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Seventh Circuit Affirm’s Trial Court Decision on Partnership Dispute But Reverses Trial Court on Copyright Issue

 

The Seventh Circuit has affirmed most of a district court ruling involving an Illinois partnership dispute involving claims for fraud, excessive partnership distributions and fraud in a trademark application for a corporate logo. The cases highlights that partnership disputes can result in very time consumer and expensive litigation when there is no clear-cut written partnership agreement. In this case, the victorious defendants were awarded substantial attorneys fees.

The case arose out of the following facts. Three individuals Swift, Schaltenbrand, and Siddle joined together as partners to operate a mail-order pharmacy, divide the profits from that business, and eventually sell the book of customers to another pharmacy. After some initial success, the partners began taking profit distributions that far exceeded the partnership’s profits and according to the Seventh Circuit did not square with any formula. All of the partners according to the Seventh Circuit’s description of the facts seemed pleased to strip the enterprise of monies and to even take out loans to do that:

Soon after the partnership started gaining steam, however, the partners began exploiting their informal arrangement for personal gain. Swift, Siddle, and Schaltenbrand repeatedly requested andreceived) profit distributions that far exceeded the amounts to which they were entitled under the agreement.
Despite the fact that the partnership was a money‐losing  enterprise,  the  partners  continually found the funds for distributions. For example,
evidence presented to the court indicated that, from 2005 to 2009,
the partnership operated at a net loss of over$400,000. During this same period,
however, Swift, Schaltenbrand, and Siddle received  nearly  $4  million  in  combined distributions.

Swift even persuaded Schaltenbrand to take out loans to facilitate
these unjustified  payments  to  the  partners.  For  his part, Swift concealed his excessive demands (which he knew had
no  basis  in  the  actual  profitability  of  the  partnership) commingling them with DeliverMed’s requests for  cost reimbursements.
Swift and Schaltenbrand each became aware of  the  other’s  excessive
distributions, but neither of them cared. So long as each
partner was able to obtain his own unjustified share of
partnership funds, no one made a fuss.
However, when a dispute erupted between the partners
Swift sued Schaltenbrand and Siddle claiming that
they had taken more money than the allegedly
agreed upon percentages and that he was therefore
entitled to larger distributions and owed money.

The district court listened to 14 days of testimony before ruling in favor Schaltenbrand and Siddle holding that Swift never properly included fraud claims, wasn’t a credible witness and couldn’t support his damages claims for greater distributions with evidence of a contract setting the agreed upon percentages. The court also invalidated a copyright registration that Swift’s marketing company obtained for a logo used by the partnership, finding that Swift knowingly misrepresented a material fact in the application to register a copyright in the logo.

The Seventh Circuit affirmed in part, agreeing that Swift did not prove Schaltenbrand and Siddle breached any obligation to provide him with a certain percentage of the distributions or even that such an obligation or contract to provide set percentages existed. The Seventh Circuit also found Swift waived fraud claims by failing to include them in the final pretrial order. The Seventh Circuit held that the district court erred by invalidating the copyright registration without first consulting the Register of Copyrights as to the significance of the inaccurate information. The Copyright Act requires courts to perform this “curious procedure” before invalidating a registration based on a fraud on the Copyright Office. The Seventh Circuit remanded the case so that Register could be notified and the issue decided based on the requirements of the statute.

You can view the entire opinion here.


Our Chicago lawyers handle partnership and shareholder disputes in closely held enterprises. We have litigated these types of cases for many years and achieved excellent results for our clients as a review of our notable cases shows. You can contact us over the internet, by email or over the telephone for a free consultation. Our toll free number is (877) 990-4990. You can fill out the contact us for at the side of this blog as well.

Super Lawyers named Chicago business trial attorneys Peter Lubin and Vincent DiTommaso Super Lawyers in the Categories of Class Action, Business Litigation and Consumer Rights Litigation. DiTommaso Lubin Austermuehle’s Chicago business dispute lawyers have over a quarter of century of experience in litigating complex class action, consumer rights and business and commercial litigation disputes. We handle emergency business law suits involving injunctions, and TROS, covenant not to compete, franchise, distributor and dealer wrongful termination and trade secret lawsuits and many different kinds of business disputes involving shareholders, partnerships, closely held businesses and employee breaches of fiduciary duty. We also assist businesses and business owners who are victims of fraud.