Closely Held Businesses

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.

Court Orders Managing Disputed Family Business Not Appealable as Injunctions, First District Rules

December 12, 2010 | Peter S. Lubin and Patrick Austermuehle

Our Oak Brook, Ill. shareholder dispute attorneys and Chicago business law lawyers took note of a recent appeals court decision in a heavily disputed case involving a family business. In Santella v. Kolton and Food Groupie Inc., Nos. 1-08-1329, 08-1357 & 08-1847 consolidated (Ill. 1st July 31, 2009), Rick Santella accused his sister, Mary Kolton, and her husband William of undermining the family’s business to enrich themselves once they became majority shareholders. The business is Food Groupie, Inc., which markets and sells use of anthropomorphic food characters and educational products that promote healthy eating. According to Santella, the intellectual property is the collective work of the family.

When Food Groupie was originally formed in 1987, Santella held a 35% interest; Mary and William Kolton held 25% each; and a non-party, their brother Ron Santella, held 15%. All four were named directors. In 1988, the plaintiff bought Ron Santella’s interest, giving him a 50% interest in the corporation to match the Koltons’ combined 50%. Shortly afterward, plaintiff transferred 1% of his interest to Mary Kolton, with the understanding that William Kolton would transfer his 25% to Mary, giving her a majority 51% interest with the idea that Food Groupie would be more successful if it was known as a woman-owned company. In exchange for this transfer, Santella claims, the parties executed an agreement that company decisions would be made only by a unanimous vote.

The business ran without incident until 2002. During that time, Santella claims Food Groupie made a profit each year between 1992 and 2001 and the three shareholders always unanimously approved compensation. But in 2002, Santella alleges that the Koltons called a shareholders’ meeting without him or Ron Santella, and gave themselves salary increases, bonuses and 401(k) contributions. This cost Food Groupie a total of 45% of gross company sales, despite a profit that year of only $15,000. The alleged ruse was repeated in 2003 and 2004. As a result, Santella claims, he was paid only one dividend of $1,470 during that time, rather than the $28,808 he believes he was entitled to as a 49% shareholder.

When he confronted his sister about this in 2003, he says she froze him out of the business decisions, changed the locks on the office and was interested only in buying him out. He further claims she usurped Food Groupie’s intellectual property by trademarking characters in her own name, and inappropriately licensed the company’s intellectual property without his consent. Finally, he claims the Koltons held a secret shareholder meeting in 2004 at which they voted to replace him with William’s brother, Anthony Kolton. He sued the Koltons, individually and as a shareholder derivative claim, for breach of the shareholder agreement, breach of fiduciary duty, usurpation of corporate opportunities and violations of the Illinois Business Corporations Act.

In 2005, that lawsuit resulted in the court’s appointment of John Ashendon as custodian of Food Groupie. In 2008, Santella filed an emergency motion to stop what he claimed was his sister’s plan to liquidate the company and move its misappropriated intellectual property to a similar business called Healthypalooza. He also alleged that the couple had continued to pay themselves inappropriately high salaries and commissions, and use the company’s profits for their personal legal defense. He sought to remove the Koltons as officers and enjoin them from using the company’s assets or competing with it, among other things. The court eventually found for Santella on some issues, removing the Koltons and ordering them to return the $144,019 in commissions they had been paid in 2005, 2005 and 2007. It said the court would appoint new officers and directors. It did not say any of these remedies were interlocutory or time limited.

The Koltons filed an interlocutory appeal in 2008, but failed to move to stay the repayment order or actually repay the $144,019. The trial court found them in contempt and ordered them to pay a fine for every day they were late. They eventually paid back the $144,019, but not the roughly $20,000 or so in fines.

On appeal, the Koltons argued that the relief granted to Santella was not supported by sufficient evidence or proof. Specifically, they argued that the Business Corporations Act requires a plaintiff like Santella to prove his claims of improper conduct before the court may order return of the allegedly improper bonuses or their removal as corporate officers. For that reason, they said, the court orders must be reversed. Santella made several arguments against the appeal, most notably that the appeals court lacked subject matter jurisdiction over the non-financial claims. The defendants filed their appeal pursuant to Rule 307(a)(1), which applies to appeals concerning injunctions, and Santella argued that the trial court’s orders removing and replacing directors and officers were not injunctions.

The First agreed with this, saying it lacked subject matter jurisdiction over those orders because they were not direct orders to the Koltons “to do a particular thing, or to refrain from doing a particular thing.” In fact, it took the analysis a step further and examined whether it had jurisdiction over the repayment order. That order was an injunction, the First wrote, but it also must be interlocutory to fall under Rule 307(a)(1). If it was a permanent order, it was outside the scope of the rule. The appeals court found that it was a permanent order, because it did not preserve the status quo. In fact, the court noted, the trial judge had specifically said so when she made her contempt ruling. The trial court had also made conclusions about the rights of the parties and had not time-limited the order. For those reasons, the First found that it also lacked subject matter jurisdiction over the repayment order, and dismissed the appeal entirely. The opinion noted that appellants may still seek a finding from the trial court under Rule 304(a).

Enforcing Noncompetition Agreements is Tricky Business

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

Any business owner should keep abreast of laws and court rulings that can affect the way they conduct their operation and interact with employees. The law constantly evolves, and that is why our lawyers are vigilant in tracking changes that affect our clients. Citadel Investment Group v Teza Technologies is one such ruling that provides clarity regarding noncompetition agreements between employees and employers.

In this case, Defendants Malyshev and Kohlmeier worked for Plaintiff Citadel Investment Group until February of 2009, when they resigned. When Malyshev and Kohlmeier were initially hired by Citadel, they each signed a nondisclosure agreement and an employment agreement containing a noncompetition clause. The noncompetition clauses contained language giving Citadel the discretion to set the length of the restrictive period at zero, three, six, or nine months. Citadel elected for a nine month restricted period for both Malyshev and Kohlmeier upon their resignation.

Malyshev and Kohlmeier formed Defendant Teza Technologies two months after leaving Plaintiff Citadel in April of 2009. When Citadel discovered the existence of Teza and its status as an entity performing similar high frequency trading in July of 2009, the present legal proceedings began. Plaintiffs initially sought a preliminary injunction against Defendants based upon the noncompetition agreements signed by Malyshev and Kohlmeier. This injunction was granted in October 2009 for relief through November of 2009. The trial court made its decision based upon the agreed upon nine month period contained in the noncompete and calculated the time from February of 2009 when Malyshev and Kohlmeier resigned.

Citadel appealed the decision, and asked the appellate court to grant the injunction for nine months from October until July of 2010. Citadel argued that they had not received the benefit of the restricted period prior to the preliminary injunction being entered, and the Court should adjust the start date of the restricted period accordingly. The Court did not find the Plaintiff’s argument persuasive and denied the appeal because the plain language of the agreements signed by Malyshev and Kohlmeier contained no provision allowing for an extension of time or modification of the commencement date. Thus, the restrictive covenant properly ended in November as was required by the agreement signed by both parties.

Citadel Investment Group v. Teza Technologies serves as a warning to business owners who utilize noncompetition agreements and a potential boon to employees who sign them. Whether you are a business already in a dispute over a noncompetition agreement or a former employee seeking employment with a new company in the same field, you should contact a Chicago business litigation attorney to be apprised of your rights.

Fifth District Court of Appeal Declines to Compel Arbitration in Shareholder Derivative Claim

October 26, 2010 | Peter S. Lubin and Patrick Austermuehle

Our Aurora, Ill. shareholder derivative claim lawyers were interested to see an appellate case that examined whether a limited liability corporation can be a party to a case brought under its own operating agreement. In Trover v. 419 OCR Inc. et al., No. 5-09-0145 (Ill. 5th, January 12, 2010), Joseph Trover sued 419 OCR Inc., O’Fallon Development Group LLC, Mark Halloran and Steve Macaluso, alleging a variety of shareholder complaints and fraud claims over a real estate deal that had gone sour. Trover, individually and as the trustee of a trust in his name, was part of a limited liability company called the Far Oaks Development Group. Other members of Far Oaks were defendants Halloran and Macaluso as well as non-defendant Garrett Reuter. Far Oaks owned land around a golf course that the members wished to develop. Reuter, Halloran and Trover also were part of a business called Far Oaks Golf Club, LLC.

In 2005, members of FODG agreed to sell and assign the company’s interest in the land to 419 OCR Inc., which was owned by Halloran and Macaluso, in order to gain a tax advantage. Trover claims he relied on the defendants and the advice of an attorney when he agreed to this. Halloran and Macaluso allegedly made an oral promise to pay the Golf Club the price of land to be sold, as well as a sum to be determined. Trover claims this was supposed to be put into writing. However, it was not included in the contract that transferred the land to 419 OCR, and it was never put into writing in other ways.

Halloran and Macaluso then proceeded to develop the land, sell lots and make a profit. Part of the interest in the land was transferred to another business called the O’Fallon Development Group. Trover’s lawsuit claims that FODG never received any money based on that land sale. Count I alleged breach of the oral contract against 419 OCR; Count II alleged breach of contract against the O’Fallon Group, which assumed obligations under the contract because of unity of ownership. Count III was a shareholder derivative action brought by Trover on behalf of FODG, alleging breach of fiduciary duty and corporate waste by Macaluso and Halloran. Count IV was a similar shareholder derivative action, brought by the Golf Club against Halloran only. Count V alleged fraud by Halloran and Macaluso individually, accusing them of making false representations when they said the sale price of the land would be paid back to the Golf Club.

After the lawsuit was filed, the defendants filed a motion to compel arbitration as required by the broadly worded operating agreements behind FODG and the Golf Club. The trial court denied this motion, and the defendants filed the interlocutory appeal that went before the Fifth District.

The appeals court upheld the trial court’s decision on four of the five counts. The transfer of the land from FODG to 419 OCR was within the scope of the operating agreements, the court found, but 419 OCR and O’Fallon were not parties to that agreement. Illinois law does not allow courts to compel arbitration among entities that were not parties to the arbitration agreement, the court wrote. Thus the trial court was correct to deny arbitration as to Counts I and II.

Counts III and IV are shareholder derivative actions, the court wrote, so compelling arbitration would require a finding that an LLC is a party to the agreement that creates itself. This is an issue of first impression in Illinois, the court noted. Relying on language in the Illinois Limited Liability Company Act, the court found that LLCs are not parties to their own agreements, because “A limited liability company is a legal entity distinct from its members.” The operating agreement specifies that it is between the signers, and the signers did not indicate that they were signing on behalf of either LLC in the case. And the agreement specifically states what actions members must take to legally bind the LLC. That shows that members knew how to do so but did not. Thus, the appeals court upheld the trial court on Counts III and IV as well.

The defendants were luckier with Count V, which named Halloran and Macaluso as individuals. Because both Halloran and the plaintiff signed the operating agreement with the arbitration clause, the court wrote, they are bound by it. Macaluso did not sign the original operating agreement, but he did buy 100 shares of each LLC after the fact. That makes him a member under the Illinois LLC Act, the court wrote, and binds him to everything in the agreement. Thus, he has the right to compel arbitration. For all of those reasons, the appeals court reversed the trial court as to Count V but upheld on the other counts, and sent the case back to trial.

Treasurer Cannot Commit Resources of Family Business Without Board Authorization, Court Finds

September 7, 2010 | Peter S. Lubin and Patrick Austermuehle

As Illinois closely held business dispute attorneys, we read with interest an appellate decision in a dispute over the extent to which a company officer can act without the board’s approval. In Fritzsche v. LaPlante, No. 2-09-0329 (Ill. 2nd March 2010), the “rogue” officer was M. Christine Rock, the secretary/treasurer for family business Fritzsche Industrial Park, Inc. (FIP), which leases real estate at an industrial park in Lakemoor, Ill. Rock also had power of attorney for her father, Herbert Fritzsche, and those two roles allowed her to lease property to Gregory LaPlante, her longtime live-in boyfriend. Separately, Rock also signed a promissory note to Gerald Shaver as payment for work he had done for FIP. This led to a lawsuit by other family members and corporate members, who alleged that she acted without authorization from the board and that the note and lease were invalid.

FIP was incorporated in 2005, although the family had owned the property for decades before. The other corporate officers were Herbert Fritzsche, president, and Scot Fritzsche, vice president and son of Herbert Fritzsche. Shares of stock were divided among the officers and other sons, daughters and grandchildren, with Herbert Fritzsche getting 68 percent. In July of 2006, Herbert Fritzsche suffered a brain hemorrhage, which affected his health and may have compromised his mental capacity. One result of this was that Rock and LaPlante moved into Herbert Fritzsche’s home after he moved in with another sibling. On the first day of August, Rock signed the lease to LaPlante, which gave him 16 properties at Fritzsche Industrial Park and 10 more owned by Herbert Fritzsche individually. LaPlante was to pay rent in the amount of the property taxes, plus 10 percent of his income, although it was not clear what that income referred to.

A week later, on August 8, Rock signed the promissory note to Shaver in exchange for work done on the property, possibly through his trucking and excavating business. It obligated FIP and Park National Bank, trustee of Herbert Fritzsche’s properties, to pay $450,000 by putting a lien on the properties they owned. Park National Bank did not sign. Three months later, Herbert Fritzsche, FIP, Park National Bank and First Midwest Bank, a trustee for some FIP properties, sued Rock and LaPlante, alleging Rock was not authorized to commit the company’s or her father’s resources. The complaint alleged that Rock was suspected of stealing rents from FIP to pay her personal expenses and refused to provide documentation of rental income, which led to a shareholder decision to remove her as secretary/treasurer in May of that year. After his illness, Herbert also allegedly revoked her power of attorney. Therefore, plaintiffs alleged, Rock had no authority to enter into the lease or the note, and they were invalid. They also claimed the rental agreement was too vague to be enforced.

During the next two years, discovery in the case moved very slowly, possibly because Rock and LaPlante also faced criminal prosecution for theft, conspiracy and financial exploitation of an elderly person. In December of 2008, the plaintiffs moved for summary judgment. They argued that even if Rock was not properly removed as power of attorney and a corporate officer, Illinois law does not allow her to enter into the lease or the note without the board’s approval. They also argued that FIP’s bylaws required approval of the note because it was a form of debt. Defendants responded that the board knew about the lease through e-mails sent among the members, and that no board approval was necessary for the lease and the note because Rock was exercising Herbert’s executive authority through the POA, and because many properties were owned by individual family members rather than the board. After oral arguments, the board granted summary judgment to the plaintiffs, saying Rock did not have the authority to act unilaterally as a matter of law. This appeal followed.

Because it was an appeal of a summary judgment order, the Second noted, it had only to decide whether there were genuine issues of material fact to try. Nonetheless, it found that the defendants failed to meet that standard. Under common law, the court said, the highest officer of a corporation must still get board approval to make contracts, especially ones that are unusual or extraordinary. The lease is such an unusual contract, it wrote, because it involved no trustees for the properties and provided LaPlante with the land for little or nothing. Rock also needed board approval for the lease under the Illinois Business Corporation Act, which requires corporate formalities for transactions involving “substantially all” the corporation’s assets. The lease covered all of the property in the industrial park, the court noted, thus making it impossible for FIP to continue its business.

The court came to similar conclusions about the note. However, in this case, the main support for voiding the note came from FIP’s bylaws. Those bylaws say loans and other forms of indebtedness must be authorized by a board resolution. No such resolution exists, the court said, but the note clearly puts a $450,000 lien on FIP. The appeals court noted that the Business Corporations Act requires board approval for actions outside the ordinary course of business, but believed that the bylaws argument was stronger. Thus, the appeals court upheld the trial court’s grant of summary judgment to the plaintiffs.

Video By a Forensic Accountant and Certified Fraud Examiner Discussing Common Types of Business Fraud — Our Chicago Business Trial Attorneys Bring Suit to Recover Monies Lost by Businesses Due to Fraud and Breach of Fiduciary Duty

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

Below is a video by a forensic accountant and certified fraud examiner discussing common forms of fraud that cause losses to businesses. The video provides solutions to protecting your business from fraud.

Lubin Austermuehle’s Chicago business trial lawyers have more than two and half decades of experience helping business clients on unraveling complex business fraud and breach of fiduciary duty cases. We work with skilled forensic accountants and certified fraud examiners to help recover monies missappropriated from our clients. Our Chicago business, commercial, and class-action litigation lawyers represent individuals, family businesses and enterprises of all sizes in a variety of legal disputes, including disputes among partners and shareholders as well as lawsuits between businesses and and consumer rights, auto fraud, and wage claim individual and class action cases. In every case, our goal is to resolve disputes as quickly and sucessfully as possible, helping business clients protect their investements and get back to business as usual. From offices in Oak Brook, near Wheaton, Naperville, Evanston, and Chicago, we serve clients throughout Illinois and the Midwest.

If you’re facing a business or class-action lawsuit, or the possibility of one, and you’d like to discuss how the experienced Illinois business dispute attorneys at Lubin Austermuehle can help, we would like to hear from you. To set up a consultation with one of our Chicago, Wheaton, Elmhurst, Geneva, Aurora, Elgin, Rockford or Naperville business trial attorneys and class action and consumer trial lawyers, please call us toll-free at 630-333-0333 or contact us through the Internet.

Partnership Agreements May Not Eliminate One Partner’s Fiduciary Duty to Others, First District Rules

August 24, 2009 | Peter S. Lubin and Patrick Austermuehle

A trial court was correct to find a breach of fiduciary duty in a real estate partnership, the First District Court of Appeal ruled March 27. In 1515 North Wells LP v. 1513 North Wells LLC, No. 1-07-1881 (Ill. 1st. Dist. March 27, 2009), the appeals court also upheld the lower court’s rulings that one partner had breached his contract and that denied him a chance to amend his complaint to pierce the corporate veil.

The case grows out of a real estate development deal struck in 1997. Thomas Bracken, Mark Sutherland, Alex Pearsall and an uninvolved fourth partner formed 1515 North Wells LP, a limited partnership, to develop a condominium with retail space. Sutherland and Pearsall then created SP Development Corporation to serve as the general partner of 1515 North Wells LP. Bracken separately created 1513 North Wells LLC to own space in the building that was to be a health club. Bracken borrowed $250,000 to pay for his part of the property, and signed a note saying he agreed to pay it back no later than 15 days after receiving a financial statement from 1515 North Wells. He further agreed to pay it even if there was a dispute, then wait for a refund later.

To begin development, SP, the general partner, solicited bids for a general contractor. It hired yet another Sutherland and Pearsall company, Sutherland and Pearsall Development, even though its bid was the only one received that failed to state a maximum price for the project. The same general contractor, not 1515 North Wells, later received the profits from condominium upgrades.

Fifth District Court of Appeal Overturns Damages Award in Trade Secrets Act Lawsuit

August 3, 2009 | Peter S. Lubin and Patrick Austermuehle

A client list and information on clients’ computer networks do not qualify as trade secrets under the Illinois Trade Secrets Act, the Fifth District Court of Appeal decided April 13 in a business trade secrets lawsuit. In System Development Services v. Haarman, No. 04-CH-30 (Ill. 5th 2009), System Development Services (SDS) sued four former employees who left to start a competing business offering networking services to businesses in Effingham County. A trial court found that the defendants had misappropriated a list of clients and potential clients, as well as information on SDS clients’ networks, but the Fifth District Court of Appeal overturned that decision.

SDS sets up and maintains computer networks for local businesses. It maintains a database of clients and potential clients, and stressed to employees that both the list and the clients’ network information should be kept private. Defendants Timothy Haarman, Jason Repking, Rick Hoene and Terry Oldham left SDS after a bad financial year and started a competing business, Technical Partners. None had signed a restrictive covenant limiting their right to compete with SDS. However, when starting out, they sent out a mailing to potential clients that SDS thought was suspiciously similar to addresses in its client database. They also relied on former SDS customers during their first month inbusiness. SDS sued them for violations of the Illinois Trade Secrets Act and breach of fiduciary duty.

At a bench trial, the plaintiff testified that some of the addresses at issue contained information not found in the telephone book, and that work orders and emails were deleted from their system shortly before defendants left. However, the company’s owners told the court that they had no personal knowledge that a client list was stolen. The defendants testified that they made their mailing list using the phone book, the Internet and a chamber of commerce listing. They also relied on client relationships formed at SDS and personal connections. One defendant testified that no special knowledge other than the ordinary knowledge of a network technician was necessary to serve SDS and Technical Partners clients.

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

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

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

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

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

Auto Dealership Entitled to New Trial Over Compensation Under Quantum Meruit, Seventh Circuit Decides

April 1, 2009 | Peter S. Lubin and Patrick Austermuehle

In a breach of implied contract lawsuit, a Wisconsin auto dealership must have a new trial because the original trial judge misconstrued Wisconsin law on quantum meruit and unjust enrichment, the Seventh U.S. Circuit Court of Appeals ruled. Lindquist Ford, Inc. v. Middleton Motors, Inc., Nos. 08-1067 & 08-1689 (7th Cir. February 25, 2009).

Middleton Motors, a Ford dealership near Madison, Wis., was a struggling business when it asked the more successful Lindquist Ford of Iowa for financial and management help. In their initial negotiations in 2003, they agreed that Lindquist’s manager, Craig Miller, would manage both dealerships and be compensated by Middleton with a percentage of the profits once he made the dealership profitable again. No deal was struck at that time, but nonetheless, Miller started managing Middleton.

In subsequent months, negotiations ran aground when Lindquist repeatedly did not offer a cash infusion, proposed as an investment in the business, that Middleton wanted. During this time, Middleton repeated several times that Miller’s compensation would be a percentage of Middleton’s profits when the dealership was profitable again. About a year into this situation, Middleton fired Miller, frustrated that the dealership was still unprofitable and no deal had been reached on a cash infusion. Two months after the firing, Miller sent Middleton a letter demanding a salary for 2003, and half of profits for the next two years. Middleton disagreed that it owed Miller anything.