Business Disputes

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

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

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.

Illinois Appellate Court Dismisses Lawsuit Between Truck Manufacturer and Franchisee

December 22, 2011 | Peter S. Lubin, Patrick Austermuehle and James V. DiTommaso

Lubin Austermuehle represents clients from many industries who operate all kinds of businesses, including both franchisors and franchisees. Our Aurora business attorneys came across an appellate decision from the Fourth District here in Illinois that involves a dispute that arose out of a franchise agreement between a heavy-duty truck manufacturer and a truck dealer.

Crossroads Ford Truck Sales, Inc. v. Sterling Truck Corp. is a disagreement that came about after the two parties entered into a sales and service agreement where Plaintiff Crossroads had the right to purchase Sterling Trucks and vehicle parts from Defendants and Defendants “reserved the right to discontinue at any time the manufacture or sale” of their parts or change the design or specs of any products without prior notice to Plaintiff. Several years after entering the agreement, Defendants allegedly announced that they were discontinuing the production of Sterling trucks and that Detroit Diesel Corporation (the truck’s engine manufacturer) would cease accepting orders as well. Defendant sent written notice of these decisions to Plaintiffs. Defendants decided to discontinue manufacture of the Sterling vehicles allegedly because they were duplicative of other vehicles manufactured by Sterling’s parent company.

In response to this notice, Plaintiff filed suit alleging violations of the Motor Vehicle Franchise Act, fraud, and tortious interference with contract. Defendants filed a motion to dismiss on all counts, which was granted in part by the trial court because Defendants’ discontinuance and re-branding of the Sterling brand constituted good cause for terminating the contract. Plaintiff then filed an interlocutory appeal for the trial court’s partial dismissal.

The Appellate Court affirmed the trial court’s dismissal of the violations of sections 4(d)(1) of the Franchise Act because Plaintiffs failed to allege specific facts supporting each element of violation under the Act and instead merely made conclusory allegations for each violation. The Court also found that the allegations under section 9 of the Act were improperly plead, as Plaintiff’s allegations contained only conclusions without the specific facts required by the Act. The Court then upheld the lower court’s ruling as to the allegations under section 9.5 of the Act because the sales and service agreement remained in effect and had not been terminated. Next the Court found the dismissal of the fraud claims to be proper because Plaintiff failed to allege a misrepresentation of a present fact and dismissed the claims under section 4(b) of the act because Defendant’s conduct was neither arbitrary nor in bad faith. Finally, the Court did not address the alleged 4(d)(6) violations due to a lack of subject-matter jurisdiction, as such violations are within the purview of the Review Board under section 12(d) of the Act.

Appellate Court Rules that Adding an Arbitration Clause to an Insurance Agreement Does Not Constitute a Change in Coverage under Illinois Law

November 10, 2011 | Peter S. Lubin, Patrick Austermuehle and James V. DiTommaso

Workers’ compensation insurance is a necessary part of doing business for many companies, so the attorneys at Lubin Austermuehle are always on the lookout for emerging legal issues in that area. Our Naperville business attorneys recently discovered a decision rendered by the Appellate Court of Illinois that is significant for current and potential clients who have workers’ compensation insurance agreements that contain an arbitration clause.

All-American Roofing, Inc. v. Zurich American Insurance Company pits Plaintiff All-American Roofing against its Defendant insurer, Zurich American in a lawsuit that arose from alleged unpaid deductibles and retrospective insurance premiums. The five-year insurance agreement was based upon retrospectively rated premiums that required Plaintiff to reimburse Defendant after the end of a policy year for claims that arose during that year. After the fourth year, the policy exchanged the retrospectively rated premiums for a larger deductible. The dispute began when Defendant summoned Plaintiff to arbitration regarding the aforementioned unpaid sums pursuant to a mandatory arbitration clause contained within the parties’ agreement. In response to the arbitration summons, All-American Roofing filed for declaratory judgment along with claims for breach of contract, fraud, and related causes of action. Plaintiff requested that the trial court declare that the mandatory arbitration clause was unenforceable and sought damages for their other claims. The trial court stayed the arbitration, dismissed most of Plaintiffs claims through summary judgment and ordered the parties to arbitrate the remaining issues. Plaintiff then appealed the trial court’s rulings regarding the arbitration clause, contract, and fraud claims.

On appeal, Plaintiff argued that the arbitration clause was added to their policy after the first year of coverage and that the clause constituted a material alteration to the policy’s coverage. Furthermore, Plaintiff argued that the Illinois Insurance Code required Defendant to give notice that it was not renewing the original coverage. Because Defendant failed to give such notice, the arbitration clause did not legally take effect. The Appellate Court disagreed, stating that the addition of an arbitration clause did not constitute a change in coverage, and cited the plain language of the statute for their reasoning. The Court went on to hold that the agreements and subsequent addenda to it for the first two years were valid because the parties lawfully entered into the agreements and there was sufficient consideration on both sides. The Court also upheld the trial courts granting of Defendant’s motion for summary judgment on Plaintiff’s fraud claim because there was not sufficient evidence in the record of fraud nor had Plaintiffs identified any material issue regarding Defendant’s alleged violation of the Illinois Consumer Fraud and Deceptive Business Practices Act. The Court held that the arbitration clause was not operative for the final two year of the agreement because Plaintiffs never signed the amended policy documents for those years. The Appellate Court reversed the trial court on this issue because they disagreed with the trial court’s ruling that Plaintiff’s payment and acceptance of coverage signified acceptance of the new terms.

All-American Roofing, Inc. v. Zurich American Insurance Company provides a valuable lesson to business owners who utilize arbitration clauses in their contracts. Namely, this case tells us to read the fine print in any contract before signing it, as you may be getting more (or less, depending on your point of view) than you originally bargained for.

llinois Appellate Court Rules that a Relocation Provision in a Commercial Lease Must Abide by State Regulations

October 20, 2011 | Peter S. Lubin, Patrick Austermuehle and James V. DiTommaso

Earlier this year, the Appellate Court of Illinois handed down an opinion that has implications for businesses with leased premises. Our Aurora business attorneys found Bright Horizons Children’s Centers LLC v. Riverway Midwest LLC, which is a dispute regarding a commercial lease that was initially filed in Cook County.

Bright Horizons is a company that operates day care facilities across the state of Illinois. The company entered into a ten year commercial lease agreement with Riverway for a property in Rosemont, Illinois. The lease agreement contained restrictive language allowed for the building to only be used for a child-care center. The agreement also contained a relocation provision which gave Riverway the right to relocate Bright Horizons, upon 180 day written notice, to a different property of equal quantity and quality to the original premises. The dispute between these two parties arose when Riverway sought to invoke the relocation clause less than one year into the lease.

Riverway attempted to exercise the relocation provision on three occasions. The first attempt was unsuccessful because the alternative premises allegedly presented to Bright Horizons did not meet the requirements of the lease agreement. Bright Horizons accepted the second space offered by Riverway, but Riverway withdrew their notice before renovating the new facilities to meet the requirements of the lease. Riverway then proposed a third relocation premises, and allegedly informed Bright Horizons that if they were unable to agree on an alternative space, Riverway would terminate the lease in 180 days from the date of the notice. This third property allegedly ran afoul of state licensing standards for child care facilities and the Illinois Administrative Code. Bright Horizons informed Riverway that the third property did not meet Illinois’ licensing standards and could not be legally used as a child care facility. In response, Riverway informed Bright Horizons that they were in default of the lease and that Bright Horizons could cure their default by relocating to the third alternative premises.

Bright Horizons then filed for declaratory judgment requesting that the trial court find: 1) that they were not in breach of the lease, 2) that Riverway could not terminate the lease, and 3) that Riverway had failed to properly exercise the relocation clause of the lease agreement. Bright Horizons then filed for summary judgment on these issues, which was granted by the trial court. Riverway then appealed the trial court’s ruling. On appeal the Appellate Court agreed with the trial court’s grant of summary judgment in favor of Bright Horizons. In so ruling, the Court held that the lease allowed for one permitted use of the premises and required that Bright Horizons comply with all laws and regulations, including the state child-care licensing standards. The Court held that Bright Horizons’ relocation to the proffered space would violate state regulations and cause Bright Horizons to be in breach of the lease due to their inability to operate a child-care. As such, the Court affirmed the ruling of the trial court granting summary judgment in favor of Bright Horizons.

Appellate Court Overturns Grant of Summary Judgment in Successor Liability Case

October 9, 2011 | Peter S. Lubin, Patrick Austermuehle and James V. DiTommaso

For many business owners, they operate their companies with the hopes that they will continue to be successful ventures long after they are gone. However, both low level and senior personnel eventually move on, and businesses may have obligations to their surviving family members. Lubin Austermuehle is familiar with such agreements, and often times companies may not wish to honor those obligations after employees are no longer working for the company. Pielet v. Pielet is one case discovered by our Crystal Lake business litigation lawyers that addresses that very issue.

In Pielet v. Pielet, Arthur Pielet allegedly entered into a consulting agreement with Defendants that provided him lifelong monthly payments in exchange for his consulting services for Defendants scrap metal business, and should he pass on, those payments were to continue and be paid to his wife until her death. Arthur Pielet eventually died, and Defendants then allegedly ceased making payments to his widow, who filed suit alleging a breach of contract and successor liability among other causes of action. Plaintiff successfully filed a motion for summary judgment, and Defendants appealed the trial court’s decision.

On appeal, Plaintiff argued that Defendant PBS One, a successor in interest to Pielet Corp. (the company who was originally obligated under the consulting agreement), was liable under the agreement because they had entered into a purchase and assignment agreement with Pielet Corp. In response, PBS One argued that a novation had occurred whereby Pielet LP had substituted for Pielet Corp. in the consulting agreement, which absolved PBS One of liability. PBS One supported their claims with deposition testimony that, in the absence of providing a defense, at least raised an issue of material fact as to the existence of the novation. Additionally, PBS One argued that because the company had dissolved four years prior to the cessation of payments (and the accrual of Plaintiff’s claims), the applicable Illinois Survival Statute prevented Plaintiff’s claim.

The Appellate Court began with its analysis of the Survival Statute, and found that the statute applies to “rights”, “liabilities”, and “causes of action.” Because the case at bar concerned Plaintiff’s “right” to payment and Defendants’ “liability” to pay, and Plaintiff raised her claim to payment within the five-year period allowed under the statute, her claim was allowed under the law. The Court went on to discuss Defendant’s second argument regarding the existence of a novation that would place liability elsewhere. The Court did not make a finding of a novation, but the facts indicated that a novation could be inferred at two different points in time. Thus, the Court concluded that a triable fact question existed as to whether a novation occurred, and if there was a novation, at what point in time did it occur. In so holding, the Court reversed the trial court’s grant of summary judgment on all of the appealed causes of action, and remanded the case.

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, Patrick Austermuehle and James V. DiTommaso

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.

Directors Are Not Liable for the Torts of Employees Unless Personally Involved, but Should Still Keep a Close Watch Over What Corporate Officers are Doing

July 28, 2011 | Peter S. Lubin, Patrick Austermuehle and James V. DiTommaso

There are hundreds of new cases filed in Illinois courts every day, and many of those cases involve business disputes. At Lubin Austermuehle, we pride ourselves on staying on top of new court filings so that we know of changes in the law as they happen. Our Waukegan business attorneys just found a decision rendered by the Appellate Court of Illinois that provides some useful information for our business clients.

Zahl v. Krupa is a dispute between investors in a fund allegedly run by a company and the directors of that company. Plaintiffs alleged that they were approached by Defendant Krupa, President of Jones & Brown Company, Inc., who solicited money to be invested in a fund only available to the officers and directors (and their family members) of the company. There were two agreements allegedly written on company letterhead that set out the terms of the investments, whereupon Plaintiffs would invest between $100,000 and $160,000 each and receive an 11.1% return guaranteed by Jones & Brown. Plaintiffs each allegedly signed an agreement with Defendant Krupa and gave him the funds requested. There was no other written documentation regarding the investments or the agreements. Plaintiffs allegedly never got the return on their investment nor did they get their money back.

Plaintiffs then filed suit against Krupa, the other officers of Jones & Brown, and the directors of the business. Plaintiffs sued for breach of contract, fraud, and negligent hiring, supervision, and retention. The breach of contract and fraud causes of action were reliant upon the alleged assertion that Defendant Krupa, in soliciting Plaintiffs, was acting as an agent or apparent agent of Jones & Brown. The remaining causes of action sought to hold Defendants liable for Defendant Krupa’s deception because they knew or should have known that he was untrustworthy.

Through discovery, the depositions of several parties allegedly showed that Defendant Krupa never had actual authority to enter into the investment agreements because the directors neither signed nor authorize the agreements. Testimony also revealed that the investment agreements were allegedly outside the scope of Jones & Brown’s normal business as a construction company, which showed that Krupa did not have apparent authority. As a result of these facts, Defendants successfully moved for summary judgment on the breach of contract claim based upon lack of actual and apparent authority. In moving for summary judgment on the fraud claim, Defendants cited Illinois case law holding that directors cannot be held personally liable for fraud unless they personally participated in perpetrating the fraud. As the directors did not sign the agreements or participate in their creation, the court granted summary judgment. Finally, Defendants successfully moved for summary judgment on the negligence claims because they did not know that Krupa had the potential for fraud.

Plaintiffs then appealed the trial court’s ruling against them, and the Appellate Court conducted a de novo review of Defendants’ motion for summary judgment. The Court agreed with the trial court’s findings and held that Defendants were not negligent with respect to Krupa and did not know about his dealings with Plaintiffs. The Court went on to say that there was no reason for Defendants to suspect Krupa of wrongdoing.

In reviewing Zahl v. Krupa, the case serves as a reminder for business investors to carefully examine any investment opportunities and accompanying paperwork to ensure the legitimacy of the investment. Additionally, business owners and directors should keep an eye on their officers and employees to ensure that they do not find themselves defending a lawsuit for their employees’ allegedly objectionable actions.

Federal District Court Exercises Supplemental Jurisdiction Over Counterclaims Regarding Ownership of Employee-Created Farm Equipment Patents

July 27, 2011 | Peter S. Lubin, Patrick Austermuehle and James V. DiTommaso

Most companies encourage their employees to innovate and come up with ways to improve the processes, products, and service of the business. Such improvements may be patentable inventions, and it is important for business owners to establish who owns that intellectual property and protect any IP that accrues to the company. In the absence of an explicit employment agreement, the ownership of such inventions can come into dispute, and our Joliet business attorneys discovered one such case in the Central District of Illinois federal court.

Shoup v. Shoup Manufacturing is a dispute between a company and its former president over the ownership of several patents. Ken Shoup, Plaintiff, was the president of Defendant Shoup Manufacturing for over twenty years, and during his time as president he conceived of several inventions that were patented on behalf of Defendant. Defendant used those patents and sold products based upon them. However, Plaintiff did not have an express or written employment contract that required assignment of the inventions to Defendant. Eventually, Plaintiff terminated his relationship with Defendant, began a similar business to compete with Defendant, and filed suit alleging patent infringement for Defendant’s continued use of his inventions. Plaintiff sought an injunction to prevent that continued use and monetary damages under 35 USC §271.

Defendant responded to Plaintiffs lawsuit by denying that Plaintiff owned the patents in question, and alleged that Plaintiff was obligated to assign the patents to Defendant, and that it had a valid license to the inventions. Defendant also filed a counterclaim alleging that Plaintiff developed the patents using company resources while he was an employee and officer of Defendant, and that Defendant was the rightful owner of the patents. Defendant sought a compulsory written assignment of the patents and an accounting of Plaintiff’s unauthorized exploitation of them. Plaintiff then filed a motion for Judgment on the Pleadings to dismiss Defendant’s counterclaims.

Plaintiff argued that the Court had no jurisdiction over the claims because ownership of the patent was determined by Illinois State law. The Court agreed that it did not have original jurisdiction over the dispute, but because the counterclaims for ownership of the patents arose out of a common nucleus of operative facts regarding Plaintiff’s original patent infringement suit (which was a federal claim), supplemental jurisdiction was proper. The Court therefore denied Plaintiffs motion, finding Defendant had satisfied the requirements for supplemental jurisdiction under 28 USC §1367(a), and allowed the counterclaim to proceed.

Fraud Magazine Reports: “In the Wake of Significant Legislative Changes, the Civil False Claims Act Hauls in $3 Billion in Fiscal Year 2010”

July 23, 2011 | Peter S. Lubin, Patrick Austermuehle and James V. DiTommaso

Fraud Magazine reports on the new changes in federal false claims act. The article states:

A 123-year-old law now has new teeth to better fight today’s tricky fraudsters. Enacted in 1863, the U.S. federal False Claims Act, 31 U.S.C. §§ 3729-3733 (FCA), was designed to fight unscrupulous contractors during the Civil War. The FCA created liability for persons that knowingly submit, or cause another person or entity to submit, false claims for payment of government funds. Today, violators are liable for three times the amount of government damages as well as civil penalties of $5,500 to $11,000 per false claim. …

The U.S. Congress reinvigorated the FCA in 1986 when it changed the law in a number of ways. Among other things, the amendments bolstered the act’s qui tam provisions, provided for treble damages — allowing courts to triple the amount of the actual damages to be awarded — and added an anti-retaliation provision that imposes liability on any employer who takes retaliatory actions against an employee because of the employee’s lawful acts in furtherance of a qui tam action. This ushered in a new era for the FCA because the amendments triggered an increase in the number of qui tam suits: now relators initiate the bulk of cases under the FCA. Also, the amendments shifted the FCA’s focus from fraud involving defense contractors to a wide array of industries — most notably health care. This has led to the federal government’s significant and increasing recoveries under the FCA.

In May 2009, Congress further revamped the FCA by passing the Fraud Enforcement and Recovery Act of 2009 (FERA), which included amendments to the FCA. The amendments made key procedural changes to the FCA and expanded the scope of liability (particularly as it relates to health-care providers). The FERA also set aside $165 million to aid fraud detection and enforcement efforts.
These amendments, coupled with a handful of other legislative changes and administrative actions, are already having a material effect on how the government and private sector are combating fraud.
BY THE NUMBERS: 2010 WAS A GOOD YEAR FOR FRAUD
According to a Nov. 22, 2010, U.S. Department of Justice (DOJ) press release, the DOJ “secured $3 billion in civil settlements and judgments in cases involving fraud against the government in the fiscal year ending Sept. 30, 2010.” Of that sum, $2.3 billion is attributable to cases initiated by whistle-blowers under the FCA relator provisions. This brings the total amount of civil recoveries since the previous major overhaul of the FCA in 1986 to more than $27 billion. This total does not take into account settlements after Sept. 30, 2010, including but not limited to $600 million in civil penalties that were part of a larger $750 settlement with GlaxoSmithKline involving the manufacture and sale of adulterated drug products and three settlements announced in December 2010: 1) $102 million in civil penalties that were part of a $203.5 million global settlement with Elan Corporation resolving off-label marketing allegations, 2) a $421 million settlement stemming from Average Wholesale Price violations by Abbott Laboratories Inc. and Roxanne Laboratories Inc. and 3) a $280 million settlement with Dey, Inc. to resolve marketing spread allegations.

The article goes on to describe what lead the government to beef up the qui tam and whistle blower laws. You can read the full article by clicking here.

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, Patrick Austermuehle and James V. DiTommaso

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.