Business Disputes

Business Dispute Alleges Mismanagement at Well Known Chicago Car Dealership

April 7, 2014 | Peter S. Lubin and Patrick Austermuehle

Business partnerships can be tricky. When running a business, it is important to remember that there is a difference between the profits that go to pay the owners’ salaries and the money that gets invested back into the company. If one owner takes money from the company’s funds to pay for his personal expenses, he is doing a disservice to the business as well as to his business partner. Illinois law allows for the harmed owner to bring the matter to court and allege violations of Illinois corporate and partnership law and under the right circumstances seek attorneys, interest and punitive damages.

Famed local car dealer, Al Piemonte is known for promoting his dealerships in long-running television advertisements is the subject of claims of mismanagement by one of the alleged owners of his Melrose Park dealership. Piemonte owns three car dealerships in the Chicago area. Todd O’Reilly, who alleges he is a co-owner of Piemonte’s Ford dealership in Melrose Park, has recently filed a lawsuit in Cook County court against his business partner, accusing him and his third wife, Rosanna, of grossly mismanaging the company. According to the lawsuit, the successful car dealership is currently “sitting on more than $6 million in cash”. Piemonte has allegedly been using that money to fund personal expenses for himself and his family, including his adult daughter’s cell phone bill and a Mercedes for his second wife. Piemonte denies all of the claims in the lawsuit.

The complaint alleges that the company’s money has been used to pay for Piemonte’s personal credit card bills and to provide health insurance for relatives of Piemonte who have never worked for the company. Piemonte also allegedly used company money to pay for repairs on a car belonging to a family member who lives out of state and has no affiliation with the business. Additionally, Piemonte allegedly used company money to pay for pest-control treatments in his home and his sister-in-law’s home.

The complaint alleges that O’Reilly “has observed Piemonte use (the business’) money to pay for various personal expenses including clothes, massages, country club memberships, and the costs associated with remodeling his condo”. These claims must be litigated and proven.

O’Reilly’s original partnership with Piemonte allegedly allows him to purchase Piemonte’s majority share in the company for book value upon his death. After a series of recent hospitalizations and medical procedures, the 82-year-old Piemonte allegedly began to rethink the arrangement. At Rosanna’s urging, Piemonte allegedly approached O’Reilly to discuss modifying the terms of the business partnership. When O’Reilly allegedly refused, the complaint alleges that the Piemontes began allegedly excluding him from meetings and barring him from the sales floor and the service department. The lawsuit claims that the Piemontes want Rosanna’s son to take over the business instead of selling Piemonte’s shares to O’Reilly. O’Reilly has stated that he has no intention of parting with his shares in the company and that he has filed the lawsuit in order to protect his financial interests in the company.

The lawsuit alleges that the dealership “is being grossly mismanaged by Piemonte and Rosanna” and that “Piemonte has systematically controlled and used the corporation for the benefit of him and his family members … In doing so, Piemonte has been using (the dealership) as his personal piggy bank.” Piemonte denies these claims.

The lawsuit is seeking to have Piemonte repay all of the money he allegedly took from the company to pay for personal expenses; claims which he has denied. The lawsuit also asks for the court to appoint a custodian or receiver to oversee the business and on an emergency basis but Chancery Judge Neil Cohen denied the request for an appointment immediately leaving that issue perhaps open to further litigation.

New Jersey Supreme Court Requires Mediated Settlement to be in Writing

November 7, 2013 | Peter S. Lubin and Patrick Austermuehle

While courts usually use the law to determine who has the right in a case, supreme courts can sometimes use a case as motivation to create new laws or to modify existing laws. In a recent case, the New Jersey Supreme Court did both of these things. The case, Willingboro Mall v. Franklin Avenue, involved a pre-existing law which the court used to rule in the case. However, the court determined that, in future cases, a slightly different set of standards would be used.

The case involved the sale of a mall which was handled in mediation. However, the settlement was never put in writing before the mediation closed. A few weeks after the settlement, Willingboro rejected the settlement and Franklin filed a motion to enforce the settlement. In his filing, Franklin included certifications from its attorney and the mediator. Rather than filing a motion to dismiss the case based on breach of mediation confidentiality, Willingboro filed an opposing motion in which it included certification from its manager regarding the substance of the parties’ discussion during mediation. During discovery, both Franklin and Willingboro agreed to waive any issues of confidentiality concerning the mediation process.

A four-day hearing followed, during which testimony was given from the mediator as well as Willingboro’s manager and attorney. However, halfway through the hearing, Willingboro changed its mind and moved for an order to expunge “all confidential communications” which had been disclosed and to bar any further disclosures regarding the mediation. The court ruled, however, that Willingboro had already waived its right to confidentiality and the hearing proceeded. At the end of the hearing, the trial court determined that the settlement was binding and ruled to enforce it, “[even] though the [settlement] terms were not reduced to formal writing at the mediation session.”

Willingboro appealed the decision until it reached the New Jersey Supreme Court. The Supreme Court upheld the rulings of the lower courts, enforcing the settlement. In determining a breach of confidentiality, the Court considered the rule governing mediation which states that “an agreement evidenced by a record signed by all parties to the agreement is an exception to the mediation-communication privilege.” Although this rule does not specify that the agreement must be made in writing, it does require some sort of documentation of the agreement, whether written or on tape, to be signed by all parties involved in the mediation. Given that there was no such signed record, the court ruled that this exception did not apply in the current case.

Willingboro’s attempt to dismiss the case based on this rule was therefore rejected.
Although the court agreed that the testimony of the mediator was a breach of confidentiality, it found that Willingboro had waited too long before objecting to the breach. The court further rejected Willingboro’s assertions that its own disclosures were permitted, but that Franklin’s disclosures consisted a breach of confidentiality.

However, in order to avoid such confusion from resulting in similar lawsuits in the future, the New Jersey Supreme Court added that, from now on “if the parties to mediation reach an agreement to resolve their dispute, the terms of that settlement must be reduced to writing and signed by the parties before the mediation comes to a close” in order to be enforced.”

Fox Business Reports: “Lawsuits on the Way Against Nasdaq?” — Chicago Business Lawyers Who Can Help Your Business

September 29, 2013 | Peter S. Lubin and Patrick Austermuehle

Watch the latest video at video.foxbusiness.com

Claim for Fraud in the Sale of a Business Requires Proof of Both Reasonable and Justifiable Reliance on a Misrepresentation – Walid v. Irene Couture

May 17, 2013 | Peter S. Lubin and Patrick Austermuehle

A couple who bought a retail business in New Jersey filed suit for fraud, alleging that the seller materially misrepresented the business’ revenues. After a bench trial, the lower court ruled for the defendants in Walid v. Yolanda for Irene Couture, Inc., holding that the plaintiffs did not demonstrate by clear and convincing evidence that their reliance on the defendants’ misrepresentations was justified. The New Jersey Superior Court, Appellate Division vacated the judgment, finding the defendants liable for fraud, remanding the case, and instructing the trial court to apportion liability among the defendants.

Anwar and Donna Walid, saw an online listing for the sale of a retail business, Irene’s Bridal Shop. They contacted the listing broker, who gave them a “fact sheet” from the owner, Yolanda for Irene Couture, Inc. (YIC). The fact sheet stated that the business had annual sales exceeding $500,000 and profits of almost $300,000. The listed sales price was $700,000. The Walids agreed to a purchase price of $700,000, subject to “proof of sales” and review by an attorney and an accountant. They retained an attorney, but Mr. Walid decided, against the attorney’s advice, to examine the financial reports himself rather than hire an accountant. YIC’s financial information showed annual income from 2003 through early 2006 well in excess of $500,000. The Walids obtained bank financing, and the sale closed in May 2006.

The business failed, and the Walids filed suit against YIC, its owner, and the accountant who prepared the financial reports Mr. Walid had reviewed prior to the sale. They amended the complaint to include Yolanda Couture, Inc. (YC), a New York company owned by YIC’s owner. They alleged that YC’s revenues were deposited into YIC’s bank accounts in order to inflate YIC’s earnings.

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.

Emails Becoming Smoking Gun Evidence in J.C Penney

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

The age of emails has made it more difficult to get away with certain things. One might find it more difficult for example, to insist on one belief or attitude if he has been found to have said the opposite in an email. Such is the case for Ron Johnson, the former head of retail at Apple and now the chief executive of J.C. Penney. He has said that, because he believes in “perfect integrity” he would never ask a person to breach a contract.

However, he engaged in discussion with Martha Stewart to sell some of her items in J.C. Penny stores, despite Ms. Stewart having an exclusive contract with Macy’s. Mr. Johnson has reportedly tried to get around the contract by claiming that there would be independent Martha Stewart stores within J.C. Penney stores.

While independent stores are allowed under the Macy’s contract, J.C. Penney has not moved to lease space to Martha Stewart Living Omnimedia (MSLO). Instead, Mr. Johnson testified in court that J.C. Penney, and not MSLO, would set prices for the merchandise, decide when it would be promoted, employ the people who sold the goods, own the goods, source the goods, book the sales, bear the risk and own the shop, J.C. Penney nonetheless insists that any space displaying the Martha Stewart mark and containing Martha Stewart merchandise qualifies as an MSLO store.

Despite his insistence that he is not inducing Ms. Stewart to breach her contract with Macy’s, Mr. Johnson admitted in an email to Ms. Stewart that her contract with Macy’s was “a major impediment” to their deal to sell her goods in J.C. Penney stores. In another email, he said, in reference to Ms. Stewart, “the ball is in her court now to talk to Macy’s about a break in a tight, exclusive agreement they have with her.” He also reportedly said that the “Macy’s deal is key. We need to find a way to break the renewal right in spring 2013.”

One person was apparently key to bringing about the J.C. Penny deal. That person was William Ackman, the activist investor whose hedge fund is J.C. Penney’s largest shareholder. After the deal was announced, Mr. Johnson wrote to Mr. Ackman, “We put Terry in a corner. Normally when that happens and you get someone on the defensive, they make bad decisions. This is good.”

The emails emerged in a New York courtroom where Macy’s has accused J.C. Penney of inducing Martha Stewart to breach her contract with Macy’s. Macy’s is also attempting to block its competitor from opening Martha Stewart stores in J.C. Penney locations.
Legal experts have been surprised that this case has made it to trial at all, since the contract itself seems fairly straightforward. Martha Stewart herself told the judge, Justice Jeffrey K. Oing of New York State Supreme Court, “I keep looking at this entire episode of this lawsuit wondering why it isn’t – it’s a contract dispute. an understanding of what is written on the page, and it just boggles my mind that we’re sitting in front of you.”

The judge agreed and ordered the parties to pursue mediation to resolve the matter.
Macy’s continues to promote Martha Stewart products with the tag line “Only at Macy’s.”

Allegations of Fraud in the Sale of a Business Cause Court to Deny Summary Judgment for Seller in Suit to Enforce Promissory Note – Bu v. Sunset Park Deli of NY

March 8, 2013 | Peter S. Lubin and Patrick Austermuehle

After the seller of a business sued the buyer to enforce a promissory note, signed as part of the sale, the buyer asserted a defense of fraudulent inducement in Bu v. Sunset Deli Park of NY Corp, et al. The buyer alleged that the seller misrepresented the weekly income of the business prior to the sale. The New York Supreme Court in Brooklyn denied the plaintiff’s motion for summary judgment, finding that the defendants had raised sufficient issues of fact as to their fraud defense.

The plaintiff, Su Nam Bu, sold her deli business to defendant In Suk Cho for $220,000 in September 2010. The stock purchase agreement executed by the parties stated that Cho would pay Bu $1,000 upon signing the agreement, and $49,000 at closing. Cho signed a promissory note on September 27, 2010 for the remaining $170,000, in which she would pay thirty-six monthly installments beginning in March 2011, plus a lump sum payment of $50,000 by September 15, 2012. A security agreement, or “chattel mortgage,” signed by the parties pledged the deli’s property, inventory, accounts receivable, equipment, and fixtures as collateral for the promissory note.

Cho made six payments on the note, but the seventh and eighth payments allegdly bounced. Bu filed suit to enforce the note. Cho answered with a fraudulent inducement defense, claiming that Bu represented the deli’s weekly income as $15,000 to $17,000 prior to the sale, but Cho found it to be an average of $11,000 to $12,000 upon taking over its operations.

Appellate Court Requires Mattel to Pay 137 Million Dollars in Attorneys Fees to MGA in Bratz Doll Litigation

January 25, 2013 | Peter S. Lubin and Patrick Austermuehle

It’s amazing how one person’s idea can turn into a patent war between two major companies. In the case of Carter Bryant, an idea for dolls which began with some sketches in 1998 while he was living with his parents in Missouri, later turned into a major battle. Bryant went to work for Mattel Inc., based in El Segundo, California, which claims they began work on designing the dolls with Bryant while he was working for them.

In 2000, MGA Entertainment, based in Van Nuys, California, made a deal with Bryant and, in 2001, the Bratz dolls were released. They were an immediate hit among “tweens” and threatened to de-throne the long-ruling queen of dolls, Mattel’s infamous Barbie. In 2004, Mattel sued Bryant for allegedly working with a competitor while also working with Mattel, and Mattel also sued MGA for alleged copyright infringement. The case against Bryant settled rather quickly but the battle with MGA rages on.

The case went back and forth in the courts. Initially, a jury agreed that Bryant had developed the concept while working with Mattel and thereby awarded the company $100 million.

The decision was overruled on appeal however when the 9th Circuit court overturned that decision and ordered a new trial.

MGA counter-sued, alleging Mattel had engaged in corporate espionage when some of their employees gained access to some of MGA’s designs at a toy fair. Mattel then allegedly used the information gained to try to keep Bratz dolls off the shelves and thereby participated in some illegal practices of their own.

In April 2011, a jury sided with MGA, awarding the entertainment company $3.4 for each of 26 instances they found of Mattel using misappropriated trade secrets, a total of $88.4 million. With fees and damages together, Mattel was ordered to pay $172 million in punitive damages in addition to the judge’s order of $137 million in legal fees and costs to defend against Mattel. This brought the entire award to over $309 million.

According to the U.S. District judge, the copyright case that Mattel was alleging was “stunning in scope and unreasonable in relief it requested.” He also said that the claims endangered free expression and competition.

A federal appeals court however has overturned the $172 million punitive damages ruling. The court decided that, as it is considering Mattel’s copyright infringement lawsuit against MGA, Mattel’s trade-secret thefts are irrelevant to the case. However, the court allowed the award of $137 million to cover legal fees and costs to remain. The case will now return to the courts.

MGA has said that it intends to file a new lawsuit to pursue their trade-theft claims against Mattel.

Court Rules that Parent Company, After Acquiring a Subsidiary, May Not Sue to Enforce the Subsidiary’s Employment Agreement – CDW, LLC, et al v. NETech Corporation

November 29, 2012 | Peter S. Lubin and Patrick Austermuehle

An Indiana federal district court ruled, in CDW, LLC, et al v. NETech Corporation, that neither a parent company nor one of its subsidiaries may sue to enforce the employment contracts of another of its subsidiaries, when one subsidiary is clearly the party to the agreement. The dispute involved covenants of noncompetition in a company’s employment contract and a claim for tortious interference with a business contract.

Berbee Information Networks Corporation employed several individuals as sales executives. These three individuals signed employment contracts that included a paragraph stating that they agreed, upon termination of their employment with Berbee, not to accept employment in direct competition with Berbee for up to twelve months. “Competition” included solicitation of Berbee employees or clients and use of Berbee’s proprietary business information. In September 2006, Berbee became a subsidiary of CDW, LLC when CDW purchased it and merged it with another subsidiary. Berbee, all parties to the eventual lawsuit agreed, was the surviving corporation of the merger.

CDW operated several subsidiaries that, like Berbee, engaged in the business of technology sales. Each subsidiary served a different market, such as commercial businesses, nonprofits, or government agencies. CDW transferred the three Berbee employees at the center of the dispute to another subsidiary, CDW Direct, between 2008 and 2009. These employees all left CDW Direct at different times to work for NETech Corporation. They each received letters after commencing work at NETech from an attorney for CDW alleging that they were in violation of their noncompetition agreement, demanding that they cease work for NETech and return all confidential materials obtained from Berbee or CDW.