Breach of Fiduciary Duty

Illinois Ranked Near the Bottom for Business Litigation — Our Chicago Business Trial Lawyers and Attorneys Help Closely Held Businesses Navigate the Tricky Waters of Illinois Business Litigation

October 22, 2015 | Peter S. Lubin and Patrick Austermuehle

Companies doing business in America are influenced by multiple factors. Not only do they need to keep track of the federal and local laws that vary between states and even cities, but court systems in different locations treat businesses differently.

Every year, the Lawsuit Climate Survey is used to rank states on how fair they are to businesses that get sued. This year, the survey was conducted by Harris, a polling firm, on behalf of the U.S. Chamber’s Institute for Legal Reform.

In 2010, Illinois was ranked 45th, out of all 50 states and it’s only gotten worse since then. In 2012, the last time the survey was conducted, Illinois ranked 46th. Now the most recent poll has put us in 48th place, ahead of only Louisiana and West Virginia. Continue reading ›

Keep Your Friends Close: What to do When a Friend and Business Partner Allegedly Defrauds You — Our Chicago Business Dispute Attorneys Concentrate on Business Litigation

May 10, 2015 | Peter S. Lubin and Patrick Austermuehle

Keep Your Friends Close: What to do When a Friend and Business Partner Allegedly Defrauds You

When entering into business transactions, it’s always important to know the terms of the agreement. The importance of being aware of the exact terms of an agreement cannot be overstated. Sometimes, even more important than the writing, is what is conveyed from one party to another is. A material misrepresentation or omission within a fiduciary relationship will most likely amount to fraud.

In Hassan v. Yusuf, 408 Ill. App. 3d 327, 944 N.E.2d 895 (1st Dist. 2011), Yusuf, the defendant, entered into an agreement regarding the purchase of a gas station together with Hassan, the plaintiff. Hassan claimed that pursuant to the parties’ agreement, he would receive one-third of the interest in a gas station along with interest in the real estate which was secured by a mortgage. These terms had allegedly been dictated to Hassan by Yusuf, who was Hassan’s good friend and one of three investors in the gas station venture. Later, after having invested significant funds, Hassan learned that Yusuf had allegdly duped him into believing that he would receive an interest in the real estate. Hassan then filed suit against Yusuf and the other defendant alleging fraud, breach of fiduciary duty, breach of contract, and sought an accounting and declaratory judgment.

In determining whether or not fraud was committed by Yusuf, the Illinois Appellate Court first addressed whether a fiduciary relationship existed between the parties. In Illinois, the law is clear that “[i]n order to prove fraud by the intentional concealment of a material fact, it is necessary to show the existence of a special or fiduciary relationship, which would raise a duty to speak.” Id. at 912.

The Court identified several facts support a fiduciary relationship, including: (1) that Hassan and Yusuf were each equal shareholders; and (2) that Hassan and Yusuf had been close personal friends for approximately ten years. The trial court had previously found that these facts were not sufficient to establish a fiduciary relationship, but the Appellate Court overturned this finding. The Appellate Court held:

“[T]here is sufficient evidence on the record to establish that such a finding would be against the manifest weight of the evidence and therefore reversible given the fact that a fiduciary relationship exists in all certainty based on their business venture together.”

The Appellate Court even found that the parties’ friendship and their joint venture was “overwhelming” evidence of a fiduciary relationship.

After finding that a fiduciary relationship existing between the parties, the Appellate Court’s concluded that there was a material omission giving rise to a breach of fiduciary duty. The trial court had previously found that Yusuf’s testimony that he told Hassan that Hassan would not receive interest in the property lacked credibility. The trial court had also found that Hassan credibly testified that he understood he would be receiving an equal share in the gas station and real estate. The Appellate Court therefore held: “[c]onsequently, Yusuf’s omission that [Hassan] would not acquire an interest in the real estate amounts to a misrepresentation upon which [Hassan’s] claim of fraud may be based.”

The Illinois Appellate Court’s decision in Hassan v. Yusuf reinforces the importance of committing oral agreements to writing. Had the parties done so, a lawsuit would likely not have been needed or it would not have turned on questions of witness credibility. The decision also reinforces that when an oral agreement is at issue, witness credibility will often be one of the most important factors. Continue reading ›

Illinois Court Dismisses Putative Shareholder Class Action, Finding Lack of Alleged Injuries – Noble v. AAR Corp.

July 10, 2013 | Peter S. Lubin and Patrick Austermuehle

An Illinois federal court granted a motion to dismiss in a putative shareholder derivative class action, having already denied the plaintiff’s application for a temporary restraining order (TRO). Noble v. AAR Corp., et al, No. 12 C 7973, memorandum and order (E.D. Ill., Apr. 3, 2013). The plaintiff asserted causes of action for various alleged breaches of fiduciary duty on behalf of the corporation, but the court found that the lawsuit was a direct action, primarily for the plaintiff’s benefit as a shareholder, rather than a derivative one.

The dispute related to a recommendation by the Board of Directors to the shareholders of AAR Corporation, a publicly-traded company, regarding an executive compensation plan. The Board made a unanimous proposal regarding the corporation’s “say on pay” plan, which allowed the shareholders to vote on executive pay as required by Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), 15 U.S.C. § 78n-1. In a seventy-page proxy statement, the Board asked the shareholders to approve an advisory resolution regarding executive compensation at the corporation’s annual shareholder meeting, which was scheduled for October 10, 2012.

The plaintiff filed suit against the corporation and individual Board members, alleging that the Proxy Statement failed to disclose various details about what the Board considered before making its proposal. Noble, memorandum at 5. He claimed that the individual defendants breached their fiduciary duties of good faith, care, and loyalty to the shareholders, and that the corporation aided and abetted these breaches. Id. at 5-6. The defendants removed the case to federal court on October 4, 2012. The following day, the plaintiff filed a motion for a TRO, asking the court to stop the shareholder vote. The court held a hearing on October 9 and denied the motion. On October 10, the shareholders approved the Board’s proposal, with seventy-seven percent of the shares voting in favor. Id. at 1-2.

Wisconsin Class Action Against Insurance Company Remanded to State Court Because of State Law Claims – LaPlant v. Northwestern Mut. Life Ins. Co.

July 5, 2013 | Peter S. Lubin and Patrick Austermuehle

Our Chicago class action attorneys note that a class action claim against an insurance company, which the defendant had removed to federal court, fell within an exception to the federal jurisdiction statute, according to a federal district judge in LaPlant v. The Northwestern Mutual Life Insurance Company, No. 11-CV-00910, slip op. (E.D. Wis., Aug. 20, 2012). The court remanded the case to Wisconsin state court under the corporate governance exception to the Class Action Fairness Act (CAFA), 28 U.S.C. § 1332(d). It held that the plaintiffs’ claims related exclusively to the defendant’s “internal affairs,” based on Wisconsin law.

The defendant issued an annuity insurance policy to the lead plaintiff. As a mutual insurance company, the defendant was “owned cooperatively by its policyholders,” LaPlant, slip op. at 1, and paid dividends to policyholders out of its profits. In 1985, it moved policyholders’ money into a separate fund and began paying dividends based on interest generated by the fund. Id. The amount of the payments received by the policyholders allegedly decreased as a result of this change. Wisconsin law gives policyholders the right to participate in annual profit distributions. Wis. Stat. § 632.62(2).

The lead plaintiff brought a class action lawsuit for breach of contract and breach of fiduciary duty on behalf of a class of policyholders in Wisconsin. The class prevailed at trial, and the lead plaintiff moved to expand the scope of the class to include policyholders in other states. The defendant removed the case to federal court under CAFA, which confers jurisdiction to federal courts over class actions with more than one hundred class members, more than $5 million in controversy, and diversity of citizenship between the defendant and at least one class member. The plaintiff moved to remand the case to Wisconsin state court based on the “corporate governance exception,” which applies when a class action’s claims solely relate (1) “to the internal affairs or governance of a corporation” (2) based on the laws of the state of incorporation. LaPlant, slip op. at 2, citing 28 U.S.C. §§ 1332(d)(9)(B), 1453(d)(2).

Court Reverses Class Certification in Case Alleging Wrongful Withholding of Bonus Compensation – InPhyNet Contracting Services v. Soria — Our Chicago Class Action Attorneys Defend Businesses in Class Cases

June 10, 2013 | Peter S. Lubin and Patrick Austermuehle

A Florida appellate court reversed an order certifying a class of doctors claiming breach of fiduciary duty and other causes of action against their employer. InPhyNet Contracting Services v Soria, 33 So.3d 766 (Fl. Ct. App. 2010). The case began as a suit alleging breach of a covenant not to compete against one physician, leading the physician to counterclaim on behalf of a putative class with regards to a bonus compensation plan. After separating the physician’s individual claims from the class claims, the trial court certified a class. The appellate court reversed, finding that the class claims did not meet the requirements of commonality or predominance over class members’ individual claims.

InPhyNet Contracting Services (ICS) places physicians in hospitals around the state of Florida on a contractual basis. It offers incentives to physicians to work in hospital emergency rooms through a Physician Incentive Plan (PIP), which pays doctors out of a “bonus pool” associated with a hospital based on performance and similar factors. Id. at 768. ICS placed Dr. David Soria in the emergency room of Wellington Regional Medical Center, where he worked as Medical Director. The dispute between Soria and ICS began when Wellington terminated its contract with ICS and contracted with a competitor, and Soria began working for the competitor.

Sale of Domain Names Used for Online Health Food Retail Leads to Lawsuit for Fraud, Breach of Contract – Inventory Recovery Corp. v. Gabriel

April 19, 2013 | Peter S. Lubin and Patrick Austermuehle

A business sued two individuals in a New Jersey federal district court in Inventory Recovery Corp. v. Gabriel, alleging that the defendants materially misrepresented the details of a sale of several hundred internet domain names. The plaintiff asserted multiple causes of action, including fraud, breach of fiduciary duty, and breach of contract. The court dismissed all but two of the causes of action on the defendants’ motion.

The plaintiff, Illinois-based Inventory Recovery Corporation (IRC), sought to purchase 324 internet domain names from the defendants, Richard Gabriel and Ashley Gabriel. The defendants used the domain names in the business of selling nutraceutical food, which the court describes as food with health benefits. IRC’s president met with the defendants in January 2010 to discuss the purchase of the domain names and the associated business, and negotiations continued into February. Richard Gabriel provided IRC with financial documents related to business income and expenses. This included expenses for Google advertising, the business’ main marketing activity. He allegedly described robust sales and a positive relationships with the merchant banks that serviced customer payments for the business.

The parties entered into a series of contracts on February 26, 2010 for the sale of the domain names. They closed the same day, and the plaintiff paid the $5.6 million purchase price with a real estate parcel in the Bahamas, an airplane, and a sum of cash. According to testimony presented in the case, the plaintiff allegedly later discovered that the business did not have good relationships with its merchant banks, its Google advertising account was suspended, and the defendants had allegedly artificially inflated the business’ revenues.

New Jersey Court Dismisses Claim for Violation of Corporate Opportunity Doctrine in Closely-Held Business Dispute – Egersheim v. Gaud

March 22, 2013 | Peter S. Lubin and Patrick Austermuehle

Two shareholders and former officers of a closely-held New Jersey company, DAG Entertainment, Inc., sued two fellow shareholders, the company, and a new company formed by the defendant shareholders in U.S. District Court. The suit, Egersheim, et al v. Gaud, et al, alleged eighteen causes of action related to alleged usurpation of corporate opportunities. The defendants moved for summary judgment as to fifteen of the eighteen causes of action, and the district court ruled that those causes of action amounted to a single cause of action under the Corporate Opportunity Doctrine. The court granted summary judgment on the fifteen causes of action, allowing three causes to proceed.

Plaintiff Kathleen Egersheim owned a three percent shareholder interest in DAG and was its former Vice President and Assistant Secretary. Plaintiff Christopher Woods owned 22.5% interest and was the former Creative Director. Defendants Luis Anthonio Gaud and Philip DiBartolo owned or controlled most of the remaining stock of the company. According to the plaintiffs, DAG began exploring an opportunity to partner with the media conglomerate Comcast in 2001. The plaintiffs claim they developed characters and show ideas for children’s television programming through 2004.

In 2005, the defendant shareholders allegedly began excluding the plaintiffs from meetings and decisions regarding DAG’s activities, and also allegedly created a new business entity called Remix, LLC without plaintiffs’ knowledge. Remix entered into a formal joint venture with Comcast. The defendants proposed ceasing DAG’s major business operations, according to the plaintiffs, and the defendants voted them out of their officer positions when they objected to this plan in September 2007. DAG essentially stopped operating at that point.

Court of Appeals Upholds Bonus Award Against Suit by Minority Shareholders, Applying Safe Harbor and Business Judgment Rules – Warren v. Campbell Farming Corp.

May 17, 2012 | Peter S. Lubin and Patrick Austermuehle

The Tenth Circuit Court of Appeals reviewed a dispute among shareholders of a closely-held corporation in Warren v. Campbell Farming Corporation. It affirmed a district court ruling that the majority shareholder did not breach fiduciary or statutory duties to the corporation by approving a bonus proposal over the minority shareholders’ objections. The court considered arguments relating to conflicts of interest and fairness, the business judgment rule, and the majority shareholder’s fiduciary duty.

Campbell Farming Corporation is a closely-held Montana corporation whose principal place of business is in New Mexico. The plaintiffs, H. Robert Warren and Joan Crocker, were minority shareholders with 49% of the shares, while defendant Stephanie Gately controlled 51%. Warren and Gately served as directors with Gately’s son, Robert Gately, who also served as the president. Stephanie Gately proposed a bonus to her son totalling $1.2 million in cash and company stock, in part to prevent him from leaving the company. Stephanie Gately voted all of her shares in favor of the proposal, so it passed despite Warren and Crocker’s votes in opposition.

Warren and Crocker filed suit in New Mexico federal court, asserting breach of fiduciary duties and various common law claims. The district court ruled in favor of the defendants after a bench trial. It found that, while the bonus met Montana’s definition of a “conflict of interest,” it was permissible under a safe-harbor statute that allowed conflict-of-interest transactions if they were “fair to the corporation.” Mont. Code. Ann. §§ 35-1-461(2), 35-1-462(2)(c). The court also found that the bonus was permitted by the business judgment rule and that the defendants did not breach any fiduciary duties. The plaintiffs appealed to the Tenth Circuit.

Business Owners Beware, Make Sure Your Employment Agreements are Clearly Written and Reasonable

February 2, 2012 | Peter S. Lubin and Patrick Austermuehle

Every business has employees, and as business litigators, the attorneys at Lubin Austermuehle pride ourselves on being knowledgeable about all the areas of law that affect our clients, including employment laws. Our Orland Park business attorneys recently discovered a case that has an impact on companies who utilize employment non-competition agreements with their employees.

Reliable Fire Equipment Company v. Arredondo pits an employer against two former employees, Defendants Arredondo and Garcia, who worked as fire alarm system salesmen for Plaintiff. Each Defendant signed an employment agreement where Defendant’s would allegedly earn commissions of varying percentages of the gross profits on items or systems sold. After working for Plaintiff for several years, Defendants created Defendant High Rise Security Systems, LLC., which was allegedly a competitor to Plaintiff’s business. Plaintiff eventually became aware that Defendants were starting an alleged competitor company, and asked Defendants if in fact they had created a fire alarm business. Defendant Arredondo allegedly denied that he was starting such a business, and resigned shortly afterward, with Defendant Garcia tendering his resignation two weeks after Arredondo.

Plaintiff then filed suit alleging breach of the duty of fidelity and loyalty, conspiracy to compete against Plaintiff and misappropriation of confidential information, tortious interference of prospective economic advantage, breach of the employment agreements, and unjust enrichment. The trial court held that the employment agreements were unenforceable because of unreasonable geographic and solicitation restrictions and the fact that language of the agreements was unclear. A trial on the issues unrelated to the employment agreement ensued, and Defendants successfully moved for a directed verdict because there was insufficient evidence that Defendants competed with Plaintiffs prior to Arredondo’s resignation.

Plaintiff then appealed the trial court’s ruling that the employment agreements in question were unenforceable and the directed jury verdict. The Appellate Court affirmed the trial court’s directed verdict, stating that the lower court had properly weighed the evidence in finding a total lack of competent evidence. The Court then analyzed the restrictive covenants under the legitimate business interest test and found that the geographic restrictions were not reasonable and therefore the trial court did not err in ruling that the restrictive covenants were unenforceable.

Reliable Fire Equipment Company v. Arredondo illustrates why it is so important for business owners to keep an eye on their employees, and serves as a warning for companies wanting to sue former employees based upon non-competition agreements. Furthermore, the case shows that courts frown upon the use of vague language in such agreements, and it is always in your best interests to keep the terms of employment agreements reasonable.

The Illinois Securities Act of 1953 Does not Apply to Common Law Damages Claims for Breach of Fiduciary Duty by Sellers of Securities

September 8, 2011 | Peter S. Lubin and Patrick Austermuehle

As a Chicago law firm that focuses on business litigation, Lubin Austermuehle pays close attention to shareholder lawsuits filed in Illinois’ courts. Our Elmhurst business attorneys discovered a case filed in the Appellate Court of Illinois, First District, Fourth Division that answers questions regarding the appropriate statute of limitations to apply in a shareholder action for common law damages.

Carpenter v. Exelon Enterprises Co. is a case filed by multiple minority shareholders against the majority shareholder, Exelon, for breach of fiduciary duty and civil conspiracy. Defendant Exelon owned 97% of InfraSource, and Plaintiffs owned a portion of the remaining 3% of the company. Defendant then allegedly decided to divest its interest in the company through a series of complex merger transactions. The alleged end result of these transactions was to grant all shareholders in InfraSource would receive a pro rata share of the net proceeds. Using its majority stake in InfraSource, Defendant allegedly voted its shares in favor of the merger transactions, which was subsequently executed according to Defendant’s plan. After the merger, Plaintiffs filed suit against Exelon alleging breach of fiduciary duty and civil conspiracy that caused the minority shareholders to be inadequately compensated for their shares in InfraSource. Defendant then moved to dismiss the action because Plaintiffs’ claims were barred under the three year statute of limitations in the Illinois Securities Law of 1953. The trial court denied Defendant’s motion, stated that the applicable statute of limitations was the five year period contained in section 13-205 of the Illinois Code of Civil Procedure. The trial court then stayed the matter and certified the statute of limitations issue for an interlocutory appeal to the Appellate Court.

On appeal, the Court examined Defendant’s argument that, despite the fact that Plaintiffs did not allege specific statutory violations, Plaintiffs’ claims fell within the scope of the Illinois Securities Law and its three year statute of limitations. Plaintiffs argued that, because of the similarities between Illinois and federal securities law, federal case law should be utilized by the Court. Plaintiffs’ cited federal cases holding that securities fraud does not include the oppression of minority shareholders nor does it include oppressive corporate reorganizations, and thus the case did not fall within the purview of the Illinois statute. The Court performed a statutory analysis and determined that subsection 13(A) of the Law did not apply to Plaintiffs because their claims did not arise out of Plaintiffs’ role as purchasers of securities. The Court went on to explain that Defendant’s argument based upon subsection 13(G), which provides a remedy to any party in interest in the unlawful sale of securities, was unpersuasive. Instead, the Court held that subsection 13 of the Illinois Securities Law of 1953 does not “concern retroactive common law damages claims for breach of fiduciary duty brought by sellers of securities in general, or minority shareholders in particular.” By so holding, the Court declared that the three year statute of limitations did not apply and remanded the case back to the trial court.

Carpenter v. Exelon Enterprises Co. provides potential shareholder litigants with a ruling that gives them an additional two years to bring their claims. Conversely, those facing liability in a common law action surrounding a securities transaction should be aware that such claims are viable for a longer period of time than they may have previously thought.