Breach of Fiduciary Duty

Appellate Court of Illinois Upholds Circuit Court’s Rescission of Oral Agreement to Jointly Purchase a Gas Station due to Fraudulent Misrepresentation

July 13, 2011 | Peter S. Lubin and Patrick Austermuehle

When starting a new business venture, choosing the right partners is one of the most important decisions any company owner will make. Unfortunately, not all partnerships work out, and in some instances that is due to the dishonest machinations of fellow owners. Our Elgin business attorneys recently discovered one such case where one business partner was allegedly defrauded by two other owners in a transaction to jointly purchase and operate a gas station in Tinley Park.

Hassan v. Yusuf pits Plaintiff, a man who thought he was investing in the purchase of a gas station, against his two business partners who were also involved in the deal. Defendants solicited an investment of $120,000 from Plaintiff, equal to their own contributions, to purchase the gas station in question, but allegedly failed to inform Plaintiff that he was only purchasing one-third of the business, and had no claim to the real-estate upon which the station was built. After Plaintiff entered into an oral agreement to purchase the station with Defendants and run the day-to-day operations of the business, Defendants acquired title to the property and conveyed that title to a corporation solely owned by Defendants. The business was profitable at first, but eventually began operating at a loss. Defendants then demanded Plaintiff invest more money in the venture to cover these losses, but Plaintiff had no additional funds to invest, and requested an accounting of the business’s financial records and documentation showing his ownership and portion of the losses. Defendants failed to provide said documentation, and Plaintiff ceased working at the station and eventually filed suit.

The Circuit Court of Cook County found that Defendants had defrauded Plaintiff through their misrepresentations regarding the purchase of the business and accompanying real estate. In its judgment, the trial court granted Plaintiff rescission of the contract and damages for the total amount of money he invested in the business. After the trial verdict, Defendants appealed the finding of fraud on the basis that there was not clear and convincing evidence of a misrepresentation that Plaintiff would be an owner of the real estate under their agreement.

The Appellate Court upheld the Circuit Court’s decision, finding the record sufficient to support a finding that Defendants misrepresented to the Plaintiff that he was purchasing a one-third interest in the station and accompanying real estate, even though they had no intention of actually doing so. Furthermore, there was clear evidence of a fiduciary relationship between the parties, which gave rise to a claim for fraud by omission when Defendants failed to make explicit to Plaintiff that he was not acquiring an interest in the land. The Court went on to state Plaintiff’s reliance upon Defendants’ misrepresentations were justifiable, and upheld the trial court’s decision to rescind the contract, but reduced the damages award in an amount equal to Plaintiff’s share of the profits from the station. The Court did so because giving Plaintiff his share of the profits would be inconsistent with the remedy of rescission, which is supposed to place a party in the same position they would be in had the contract never occurred.

Northern District of Illinois Federal Court Dismisses Double Derivative Shareholder Action Due to Lack of Parent / Subsidiary Corporate Relationship

June 15, 2011 | Peter S. Lubin and Patrick Austermuehle

Members of the board of directors of a corporation have the responsibility to orchestrate the business in such a way that is advantageous to the shareholders and the continued growth and prosperity of the company. However, there are times when those directors may act in a way that serves their own interests, and the only way to protect the business is for shareholders to file a derivative suit on behalf of the company. Lubin Austermuehle is always researching new developments in this field of law, and our Chicago shareholder derivative action attorneys recently came across one such case filed here in the Northern District of Illinois, Eastern District federal court.

Reiniche v. Martin is a double derivative suit brought by individual plaintiffs who are shareholders of a corporation, Health Alliance Holdings (HAH), that itself is a primary shareholder of HA Holdings (Holdings), another corporation. Plaintiffs allege that Defendants sought to freeze them and other HAH shareholders out through a series of illegal and wasteful acts that resulted in an insider transaction to sell Holdings for $10 and debt relief to another company in which Defendants had an interest. That transaction was approved by Holdings’ board of directors in spite of the fact that there was no quorum present to do so, and HAH was denied its right to sit on the board. In doing so, Plaintiffs alleged that the Defendant directors and other shareholders of Holdings breached their fiduciary duties to the company. Defendants then moved to dismiss the suit under Federal Rule of Civil Procedure 12(b)(6), claiming that Plaintiffs lacked standing, their claim was untimely, and the claims are insufficient under the law and barred by the business judgment rule.

The Court held that Plaintiffs did not have double derivative standing because such standing is only granted in the context of a parent/subsidiary relationship, and HAH was only a shareholder in Holdings – it was not a parent or holding company of Holdings. The Court went on to say that because the individual Defendant shareholders were each minority owners, none of them had a controlling interest in Holdings, and therefore did not owe a fiduciary duty to the Plaintiffs. As such, the Court found no policy reason for invoking a double derivative action and granted Defendants’ motions to dismiss.

Settlement Agreements With Former Employees Containing Broad Release Language May Prevent Subsequent Qui Tam Actions

May 25, 2011 | Peter S. Lubin and Patrick Austermuehle

No matter what kind of business you own and operate, an unfortunate part of running a company is the inevitable employment disputes with employees. Whether it is an action over wages, job duties, or other issues, many business owners will find themselves in court opposite a current or former employee at some point. Lubin Austermuehle’s Naperville business attorneys know the legal challenges that business owners face, and are always mindful of new case law that affects our clients.

Enterprise Recovery Systems, Inc. v. Salmeron is a decision handed down by the Appellate Court of Illinois earlier this year regarding an employer/employee dispute filed in the circuit court of Cook County. Plaintiff Enterprise Recovery Systems hired Defendant Salmeron as general manager and director of operations for their recovery and resolution of delinquent student loans business. Defendant worked for Plaintiff for four years before being terminated, and she sued Plaintiff for sexual harassment. This case settled, and Defendant signed a broadly worded release containing language that discharged Plaintiff from any other claims arising out of Defendant’s employment with Plaintiff in exchange for $300,000. After this settlement, Defendant Salmeron filed a qui tam action against Plaintiff Enterprise on behalf of the federal government alleging that Enterprise had defrauded the government. The federal government declined to intervene in the qui tam action, and the lawsuit was eventually dismissed with prejudice due to the misconduct of Salmeron’s lawyer, according to the court. Because of issues brought to light in the qui tam action, Plaintiff filed suit against Defendant alleging fraud in the inducement and breach of Defendant’s duty of loyalty to Plaintiff. After the court found repeated misconduct by Defendant’s attorney (which included multiple violations of court orders), the trial court banned Defendant from presenting evidence in her defense of the fraud and breach of fiduciary duty action. Plaintiff then moved for summary judgment on both claims.

Plaintiff’s motion showed that Defendant produced company log reports in the qui tam suit and those reports were stolen from the Plaintiff. Furthermore, Plaintiff alleged that Defendant failed to alert Plaintiff about the supposed illegal conduct of Plaintiff’s employees prior to notifying the government and filing the qui tam lawsuit. Additionally, Plaintiffs contended that Defendant planned to file the qui tam action before signing the release that was a part of the sexual harassment suit settlement. Defendant failed to file a response to the motion for summary judgment, so the court granted the motion. Plaintiff appealed, and the matter was reviewed de novo by the Appellate Court.

The Appellate Court upheld the trial court’s grant of summary judgment as to the fraud in the inducement claim because the court found that Defendant knew she had information for the qui tam case against Plaintiff at the time she negotiated the sexual harassment claim’s settlement and release. Furthermore, the court found that Defendant waited until she had received her last settlement payment before filing the qui tam lawsuit and signed the settlement agreement with no intention of honoring it. The Court upheld summary judgment as to Plaintiff’s breach of the duty of loyalty cause of action because Defendant was a high-level member of Plaintiff’s management team and owed a duty of loyalty to the company. This duty was breached when Defendant sought to profit from information harmful to the company that was obtained through her position of trust within the company. The Court also explained that it was reasonable for Plaintiffs to expect Defendant to neither exploit her position for personal gain nor hinder the business operations of the company

Employers Should Ensure They Have Adequate Evidence Before Filing Suit Against Former Employees

May 4, 2011 | Peter S. Lubin and Patrick Austermuehle

Most employers at some point will face the prospect of an employee failing to perform their job adequately. Additionally, some employees breach fiduciary duties owed the company or commit fraud and other harmful acts during the course of their employment. Hytel Group, Inc. v. Butler is a recent case out of the Appellate Court of Illinois that is just such a dispute between a Plaintiff employer and its Defendant ex-employee. Our Schaumburg business litigation attorneys discovered this decision and want to pass along the information to our readers.

In Hytel Group, Inc. v. Butler, Plaintiff Hytel Group initially hired Defendant Butler as comptroller for the company in February of 2008 and fired Butler four months later in June of that year. During Butler’s employment, Hytel’s lender, GBC Funding, filed suit in response to Hytel allegedly defaulting on several obligations under their loan agreement and Hytel’s failure to respond to the notices of default sent to them by GBC. Furthermore, GBC alleged that Hytel failed to cooperate with a restructuring officer approved by GBC pursuant to another agreement. This agreement was for GBC to refrain from exercising their rights under the loan agreement in exchange for Hytel’s cooperation with the restructuring officer. Hytel then filed the action in question in December 2008 against Defendant Butler alleging that she breached her fiduciary duty of loyalty and committed fraud when she failed to perform certain job duties because of a relationship she developed with GBC.

After Butler was fired by Hytel, but before Hytel filed suit, she filed a claim with the Illinois Department of Labor for unpaid final wages, and she moved to dismiss Hytel’s lawsuit under the Citizen Participation Act. The motion was based upon the allegation that Hytel was suing her in retaliation for filing the wage claim. Butler also moved to dismiss Hytel’s suit on procedural grounds because Hytel failed to properly state a cause of action for breach of fiduciary duty or for fraud. In dismissing Hytel’s claims, the trial court found that the Citizen Participation Act did apply to Butler’s wage claim, that she did not have a fiduciary relationship with Hytel, and that Hytel did not sufficiently allege all the elements of fraud. Plaintiff Hytel appealed the trial court’s ruling on the basis that Butler’s wage claim was a private dispute and the Citizen Participation Act is concerned with protecting free speech and citizen participation in government.

The Appellate Court reviewed the legislative intent behind the Citizen Participation Act and found that the state of Illinois intended the law to be construed broadly. As such, the Court found that Butler’s wage claim was an exercise of her right to petition for redress of grievances and therefore fell within the express language of the Act that protects actions taken in furtherance of a citizen’s right to petition. The Court went on to hold that the Act contains no public concern requirement and the fact that the wage claim was a private dispute did not matter. Finally, the Court found that Hytel’s suit was retaliatory in nature and upheld the trial court’s dismissal of the action and the award of attorneys fees under the Act.

This case provides a warning for business owners who file suit against former employees for a breach of duty, particularly if there is an existing wage or other employment dispute between the parties. Hytel Group, Inc. v. Butler shows that Illinois courts will dismiss such claims pursuant to the Citizen Participation Act if there evidence that the suit filed by the employer is retaliatory in nature. As such, employers should ensure that they have ample evidence to show the legitimacy of their claims before filing, as they may be on the hook for the opposing party’s attorneys fees should the court find a retaliatory impetus for the action.

Appellate Court of Illinois Orders in Camera Review of Potentially Privileged Documents in Action for Breach of Fiduciary Duty

April 12, 2011 | Peter S. Lubin and Patrick Austermuehle

Business litigation is necessarily an adversarial process – the stakes are high and as such the opposing parties in most lawsuits will fight over many issues during the case. One of the most contentious segments of any case is the discovery process. Because the information obtained during discovery can make or break a case, it is important to understand the law in this area. In that vein, our Berwyn business attorneys would like to share a recent Illinois Appellate Court decision that may affect many of our clients the next time they go to court.

In Mueller Industries Inc. v. Berkman, Defendant Berkman worked for Plaintiff as president of a company owned by Plaintiff pursuant to an employment contract. During his employment, Defendant formed an investment partnership and obtained a 10% ownership interest in a company that was one of Plaintiff’s primary suppliers. Defendant’s lawyer – whose firm was also counsel for Plaintiff – advised him how to structure the investment venture so as to not run afoul of his employment contract with Plaintiff. The initial employment agreement subsequently expired, and a new open-ended agreement was consummated that contained a non-compete clause and other restrictive covenants governing outside financial interests and business opportunities. Defendant then had his attorney form a new company to compete with Plaintiff, and Defendant subsequently resigned his position with Plaintiff.

Plaintiff filed suit for breach of his employment contract and breach of fiduciary duty, alleging Defendant profited personally at the expense of Mueller through his investment partnership. A discovery dispute ensued when Defendant refused to produce documents related to his investment in the supply company and his creation of the competing company. Defendant refused production based upon the 5th amendment and attorney-client privileges. Plaintiff filed a motion to compel production, which was granted by the trial court.

Defendant appealed the trial court’s grant of the motion, and reasserted that the documents were privileged. The Appellate Court reversed in part, holding that Defendant’s pre-existing relationship with his lawyer kept all communication prior to the attorney’s firm’s representation of Plaintiff privileged. However, all communications after the dual representation began were no longer so protected because Defendant no longer had any reasonable expectation of confidentiality. Finally, the Court found that Defendant had failed to demonstrate that producing the requested documents would amount to incriminating testimony, but remanded the case with orders for the lower court to perform an in camera review of the disputed documents and urged the trial court to make a detailed record of its findings.

If You Have a Business Agreement, Get It in Writing!

March 10, 2011 | Peter S. Lubin and Patrick Austermuehle

The issues faced by our clients, and particularly our business clients, are often complex both factually and legally. Our Palatine business lawyers recently discovered a case filed in Du Page county that illustrates how business legal issues can, and often do, dovetail with personal legal issues. Prignano v. Prignano demonstrates the importance of obtaining legal advice before making business agreements and contracts that include will and probate issues.

In Prignano v. Prignano, the widow of George Prignano, a man who owned several businesses with his brother Louis, sued that brother for allegedly failing to honor an agreement that the survivor of the two brothers would buy the decedent brother’s share of their co-owned businesses. The Prignano brothers jointly owned two corporations, Sunrise Homes and Rainbow Installations, and were equal partners in 710 Building Partnership. The Plaintiff widow alleged that the Defendant had an oral agreement with her deceased husband George whereupon Louis would purchase George’s share of their three businesses with the proceeds from life insurance policies purchased for that purpose. Plaintiff also alleged that she and Defendant had an oral agreement that Defendant would purchase his brother’s share of the businesses from Plaintiff.

After George’s death, Defendant, who was the executor of George’s estate, allegedly kept George’s share of the businesses and the life insurance payments for himself unbeknownst to Plaintiff. When Plaintiff discovered this, she filed suit against him for fraud, breach of fiduciary duty, breach of contract, and unjust enrichment. The trial court ruled in her favor on all counts and awarded her damages and prejudgment interest. Defendant then appealed the trial court’s finding of liability and the award of prejudgment interest.

On appeal, the Second District of the Appellate Court of Illinois reaffirmed the trial court’s finding that both oral agreements (between the brothers and between Plaintiff and Defendant) were valid and enforceable due to the testimony of third parties who were aware of the oral agreement between the brothers, and the existence of a written agreement that was drawn up after the oral contract between Plaintiff and Defendant was initially formed. The Court also found that Defendant owed a fiduciary duty to Plaintiff as he was a corporate officer and partner in the businesses, and upon George’s death, his interest in the businesses was transferred to Plaintiff. As such, the Court held that Defendant owed Plaintiff a duty to exercise “the highest degree of honesty and good faith” in dealing with Plaintiff, and Defendant breached that duty. The Court then vacated the trial court’s judgment on the unjust enrichment claim because Plaintiff was victorious on her breach of contract claim. The Court stated that unjust enrichment does not apply when there is a breach of contract under Illinois law. Finally, the Court reaffirmed the award of prejudgment interest because Plaintiff had been deprived of money that was rightfully hers, and Defendant should not profit from his wrongful retention of the funds.

Prignano v. Prignano exemplifies why business owners should have all of their business agreements and contracts reviewed by a trained legal professional. Family business owners, in particular, should guard against casual or oral agreements, as personal relationships can be strained when there is a misunderstanding regarding such agreements. If you are unsure about the legality or legitimacy of your business agreements, or are currently in a dispute, you should consult a discerning Chicago and Naperville business attorney to determine your rights.

Fifth District Reverses Decision to Deny Arbitration Clause in Fiduciary Duty Case

December 21, 2010 | Peter S. Lubin and Patrick Austermuehle

Our Illinois alternative dispute resolution lawyers noted an opinion from the Fifth District Court of Appeal reversing a trial court that declined to compel arbitration. In Hollingshead v. A. G. Edwards & Sons, Inc., No. 1-09-0067 (Ill. 5th Jan. 22, 2009), the court ruled there simply was not enough evidence to support the trial court’s decision to deny to compel arbitration. The case pits Carol Hollingshead, independent administrator of the estate of Selma Elliott, against Elliott’s investment company and Leonard Suess, an investment advisor there and Elliott’s son-in-law. Hollingshead sued the defendants for various causes of action related to financial mismanagement, but defendants moved to compel arbitration under several contracts related to the investment accounts. The trial court denied this motion without an explanation or an evidentiary hearing.

Elliott passed away in 2003 at the age of 101. During her lifetime, she had an account at A.G. Edwards, managed by Suess. Her power of attorney was granted to her daughter, Judy Suess, at the time of her death, so that Judy Suess could manage Elliott’s affairs. Those affairs included 11,000 shares of stock in the pharmaceutical company Merck, which had a value of $985,000 in 2001. Around 1994, defendants used that value to open up a margin account and buy other stock. Unfortunately, the value of her portfolio dropped significantly and the defendants began selling off the Merck stock to cover margin calls. Plaintiff claims this triggered tax liabilities that could easily have been avoided if the sale had happened after Elliott’s death. She sued them for breach of fiduciary duty, breach of contract and negligence.

However, Elliott had signed three contracts with Edwards before her death and Judy Suess as power of attorney had signed another, and all of them had an arbitration agreement. Defendants moved to dismiss the case and compel arbitration on this basis. The trial court heard arguments that did not get into the record on appeal, then denied the motion without comment. Defendants filed an interlocutory appeal. They argued that the contracts are the only evidence in the record and clearly apply to the lawsuit. The plaintiff argued in response that the arbitration agreements are substantively and procedurally unconscionable and the product of undue influence, all of which make them unenforceable. Defendants responded that this is a question for an arbitrator to decide.

The Fifth started with this last issue. It did not agree. Under caselaw, arbitrability is an issue for the courts unless the parties have specifically agreed otherwise, it wrote. The plaintiff is not challenging the validity of the contracts as a whole — indeed, she is relying on them in the breach of contract count.

Next, the court examined the plaintiffs’ arguments to invalidate the arbitration agreements. Under the Federal Arbitration Act, arbitration agreements are enforceable except “on such grounds that exist at law or in equity for the revocation of any contract.” This includes the plaintiff’s claims of unconscionability and undue influence. However, the court found that generally, there was no support in the record for the plaintiff’s arguments. To support the claims of unconscionability, the plaintiff made allegations in her complaint about Elliott’s age and the relationship between her and the Suesses, but did not provide any evidence, the court said. Nor do the allegations in the complaint, even if taken as true, support those defenses, it added. Under caselaw, advanced age is not enough in itself to show that a person is incapable of signing contracts, the court noted, and there is nothing per se procedurally unconscionable about having a relative for a broker.

Similarly, the Fifth found no evidence in the record to support the undue influence claim, aside from unsubstantiated claims about the familial relationship between Elliott and the Suesses. The plaintiff also made claims for substantive unconscionability, saying the $1,575 cost of arbitration is too high and the forum is biased. Again, the Fifth found, these claims are not supported by sufficient evidence in the record. It also dismissed a claim that waiving judicial review is inherently unconscionable, noting that this is directly contradicted by the FAA. For those reasons, the Fifth found that the trial court should not have declined to compel arbitration without an evidentiary hearing. It reversed that decision and remanded it to the trial court for further proceedings — including an evidentiary hearing, the Fifth said, if the plaintiff requests one.

Illinois Securities Law Statute of Limitation Does Not Apply to Breach of Fiduciary Duty Claim

September 28, 2010 | Peter S. Lubin and Patrick Austermuehle

Our Chicago business litigation lawyers were interested in a recent decision from the First District Court of Appeal. Carpenter et al. v. Exelon Enterprises Company, No. 1-09-1222 (Ill. 1st March 18, 2010) posed a certified question to the court: Does the three-year statute of limitations established by the Illinois Securities Law apply to a claim that a majority shareholder breached its fiduciary duty to minority shareholders? In this case, the First decided that it does not, allowing Timothy Carpenter and seven co-plaintiffs to pursue a claim under a more generous five-year statute of limitations under the Illinois Code of Civil Procedure. Their victory in this interlocutory appeal allows them to continue their claim at the trial court level.

The plaintiffs all held minority shares of InfraSource, Inc., a Delaware corporation. The majority shareholder at 97% was Exelon, a Pennsylvania corporation. In 2003, Exelon created a new company for the purpose of divesting its interest in InfraSource, which allowed it to merge InfraSource with the new company. The resulting corporation sold some of its (formerly InfraSource’s) assets and business units to Exelon and others to GFI Energy Ventures, an independent third party. InfraSource would continue as a company, but the former minority shareholders were paid a pro-rated share of the proceeds. In 2007, the plaintiffs sued Exelon, alleging that it abused its power as majority shareholder. They accused Exelon of structuring the transaction in a way that did not adequately compensate them for the market value of their shares.

A second amended complaint said Exelon sold itself the InfraSource assets at an artificially low price and awarded itself preferred stock. It alleged causes of action for breach of fiduciary duty, civil conspiracy, and, against Exelon’s parent company, aiding and abetting those actions. Exelon moved to dismiss the second complaint based on the three-year statute of limitations in the Illinois Securities Law. The trial court denied this, finding that the five-year statute of limitations applied. However, it stayed further proceedings until the instant interlocutory appeal had been decided, answering the question of which statute of limitations is correct.

The First District started its analysis by examining the statue of limitations portion of the Illinois Securities Law. That language says plaintiffs have three years from the date of the relevant sale to bring claims under the Act, or on matters for which the Act grants relief. Plaintiffs specifically stated their claim under Delaware law in order to distance themselves from this statute of limitations, but Exelon argued that the statute still applies under the language allowing its use for matters for which the Act grants relief, and cited two cases in support. The plaintiffs countered that Illinois courts found that because the Act is modeled after federal securities laws, courts should look at how those laws are interpreted for guidance in interpreting the Act. Tirapelli v. Advanced Equities, Inc., 351 Ill. App. 3d 450, 455 (2004).

The First rejected both lines of case law, saying that the decision “actually depends on the resolution of a straightforward and fundamental question of statutory construction.” The relevant portion of the Illinois Securities Law gives any party in interest the right to bring legal action to enforce compliance or stop a violation. Exelon relies on that language to place the plaintiffs’ complaint under the Act, the court wrote, but incorrectly. When the Legislature added this language to the Act, it explicitly said it was trying to give Illinois security holders the right to stop illegal acts. It included the right to sue for rescission, the court said, but only to enforce the remedy the law provides. In fact, Guy v. Duff & Phelps, Inc., 628 F. Supp. 252 (N.D. Ill. 1985) explicitly examined whether the law gives a retrospective right of rescission to securities sellers and concluded that it should not be interpreted that way.

The First agreed, saying another reading would make other sections of the law irrelevant. It then dismissed arguments based on the Seventh Circuit’s finding in Klein v. George G. Kerasotes Corp., 500 F.3d 669 (7th Cir. 2007), saying the arguments that led to its contradictory conclusion did not apply, for all of the reasons discussed above. Because there is no retrospective right of rescission in the Act, the First said, the plaintiffs are not seeking relief on any matter for which the Act grants relief. Nor, as noted earlier, are they seeking relief under the Act itself. For that reason, the three-year statute of limitations provided by the Act does not apply, the court concluded. It answered the certified question posed by the trial court in the negative, essentially upholding that court’s decision, and remanded it for further proceedings.

Investors May Not Go Forward With Flawed Fraud Claim, Seventh Circuit Rules

September 8, 2010 | Peter S. Lubin and Patrick Austermuehle

Our Illinois class action attorneys recently noted a Seventh Circuit decision ending a class-action case in the difficult realm of securities fraud. In Re Guidant Corporation, No. 08-2429 (7th Cir. Oct. 21, 2009), is a securities class action stemming from allegedly misleading statements Guidant Corp. made about its implanted defibrillators. A design flaw with certain lines of defibrillators was discovered in February of 2002, and by April, Guidant had corrected the problem in all of the new devices it made. However, the problem remained in machines already made, and Guidant failed to recall them or warn the public. All in all, Guidant knew in 2002 of at least 25 reports of short-circuiting from the older defibrillators. More reports emerged later.

Two years after this redesign, Guidant entered into merger talks with Johnson & Johnson. As part of these negotiations, it issued a press release expressing confidence about its growth prospects in the implanted defibrillator market. In their claim, plaintiffs said this was false and misleading because Guidant knew it still had liability for the Ventak defibrillators. Subsequent press releases on the merger also omitted this information, as were three merger-related forms Guidant filed with the SEC. However, in March of 2005, a young man died after his Guidant defibrillator short-circuited. Guidant issued several other SEC filings and press releases without disclosing this before it finally sent a letter to doctors in May of 2005 disclosing reported problems, an act prompted by an article about to be published in the New York Times.

The FDA recalled the defibrillators the next month, and Guidant’s stock dropped immediately. It dropped further when Johnson & Johnson announced that it was reconsidering the merger. All in all, the stock fluctuated between $63 a share and $80 a share until Guidant was purchased by Boston Scientific. The instant case is a consolidated class action filed against Guidant and eleven officers and directors as a result of these drops. In addition to alleging that all defendants made false and misleading statements about the company and omitted material information from their statements, it alleged that the individual defendants used insider knowledge and the approval of the Johnson & Johnson merger to sell stock during the period at issue.

Over the course of pre-trial motions, the plaintiffs attempted to amend their complaint at least three times, twice because of new information revealed in related product liability cases. At some point, Guidant moved to dismiss the complaint for failure to state a claim. The claims were brought under the Securities Exchange Act, which requires heightened pleading standards for plaintiffs alleging securities fraud. Specifically, the court found that the plaintiffs’ pleadings were not particular enough and failed to include facts showing that defendants knowingly and with malice misled investors. It dismissed the case with prejudice. It also declined to reconsider based on new evidence from a products liability case, and declined a motion to amend their complaint based on the same evidence. The plaintiffs appealed all three decisions.

In its analysis, the Seventh started by noting that plaintiffs had ample time to make changes to their complaint. In addition to the consolidated complaint from individual claims, it allowed an amendment at the start to change the class period. Plaintiffs notified the court twice of new evidence from other cases, but failed to amend their complaint with that evidence. The Seventh found that this was ample time for plaintiffs to amend their complaint to meet the admittedly strict standards provided for securities cases by the Private Securities Litigation Reform Act.

It then moved to the trial court’s denial of reconsideration of the dismissal. The plaintiffs claimed that it should have been reconsidered because they had new evidence from product liability cases, a standard ground for reconsideration. They acknowledged that those facts were older, but said the trial court stymied them by refusing to lift a stay of discovery. The Seventh found this unpersuasive, saying the trial court could have ruled either way without abusing its discretion. The trial court must have assessed the new evidence, it wrote, and decided that a new amended complaint would still have lacked the necessary specific facts and evidence of scienter. And the plaintiffs could have entered the new evidence into the record earlier. Thus, the district court did not abuse its discretion by denying reconsideration. For the same reasons, it was also not an abuse of discretion to deny the motion to amend, the Seventh said. Thus, all of the district court’s rulings were affirmed.

Fortune Reports: “How Ronald Perelman Met His Match”

September 8, 2010 | Peter S. Lubin and Patrick Austermuehle

Fortune Reports: How Ronald Perelman Met His Match

Fortune magazine provides an insightful account of billionaire Ronald Perelman’s litigation on behalf of his daughter against his ex-wife’s family of New Jersey book store and publishing distributor magnates. The New Jersey state court sanctioned Perelman’s counsel in excess of a million dollars for allegedly pursuing frivilous litigation. The article states:

When the Revlon chairman sued his ex-father-in-law Robert Cohen and his ex-brother-in-law James Cohen in 2008, hardly anyone batted an eyelash. …

Even by modern standards of dysfunctional-family estate battles — think of the Astor clan — this one was a lulu. … But Perelman, it turned out, tangled with the wrong octogenarian. …

Judge Koblitz’s decisions fell like a lash on Perelman’s legal team. In June she found Robert Cohen competent, rejecting Perelman’s demand that a guardian be appointed to represent him during the litigation. Later in the month she ruled on the central claim in Perelman’s case, that Robert Cohen had made a promise to Claudia before Sept. 1, 1978. “It’s just not there,” the judge said. “You can’t make a silk purse out of a sow’s ear.”