Breach of Fiduciary Duty

Company Must Have Trial on Whether It Breached Golden Parachute Contract With Termination of CEO, Appeals Court Rules

June 17, 2009 | Peter S. Lubin and Patrick Austermuehle

In a breach of contract and Illinois Wage Payment Act case, the First District Court of Appeal has ruled that a company and its former executive must have a trial to determine whether it breached the executive’s employment contract. Covinsky v. Hannah Marine Corporation, No. 1-08-0695 (Ill. 1st. Feb. 17, 2009). At issue in the case is a severance clause in Jeffrey Covinsky’s employment contract with Hannah Marine Corp., for which he served as president, CEO and CFO from 1998 to 2006.

Covinsky’s contract specified that he was entitled to a “golden parachute” of 18 months’ salary if there is “…a change in the present ownership which results in the termination of the Employee’s employment…” This agreement was executed in 2004, when Hannah Marine was jointly owned by three people, including Donald Hannah. Hannah sued the other shareholders in 2005 for financial mismanagement, and ended up buying out the other two shareholders. Covinsky told Hannah in 2005 that he assumed Hannah would want to let him go after the change; in 2006, Covinsky told Hannah he did not intend to resign and wanted to finish the contract, which was set to expire in 2006.

A month later, when the takeover was final, Hannah told Covinsky that he was terminated and that Hannah “accepted” Covinsky’s resignation. Covinsky protested that he never resigned, but was not paid the severance. He sued Hannah Marine and Donald Hannah for breach of the employment contract and violating the Illinois Wage Payment Act. Hannah countersued Covinsky for breach of fiduciary duty. The trial court granted summary judgment to Covinsky on both counts as to Hannah Marine, but dismissed the Wage Act claim against Hannah personally. It also dismissed the company’s counterclaim. Both sides appealed, resulting in the consolidated instant appeal.

Appeals Court Rules Small Business Cannot Sue Bank Over Embezzlement

January 8, 2009 | Peter S. Lubin and Patrick Austermuehle

A small business may not sue a bank for allowing a minority shareholder to embezzle, the Illinois Second District Court of Appeal has ruled. In Time Savers, Inc. v. LaSalle Bank, N.A., 02-06-0198 (Feb. 28, 2007), the company had sued its bank for breach of contract, common-law fraud, conspiracy to defraud, aiding and abetting and violating the Illinois Fiduciary Obligations Act.

The case stems from bad loans taken out by the minority shareholder in construction and maintenance equipment supplier Time Savers (TSI), Stephen Harrison. He owned 20% of the company and shareholder Lawrence Kozlicki owned the remaining 80%. Harrison also owned another business, RDSJH Equipment Venture, that does the same kind of equipment supply business. Kozlicki has no ownership interest in RDSJH, but the two companies did business together. Between 1997 and 2001, Harrison, through TSI, refinanced existing loans and took out new ones with LaSalle Bank seven times. With these loans, Harrison financed new equipment purchases for RDSJH; the equipment was then rented to TSI, allowing RDSJH to enrich itself at TSI’s expense.

Kozlicki and TSI contended that LaSalle suspected or knew that the loans were for Harrison’s personal benefit, but failed to alert Kozlicki or investigate further. TSI pointed to various documents and communications, as well as the fact that some funds were deposited into an RDSJH account. The complaint at issue in this appeal is the third amended complaint by TSI; the company voluntarily dismissed the original complaint and the DuPage County trial court dismissed the first, second and third amended complaints at LaSalle’s request. (The bank also moved for sanctions after the third amended complaint was dismissed.) The final dismissal is the subject of this appeal.

Three Leading Profession Organizations Have Published a New Guide to Preventing Business Fraud — If Your Business Has Been a Victim of Fraud Our Experienced Chicago, Naperville, Wheaton and Oak Brook Business Trial Attorneys Can Help Recover Your Losses

November 15, 2008 | Peter S. Lubin and Patrick Austermuehle

New guidelines for fighting fraud have just been released by three leading professional organizations. “Managing the Business Risk of Fraud: A Practical Guide” is sponsored by the ACFE, The Institute of Internal Auditors (IIA), and the American Institute of Certified Public Accountants (AICPA). Principles for establishing effective fraud risk management, regardless of the type or size of an organization, are outlined in the guide.

Download “Managing the Business Risk of Fraud”

Our commercial litgation attorneys work closely with auditors, accountants, forensic accountants and certified fraud examiners to determine the extent of the damages your business has suffered due to fraud. We bring suit to recover the lost funds. Our experienced business and commercial litigation attorneys with offices in or near Naperville, Wheaton, Oak Brook and Chicago have helped businesses and individuals recover substantial losses in individual or class action lawsuits arising from business fraud by vendors, employees and others. To review a summary of the business and fraud lawsuits we have handled click here. To contact us for a free consultation about business fraud or other business litigation issues fill out the form on the left side of this blog or click here.

Attorneys May Be Disqualified When Appearing Before a Judge Who is a Former Law Partner

October 30, 2008 | Peter S. Lubin and Patrick Austermuehle

Our Chicago, Naperville, Wheaton and Oak Brook business trial lawyers won an important procedural victory in a business dispute involving a closely held business. In short, we were able to convince an Illinois trial court that an attorney’s appearance should be stricken after being added to a case, we argued, because it appeared the new attorney could have been added to force the recusal of the judge, the attorney’s former law partner.

The underlying case was a high-stakes financial dispute in a closely held business. It had been litigated for six years, but was delayed when the defendants added a new lawyer to their team. This lawyer was the former law partner of the judge assigned to the case, who had already put substantial time and effort into the matter. However, to avoid any appearance of impropriety, the judge immediately recused himself when the new lawyer, the former partner, was added. Our position was that it could appear that this was precisely what the defense had intended. In fact, the new lawyer was added two days after three rulings on motions that the new judge called “hotly contested,” including rulings unfavorable to the defense.

Another attorney for the defense was a recognized expert in legal ethics, we argued, so the defense clearly must have known that the judge might recuse himself. Furthermore, the defense admitted that it had discussed the possibility of recusal with the client. And finally, the new lawyer had chosen what we alleged was a non-standard way to notify the court of his addition. Rather than asking for leave of court to move for the addition, which would have allowed the parties to discuss the addition in open court, he simply sent his appearance directly to the judge. The trial court held this was contrary to both the rules of court and the usual practice. All of this showed that it appeared that the attorney might have been added to force a change of judges, we argued. For those reasons, we moved to disqualify the new attorney.

Evidentiary Hearings in Motions to Disqualify Illinois Attorneys

October 24, 2008 | Peter S. Lubin and Patrick Austermuehle

A recent case of ours includes a motion to disqualify attorneys for the defense under Rule 3.7 of the Illinois Rules of Professional Conduct. Part (b) of that rule states that a lawyer may not represent a client in a case where he or she may be called as a witness to give testimony prejudicial to the client. We moved for an evidentiary hearing on this subject, because our underlying contentions included the contention that the lawyers for the defense witnessed the intentional torts that underlay the case.

Illinois law takes a motion to disqualify an attorney very seriously. Disqualifying a lawyer is considered drastic under state law, because it touches on basic rights by destroying the client’s relationship with the lawyer of his or her choosing. Schwartz v. Cortelloni, 177 Ill.2d 166 (1997). For that reason, an evidentiary hearing to determine what evidence is relevant and admissible is generally either necessary or wise. City of Kalamazoo v. Michigan Disposal Service, 125 FSupp2d 219 (WD Mich 2000). In fact, some appeals courts have found that a lack of an evidentiary hearing is sufficient to allow them to question a trial court’s decision.

However, Illinois and federal courts have held that an evidentiary hearing is unnecessary when the facts are not disputed, or when investigation is unlikely to provoke an admission that one side has ulterior motives. Robinson v. Boeing Co., 79 F3d 1053 (11th Cir 1996). The Eleventh Circuit’s decision in In Re BellSouth Corp., 334 F3d 941, 962 (11th Cir 2003), supporting Robinson, laid down factors for judges to consider when considering disqualifying an attorney for alleged “judge shopping.” These include “the fundamental right to counsel, the court’s docket, the injury to the plaintiff, the delay in reaching decision, the judicial time invested, the expense to the parties objecting and the potential for manipulation or impropriety.”

Contribution Act Does Not Bar Breach of Fiduciary Duty Claim in Embezzlement Case

October 22, 2008 | Peter S. Lubin and Patrick Austermuehle

In a Chicago breach of contract and breach of fiduciary duty case, the Illinois First District Court of Appeal has ruled that an insurance company may sue a bank for allowing embezzlement from one of the insurer’s clients. Continental Casualty Company v. American National Bank and Trust Company of Chicago, No. 1-07-0627 (Sept. 25, 2008).

Continental Casualty Company is the assignee of General Automation, Inc. GAI was the victim of $1.32 million worth of embezzlement by an accountant, Lawrence Cohn, who deposited $370,000 of the stolen money into his own account at American National Bank. (He also embezzled by paying his client’s money directly to the IRS to cover his own taxes.) The checks drew on GAI’s corporate account, also at ANB. After Cohn was caught, his former accounting firms settled with GAI, but the bank did not. Continental Casualty, the insurer for one of Cohn’s former firms, sued ANB as GAI’s assignee for allowing the fraudulent deposits, for breach of contract and violation of the Illinois Fiduciary Obligations Act.

The trial court dismissed the case on statute-of-limitations and insufficiency grounds. The appeals court reversed and remanded, but the trial court again stopped the case, granting summary judgment to ANB because the Illinois Joint Tortfeasor Contribution Act bars settlement requests from a settling party to a nonsettling party. This was the subject of the instant appeal.

Using Forensic Accountants and Certified Fraud Examiners in Shareholder, Business, Divorce and Commerical Litigation

July 23, 2008 | Peter S. Lubin and Patrick Austermuehle

As Chicago business, shareholder rights and commercial law litigators, we frequently handle cases involving allegations of business fraud or financial mismanagement, often as part of complex business dispute, that require significant expertise in financial issues. When handling a divorce involving a family business or other closely held company, we also sometimes find we need an expert’s help properly valuing the business, so we can help our clients get the most equitable possible distribution of marital property.

Our Chicago, Oak Brook, Wheaton and Naperville business trial attorneys have handled many complex business and commecial law litigation matters which have involved presenting or cross-examining accounting witnesses.

While we’re confident in our legal skills, these situations call for specialized financial skills. To give our clients the best possible representation in business, shareholder and other commercial disputes, we sometimes retain a forensic accountant or fraud examiner. Both of these jobs are twofold: They help attorneys and their clients understand the complex financial aspects of their cases, and they may also be called to testify as expert witnesses. A forensic accountant’s job is to examine a person or corporation’s accounts “cold,” from the outside; the subject isn’t generally expected to cooperate. Similarly, a fraud examiner delves deep into a company’s finances, looking for the source of anything that seems inconsistent or suspicious. Both can serve as expert witnesses who help establish the value of a business or testify to the existence of fraud.

Shareholders Cannot Sue Bank One Officers, Appeals Court Decides

July 22, 2008 | Peter S. Lubin and Patrick Austermuehle

In a shareholder derivative action related to 2004’s merger between Bank One and J.P. Morgan Chase, the Illinois First District Court of Appeal upheld the dismissal with prejudice of a complaint filed by Bank One shareholders. Shaper v. Bryan, No. 1-05-3849 (March 8, 2007).

The dispute grew out of the high-profile merger of Bank One with J.P. Morgan Chase. As part of the deal, J.P. Morgan agreed to issue stock to each Bank One shareholder worth 14% more than the Bank One shares’ closing price on the day of the merger. In other words, Bank One shareholders received extra value as part of the deal. Bank One CEO James Dimon would serve as president and COO of J.P. Morgan Chase for two years, after which he would take over for the existing CEO. These two men negotiated both the premium and the succession plan themselves.

Media reports soon appeared, suggesting that Bank One shareholders could have gotten a much larger premium from another company or through another negotiator. The media also reported that Dimon was eager to move to New York and take over as the leader of J.P. Morgan Chase, offering to do the deal for no premium at all if he could start as CEO without waiting the two years.

Shareholder May Withdraw Complaint, Appeals Court Rules in Corporate Dispute

July 18, 2008 | Peter S. Lubin and Patrick Austermuehle

A minority shareholder may withdraw his complaint under the Illinois Business Corporation Act of 1983, because the majority shareholder failed to meet requirements of that law, the Illinois Third District Court of Appeal ruled in an Illinois shareholder dispute lawsuit. Lohr v. Havens, 3-06-0930 (Nov. 11, 2007).

Charles Lohr owned a large minority of the stock in Phoenix Paper Products, Inc., a closely held private corporation in Illinois. He and another shareholder, James Durham, became concerned about possible financial mismanagement by the majority shareholder and president, Terry Havens, and their accountant, Samuel Morris. In months of correspondence, they accused Havens and Morris of taking unspecified inappropriate actions without shareholder approval.

This culminated in a 2003 lawsuit by Lohr alleging that Havens and Morris were misusing the company’s resources and acting illegally. Count I of the suit asked the court to either order a buyout of all Lohr’s stock or dissolve the company. Havens filed a timely election to buy Lohr’s shares, but Lohr accused Havens of illegally doing this without shareholder approval. After two years of discovery, Lohr asked to withdraw Count I and its associated demands, but Havens objected. The trial court found that because Havens hadn’t notified shareholders about the election, it was invalid, allowing Lohr to dismiss Count I of his complaint. Havens appealed.

LLC Members Owe Company, Manager No Fiduciary Duty, Appeals Court Rules

July 17, 2008 | Peter S. Lubin and Patrick Austermuehle

Only managers in manager-operated limited liability corporations have a fiduciary duty to the company or to other members, the First District Court of Appeal ruled in a usurpation of corporate opportunity lawsuit involving a closely held LLC. Katris v. Carroll, No. 1-04-3639 (Dec. 23, 2005).

Peter Katris was one of four members/officers and two managers of an Illinois limited liability corporation, Viper Execution Systems LLC. Viper LLC was formed to market a type of options-related software, also called Viper, written by LLC member Stephen Doherty for member Lester Szlendak. Its articles of organization specified that management was vested in Katris and the other manager, William Hamburg.

Defendant Patrick Carroll employed Doherty before and during the organization, and defendant Ernst & Company later hired Doherty to work with Carroll. Their work included the writing of another software program, WWOW, which Katris believed was functionally similar to Viper. Five years after the organization, Katris sued Carroll and Ernst for collusion and usurpation of corporate opportunity because of WWOW’s similarity to Viper. (He also sued Doherty for collusion and breach of fiduciary duty, claims they later settled.)