leased by him to the corporation and that Hicks failed to sustain the burden ofproving fairness as required by section 8.60 of the Act (805 ILCS 5/8.60 (West 1998)). Thecourt concluded that MWT's existence was in imminent jeopardy if the status quo weremaintained and third-party intervention not ordered.

As noted above, the trial court's decision to appoint a receiver is reviewed using anabuse-of-discretion standard, albeit a strict one. We therefore turn to a review of the recordto determine whether there is sufficient evidence to support the trial court's appointment ofa receiver.

According to the evidence, Pilot Truck Centers, Inc., and Dixie Management Groupsupply fuel to MWT. Fabick Tractor sells engines to MWT, and Blue Beacon Internationalprovides truck washes. Each pays rebate monies to MWT as an incentive to buy its goodsor services. These rebates are in the form of checks payable to MWT. Over a period ofseveral years prior to April 20, 2000, Hicks cashed many of these rebate checks for hispersonal use or had employees cash the checks and give him the money. MWT employeesJanie Ensminger and Becky Stoltz testified that Hicks gave them rebate checks withinstructions to cash them and give him the money and that they did so. Hicks himself cashedover $170,000 in rebate checks and placed the money in his children's stock accounts. Hicksdid not dispute this at the trial, nor does he dispute it in his brief on appeal. Hicks maintainsthat since the April 20, 2000, TRO, he has not retained any rebate monies and that rebatechecks have been recorded in MWT's books from September 2000 through May 2001. Wefind Hicks' argument that his prior bad acts did not justify the appointment of a receiver tobe without merit in light of the evidence in the present case. Hicks' conversion of rebatemonies owed to MWT to his own use, taken with the other evidence, demonstrates a patternof fraudulent and illegal activity and clearly supports the appointment of a receiver.

With respect to Colorado Auto Auction rent checks, the record also shows that MWTowns real estate in Commerce City, Colorado, which has been leased to Colorado AutoAuction at a rate of $3,000 per month. Lease payments began in June 2000, but as of May2001, only four such payments were recorded in MWT's books. Although the first month'slease check was made payable to MWT, the remainder were made payable to "Hal D.Hicks." Stoltz and Pam Mason, Hicks' personal secretary, each cashed at least one of thesechecks. Mason testified that she gave the money to Hicks. Hicks' wife cashed another ofthese checks in Florida. The remaining checks were endorsed by Hicks. Hicks offered notestimony about what happened to the money. Hicks contends that there is no evidenceindicating where the proceeds of the remaining checks went and that the plaintiffs are simplyinferring that he kept the money. The trial court found that these rent checks were paid toHicks and that he retained them rather than depositing them into MWT's corporate accounts,and the evidence clearly supports this finding.

With respect to interest on employee loans, the record reveals that employees wereallowed to borrow money from MWT and pay the money back, with interest, through apayroll deduction. Loan repayments are accumulated in each payroll, and the payrollgenerates a check for the total payable to MWT. Ensminger, the payroll clerk, cashes thecheck and transmits the money to Mason, allegedly so the money can be used for otherloans. Mason conceded that no records were kept of the loans or the interest generatedthereon. Thus, there was no way to keep track of the interest paid on the loans, which isincome for MWT. Hicks contends that money from vendor rebates was held in a pool fromwhich employees could receive loans and that, while interest was "sometimes" charged onthese loans, the interest income generated from the loan program was reduced because"presumably" some loans were not paid back. Hicks disingenuously argues that theplaintiffs failed to introduce evidence of the actual income from the loan program. Theplaintiffs' inability to introduce such evidence is a consequence of Hicks' failure to properlyaccount for the interest income generated by the loan program. Even his argument on appealthat interest was "sometimes" charged and that "presumably" some loans were not repaiddemonstrates that records were not adequately kept. Not only is this failure to properlyaccount for income generated by the loan program not in accordance with generally acceptedaccounting principles, but it also creates potentially serious income tax problems.

In March 2000, Hicks formed an Illinois corporation named "Hal D. Hicks MailTransportation, Inc.," which subsequently elected "Mail-A-Way" as an assumed name. Thestated purpose of this corporation was to obtain government mail contracts, the samebusiness as MWT. The articles of incorporation listed Stoltz as the president and Ensmingeras the vice president. Ensminger, who bids contracts for MWT, testified that she wasinstructed by Hicks not to bid contracts for MWT and to bid all contracts for Mail-A-Way. Ensminger acknowledged that the contracts being bid for Mail-A-Way were the same typeof contracts MWT operates. She further conceded that some of these contracts were forwork which had previously been done by MWT. Hicks maintains that MWT was not in aposition financially to take advantage of this opportunity and could not have afforded thestart-up costs of the new routes. The evidence demonstrates that any such financialweakness was the result of Hicks' mismanagement. In any event, this does not justify Hicks'use of MWT personnel to bid contracts for his own business, a business in directcompetition with MWT, and his doing so clearly constitutes oppressive activity and a breachof his fiduciary duties to MWT.

The Buffalo route was a mail route operated by MWT. MWT pays for all fuel andother operating costs. MWT employees operate the route and handle all the paperwork forthe route. MWT financial statements show a line item for revenue from the Buffalo route. Although maintained in Hicks' name, since its inception, revenue for the Buffalo route hadbeen transferred to MWT. Since the beginning of the present suit, Hicks retained therevenue from the route, although it continues to be operated by MWT and at MWT'sexpense. Hicks acknowledges that several MWT trucks are used to operate the Buffaloroute, but he argues that MWT uses 68 of his trucks but pays him nothing. Not only doesthis not justify Hicks' use of MWT assets and personnel to operate a route which is in hisname and from which he keeps all revenue, but it also is exactly the type of comminglingof personal and corporate assets that justifies the appointment of a receiver.

The trial court also found that MWT's payment of $20,000 per month in rent toSumner Mobile Homes (SMH), a company owned by Hicks, constituted oppressive activityand self-dealing. According to the evidence, SMH owns the land and buildings used byMWT. Hicks concedes that MWT paid SMH $120,000 in 2001, which is clearly in violationof the April 20, 2000, TRO. Moreover, section 8.60 of the Act, dealing with directorconflicts of interest, provides that if a director of a corporation, directly or indirectly, is aparty to a transaction with that corporation, the person asserting the validity of thetransaction bears the burden of proving that such transaction is fair to the corporation. 805ILCS 5/8.60 (West 1998). Although Hicks argues that there was no showing that theamount SMH paid MWT was below market rate or that the transaction was otherwiseimproper, it was Hicks' burden to demonstrate that the transaction in question was fair toMWT, a burden that the record demonstrates he failed to meet.

In addition to the foregoing, the trial court found that Hicks' leasing of trailers ownedby him to MWT constituted a conflict of interest as set forth in section 8.60. MWT leasedthe trailers from HDH Mail Transportation, a company owned by Hicks. Hicks maintainsthat MWT has been leasing trailers from him since 1993, that there is no evidence that theamount he charged was in excess of fair market value, and that he had corporate authorityto do so. Again, it was Hicks' obligation to show that the transaction was fair to MWT. Thetrial court found that Hicks failed to meet this burden, and the record supports that finding.

In summary, the evidence overwhelmingly supports the trial court's finding that third-party intervention was necessary and supports its appointment of a receiver. Indeed, theevidence calling for that action is so clear that it would have been an abuse of discretion notto do so.

Hicks next argues that the trial court erred in ordering the use of his personal propertywithout compensation or due process of law. He contends that the July 25, 2001, orderprecludes him from receiving his checks from the United States Postal Service for hisoperation of the Buffalo route, allows MWT to occupy lands owned by SMH without payingrent, allows MWT to use 68 tractors belonging to Hicks for the operation of its business, andallows MWT to use a number of trailers belonging to Hicks without paying for them.

The trial court's order of July 25, 2001, states as follows:

"C. All parties to this action shall be enjoined from interfering with the interimreceiver's activities in any manner and shall be mandatorily enjoined to granthim and his agents and others under his command unfettered access tocorporate premises, to all corporate property, and to all books, records[,] andaccounts of the corporation. The parties are further enjoined from interferingin any way with the interim receiver's sole control of the finances of thecorporation and are enjoined from diverting any funds away from thecorporation and its accounts, including all fuel supplier rebate checks, all rentchecks from Colorado Auto Auction, and all income generated by the Buffaloroute.

• The parties are further ordered to provide all of such funds and any othercorporate funds which may make their way into the possession of the parties,or any one or more of them, during the interim receivership immediately to theinterim receiver."

With respect to the rebate checks, the Colorado Auto Auction rent checks, andincome generated from the Buffalo route, the evidence demonstrates that such revenueproperly belongs to MWT. With respect to the various assets of his which Hicks claimsMWT will be allowed to use for free, there is nothing in the court's order that allows MWTto use these assets without fair compensation.

Hicks next argues that the trial court erred in waiving the plaintiffs' bond for theappointment of a receiver, because no hearing was held on the plaintiffs' motion to waivebond and because the trial court failed to set forth the factors upon which it relied. We agreethat section 12.60(g) of the Act provides that a receiver "shall give such bond as the courtmay direct with such sureties as the court may require." 805 ILCS 5/12.60(g) (West 1998). In its July 25, 2001, order, the trial court waived any bond on the part of the interim receiver,but it did not set forth the facts it relied upon in waiving the bond. Section 2-415(a) of theCode of Civil Procedure (Code) provides that before a receiver is appointed pursuant to theCode, the party seeking the appointment of a receiver must give a bond unless the court,after notice and a hearing, determines that a bond is not required. 735 ILCS 5/2-415(a)(West 1998). There is no similar provision providing for the waiver of a bond in section12.60(g) of the Act. We therefore remand the cause to the circuit court with directions thatit require the receiver to give a bond pursuant to section 12.60(g).

Finally, Hicks argues that the trial court erred in denying his request to purchase theplaintiffs' shares of stock pursuant to section 12.56(f). Section 12.56(f) provides as follows:

"At any time within 90 days after the filing of the petition under this Section,or at any time determined by the court to be equitable, the corporation or one or moreof its shareholders may elect to purchase all, but not less than all, of the shares ownedby the petitioning shareholder for their fair value." 805 ILCS 5/12.56(f) (West 1998).

Plaintiffs' section 12.56 petition was filed on January 21, 2000. In his brief onappeal, Hicks acknowledges that he did not make his election within 90 days of the filingof the complaint, but he maintains that he did make this election within 90 days of the filingof the plaintiffs' amended motion for the appointment of a custodian/receiver. The 90-dayperiod began to run when the plaintiffs filed their complaint. See Hamlin v. HarbaughEnterprises, Inc., 324 Ill. App. 3d 612, 755 N.E.2d 993 (2001). Thus, Hicks' election wasnot timely made. Although the trial court did not reject Hicks' election on that basis, it iswell-settled that this court may affirm a decision of the trial court on any basis appearing inthe record.

In case No. 5-01-0660, Hicks argues that the trial court erred in entering the ex parteorder of attachment because the receiver did not file an affidavit or post a bond as requiredby section 4-107 of the Code (735 ILCS 5/4-107 (West 1998)). Section 4-107 of the Codeprovides that before the entry of an attachment order, the party seeking the order must filean affidavit and post a bond in an amount equal to twice the sum alleged to be due. Section4-107 further provides that a bond shall not be required of the State of Illinois, anydepartment of government thereof, or any state officer. In the present case, the receiversought and obtained a waiver of the bond request on the grounds that as a receiver appointedby the court, he was a state officer within the contemplation of section 4-107.

A "receiver" is an officer of the court that appointed him. Compton v. Paul K.Harding Realty Co., 6 Ill. App. 3d 488, 285 N.E.2d 574 (1972). The appointment of areceiver is an equitable remedy not dependent upon any statute and rests within thediscretion of the trial court. Compton, 6 Ill. App. 3d at 497, 285 N.E.2d at 580. As anofficer of the court, a receiver has no discretion or personal control over property in hishands, but he must obey orders of the court so long as they are unimpeached. PSL RealtyCo. v. Granite Investment Co., 76 Ill. App. 3d 978, 395 N.E.2d 641 (1979), aff'd in part &rev'd in part on other grounds, 86 Ill. 2d 291, 427 N.E.2d 563 (1981).

Hoagland argues that the judicial branch is a department of government and that, asan officer thereof, he is exempt from the bond requirement of section 4-107. We do notagree. Article V, section 9(a), of the Illinois Constitution provides that the Governor shallnominate and appoint all officers whose election or appointment is not otherwise providedfor. Ill. Const. 1970, art. V,