Petition for Writ of Certiorari — Powell v. Western Illinois Electric Cooperative

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In THE ——

Supreme Court of the United States

OCTOBER TERM, 1989

LEWIS POWELL, etc., et al.,

Petitioners,

WESTERN ILLINOIS ELECTRIC

COOPERATIVE, et al.,

Respondents.

PETITION FOR WRIT OF CERTIORARI

TO THE APPELLATE COURT OF ILLINOIS,

FOURTH JUDICIAL DISTRICT

THOMAS F. LONDRIGAN

LONDRIGAN, Potter & Ranp te, P.C.

1227 South Seventh Street

Post Office Box 399

Springfield, Illinois 62705

Telephone: (217) 544-9823

Attorney for Petitioners

Midwest Law Printing Co., Chicago 60611, (312) 321-0220

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QUESTION PRESENTED FOR REVIEW

—

Whether a state court denies due process by a proce-

dure that eliminates adversarial interests before a hear-

ing on the merits.

ii

LIST OF PARTIES

Petitioners

LEWIS POWELL, individually and as member of Menard

Electric Cooperative; JOHN B. HENRY, individually and as

member of Spoon River Electric Cooperative; TERRY POST,

individually and as member of Adams Electric Cooperative;

DR. GENE SHULTZ, individually and as member of MJM

Electric Cooperative; RUBY WATRET, individually and as

member of Illinois Rural Electric Cooperative; FRANCIS F.

WHITE, individually and as member of Rural Electric Con-

venience Cooperative; JOHN R. GLIDDEN, individually and

as member of Western Illinois Electric Cooperative, said

cooperatives being members of Western Illinois Power Co.,

Inc.; and DAVID COLLINS, individually and as member of

Coles-Moultrie Electric Cooperative; KEN BAEBLER, in-

dividually and as member of Monroe County Electric Co-

operative; TOM DEWITT, individually and as member of Edgar

Electric Cooperative; LEO GOGOLEK, individually and as

member of Tri-County Electric Cooperative; CHARLES

GOODALL, individually and as member of Illini Electric

Cooperative; GLEN KRIDER, individually and as member

of Southwestern Electric Cooperative; R.O. JEWELL, indi-

vidually and as member of Illinois Valley Electric Coopera-

tive; JEFFREY R. KINCAID, individually and as member

of Farmers Mutual Electric Company; EBEN IRISH, indi-

vidually and as member of McDonough Power Cooperative;

MAURICE MOORLEGHEN, individually and as member of

Clinton County Electric Cooperative; MRS. DALE SNYDER,

individuaily and as member of Clay Electric Cooperative; TOM

SUMMERS, individually and as member of Sheiby Elec-

tric Cooperative; GLELA SHARP, individually and as member

of Eastern Illinois Power Cooperative; DEANE WEIHMEIR,

individually and as member of Corn Belt Electric Coopera-

tive; LOUIS ZURLIENE, individually and as member of

Wayne-White County Electric Cooperative, said cooperatives

being members of Soyland Power Cooperatives, Inc.; and

ill

LEWIS POWELL, JOHN B. HENRY, TERRY POST, DR.

GENE SHULTZ, RUBY WATRET, FRANCIS F. WHITE,

JOHN R. GLIDDEN, DAVID COLLINS, KEN BAEBLER,

TOM DEWITT, LEO GOGOLEK, CHARLES GOODALL,

GLEN KRIDER, R.O. JEWELL, JEFFREY R. KINCAID,

EBEN IRISH, MAURICE MOORLEGHEN, MRS. DALE

SNYDER, TOM SUMMERS, GLELA SHARP, DEANE WEIH-

MEIR, LOUIS ZURLIENE, as Representatives of a Class of

All Customers of Illinois Power Company, Inc., who are ob-

ligated to Pay Rates Charged Through the Clinton Nuclear

Station.

Respondents

WESTERN ILLINOIS ELECTRIC COOPERATIVE, ADAMS

ELECTRIC COOPERATIVE, SPOON RIVER ELECTRIC

COOPERATIVE, MENARD ELECTRIC COOPERATIVE,

ILLINOIS RURAL ELECTRIC COOPERATIVE, MJM ELEC-

TRIC COOPERATIVE, RURAL ELECTRIC CONVENI-

ENCE COOPERATIVE, CLAY ELECTRIC COOPERATIVE,

CLINTON COUNTY ELECTRIC COOPERATIVE, COLES-

MOULTRIE ELECTRIC COOPERATIVE, CORN BELT

ELECTRIC COOPERATIVE, EASTERN ILLINOISPOWER

COOPERATIVE; EDGAR ELECTRIC COOPERATIVE,

FARMERS MUTUAL ELECTRIC COMPANY, ILLINI

ELECTRIC COOPERATIVE, ILLINOIS VALLEY ELEC-

TRIC COOPERATIVE, McDONOUGH POWER COOPERA-

TIVE, MONROE COUNTY ELECTRIC COOPERATIVE,

SHELBY ELECTRIC COOPERATIVE, SOUTHWESTERN

ELECTRIC COOPERATIVE, TRI-COUNTY ELECTRIC CO-

OPERATIVE, WAYNE-WHITE COUNTY ELECTRIC CO-

OPERATIVE, WESTERN ILLINOIS POWER COOPERA-

TIVE, INC., and SOYLAND POWER COOPERATIVE, INC.

he

TABLE OF CONTENTS

QUESTION PRESENTED FOR REVIEW ...

FR ee 5). ge Ae eae

APPLICABLE CONSTITUTIONAL PROVI-

SIONS, STATUTES AND REGULATIONS ...

STATEMENT OF THE CASE ...............

REASONS FOR ALLOWANCE OF THE WRIT:

I.

IN A CASE OF “FIRST IMPRESSION”, THE

ILLINOIS COURT DENIES DUE PROCESS

BY DISMISSING PROPER PARTIES BEFORE

A HEARING ON THE MERITS ...........

A.

B.

C.

F.

Participation In A Hearing On The Merits .

Management Records And Minutes

Plaintiffs’ Verified Pleadings Remain Un-

answered And Leave No Issue Of Fact To

Be Resolved As To Alignment Of Real In-

terests Until A Hearing On The Merits .

. The Business Judgment Rule Has No Ap-

plication To Ultra Vires Acts ........

Rescission Must Be Considered As A

NE ie a ah eas

The Illinois Court Continues To Refuse

Judicial Notice Of Material Facts Occurring

So ae | ae ee

CAI Sak Sin ok cece ee eas oie eeea ee

PAGE

10

1]

13

14

17

19

y

TABLE OF AUTHORITIES

Cases PAGE

Briscoe v. Kusper, 435 F.2d 1046 (7th Cir. 1970) .. 10

Delaware & Hudson Company v. Albany & Sus-

quehanna Railroad Company, et al., 213 U.S.

435, 29 S.Ct. 540, 53 L.Ed. 862 (1909) ..... 12, 13

Doctor v. Harrington, 196 U.S. 579, 25 S.Ct. 355,

OD. 2 ee ee oa os Gea Peden ceak eas 19

Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir.

1970), cert. denied, 401 U.S. 974, 91 S.Ct. 1191,

ere OR) oy errr eon 10, 11

Hawes v. Contra Costa Water Company, 104 U.S.

eee A a. : eer re 14

Logan v. Zimmerman Brush Co., 455 U.S. 422,

102 S.Ct. 1148, 71 L.Ed.2d 265 (1982) ..... 3,9

Melish v. Vogel, 35 Ill.App.3d 125, 348 N.E.2d 17

Chat TR. sk x0 eae ee eae 15

Nordine v. Illinois Power Company, 32 I1l.2d 421,

ee my OS | ererrerrrr rE ee 18

Smith v. Sperling, 354 U.S. 91, 77 S.Ct. 1112, 1

LaRue GEE REGED cari vckadsavewsaenas 12, 16, 19

Vermont Dept. of Public Service v. Mass. Mun.

Elec. Co., 558 A.2d 215 (Vt. 1988) ......... 14,15

Constitutional Provision, Rule and Statute

US; “t., ae PO ok iS vinceie ieee 2

Rule 317, Supreme Court of Illinois .......... 2,3

fil. deev.semt.; Gh Be, GOA i eS Re ees 15

IN THE

Supreme Court of the United States

OCTOBER TERM, 1989

LEWIS POWELL, etc., et al.,

Petitioners,

WESTERN ILLINOIS ELECTRIC

COOPERATIVE, et al.,

Respondents.

PETITION FOR WRIT OF CERTIORARI

TO THE APPELLATE COURT OF ILLINOIS,

FOURTH JUDICIAL DISTRICT

Powell, et al. prays that a Writ of Certiorari issue to

review the judgment of the Illinois Supreme Court en-

tered on October 5, 1989 denying an appeal as a matter

of right raising issues under the Constitution of the

United States arising for the first time as a result of ac-

tion of the Illinois Appellate Court.

OPINION BELOW

Powell, et al. v. Western Illinois Electric Cooperative,

et al., 180 IL. App.8d 581, 129 Ill. Dec. 547, 5386 N.E.2d 231

(4th Dist. 1989); also see Appendix A hereto.

»)

JURISDICTION

The Opinion of the Fourth District Appellate Court was

issued on March 17, 1989. Appeal as a matter of right

to the Illinois Supreme Court was denied on October 5,

1989. A stay of mandate to allow filing of this Petition

for Certiorari was granted on October 27, 1989. This

Court’s jurisdiction is invoked pursuant to Supremé Court

Rule 17.1(¢) and 28 U.S.C. §1257(a).

APPLICABLE CONSTITUTIONAL PROVISIONS.

STATUTES AND REGULATIONS

United States Constitution, Fourteenth Amendment

Amendment XIV

No State shall . . . deprive any person of . . . prop-

erty, without due process of law; .. .

Rule 317 of the Supreme Court of Illinois

Rule 317. Appeals from the Appellate Court to the

Supreme Court as of Right

Appeals from the Appellate Court shall lie to the

Supreme Court as a matter of right in cases in which

a question under the Constitution of the United

States or of this State arises for the first time in and

as a result of the action of the Appellate Court.

_3—

STATEMENT OF THE CASE

Stage Of Proceedings Where

Federal Issue Was Raised

Illinois Supreme Court Rule 317 provides where issues

under the United States Constitution arise ‘. . . for the

first time and as a result of the action of the Appellate

Court” appeal is a matter of right. In reliance upon that

provision, an appeal was filed with the Illinois Supreme

Court asserting as follows: -

A.

I.

Appeal As Of Right.

IN A CASE OF “FIRST IMPRESSION”, THE AP-

FELLATE COURT DENIES DUE PROCESS BY

CONDUCTING A SUMMARY HEARING TO RE-

ALIGN PARTIES AND DISMISS PLAINTIFFS’

DEPRIVATIVE ACTION BEFORE A FULL AND

FAIR HEARING ON THE MERITS.

Realignment should never be used to deny an inter-

ested party’s right to participate in a hearing which

may deny constitutionally protected property rights.

Similarly, the Fourteenth Amendment’s Due

Process Clause has been interpreted as prevent-

ing the States from denying potential litigants

use of established adjudicatory procedures, when

such an action would be “the equivalent of deny-

ing them an opportunity to be heard upon their

claimed right{s].”” Boddie v. Connecticut, 401 U.S.

371, 380, 28 L.Ed.2d 113, 91 S.Ct. 780 (1971).

Logan v. Zimmerman Brush Co., 455 U.S. 422,

429-430, 102 S.Ct. 1148, 71 L.Ed.2d 265, 274

(1982).

Petition For Appeal As A Matter Of Right Or, In

The Alternative Petition For Leave To Appeal, pp.

2, 9-10.

oo

An appeal as a matter of right was denied in this case

and the intermediate reviewing court remains the Illinois

court of last resort.

In a case it describes as “first impression’’, an Illinois

reviewing court, for the first time, approved procedural

realignment to dismiss parties whose participation was es-

sential to preserve the adversary nature of proceedings

and necessary to insure due process. In sanctioning such

a procedure, the Illinois court ignored decisions ‘of this

Court requiring a “‘collision of interests.”’

The Parties

The Plaintiffs are members/owners of not-for-profit elec-

trical cooperatives distributing electrical power to rural

consumers. Each distribution cooperative purchases power

produced by other utilities. These distribution cooperatives

are either members of Soyland Power Cooperative (Soy-

land) or Western Illinois Power Cooperative (WIPCO).

WIPCO and Soyland are known as generation and trans-

mission cooperatives and service 170,000 member/owners.

Regulatory Agencies

Rural cooperatives are not regulated by the Illinois

Commerce Commission (ICC). Therefore, consumer rate

regulation provided by the ICC to public utility ratepayers

is not available to cooperative member/owners. (Trans.

Vol. III, p. 23, Gant testimony; Pl. Ex. 2, pp. 35-36) The

co-ops are regulated by the Federal Energy Regulatory

Commission (FERC). However, FERC does not regulate

rates. The Rural Electrification Administration (REA) ex-

ercises financial control over the level of debt of the co-

ops, but does not regulate rates or provide consumer pro-

tection. (Pl. Ex. 23)

-

—)—

Illinois Power: The Clinton Nuclear Power Station

In 1975, Illinois Power Company, Inc. (Illinois Power)

began construction of the Clinton Nuclear Power Station

(Clinton). In August of 1976, WIPCO and Soyland signed

an “Ownership Participation Agreement” (OPA) with Illi-

nois Power. (Pl. Ex. 30A — CC1; R.C99) This agreement

provided that Soyland purchase 10.5% and WIPCO pur-

chase 9.5% of Clinton. The original cost of the plant was

estimated to be $400 million, but the OPA provided that

WIPCO and Soyland would be obligated for whatever

amount of capital was required according to their propor-

tionate ownership. (Pl. Ex. 30A — CCi, p. 13; Article IV,

4.2; R.C113) There was no cap on the liability. The OPA

also granted Illinois Power sole control over the design,

construction and operation of the plant and designated IIli-

nois Power as the cooperatives’ agent in presenting tes-

timony to regulatory agencies and lending bodies. (Pl. Ex.

30A — CCl, p. 15; Article V, 5.1; R.C115)

To finance this project, Soyland obtained loan guaran-

tees of $328 million from the REA, and WIPCO obtained

loan guarantees of $286.8 million. (Pl. Ex. 23, Appendix

1:16) These loans must be repaid through electric rates

charged to member/owners.

Notice Of Mismanagement

In 1978, a group of co-op member/owners prepared a

document entitled “The Prairie Alliance White Paper”

chronicling waste and negligence by Illinois Power at Clin-

ton and forecasting the long term financial damage to

WIPCO and Soyland. (Pl. Ex. 42) By 1979, all officers and

directors of WIPCO and Soyland were aware of large cost

overruns at Clinton. (Trans. Vol. III, p. 17, Gant testi-

mony; pp. 49-51, Mohrman testimony; p. 165, Beatty testi-

- _6—

mony; p. 171, Champion testimony).! Between 1979 and

1985, local newspapers throughout the state carried re-

peated stories of mismanagement at Clinton. (Pl. Ex. 29],

2911, 29111) Media attention climaxed in 1980 when CBS

televised a program on ‘60 Minutes”: “‘Who Pays? ...

You Do”, dramatizing mismanagement and cost overruns

at the Clinton plant. (Pl. Ex. 21)

Statute Of Limitations And Release

On October 5, 1984, WIPCO and Soyland abandoned an

agreement with Illinois Power tolling applicable statutes

of limitation and executed a “mutual release’’. (Pl. Ex. 3-

63, p. 6; Pl. Ex. 4-87, p. 3; Pl. Ex. 11) The fact that IIli-

nois Power and WIPCO and Soyland also released Illinois

Power from claims of mismanagement was not communi-

cated to the member/owners of the local co-ops. (Trans.

Vol. V, pp. 24-25, Smith testimony; p. 119, Powell testi-

mony) Agreements capping co-op investment in Clinton

were submitted to the Federal Energy Regulation Com-

mission (FERC) for a fairness hearing. (Trans. Vol. III,

p. 64, Gant testimony) However, the 1984 ‘mutual re-

lease’ was an essential part of those agreements and was

neither submitted for FERC approval nor made public.

(Trans. Vol. II], pp. 146-147, Gant testimony; Trans. Vol.

V, pp. 24-25, 119)

Less than a year after Illinois Power was secretly re-

leased from liability, an independent study commissioned

by the ICC was made public. (Pl. Ex. 5A-E) A prelimi-

1 The Illinois Appellate Court’s Opinion suggests at page 5 that

management first began to investigate the basis for legal action

against Illinois Power after an independent Touche-Ross Audit was

made public by the Illinois Commerce Commission in 1985.

= oe

nary five volume report prepared by Touche-Ross detailed

the chronology of Clinton cost overruns and concluded that

as much as $463 million had already been misspent on

the uncompleted Clinton piant. (Pl. Ex. 5A, pp. 1-36) Im-

mediately thereafter, co-op management publicly joined

with Illinois Power to deny these findings. In January of

1986, Illinois Power called a press conference participated

in by both Soyland and WIPCO and criticized Touche-Ross

findings of mismanagement. (Pl. Ex. 19)

Pleadings

On September 26, 1986, member/owners of twenty-two

distribution cooperatives that comprise WIPCO and Soy-

land filed this derivative action against Illinois Power. IIli-

nois Power, together with WIPCO and Soyland, filed mo-

tions to dismiss based upon standing. (R.C95, 217, 224,

285) WIPCO and Soyland’s motions to dismiss were argued

and Illinois Power’s motion was deferred. The trial court

ruled that Plaintiffs had standing to sue; however, the

complaint was dismissed with leave to amend and plead

with specificity the demands made upon WIPCO and Soy-

land to pursue an action against Illinois Power. (R.C252s,

Docket Entry)

Plaintiffs filed a verified amended complaint (R.C751)

WIPCO and Soyland elected not to challenge the legal

sufficiency of Plaintiffs’ verified factual allegations and in-

stead responded with a “Motion of Nominal Defendants

Soyland and WIPCO to be Realigned as Plaintiffs and

to Dismiss the Derivative Counts of the Powell Plaintiffs.”

(R.C952) In their motion to “realign”, WIPCO and Soy-

land sought exclusive control over the suit by dismissing

derivative Plaintiffs as parties prior to a hearing on the

merits.

=

Several distribution co-ops, including Rural Electric Con-

venience Cooperative, Southwestern Electric Cooperative,

Western Illinois Cooperative and Coles-Moultrie Electric

Cooperative, objected to WIPCO and Soyland assuming

exclusive control over this suit arguing that the directors

and officers of WIPCO and Soyland were opposed to the

claim against Illinois Power, and therefore, had a conflict

of interest. (R.C1533, 1528, 1543, 1364)

The trial court ruled that Plaintiffs had the burden to

establish that the current officers and directors of WIPCO

and Soyland would not prosecute the corporate claim

against Illinois Power with “good faith and independence”.

In addition, the trial court refused in camera review of

corporate minutes, but nevertheless, ruled that redacted

portions of those minutes were subject to management’s

claim of corporate attorney-client privilege. Therefore,

relevant corporate minutes were never examined by the

Plaintiffs and never considered by the trial court. (Trans.

Vol. II, p. 86; Vol. VI, pp. 157-160, Ward testimony; Vol.

VII, p. 26) At the close of the hearing, the court granted

the co-op’s motion to realign corporate management as

the sole plaintiffs and all derivative claims were dismissed

before a hearing on the merits.

a

REASONS FOR ALLOWANCE OF THE WRIT

I.

IN A CASE OF “FIRST IMPRESSION”, THE ILLINOIS

COURT DENIES DUE PROCESS BY DISMISSING PROPER

PARTIES BEFORE A HEARING ON THE MERITS.

A. Participation In A Hearing On The Merits.

The Plaintiffs, as member/owners of not-for-profit cor-

porations, are burdened with hundreds of millions of

dollars of waste and mismanagement that must be borne

in the form of electric rate increases. Plaintiffs filed this

derivative action to prevent accrual of further statute of

limitation and laches defenses. In an opinion described by

the Illinois Appellate Court as ‘‘first impression”, a rule

is announced which permits “realignment” of parties in

order to dismiss member/owners who forced the corporate

claim before court. The only novel issue in this case is

the Illinois court’s disregard of principles established by

this Court to insure due process.

Realignment is not a judicial tool to deny an interested

party’s right to participate in a hearing which adjudicates

constitutionally protected property rights.

Similarly, the Fourteenth Amendment’s Due Process

Clause has been interpreted as preventing the States

from denying potential litigants use of established ad-

judicatory procedures, when such an action would be

“the equivalent of denying them an opportunity to

be heard upon their claimed right[s]."" Boddie v. Con-

necticut, 401 U.S. 371, 380, 28 L.Ed.2d 113, 91 S.Ct.

780 (1971).

Logan v. Zimmerman Brush Co., 455 U.S. 422, 429-

430, 102 S.Ct. 1148, 71 L.Ed.2d 265, 274 (1982).

onlin

B. Management Records And Minutes.

Both the trial court and appellate court were asked to

examine management’s unilateral redaction of corporate

minutes. This request was made in order to obtain a rul-

ing on management’s claim of corporate attorney-client

privilege, not invite an ex parte finding on the legal sig-

nificance of management's prior conduct. The trial court

refused to examine the redacted minutes. (Trans. Vol. VI,

pp. 157-160) The Illinois Appellate Court then refused to

allow examination of redacted minutes on appeal. (Order

of Appellate Court, September 27, 1988, Appendix B) In-

stead, the Illinois Appellate Court reviewed the redacted

minutes ex parte and summarily found “. . . no informa-

tion of value exists relating to determining the issue of

good faith.”’ (App. 13)

Denial of member/owner access to its corporate minutes

is a further denial of due process. Such an ex parte pro-

cedure has previously been stricken down as violative of

due process.

Reliance upon evidence considered in camera as the

basis for decision is fundamentally inimical to due

process. (citations omitted) Only the most exceptional

circumstances can justify determinations based upon

documents which interested parties may not examine.

* * *

In light of the limited review available in state courts

. . . (citations omitted) such in camera practice pre-

vented any meaningful adjudication and violated the

Due Process Clause of the Fourteenth Amendment.

Briscoe v. Kusper, 435 F.2d 1046, 1057 (7th Cir. 1970).

This procedure not only denies due process in this case,

but also denies due process prospectively to member/

owners by refusing information revealing how manage-

ment is operating a business they own. Garner v. Wolfin-

—l]l—_

barger, 430 F.2d 1093 (5th Cir. 1970), cert. denied, 401

U.S. 974, 91 S.Ct. 1191, 28 L.Ed.2d 323 (1971).

C. Plaintiffs’ Verified Pleadings Remain Unanswered And

Leave No Issue Of Fact To Be Resolved As To Align-

ment Of Real Interests Until A Hearing On The Merits.

The Plaintiffs’ pleadings are verified and absent a veri-

fied answer must be taken as true. Prior United States

Supreme Court decisions clearly instruct that the allega-

tions of the pleadings alone should define the issues and

determine proper alignment of the parties, until a hear-

ing on the merits. This Court’s decisions also hold that

the business judgment rule has no application where direc-

tors are antagonistic toward pursuit of a valid corporate

claim.

The gist of the findings of the District Court is that

since there was no fraud on the part of the direc-

tors in making the contracts but only an exercise of

independent business judgment, the management was

not antagonistic to the financial interests of the corpo-

ration. That is an issue that goes to the merits, not

to the question of jurisdiction. There will, of course,

be antagonism between the stockholder and the man-

agement where the dominant officers and directors

are guilty of fraud or misdeeds. But wrongdoing in

that sense is not the sole measure of antagonism.

There is antagonism whenever the management is

aligned against the stockholder and defends a course

of conduct which he attacks.

* %x*«* %*

It seems to us that the proper course is not to try

out the issues presented by the charges of wrongdoing

but to determine the issue of antagonism on the face

of the pleadings and by the nature of the controversy.

The bill and answer normally determine whether the

management is antagonistic to the stockholder, as Cen-

=

tral R. Co. v. Mills, 113 US 249, 28 L ed 949, 5 S Ct

456, and Doctor v. Harrington, (U.S.) supra, indicate.

The management may refuse or fail to act for any

number of reasons. Fraud may be one; the reluctance

to take action against a close business associate may

be another; honest belief in the wisdom of the course

of action which management has approved may be

still another; and so on.

Smith v. Sperling, 354 U.S. 91, 95, 96, 77 S.Ct. 1112,

1 L.Ed.2d 1205, 1210, 1211 (1957) (emphasis added).

The management of WIPCO and Soyland were clearly

“antagonistic” toward any claim against Illinois Power,

their managing partner in Clinton. This “antagonism”’

arose from the fact that proof of mismanagement against

Illinois Power will necessarily involve proof of ultra vires

conduct and breach of management’s fiduciary duties to

monitor Clinton and take timely legal action. (See pp. 14-

17 herein)

Since derivative actions were created by federal courts

of equity over one hundred years ago, this Court has re-

peatedly set guidelines whic have been applied by both

state and federal courts. Alignment of the corporate en-

tity is determined by whether “antagonism” to the suit

exists among its corporate management.

It was certainly natural enough that a stockholder

should seek more earnest representatives, and con-

sider that the directors ‘‘occupied,”’ to use the lan-

guage of Dodge v. Woolsey, ‘‘antagonistic grounds in

respect to the controversy” as to him. The attitude

of the directors need not be sinister. It may be sin-

cere. It was so in Chicago v. Mills, 204 U.S. 321, 51

L.ed 504, 27 Sup.Ct.Rep. 286, and Ex parte Young,

209 U.S. 123, 52 L.ed. 714, 13 L.R.A. (N.S.) 932, 28

Sup.Ct.Rep. 441, and other cases. In this case it was

certainly determined. It continued until after this suit

was brought.

—13—

Delaware & Hudson Company v. Albany & Susque-

hanna Railroad Company, et al., 213 U.S. 435, 451,

29 S.Ct. 540, 53 L.Ed. 862, 868 (1909).

The Illinois court dismisses precedent of this Court as

“".. a string of federal cases”. (App. 7) The only rationale

offered to distinguish these cases was that this Court con-

sidered realignment in the context of federal diversity.

However, all of the “. . . string of federal cases” are cor-

porate derivative suits and outline this Court’s guidelines

to align parties according to their real, rather than nomi-

nal interests.

Alignment according to real interests is essential to pre-

sent a “collision of interests” and thereby preserve a true

adversary system. Under the newly announced Illinois rule,

the parties bringing this action are not only “realigned”,

they are dismissed before a hearing on the merits of a

claim they alone were willing to force before the Illinois

eourts.

D. The Business Judgment Rule Has No Application To

Ultra Vires Acts.

The Illinois court suggests that business judgment justi-

fies a ten year delay and secret release of Illinois Power.

(App. 10) The Opinion concludes that the business deci-

sions were complicated “. . . possibly, beyond the actual

ability of either plaintiffs or the management and directors

of WIPCO and Soyland.” (App. 5)

In the words of WIPCO President, Robert Gant, the

decision to take over this lawsuit was prompted by the

management’s realization that it could no longer prevent

members/owners from pursuing a corporate derivative claim

against Illinois Power. It was only after motions to dis-

miss Plaintiffs’ derivative action failed that management

oY ie

began its effort to pre-empt this claim. As pointed out

by WIPCO President, Robert Gant, it was suddenly time

for management to take over the suit.

At our cooperative we got to discussing this, and

our attorney, Mr. Bonjean, and myself, and pointed

out to the directors that this suit was going to move

forward whether or no (sic) and it was the feeling of

our board that we should make a demand on WIPCO

to go ahead with the suit. f

(Pl. Ex. 2, p. 214, Gant testimony; see also Trans.

Vol. V, pp. 18-19, Smith testimony)

The fact that management purports to change its mind

and requests to be “‘realigned”’ as a plaintiff is not a rec-

ognized basis to dismiss derivative Plaintiffs and deny

them the right to participate in a hearing on the merits.

The business judgment rule is not a defense available

to fiduciaries that are guilty of ultra vires acts. Derivative

actions were created to protect shareholders from the

ultra vires acts of management. Over one hundred years

ago, this Court recognized ultra vires as an example of

when a derivative action should be pursued. Hawes v.

Contra Costa Water Company, 104 U.S. 450, 460, 26 L.

Ed. 827, 832 (1882).

E. Rescission Must Be Considered As A Remedy.

Plaintiffs assert that rescission of the original ‘‘all

power” contracts entered into with Illinois Power regard-

ing Clinton is an appropriate remedy. Conversely, WIPCO

and Soyland oppose rescission of these agreements. (R.

C1431)

The remedy of rescission was recently recognized in the

Vermont Supreme Court case of Vermont Dept. of Public

Service v. Mass. Mun. Elec. Co., 558 A.2d 215 (Vt. 1988).

=)

In a strikingly similar case, an electrical cooperative chal-

lenged the enforceability of contracts for the Seabrook

Nuclear Station (Seabrook). The Seabrook contracts were

similar because they delegated all authority over the plant

project to Massachusetts Municipal Wholesale Electric

Company (MMWEC). The Vermont co-ops were also re-

quired to pay their proportionate share of MMWEC’s cost

relating to the project while MMWEC retained the power

to fix the level of these shares. The court found that these

“hell or high water” contracts were an impermissible dele-

gation of corporate authority and void as ultra vires.

Because these agreements would have operated to

restrict the freedom of the trustees to manage cor-

porate affairs, they are illegal and void.

Vermont Dept. of Public Service, supra at p. 225.

Given the similarities between the [llinois Power con-

tracts and those voided in the Vermont case, it is clear-

ly in the best interest of the co-ops and their members

to place the remedy of rescission before the court. Under-

standably, present management refused to seek rescission.

Rescission based upon ultra vires requires management

to recognize its continuous abdication of fiduciary duty.

Officers and directors are personally liable for any injury

caused by ultra vires acts under Illinois law. (Melish v.

Vogel, 35 Ill. App.3d 125, 348 N.E.2d 17 (st Dist. 1975);

Ill. Rev.Stat., Ch. 32 §103.15).

During this appeal, Illinois Power asserted the statute

of limitation in addition to the 1984 ‘‘mutual release” as

defenses against WIPCO and Soyland. (Appendix C and

D) Co-op management is caught on the horns of its own

dilemma by contending that its ten year delay and the

formal release of Illinois Power were both based upon

“business judgment.” Co-op management cannot argue

“business judgment” to avoid either the statute of limita-

—16—

tion or its release of Illinois Power. Co-op management

must acknowledge its ultra vires acts and argue they are

not binding on the cooperative and its members/owners.

Management will never admit ultra vires because of its

obvious conflict. By way of comparison, an attorney could

not waste assets or allow a statute of limitation to bar

a meritorious claim and then assert “business judgment”.

The Illinois courts cannot defer to a naked “‘business judg-

ment” excuse for management’s inaction which is also

used by Illinois Power to defeat the corporate claim—

especially where management attempts to pass on hun-

dreds of millions of dollars of mismanagement to member’

owners toward whom they owe a duty of faithful service.

Management’s failure to seek rescission based upon

ultra vires constitutes antagonism on its face.

Whenever the management refuses to take action to

undo a business transaction or whenever, as in this

case, it so solidly approves it that any demand to

rescind would be futile, antagonism is evident .. .

This is a practical not a mechanical determination and

is resolved by the pleadings and the nature of the

dispute.

Smith v. Sperling, 354 U.S. 91, 97, 77 S.Ct. 1112,

1116, 1 L.Ed.2d 1205, 1211 (1957).

The remedy of rescission will never be requested by

present management, and therefore, never considered by

the Illinois courts. Instead, further compromise of the

rights of co-op ownership is threatened in non-adversarial

proceedings. Consider the words of counsel for Illinois

Power prior to this appeal:

Mr. Lunpy: The impact would be, your Honor, that

if the Powell plaintiffs appeal we would ask the court

to delay any further litigation in response to the Soy-

land/WIPCO complaint until that appeal is resolved.

=| =

It could have other implications, I don’t know.

It may be that settlement discussions may occur—

THE Court: Oh, no.

Mr. LUNDY: —once the order that—dismissing—.

THE Court: The court will take judicial notice of

that fact, that there will be no negotiations.

~ ~*~ ba

Mr. LuNby: I’m talking about, your Honor, between

Illinois Power and the cooperatives if it becomes known

that the Powell plaintiffs are once and for all out of

this case and that that order is final...

(Trans. Vol. VIII, pp. 43-44) (emphasis added).

Instead of ‘collision of interests”, the spectre of ‘collusion

of interests” not only threatens the adversary process,

but also threatens unrepresented ownership interests.

Such a rule, adopted as a case of “first impression” in

Illinois, denied due process under the Fourteenth Amend-

ment of the United States Constitution.

F. The Illinois Court Continues To Refuse Judicial Notice

Of Material Facts Occurring During This Appeal.

From February 1, 1984 to February &, 1989, the ICC

listened to evidence presented by the ICC Staff, Illinois

Power Company, Inc., Citizens Utility Board, the Gover-

nor’s Office of Consumer Services, the Office of Public

Counsel and various experts retained to audit construc-

tion at Clinton. On March 30, 1989, the ICC issued its

order in docket numbers &4-0055, 87-0695 and 88-0256.

This order summarized the evidence and made a specific

finding that $712 million of cost overruns were due to

mismanagement or negligence. (ICC Order, docket num-

bers 84-0055, 87-0695, &8-0256, p. 118).

~~

Pursuant to Nordine v. Illinois Power Company, 32 Il.

2d 421, 206 N.E.2d 709 (1965), reviewing courts have the

power to judicially notice orders of the ICC at any time,

even if notice was not taken by the trial court. For con-

venience of the Illinois appellate court, plaintiffs filed a

Motion for Leave to File Appendix to Petition for Rehear-

ing... citing Nordine and other authority. Despite the

fact that the ICC order was not issued until after ora!

argument, the motion was denied. (Appendix C and D)

The ICC also determined that there was no need for

additional power in Lilinois at the outset of the Clinton

project and that less than thirty percent (30%) of the out-

put of Clinton would ever be needed. (ICC Order, docket

numbers 84-0055, 87-0695, 88-0256, p. 151) This confirms

Plaintiffs’ position that there is no reason to pay inflated

construction costs to obtain power from Clinton. The ICC

finding also contradicts the Illinois court’s opinion that

continuing to exclusively purchase electric power from TIIli-

nois Power was a “benefit” to the co-ops.

In May 1986, a separate legal committee was set up

to evaluate the advisability of proceeding in the de-

rivative action. Concern was voiced by this committee

relating to the possibility of loss of all power benefits

from IP.

x* * *

The long-term source of power must be considered

with the present and future projected costs of elec-

trical energy from both the Clinton nuclear source

— and fossil-fuel sources.

App. 14-15 (emphasis added).

The issue of ‘“real’’ versus “nominal” interest has been

examined repeatedly by this Court. In a derivative ac-

tion, the nominal defendant corporation can normally be

realigned as plaintiff since the action is pursued in the

~

corporate interest. However, that is never the case where

corporate management has expressed antagonism to the

claim presented by the plaintiff shareholders. (Smith v.

Sperling, 354 U.S. 97, 77 S.Ct. 1112, 1 L.Ed.2d 1205

(1957); Doctor v. Harrington, 196 U.S. 579, 25 S.Ct. 355,

49 L.Ed. 606 (1905).

CONCLUSION

“Realignment” is a misnomer in this case. Realignment

is an issue distinct from the right to participate in a dis-

pute that will determine constitutionally protected prop-

erty rights. Parties with opposing interests should be

aligned on opposite sides, not the same side. Encourag-

ing “collusion” destroys our adversary system and thereby

violates due process.

Respectfully submitted,

THOMAS F. LONDRIGAN

LONDRIGAN, Potrer & Ranovie, P.C.

1227 South Seventh Street

Post Office Box 399

Springfield, Illinois 62705

Telephone: (217) 544-9823

Attorney for Petitioners

APPENDICES

INDEX TO APPENDICES

APP

PAGE

A—Trial Court’s Opinion, March 17, 1989 ..... 1

B— Order of Appellate Court, September 27, 1988 . 16

C— Motion for Leave to File Appendix to Petition

for Rehearing in Excess of Page Limitation,

SS SR ere tere yer rere 18

D— Order of Appellate Court, April 17, 1989 .. 20

E— Order of Illinois Supreme Court Denying Peti-

tion for Appeal as a Matter of Right or Leave

to Appeal, October 5, 1989 ............... 21

F— Supreme Court Rule 317 ................. 23

App. 1

APPENDIX A

[Filed March 17, 1989]

No. 4-88-0355

IN THE

APPELLATE COURT OF ILLINOIS

FOURTH DISTRICT

LEWIS POWELL, individually and as member of Menard

Electric Cooperative; JOHN B. HENRY, individually and

as member of Spoon River Electric Cooperative; TERRY

POST, individually and as member of Adams Electric Co-

operative; DR. GENE SHULTZ, individually and as member

of MJM Electric Cooperative; RUBY WATRET, individual-

ly and as member of Illinois Rural Electric Cooperative;

FRANCIS F. WHITE, individually and as member of Rural

Electric Convenience Cooperative; JOHN R. GLIDDEN, in-

dividually and as member of Western Illinois Electric Co-

operative, said cooperatives being members of Western

Illinois Power Co., Inc.; and DAVID COLLINS, individual-

ly and as member of Coles-Moultrie Electric Cooperative;

KEN BAEBLER, individually and as member of Monroe

County Electric Cooperative; TOM DEWITT, individually

and as member of Edgar Electric Cooperative; LEO GO-

GOLEK, individually and as member of Tri-County Elec-

tric Cooperative; CHARLES GOODALL, individually and

as member of Illini Electric Cooperative; GLEN KRIDER,

individually and as member of Southwestern Electric Co-

operative; R.O. JEWELL, individually and as member of

Illinois Valley Electric Cooperative; JEFFREY R. KINCAID,

individually and as member of Farmers Mutual Electric

Company; EBEN IRISH, individually and as member of

McDonough Power Cooperative; MAURICE MOORLEGHEN,

individually and as member of Clinton County Electric Co-

App. 2 :

operative; MRS. DALE SNYDER, individually and as mem-

ber of Clay Electric Cooperative; TOM SUMMERS, indi-

vidually and as member of Shelby Electric Cooperative;

GLELA SHARP, individually and as member of Eastern

Illinois Power Cooperative; DEANE WEIHMEIR, individual-

ly and as member of Corn Belt Electric Cooperative;

LOUIS ZURLIENE, individually and as member of Wayne-

White County Electric Cooperative, said cooperatives being

members of Soyland Power Cooperatives, Inc.; and LEWIS

POWELL, JOHN B. HENRY, TERRY POST, DR, GENE

SHULTZ, RUBY WATRET, FRANCIS F. WHITE, JOHN

R. GLIDDEN, DAVID COLLINS, KEN BAEBLER, TOM

DEWITT, LEO GOGOLEK, CHARLES GOODALL, GLEN

KRIDER, R.O. JEWELL, JEFFREY R. KINCAID, EBEN

IRISH, MAURICE MOORLEGHEN, MRS. DALE SNYDER,

TOM SUMMERS, GLELA SHARP, DEANE WEIHMEIR,

LOUIS ZURLIENE, as Representatives of a Class of All

Customers of Illinois Power Company, Inc., who are obli-

gated to Pay Rates Charged Through the Clinton Nuclear

Station,

Plaintiffs-Appellants,

v.

WESTERN ILLINOIS ELECTRIC COOPERATIVE, ADAMS

ELECTRIC COOPERATIVE, SPOON RIVER ELECTRIC

COOPERATIVE, MENARD ELECTRIC COOPERATIVE,

ILLINOIS RURAL ELECTRIC COOPERATIVE, MJM ELEC-

TRIC COOPERATIVE, RURAL ELECTRIC CONVENI-

ENCE COOPERATIVE, CLAY ELECTRIC COOPERATIVE,

CLINTON COUNTY ELECTRIC COOPERATIVE, COLES-

MOULTRIE ELECTRIC COOPERATIVE, CORN BELT

ELECTRIC COOPERATIVE, EASTERN ILLINOIS POWER

COOPERATIVE; EDGAR ELECTRIC COOPERATIVE,

FARMERS MUTUAL ELECTRIC COMPANY, ILLINI

ELECTRIC COOPERATIVE, ILLINOIS VALLEY ELEC-

TRIC COOPERATIVE, McDONOUGH POWER COOPERA-

TIVE, MONROE COUNTY ELECTRIC COOPERATIVE,

SHELBY ELECTRIC COOPERATIVE, SOUTHWESTERN

ELECTRIC COOPERATIVE, TRI-COUNTY ELECTRIC CO-

App. 3

OPERATIVE, WAYNE-WHITE COUNTY ELECTRIC CO-

OPERATIVE, WESTERN ILLINOIS POWER COOPERA-

TIVE, INC., and SOYLAND POWER COOPERATIVE, INC.,

Defendants-Appellees,

and

ILLINOIS POWER COMPANY, INC., an Illinois Corpora-

tion,

Defendant.

Appeal from Circuit Court, County of Sangamon, No. 86L373.

Honorable Simon L. Friedman, Judge Presiding.

JUSTICE LUND delivered the opinion of the court:

On September 22, 1986, plaintiffs Lewis Powell and

others filed a derivative action against nominal defendants

Western Illinois Power Cooperative (WIPCO) and Soyland

Power Cooperative, Inc. (Soyland), and real defendant IIli-

nois Power Company, Inc. (IP). The derivative action re-

sulted from the failure or delay of WIPCO and Soyland

to bring action against IP for alleged wrongdoing by IP

in the construction of the nuclear power plant near Clin-

ton, Illinois (Clinton Nuclear Station). After various mo-

tions and pleading procedures, including an amended com-

plaint by plaintiffs, on March 13, 1987, WIPCO and Soy-

land moved to be realigned as plaintiffs, and asked that

the original plaintiffs be dismissed as to all of the deriva-

tive counts. Plaintiffs objected, contending their amended

pleadings suggested a conflict of interest. existed with

WIPCO and Soyland directors preventing proper deter-

mination of litigation matters. The trial court ordered a

good faith hearing, placing the burden on plaintiffs to es-

tablish the lack of good faith on the part of WIPCO and

App. 4

Soyland’s board of directors. On January 7, 1988, the trial

court denied pending motions and found plaintiffs failed

to establish that the present board of directors suffered

from a conflict of interest or acted in bad faith. An order

was entered realigning the derivative defendants as plain-

tiffs, and dismissing plaintiffs from the derivative action

counts. This appeal followed.

From cases cited and from our additional research, it

appears we are dealing with a case of first impression

in the State of Illinois. Often, derivative actions are brought

because of alleged specific wrongdoing by corporate man-

agement and directors. WIPCO and Soyland are coopera-

tives but, for purposes of this action, are treated as cor-

porations.

Various rural electric cooperatives, serving rural Illinois,

created WIPCO and Soyland for purposes of most economi-

cally obtaining electrical power supplies for the various

distribution coops. The distribution coops do not and, for

practical purposes, cannot produce the power they sell di

rectly to their consumers.

The WIPCO and Soyland board of directors are elected

by the directors of the various distribution coops. The di-

rectors of the distribution coops, in turn, are elected from

the membership of their respective coops. The member-

ship is composed of the coops’ power consumers.

The present action evolved from a 1976 partnership

agreement between WIPCO and Soyland on one hand and

IP on the other. The initial agreement provided for IP

to own 80% of the Clinton Nuclear Station, with Soyland

owning 10.5%, and WIPCO owning 9.5%. The original es:

timated cost for the Clinton Nuclear Station was $400

million. The final cost, evidently, exceeded $4 billion. The

overrun on cost brought WIPCO and Soyland to the brink

App. 5

of bankruptcy. Many distribution coops were faced with

unanticipated large rate increases.

In 1983 and 1984, as a result of the financial disaster

facing WIPCO and Soyland, an agreement evolved be-

tween WIPCO and Soyland on one side and IP on the

other, freezing the coops’ required investments, reducing

the coops’ ownership interest, mutually releasing liabil-

ity, and tolling the statute of limitations. In separate

agreements, certain rights to IP fossil fuel electric energy

sources were extended to the coops.

In December 1985, an independent audit by Touche-Ross

alleged cost overruns exceeding $400 million at the Clinton

Nuclear Station, due to IP mismanagement. The WIPCO

and Soyland board started investigations into a possible

legal action based upon mismanagement overruns. Plain-

tiffs had made many complaints about the IP transaction.

The present action by plaintiffs resulted from nominai

defendants delaying their actions against IP.

We, by our summary of the history, do not intend to

downplay the complexity of all the facts surrounding this

cause of action. Plaintiffs seek, as part of their requested

relief, a rescission of the original partnership agreement

and the voiding of the 1983 and 1984 agreements, especial-

ly those concerning mutual release liability.

Nominal defendants, together with their underlying

member cooperatives, are faced with decisions concern-

ing power sources, power costs, and the economic effect

of winning or losing litigation with IP. These business

decisions are far from simple and, possibly, beyond the

actual ability of either plaintiffs or the management and

directors of WIPCO and Soyland.

App. 6

Legally, we begin by recognizing the principle that cor-

porate decisions are the responsibility of the board of di-

rectors, and not subject to various shareholders’ control.

This is referred to as the business judgment rule, and

extends to the management of matters of litigation. (United

Copper Securities Co. v. Amalgamated Copper Co. (191%),

244 U.S. 261, 263, 61 L. Ed. 1119, 1124, 37 S. Ct. 509,

510.) There generally is a presumption that in making a

business decision, the directors act on informed basis, in

good faith, and in the honest belief that the action taken

is in the best interest of the company. Aronson v. Lewis

(Del. 1984), 473 A.2d 805.

Derivative actions exist when directors or officers com-

mit wrongful acts detrimental to the corporation, and the

corporation fails to bring a related legal action. (15 Wm.

Fletcher, Fletcher Cyclopedia of the Law of Private Cor-

porations sec. 5941.1, at 18-22 (1984 rev. vol., perm. ed.).)

These wrongful acts can include fraudulent conduct, breach

of fiduciary duties, or the failure to bring suit against a

third party. The nature of a derivative suit is twofold.

It is a suit to compel the corporation to sue, and a suit

by the corporation, asserted by the shareholder on its

behalf, against those liable to it. Kawfman v. Kansas Gas

& Electric Co. (D. Kan. 1986), 634 F. Supp. 1573, 1577;

Aronson, 473 A.2d at &11.

Generally, a corporation can, due to the business judg-

ment rule, step in and dismiss a derivative suit as being

contrary to the corporation’s best interest. (See Abramo-

witz v. Posner (2d Cir. 1982), 672 F.2d 1025.) However,

this ability is restricted if it ppears that the corporate

management and directors are not acting independently

and in good faith. See Abramowitz, 672 F.2d 1025; Zapata

Corp. v. Maldonado (Del. 1981), 480 A.2d 779.

App. 7

In the present case, the complaint alleges, as a basis

for its suit, that nominal defendants have failed to pro-

ceed with the suit against IP. There are no allegations

of any other wrongdoing by the corporate authorities.

After the nominal defendants asked to be realigned, plain-

tiffs asked permission to file an amended complaint which

named various officers and directors as defendants, and

alleged they are personally liable to the corporations for

their conduct. The court did not allow this amended in-

formation, and it is not now part of this action.

Thus, we are faced with the anomalous situation where

plaintiffs have filed suit on behalf of the corporations

against IP, alleging the management of the corporations

refused to do so, but, now that the corporations wish to

conduct the action on their own behalf, plaintiffs are re-

sisting them.

Plaintiffs insist the court’s decision was erroneous for

several reasons. First, they believe the court should not

have conducted the hearing on the good faith and inde-

pendence of nominal defendants. Second, they maintain,

if the hearing should have been conducted, the court mis-

takenly placed the burden of proof on them. Third, they

allege that, if the first two steps were proper, then the

court’s ultimate decision was against the manifest weight

of the evidence.

PROPRIETY OF EVIDENTIARY HEARING

Plaintiffs assert the court should not have conducted a

hearing. They rely on a string of Federal cases which hold

that in questions of party realignment, the court must look

at the pleadings and the nature of the dispute to deter-

mine if the corporation is actually antagonistic to the share-

holders’ claim. (See Liddy v. Urbanek (11th Cir. 1983),

App. &

707 F.2d 1222, 1224: Lewis v. Odell (2d Cir. 1974), 503

F.2d 445, 447.) We do not find these cases persuasive

since they are directed to questions of party alignment

for purposes of Federal diversity jurisdiction.

Rather, we believe the analysis most persuasive to our

situation is in those cases where the court allows the cor-

poration to dismiss the derivative complaint over the

wishes of the plaintiff shareholders (see Abramowitz, 672

F.2d 1025; Zapata, 430 A.2d 779), since the authority to

ultimately dispose of the lawsuit is what is involved in

the present case. In those cases, the court acknowledged

the efficacy of the business judgment rule, and the im-

portance of deferring to the corporate authorities in deci-

sions involving corporate litigation. Accordingly, they de-

termined a hearing should be held to determine the direc-

tors’ good faith and independence in seeking termination

of the suit. If that is established, then, due to the busi-

ness judgment rule, the action would be dismissed.

Similarly, the Illinois courts recognize the strong prefer-

ence to the decisions of the corporate boards:

ee

The directors represent all the stockholders

and are presumed to act honestly and according

to their best judgment for the interests of all.

Their judgment as to any matter lawfully con-

fided to their discretion may not lightly be chal-

lenged by any stockholder or at his instance sub-

mitted for review to a court of equity. * * *

And a court of equity may not be called upon

at the appeal of any single stockholder to com-

pel the directors of the corporation to enforce

every right which it may possess, irrespective

of other considerations. It is not a trifling thing

for a stockholder to attempt to coerce the direc-

tors of a corporation to an act which their judg-

ment does not approve, or to substitute his judg-

ment for theirs.’ ”’ (Goldberg v. Ball (1940), 305

App. 9

Ill. App. 273, 282, 27 N.E.2d 575, 579, quoting

Corbus v. Alaska Treadwell Gold Mining Co.

(1903), 187 U.S. 455, 463, 47 L. Ed. 256, 259-60,

23 S. Ct. 157, 160.)

It would seem incongruous to recognize this important

principle and then deny the corporate authorities the right

to control a corporate cause of action based on the artful

pleadings of the derivative complaint. We believe that,

due to this presumption, a corporation should be able to

be realigned and take over responsibility for its own cause

of action, subject to a hearing on the good faith and inde-

pendence of the board in reaching this determination.

WIPCO and Soyland contend the realignment should

have been automatic and without the trial court hearing.

In light of the allegations of conflict, and WIPCO and Soy-

land’s delay in seeking realignment, we disagree and ap-

prove the trial court’s hearing requirement. In so decid-

ing, we are cognizant of the conflict with the general

policy letting corporate directors make all of the business

decisions.

BURDEN OF PROOF AT HEARING

Similarly, we find the court properly placed the burden

on plaintiffs to prove the coops were not acting indepen-

dently and in good faith in seeking to be realigned as

plaintiffs. Plaintiffs insist this is incorrect, relying on

Zapata, where the Delaware Supreme Court placed the

burden on the corporate authorities.

However, a close reading of Zapata, which is further

explained in Abramowitz, clarifies that the court was ad-

dressing two different situations. The first is where a de-

mand to sue is not made on the corporation because it

is deemed futile. This is generally due to improper con-

App. 10

duct of members of the board of directors where the

courts recognize it would be a useless task to ask the

board to sue themselves. In this situation, if the board

seeks to dismiss the action, the disinterested board mem-

bers have the burden of proving their good faith. (Abram-

owitz, 672 F.2d at 1031.) This is not the situation with

which we are faced.

The second circumstance involves those cases where a

demand to sue a party has been made on the board, and

they have refused to to do. In that situation, since the

refusal to sue was presumably made by application of the

board’s business judgment, the shareholder has the bur-

den at the hearing on the motion to dismiss to prove some

wrongdoing on the behalf of the board in reaching that

determination. (Abramowitz, 672 F.2d at 1031.) This is the

factual setting before us, and we find this analysis per-

suasive.

As noted, the-business judgment rule is grounded on

the thesis that the corporate directors are, in good faith

applying their best business judgment for the benefit of

all. Accordingly, a decision to not sue or delay filing a

suit should be given deference. There may exist a myriad

of factors for the board making that determination. For

example, in the present case, it is apparent the directors

were attempting to balance concerns of costs and long-

term power supply, as well as investigating a possible

claim against one of its suppliers. In such a situation, the

directors’ decision is presumed proper, and the burden

is properly placed on the shareholder plaintiffs to show

that the directors are not now acting in good faith and

independently in desiring to prosecute the lawsuit. An op-

posite result would unduly burden corporation manage-

ment and directors, who have the responsibility for the

business decisions of the corporation, from taking control

of what are, in fact, the corporation’s legal proceedings.

OO

App. 11

ATTORNEY-CLIENT PRIVILEGE ISSUE

Prior to determining the question of sufficiency of evi-

dence, we consider the plaintiffs’ argument that the trial

court improperly found an attorney-client privilege existed,

limiting certain discovery from the board of directors’

minutes of both WIPCO and Soyland.

Plaintiffs were supplied with redacted copies of defen-

dants’ board meeting minutes. Plaintiffs attempted to elicit

testimony concerning the redacted discussions between at-

torney John Ward and defendants’ board. Defendants as-

serted the privilege, alleging they did not want the repre-

sentatives of IP, present in the courtroom, to receive the

information. The court upheld the privilege.

The attorney-client privilege exists in order that one

who is, or seeks to become, a client may consult freely

with counsel, without fear of compelled disclosure of in-

formation communicated by him to the attorney whom he

has employed, or seeks to employ. (People v. Adam (1972),

51 Ill. 2d 46, 48, 280 N.E.2d 205, 207, cert. denied (1972),

409 U.S. 948, 34 L. Ed. 2d 218, 93 S. Ct. 289.) The privi-

lege is created and continues to exist where legal advice

of any kind is sought from a professional legal advisor

in his capacity as such, at which time the communications

relating to that purpose, which are made in confidence

by the client, are at his instance permanently protected

from disclosure by himself or by the legal advisor, ex-

cept when the privilege is waived. (Adam, 51 Ill. 2d at

48, 280 N.E.2d at 207.) This privilege also applies to dis-

cussions between a legal advisor and the control group

of a corporation. (Consolidated Coal Co. v. Bucyrus-Erie

Co. (1982), 89 Ill. 2d 103, 118, 432 N.E.2d 250, 257.) In

the present case, it is evident defendants are such a con-

trol group and, absent any exceptions, the general rule

should apply.

App. 12

John Ward testified he is an attorney, licensed and prac-

ticing in Iowa. He is not licensed in Illinois State courts,

but is licensed in the Federal courts. Since 1983, he has

provided services to Soyland. In response to questioning

about the redacted portion of-the March 1984 minutes,

defendants asserted their privilege. The court reviewed

an unredacted copy of the minutes and, finding that legal

advice was involved, upheld defendants’ assertion.

Plaintiffs observe that Ward admits he is not licensed

to practice in Illinois. They argue the purpose of the privi-

lege is to protect the attorney-client relationship. Since

Ward cannot be considered an attorney in IJlinois, then

there is no relationship to protect.

It is clear Ward is not licensed in Illinois. However,

this appears to have little to do with the efficacy and ap-

plication of the privilege. The purpose of the privilege is

to facilitate a dialogue between a legal advisor and a client

to allow for advice and an exchange of information without

fear of this discussion being subject to compelled disclo-

sure. The key appears to be not whether an attorney is

licensed in Illinois, but whether a protected relationship

has developed between a professional legal advisor and

a client.

The above analyses seems particularly appropriate in

view of the fact the practice of law is becoming increas-

ingly specialized and technical. It is, therefore, necessary

for corporate boards to seek out counsel from those attor-

neys having developed the requisite expertise. To hold

that the communications between these parties has some-

how lost its privileged character because counsel is not

licensed in the present jurisdiction makes little sense. In

fact, in the Federal courts, the privilege is available as

long as counsel is ‘ta member of the bar of a court” (em-

App. 13

phasis added) (United States v. United Shoe Machinery

Corp. (D. Mass. 1950), 89 F. Supp. 357, 358), and has been

applied even though counsel was not licensed in the re-

spective jurisdiction. See Paper Converting Machine Co.

v. FMC Corp. (E.D. Wis. 1963), 215 F. Supp. 249; Georgia-

Pacific Plywood Co. v. United States Plywood Corp. (S.D.

N.Y. 1956), 18 F.R.D. 463; Zenith Radio Corp. v. Radio

Corp. of America (D. Del. 1954), 121 F. Supp. 792.

Plaintiffs next contend that this court should adopt a

good-cause exception to the privilege in shareholder deri-

vative lawsuits. They rely on the case of Garner v. Wol-

finbarger (5th Cir. 1970), 430 F.2d 1093, cert. denied (1971),

401 U.S. 974, 28 L. Ed. 2d 323, 91 S. Ct. 1191.

The Garner opinion might seem applicable to the pres-

ent case and the hearing held by the trial court. However,

the present action is not against the officers and direc-

tors, as in Garner, and this wouid, normally, justify a deci-

sion contrary to Garner. In the trial court hearing, the

issue related to the good-faith conduct of the directors

in pursuing the action against IP. The litigated relation-

ship appears similar to the facts in Garner, with an im-

portant exception—the disclosure of information sought

could have a detrimental effect on the cooperatives in

their litigation with IP. IP was present by counsel and

is the principal party defendant in the derivative action.

We conclude the trial court acted properly in holding

the attorney-client relationship existed. Further, we have

gone farther than the trial court and have examined the

sealed documents containing the unredacted minutes, and

conclude no information of value exists relating to deter-

mining the issue of good faith.

App. 14

PROPRIETY OF

TRIAL COURT’S DETERMINATION

We have considered the evidence before the trial court.

The record indicates the substantial problems which con-

fronted both WIPCO and Soyland in obtaining power

sources. In the 1980’s Soyland cancelled construction that

had already begun on a coal generation plant located in

Pike County. Availability of government financing became

questionable when a $900 million projected cost was de-

termined. Negotiations for long-term power sources, in ad-

dition to the Clinton Nuclear Station, were sought from

several sources. Separate contracts with IP, relating to

energy from fossil-fuel plants, were delayed because of

hearings before the Federal Energy Regulatory Commis-

sion. Negotiations for long-term contracts with Central IIli-

nois Public Service Company appeared to be proceeding

over a lengthy period of time and causing great concern.

During all this time, the escalating costs of the Clinton

Nuclear Station, together with the settlement of claims

because of cancellation or delay of the Pike County con-

struction, placed both WIPCO and Soyland on the verge

of bankruptcy. Congressional action was eventually needed -

and obtained to enable satisfactory refunding of debt

payments to the United States Government.

Negotiations with IP resulted in a limit on the invest-

ment in the Clinton Nuclear Station. The coop minutes

over the several-year period indicated the great concern

over power costs. Board members changed, as did manage-

ment personnel. Opinions of board members in how to pro-

ceed differed. In May 1986, a separate legal committee

was set up to evaluate the advisability of proceeding in

the derivative action. Concern was voiced by this com-

mittee relating to the possibility of loss of all power bene-

App. 15

fits from IP. In December 1986, a consulting firm was

retained to advise WIPCO and Soyland as to advisabil-

ity of seeking action against IP relating to the Clinton

Nuclear Station construction mismanagement.

We are mindful of the various transactions between

WIPCO and Soyland on one hand and IP on the other,

but we conclude the trial court’s decision allowing the

cooperatives to be realigned as plaintiffs and dismissing

the initial plaintiffs was not against the manifest weight

of the evidence.

The substantial record in this case further indicates the

complexities which exist. It is obvious that consideration

must be given to interests other than just recovering a

portion of an unnecessary $400 million overrun or a billion

dollar overrun. The long-term source of power must be

considered with the present and future projected costs

of electrical energy from both the Clinton nuclear source

and fossil-fuel sources. Decisions concerning these matters

are those of the board of directors.

Because of our decision, we find issues relating to pre-

liminary injunctions to be moot.

Affirmed.

McCULLOUGH, P.D., and KNECHT, J., concur.

App. 16

APPENDIX B

[Filed September 27, 1988]

No. 4-88-0355

IN THE

APPELLATE COURT OF ILLINOIS

FOURTH DISTRICT

LEWIS POWELL, et al.,

Plaintiffs-Appellants,

V.

WESTERN ILLINOIS ELECTRIC COOPERATIVE, et al.,

Defendants-Appellees.

Appeal from Circuit Court,

County of Sangamon, No. 86L373

ORDER

This cause comes for consideration upon a motion to sup-

plement the record on appeal with all discovery materials

submitted to the trial court which are, at present, sealed

by order of the trial court. Upon consideration, the mo-

tion is ALLOWED and the clerk of the circuit court- of

Sangamon County is directed to supplement the record

on appeal with all sealed materials now in the possession

of the trial judge. The court further directs that these

materials shall continue to remain sealed until further

order of the court. See People v. Jenkins (1975), 30 Ill.

App. 3d 1034, 333 N.E.2d 497; People v. Stevens (1981),

102 Ill. App. 3d 773, 430 N.E.2d 331.

App. 17

Appellants have also filed a motion for extension of time

to file the brief on the basis these sealed records must

be examined by counsel for the appellants. Given the ra-

tionale expressed in Jenkins and Stevens the request for

extension of time is DENIED.

ENTERED: September 27, 1988

By order of the Court

consisting of the panel of

HONORABLE FREDERICK 8S. GREEN

HONORABLE JOHN T. McCULLOUGH

HONORABLE CARL A. LUND

App. 18

APPENDIX C

[Filed April 14, 1989]

IN THE

APPELLATE COURT OF ILLINOIS

FOURTH DISTRICT

Powell, et al. ds

— Plaintiff-Appellants

VS.

Western Illinois Electric Cooperative, et al.

Defendant-Appellees

Appeal from Circuit Court, County of Sangamon

No. 86-L-373

Honorable Simon L. Friedman, Presiding

MOTION FOR LEAVE TO FILE APPENDIX

TO PETITION FOR REHEARING

IN EXCESS OF PAGE LIMITATION

COMES NOW, the Plaintiff-Appellants, POWELL, ET AL.

by and through their attorney, LONDRIGAN, POTTER &

RANDLE, P.C. and pursuant to J///.Rev.Stat. Ch. 110A,

$367 moves this Court for leave to file an Appendix to

their Petition for Rehearing in excess of the page limita-

tion and in support thereof state as follows:

‘1. On March 17, 1989, this Court filed its opinion in

. this case. This opinion affirmed the trial court’s orders.

2. On April 7, 1989, Plaintiff-Appellants filed their Peti-

tion for Rehearing.

App. 19

3. As a part of said Petition, Plaintiff-Appellants re-

quested the Court to take judicial notice of two items of

public record (a) the Order of the Illinois Commerce Com-

mission dated March 30, 1989 entered in the Illinois Power

Company rate case, (b) the Answer, Affirmative Defenses

and Counterclaim filed against Defendant-Appellees in the

trial court. Plaintiff-Appellants cited Nardine v. Illinois

Power Company, 32 Il.2d 421 and J//.Rev.Stat. Ch. 110,

48-1002 in support of that request.

4. As a convenience to this Court, the Plaintiff-Appel-

lants included the above items in an Appendix to their

Petition for Rehearing. However, as this Appendix ex-

ceeded twenty-seven (27) pages in length, the clerk of the

Appeliate Court refused to accept this Appendix for filing.

5. As set forth fully in the Petition for Rehearing the

documents in said Appendix are relevant and material to

the appeal at bar and should be judicially noticed by this

Court. on

WHEREFORE, Plaintiff-Appellant, POWELL, ET AL.

pray this Court grant them leave to file the Appendix

to their Petition for Rehearing. A copy of said Appendix

is attached hereto.

By: /s/ GORDON W. GATES

One of Plaintiff-Appellants

Attorneys

THOMAS F. LONDRIGAN

GORDON W. GATES

LONDRIGAN, POTTER & RANDLE, P.C.

1227 South Seventh Street

Post Office Box 399

Springfield, Ilinois 62705

Telephone: 217/544-9823

JAMES C. CRAVEN

1005 N. Seventh Street

Post Office Box 1207

Springfield, Illinois 62705

Telephone: 217/544-1777

App. 20

APPENDIX D

(Letterhead Of)

STATE OF ILLINOIS

APPELLATE COURT

FOURTH DISTRICT

SUPREME COURT BUILDING

SPRINGFIELD 62701-1792

DATE: April 17, 1989

RE: Powell v. Western

Illinois Electric

Cooperative et al.

General No. 4-88-0355

TO COUNSEL:

Appellants’ motion for leave to file appendix

to petition for rehearing DENIED.

DARRYL PRATSCHER, Clerk

Appellate Court

Fourth District

DP:iv

TO:

Attorney Gordon W. Gates and

Attorney Thomas F. Londrigan

Attorney James C. Craven

Attorney Ed Cunningham

Attorney Thomas Wack and

Attorney Deborah Bell Yates and

Attorney Peter W. Herzog

Attorney Joseph Lundy

App. 21

APPENDIX E

(Letterhead Of)

ILLINOIS SUPREME COURT

JULEANN HORNYAK, CLERK

SUPREME COURT BUILDING

SPRINGFIELD, ILL. 62706

(217) 782-2035

October 5, 1989

Mr. Thomas F. Londrigan

Londrigan, Potter & Randle

P.O. Box 399

Springfield, IL 62705

No. 68670— Lewis Powell, Indv., etc., et al., petitioners, v.

Western Illinois Electric Cooperative, et al.,

ete., respondents. Leave to appeal, Appellate

Court, Fourth District.

The Supreme Court today DENIED the petition for ap-

peal as a matter of right or leave to appeal in the above

entitled cause.

Miller, J., took no part.

The mandate of this Court will issue to the Appellate

Court on October 27, 1989.

App. 22

APPENDIX F

ILLINOIS SUPREME COURT RULE 317

Appeals From The Appellate Court To

The Supreme Court As Of Right

Appeals from the Appellate Court shall lie to the Su-

preme Court as a matter of right in cases in which a ques-

tion under the Constitution of the United States or of this

State arises for the first time in and as a result of the

action of the Appellate Court. The appeal shall be initiated

by filing a petition in the form prescribed by Rule 315,

except that the petition shall be entitled “Petition for Ap-

peal as a Matter of Right’’, item (1) of the petition shall

state that the appeal is taken as a matter of right, and

item (5) shall contain argument as to why appeal to the

Supreme Court lies as a matter of right. In other respects

the procedure is governed by Rule 315. If leave to ap-

peal is to be sought in the alternative, the request there-

for must be included in the same petition, and item (1)

thereof shall include an alternative prayer for leave to

appeal, and item (5) the argument as to why in the alter-

native leave to appeal should be allowed as a matter of

sound judicial discretion. When both appeal as a matter

of right and leave to appeal are sought, both requests will

be disposed of by a single order. If the court allows the

petition, briefs, and abstracts in cases in which they are

required, shall be filed as provided in the case of appeal

by leave under Rule 315.

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