Illinois Appellate Courts

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.

First District Rules Improper Joinder of Legal Malpractice Case With Underlying Action Does Not Foreclose Defenses

August 19, 2009 | Peter S. Lubin and Patrick Austermuehle

In a Chicago legal malpractice lawsuit, the First District Court of Appeal has ruled that the defendant is not barred from certain defenses because the plaintiff improperly joined the malpractice claim with its underlying action. Preferred Personnel Services, Inc. v. Meltzer, Purtill & Stelle, LLP, No. 1-08-0389 (Ill. 1st. Jan 23, 2009).

Preferred is a staffing company with a claim against insurance broker Arthur J. Gallagher & Co. Gallagher told Preferred that it had secured malpractice insurance for the company and accepted payment for those services, but Preferred later discovered that it had no insurance. Preferred hired Illinois law firm Meltzer, Purtill & Stelle to sue Gallagher, but the firm never started its case. More than two years later, Preferred and its new lawyers sued Gallagher for breach of contract, negligence and fraud. In the same suit, it also sued Meltzer and one of its attorneys, Thomas Palmer (collectively “Meltzer”), for malpractice.

Gallagher moved to dismiss because the statute of limitations had passed in 2001, a motion that was granted by the trial court and upheld by the appellate court. While that motion was pending, Meltzer moved to dismiss the claims against it, saying the malpractice claims were premature because the underlying claim was still viable until the appeals court had ruled. This motion was denied. After the appellate decision on the Gallagher dismissal, Preferred moved for partial summary judgment, asking the court to foreclose arguments by Meltzer that the statute had not run on the Gallagher claims. The trial court granted this motion, but also certified three questions for the First District Court of Appeal to answer:

First District Strikes Verdict Against Partners But Leaves Firm Liable in Partnership Dispute

August 9, 2009 | Peter S. Lubin and Patrick Austermuehle

In a partnership dispute and breach of fiduciary duty claim, the First District Court of Appeal has ruled that an attorney may sue his former firm, but not his former partners. In Kehoe v. Harrold, Wildman, Allen & Dixon, No. 1-07-0435 (Ill. 1st Dec. 23, 2008), Robert Kehoe, a former partner in the firm, sued after partners voted to change him from equity partner to nonequity partner. That is, they voted to end his part ownership of the firm and make him a salaried employee.

In 1995, after Kehoe had been a partner in Harrold Wildman for sixteen years, the firm renegotiated its financing with its bank, a deal that required every equity partner to execute a personal guaranty acceptable to the bank. Kehoe objected to the proposed guaranty and was unable to find a compromise, despite offers to draft his own version. The bank allowed the firm to take out its loan anyway. Later, the firm amended its loan agreement with the bank to eliminate the guaranty requirement but specify that partners without a guaranty are personally liable for the full amount of the debt. A few months later, partner Eisel approached Kehoe about his lack of a guaranty, and Kehoe replied that the amendment made it unnecessary.

The firm’s management committee then met and adopted a resolution allowing a two-thirds vote of partners to change the status of any partner who failed to execute a guaranty. Kehoe was present and objected, and rebuffed later advice to sign the guaranty. The partners later voted to remove his equity status per the resolution. Over the next two days, Kehoe moved his clients to a law firm of his own; he also requested his equity be paid out and was denied. He sued individual partners, claiming they breached their fiduciary duty by advocating the resolution, and the firm as a whole for breaching their obligation to pay his equity share.

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.

Continued Employment for a Short Time Is Not Adequate Consideration for Post-Employment Restrictive Covenant, Appeals Court Decides

July 29, 2009 | Peter S. Lubin and Patrick Austermuehle

Lubin Austermuehle’s Illinois breach of contract litigation attorneys were pleased to see a split Illinois Third District Court of Appeal decision clarifying the circumstances under which a post-employment restrictive covenant is valid. The decision came in Brown & Brown v. Patrick Mudron, No. 03-CH-1363 (Ill. 3rd March 11, 2008), in which a Florida insurance company sued a former employee for breaching a restrictive covenant in her employment agreement.

Diane Gunderson, the employee, worked for a Joilet, Ill. company that was taken over by Brown & Brown. Brown asked Gunderson to sign a new employment agreement with them, and in fact, fired an employee who refused to do so. The agreement said Gunderson’s employment could be terminated any time for any reason and prohibited her from soliciting or servicing any of Brown’s employees for two years after ending her employment with the company. She signed the agreement, but resigned seven months later and went to work for a competitor. Brown sued, alleging that Gunderson had breached the restrictive covenant at her new job. The trial court granted summary judgment in favor of Gunderson because it couldn’t find any evidence that she had breached the covenant, and Brown appealed.

The majority started by disposing of a “choice of law” provision in the contract requiring all disputes to be resolved in Brown’s home state of Florida. Illinois law applies anyway, the court wrote, because Illinois has a greater interest in the case and moving it to Florida would be against Illinois public policy interests. International Surplus Lines Insurance Co. v. Pioneer Life Insurance Co. of Illinois , 209 Ill. App. 3d (1990).

Illinois Probate Law Allows Executors to Set Multiple Deadlines for Claims Against Estates, Appeals Court Decides

July 13, 2009 | Peter S. Lubin and Patrick Austermuehle

A legal malpractice plaintiff who is also the executor of an estate may issue new creditor notices to avoid having his case dismissed, the First District Court of Appeal decided March 31. In Jaason v. Sullivan, No. 1-08-1254 (Ill. 1st Dist. March 31, 2009), the executor, Erik Jaason, filed a Chicago legal malpractice lawsuit against Barbara J. Sullivan and B.J. Sullivan & Associates for alleged mistakes in a will Sullivan prepared for Alexander Koepp.

In his complaint, Jaason alleges that Koepp instructed Sullivan to prepare a will giving Jaason the right to purchase Koepp’s home for $150,000, at Jaason’s discretion. However, Koepp’s home was already held in joint tenancy with his wife, Karsti Koepp. Thus, upon Alexander Koepp’s death in November of 2006, the property was outside the purview of the will and passed to Karsti Koepp under the joint tenancy, leaving Jaason with no option to purchase it. He sued Sullivan in December of 2007 for legal malpractice, alleging that her failure to recognize and take action on the joint tenancy fell outside the applicable standard of care.

In response, Sullivan filed a motion to dismiss the suit as time-barred. The Illinois Code of Civil Procedure requires that, in cases where probate has been opened, plaintiffs must file their claims for legal malpractice within the time given for claims against the estate or the time given for contesting the validity of a will — whichever is greater. The six-month window for contesting the will had clearly elapsed in the 13 months since Koepp’s death. To make a claim against an estate, creditors in Illinois have three months from the date they receive a notice of the death in the mail, or six months from the date of publication of the death as a legal notice, whichever is later.

First District Rules Insurer Must Defend Private Security Company in Chicago Fire Damage Lawsuits Despite ‘Joint Venture’

June 29, 2009 | Peter S. Lubin and Patrick Austermuehle

A private security company’s agreement with a competitor does not foreclose insurance coverage in lawsuits filed against the first company alone, the First District Court of Appeal has ruled. Clarendon America Insurance Company v. B.G.K. Security Services, Inc., No. 1-07-2994 (Ill. 1st Dec. 19, 2008), arises out of a 2003 fire at a Cook County-owned building at 69 West Washington Street in Chicago. Twenty-two lawsuits resulted from the fire. Clarendon, which insures BGK, had filed for declaratory judgment that it had no duty to defend BGK in those suits.

Clarendon’s argument focuses on language in its policy, specifying that the insured parties include “[a]ny organization you newly acquire or form, other than a partnership, joint venture or limited liability company…” It used that language to argue that coverage for BGK in the 22 fire lawsuits should be excluded, because BGK had entered into a joint venture with another security company, Aargus Security Systems, Inc. Both sides filed for summary judgment in the trial court, and the trial court sided with BGK. Clarendon appealed, arguing both the summary judgment language and that it should have been allowed to complete discovery because the record was unclear.

By contrast, BGK argued that Clarendon has a duty to defend because the lawsuits name BGK rather than the joint venture, and BGK is also the insured named by the insurance policy. The appeals court agreed. Pointing out that the joint venture is extrinsic evidence, the court reasoned that this evidence involves facts that could drastically change the underlying litigation (the fire lawsuits) by affecting BGK’s liability. That would make it an impermissible consideration under Illinois caselaw, the court wrote, and thus, the trial court was right to exclude it.

Appeals Court Dismisses Chiropractor’s Class Action Lawsuit Against Insurer for Alleged Underpayment and Breach of Contract

June 22, 2009 | Peter S. Lubin and Patrick Austermuehle

In a proposed class-action insurance fraud lawsuit, the Illinois Third District Court of Appeal has ruled that a chiropractor may not sue a workers’ compensation insurer. In Martis v. Grinnell Mutual Reinsurance Company, No. 3-08-0004 (Ill. 3rd March 27, 2009), chiropractor Richard Martis sued Grinnell Mutual Reinsurance Company after Grinnell’s billing employees incorrectly paid Martis too little for treating an injured worker.

In February of 2006, Martis began treating an employee of Water Management Corp. of Illinois who had been injured on the job. He was to be paid by Water Management’s workers’ compensation policy, issued by Grinnell. When he submitted his bills to Grinnell, the insurer’s outside billing firm applied PPO discounts to those bills even though Martis did not have a PPO agreement with Grinnell. Thus, Grinnell underpaid Martis. He responded with a proposed class-action lawsuit encompassing all Illinois health care providers who had been underpaid by Grinnell in the same way, through incorrect PPO discounts.

The complaint by Martis alleged conspiracy, unjust enrichment, breach of contract and violations of the Illinois Consumer Fraud Act. The trial court granted Grinnell’s motion to dismiss the conspiracy and unjust enrichment counts. However, it certified the class of health-care providers as to the breach of contract claim. Grinnell appealed the denial of its motion to dismiss the breach of contract claim and the class certification to the Third District.

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.

Homeowners May Bring Derivative Claim Against Association’s Board of Directors, Appeals Court Rules

June 7, 2009 | Peter S. Lubin and Patrick Austermuehle

A group of Chicago condo owners may proceed with a derivative lawsuit against their homeowners’ association’s Board of Directors, the First District Court of Appeal has ruled. In Davis v. Dyson, No. 1-07-2927 (Ill. 1st Dec. 19, 2008), twelve condo owners sued individuals formerly on the board of directors after the board members failed to detect embezzlement by an outside property manager. Furthermore, the homeowners alleged, the former board members failed to get enough insurance or get an attorney’s advice on their duty to do so, resulting in losses and out-of-pocket costs of more than $800,000 after the embezzlement was detected.

The homeowner plaintiffs sued for breach of fiduciary duty under two counts — one derivative claim on behalf of the association and one claim as individual homeowners whose property values were allegedly harmed by the directors’ inaction. In response, board members argued that the homeowners lacked standing to sue in both claims — for the individual claim, because the property value claim did not constitute a separate and distinct harm to the individual homeowners. For the derivative claim, the board members argued that only the board itself may bring a derivative action against third parties. The trial court agreed and dismissed both claims; the homeowners appealed.

In its analysis, the appeals court pointed out that shareholders have an undisputed right to sue their own boards of directors; the question was whether they may file a derivative claim against third parties (in this case, the former directors). The court concluded that they could, pointing out that the right to file a derivative suit puts homeowners into the association’s shoes. This means that they are acting on behalf of the association, the opinion said, not usurping its undisputed right to sue third parties. The relevant section of the Illinois Condominium Property Act does not prevent derivative claims by homeowners, the court wrote, so it saw no reason to deviate from caselaw on derivative actions.