Breach of Contract

Filing Counterclaims Does Not Waive Contractual Right to Arbitration, Fourth District Rules

November 30, 2010 | Peter S. Lubin and James V. DiTommaso

As Illinois mediation and arbitration lawyers, we were interested to see a decision confirming that parties may invoke their contractual rights to arbitrate even after some participation in the other side’s lawsuit. TSP-Hope Inc. v. Home Innovators of Illinois, Inc., No. 1-07-1028 (Ill. 4th June 26, 2008) pits a Springfield housing nonprofit, TSP-Hope Inc., against residential construction company Home Innovators of Illinois. The two made a contract in July of 2005 for the construction of houses. In the summer of 2006, construction stopped. Shortly after, TSP-Hope sued for breach of contract and other causes.

About a month later, the defendant filed for an extension of time to plead, saying the plaintiff had served a demand three days before for the defendant to file suit to enforce its liens. Another month later, the defendant filed an answer and counterclaims, including duress in contract formation, breach of contract and enforcement of the liens. After a series of motions and counter-motions, the defendant in July of 2007 filed to dismiss all claims and compel arbitration. In this motion, the defendant claimed that the plaintiff had verbally agreed to mediation before the lawsuit. The parties’ contract specified that they should use mediation at first, and then binding arbitration with a specified arbitration company, to resolve disputes. The trial court eventually granted the defendants’ motion to dismiss a breach of contract claim, saying it had not been waived by participation in the litigation. After a motion to reconsider failed, the plaintiff appealed.

Unusually, the Fourth said, the defendants did not file a brief in the appeals case. However, the court said it had sufficient evidence from the plaintiffs’ brief. That brief argued that defendants had waived their right to arbitration by waiting almost 11 months to assert it, and by submitting arbitrable issues to the trial court in the meantime. To determine whether this is true, the Fourth wrote, it needed to determine whether the defendant had acted inconsistently with its right to arbitrate. Under Cencula v. Keller, 152 Ill. App. 3d 754, 757, 504 N.E.2d 997, 999 (1987), this can include submitting arbitrable issues to the court.

The Fourth then ran down a list of past cases in which a party was found to have waived its right to arbitration. In all of those cases, the court noted, parties had conducted discovery and made pleadings that were more than just responses to the other side. Neither of these was true in this case, it said. It is true that the defendant’s counterclaims could have waived its right to arbitration, the court said, but this is not automatic. In this case, the counterclaim “appeared to be responsive to plaintiff’s complaint” as well as the plaintiff’s demand to enforce its liens. Under those circumstances, the Fourth concluded that the defendant had not acted inconsistently with its right to arbitrate. Thus, the appeals court affirmed that trial court was correct to find that there was no waiver.

Federal Arbitration Act Controls Dispute Between Construction Companies, Third District Finds

November 9, 2010 | Peter S. Lubin and James V. DiTommaso

Our Illinois mediation and arbitration attorneys were interested in a court ruling on the controlling legal authority in a dispute over whether an issue is arbitrable. R.A. Bright Construction Inc. v. Weis Builders Inc., No. 3-09-0910 (Ill. 3rd June 9, 2010) pits construction company Weis Builders against its subcontractor, R.A. Bright Construction. A dispute later arose in which Bright claimed Weis owed it $765,701 under two contracts the parties had signed. Bright sued and Weis moved to dismiss, or alternatives, to compel arbitration. The trial court denied the motion, but two judges from the Third District Court of Appeal reversed that decision under the Federal Arbitration Act. A third dissented, saying the FAA cannot apply because no interstate commerce was involved in the dispute.

Weis, a Minnesota company with offices in four states, was originally hired to build a Wal-Mart in Lockport, Ill. Weis in turn hired Bright to do concrete work for $2.93 million, and later, underground utilities work for $679,567. Neither party alleged fraud or misrepresentation in those contracts. For reasons the opinion does not discuss, Bright alleged that Weis owed it $765,701 on those two contracts, which Weis denied. Bright sued and Weis filed a motion to dismiss and compel arbitration, or alternatively, to stay and compel arbitration, under the Federal Arbitration Act. Before that motion could be heard, Bright filed an amended complaint seeking to enforce a mechanic’s lien against Wal-Mart for the money. The trial court later denied the motion from Weis and this appeal followed.

In its appeal, Weis argued that section 2 of the FAA compels arbitration because the Illinois Supreme Court has found that the FAA mandates judicial enforcement of arbitration agreements “in any … contract evidencing a transaction involving commerce.” Bright disagreed for two reasons. It argued that the FAA does not apply because no interstate commerce was involved in this transaction. And even if it does, Bright said, the clause in question violates the Illinois Building and Construction Contract Act.

The Third started with the issue of whether the contract between Weis and Bright was interstate commerce. The U.S. Supreme Court has found that the FAA preempts state laws hostile to arbitration and is intended to exercise power over interstate commerce to the fullest, the court noted. To interpret this situation, it relied in part on Allied-Bruce Terminix Cos. v. Dobson, 513 U.S.265, 278, 130 L. Ed. 2d 753, 767, 115 S. Ct. 834, 841 (1995), in which the Supreme Court overturned the Alabama Supreme Court on a motion to compel arbitration. In that case, a homeowner was suing a pest control company for inadequate work, and the pest control company argued that the FAA applied because it had a “slight nexus” with interstate commerce. While the work was contracted and performed locally, the companies were multistate and some materials came from out of state.

Despite the intention of the parties to stay local, the Supreme Court wrote, a strict reading of the facts showed that the commerce was in fact interstate. Similarly, the Third wrote, the transaction between Bright and Weis was an interstate transaction in fact. Weis is a multistate corporation and Bright bought some materials from a Wisconsin company. Thus, their contract was interstate commerce within the meaning of the FAA and that law applied.

The Third next disposed of Bright’s argument that the clause violates the Illinois Building and Construction Contract Act, because the FAA allows consideration of contract defenses “upon such grounds as exist at law or in equity for the revocation of any contract.” While this is valid, the court said, a defense based on the Act is not grounds to contest “any contract”; it is grounds only to contest construction and building contracts. It noted that the state Supreme Court had recently made a similar ruling in Carter v. SSC Odin Operating Co., No. 106511 (Il April 15, 2010). Finally, the Third rejected a forum non conveniens defense, saying this is not a general contract defense but a procedural mechanism. Thus, a two-judge majority reversed the trial court and remanded the case with orders to stay and compel arbitration. The dissenter, Justice McDade, disagreed that the contract between Bright and Weis was a transaction involving interstate commerce, and thus argued that the FAA does not apply to this case. “Nothing beyond ‘the multistate nature of one of the parties’ (slip order at 8) demonstrates that the transaction ‘in fact’ involved interstate commerce.”

Video Explaining that an Employer’s Material Breach of an Employment Agreement Can Invalidate a Non-Compete Agreement

November 7, 2010 | Peter S. Lubin and James V. DiTommaso

Our Chicago non-compete agreement attorneys have defended high level executives in covenant not to compete and trade secret lawsuits. A case in which our firm defended a former Motorola executive was covered in Crain’s Chicago business. You can view that article by clicking here.

DiTommaso Lubin handles litigation over non-compete clauses for individuals and businesses of all sizes, including small or closely held businesses for whom competition from an ex-employee can be a serious threat. Our Chicago business lawyers have substantial experience in restrictive covenant and breach of contract cases, and we are proud of our record of strong results.

DiTommas-Lubin a Chicago business law firm represent both plaintiffs and defendants in such cases, and can also help stop litigation before it starts by reviewing contracts to look for covenants and clauses that could create problems later. Based in Oakbrook Terrace and downtown Chicago, our Schaumburg noncompete clause lawyers take cases from Naperville, Keniworth, Aurora, Lake Forest, and many other cities throughout Illinois, as well as in Indiana, Wisconsin and the entire United States. To learn more or set up a free consultation, please contact us through the Internet or call toll-free at 630-333-0333 today.

Second District Voids Contractor’s Arbitration Clause Because Homeowners Never Signed It

November 3, 2010 | Peter S. Lubin and James V. DiTommaso

Our Illinois consumer protection attorneys were pleased to see a recent victory in an Illinois appeals court for consumers concerned about the effects of mandatory binding arbitration. In Artisan Design Build, Inc. v. Bilstrom, No. 2-08-0855 (Ill. 2nd Sept. 22, 2009), David and Jody Bilstrom of Hinsdale, Ill., hired Artisan Design Build of Wisconsin to remodel their home. Their contract provided, among other things, an arbitration clause saying disputes “shall be subject to and decided by mediation or arbitration.” The repairs required eight changes to the original contract, significantly increasing the overall price of the work. The Bilstroms paid the first six bills, but refused to pay the seventh despite multiple requests. On Sept. 20, 2006, they locked Artisan out of the project and told it they had hired someone else to finish the job. Artisan claimed they owed $208,695.69.

In April of 2008, Artisan sued the Bilstroms to foreclose its mechanic’s lien; for breach of contract; and for unjust enrichment. The Bilstroms filed a motion to dismiss, claiming Artisan had violated the Illinois Home Repair and Remodeling Act by failing to finish its work within the contracted time; failing to carry insurance; and failing to provide them with a consumer rights pamphlet. The parties continued the case several times while they tried without success to reach a settlement. When that proved fruitless, Artisan filed a complaint with the American Arbitration Association. The Bilstroms moved to stay the arbitration, saying Artisan had voided that part of the contract by suing first, and by violating the Home Repair and Remodeling Act. The trial court agreed with them, prompting an amended complaint from Artisan. The trial court dismissed that and Artisan appealed, arguing that it did not violate the Act or waive the arbitration clause.

On appeal, the Second District first considered whether Artisan had violated the Act by failing to furnish a consumer rights pamphlet. The Bilstroms had argued that the Act’s language makes any violation an unlawful act that nullifies the contract. Artisan countered that the Act does not require courts to dismiss an otherwise valid claim just because a contractor fails to provide the pamphlet. The appeals court agreed, finding that the plain language of the Act provides no remedy other than a Consumer Fraud Act lawsuit. Furthermore, the court wrote, the legislature could not possibly have intended to allow consumers to void contracts for failure to provide the pamphlet, because allowing this would allow consumers to essentially steal from contractors. Thus, the appeals court found that the trial court was wrong to dismiss Artisan’s amended complaint.

Artisan had less luck on the question of whether it had waived its right to arbitration by filing a lawsuit first. Section 15.1 of the Act also requires contractors to advise clients of binding arbitration and waiver of jury trial clauses, which consumers should be able to reject or accept.

Failure to advise, or to obtain acceptance, explicitly voids the clause. Artisan clearly failed to do so in this case, the Second District wrote, because there are no signatures or “accept” or “reject” notations in the appropriate place on the contract. This argument does not reach the issue of whether Artisan waived its right to binding arbitration, the court said, but it can affirm on any grounds in the record. It did affirm the trial court’s decision on the arbitration clause, and remanded the case for further proceedings on Artisan’s amended complaint.

Law.com Reports: “National Class Action Status Granted in Conseco Life Insurance Case”

October 30, 2010 | Peter S. Lubin and James V. DiTommaso

National Class Action Status Granted in Conseco Life Insurance Case
By Petra Pasternak
October 26, 2010
Instead on alleging fraud based on state consumer fraud statutes this article explains that this class action against Conseco relies on a breach of contract claim for the life insurance carrier’s alleged failure to honor the terms of similar life insurance policies. The article describes the Federal Judge Ilston’s decision to approve class certification because Judge Ilston concluded contract law is subtantially the same in throughout the different States:

The plaintiffs alleged that Conseco was breaching nearly 10,000 “LifeTrend” insurance policies … including improper premium charges and improper deductions from policyholders’ accounts — could result in losses of tens of thousands of dollars per policyholder. …
Conseco tried to smack down class certification … But Illston wrote that Conseco was exaggerating any variations when it came to breach-of-contract.
“Contrary to Conseco’s representations, several courts have recognized that the law relating to the element of breach does not vary greatly from state to state,” Illston wrote.

This trend to to allow use of contract law to obtain national class certification is a breath of fresh air. Class actions are the only way to protect against this type of mass breach of contract by a large insurer. Absent a national class action many victims in smaller states would obtain no redress.

You can read the entire article by clicking here.

First District Rules Creditor Has No Lien Rights on Payment of Unrelated Debt

October 19, 2010 | Peter S. Lubin and James V. DiTommaso

Our Chicago business attorneys were interested to see a decision sorting out how an individual creditor with a judgment in his favor may collect on the debt. In Tobias v. Lake Forest Partners LLC, No. 1-09-1054 (Ill. 1st June 22, 2010), Andrew Tobias lent $500,000 to Lake Forest Partners, a Nevada corporation. The company defaulted on the loan and Tobias won a judgment awarding him the loan principal, interest and attorney fees, against Lake Forest as well as three people who personally guaranteed the loan: Mark Weissman, Christopher French and Albert Montano. The judgment originally called for more than $668,000 to be paid to Tobias, but Tobias successfully moved to amend the judgment to call for $662,172.21 “plus costs,” possibly to account for post-judgment attorney fees, costs and interest.

Meanwhile, intervenor Greystone Business Credit II won a judgment against Weissman individually in Florida federal court. Both Greystone and Tobias sought to recover their judgments by discovering assets owned by Weissman and held by another company, MEA Management LLC. Tobias filed his request some months earlier than Greystone, and Greystone’s request was stayed. MEA had $339,444 belonging to Weissman. Tobias requested that MEA release enough to satisfy his judgment and Greystone intervened to point out that it also had an interest in the money. Tobias later petitioned for post-judgment attorney fees and costs. After entertaining out-of-court attempts to resolve this conflict, the court awarded $86,845.12 to satisfy the original judgment for Tobias, and $126,299.44 each to Weissman and Greystone. The petition by Tobias for post-judgment fees was not addressed.

Tobias appealed, arguing that the $86,845.12 award was not “full satisfaction” of his judgment, since the post-judgment attorney fees were not paid. He argued that his post-judgment attorney fees claim should have been given the same priority as the rest of the judgment, meaning priority over any other party, including Greystone. Not surprisingly, Greystone disagreed, arguing that the post-judgment attorney fees had never been reduced to a judgment and could therefore not be enforced in this situation. The First District Court of Appeal agreed with Greystone. Under sec. 2-1402 of the Illinois Code of Civil Procedure, a judgment creditor may discover assets held by a third party for the debtor. But Supreme Court Rule 277 says these proceedings “may be commenced at any time with respect to a judgment which is subject to enforcement.” Under Bank of
Matteson v. Brown, 283 Ill. App. 3d 599, 602, 669 N.E.2d 1351 (1996), the First said, that means credits cannot discover assets until a judgment has been entered.

The First rejected the argument from Tobias that his post-judgment claim should have the same priority as the underlying claim because it is ancillary to the underlying debt. Because of Supreme Court Rule 277, the court wrote, no claim can achieve lien status until there is a judgment. The judgment in favor of Tobias never included post-judgment attorney fees, the court wrote. If he later obtains one, it would be prioritized behind earlier judgments, including Greystone’s. For those reasons, the First found that the trial court’s order was proper and affirmed its decision.

Court Rules Illinois Courts Should Hear Contract Dispute Despite Case in New York

September 28, 2010 | Peter S. Lubin and James V. DiTommaso

Our Chicago business attorneys were interested to note a ruling establishing that an Illinois venue is correct in a case of dueling lawsuits between companies working in Illinois and New York. In Whittmanhart, Inc. v. CA, Inc. and Niku LLC, No. 1-09-3136 (Ill. 1st June 22, 2010), Whittmanhart bought software from CA and its wholly owned subsidiary, Niku, in 2006 and entered into an end-user license agreement. They later entered into a statement of work saying CA employees would help Whittmanhart implement and develop the software, in exchange for an hourly fee and expenses. CA invoiced Whittmanhart several times during the project, but claims no invoices were ever paid. Whittmanhart claims CA and Niku breached their own contract by failing to deliver a fully functioning software system by a specified date and failing to invoice monthly, as specified.

CA and Niku sued Whittmanhart in New York federal court Nov. 12, 2008 for breach of contract and account stated. They sought payment of the invoices, plus attorney fees and court costs. In December of that year, Whittmanhart told the court it would move to dismiss for lack of federal diversity jurisdiction, as all three companies are Delaware citizens. On the same day, CA and Niku filed a claim in New York state court. Two hours later, they voluntarily dismissed the federal case. About 40 minutes later, but in a different time zone, Whittmanhart filed a lawsuit against CA and Niku in Cook County trial court, creating dueling lawsuits. That claim asks for financial damages, attorney fees and court costs and a declaratory judgment that it did not owe further money to CA and Niku.

Whittmanhart did not answer the New York state complaint and CA moved for default judgment. Whittmanhart then argued that it had not been properly served and successfully moved to dismiss. CA then filed an identical claim in New York state court, which Whittmanhart moved to dismiss on the grounds that the Illinois action was pending and on forum non conveniens. This was denied. CA later moved to dismiss the Illinois action on the grounds that New York was considering the same claim, and this motion was granted. Whittmanhart appealed to the First District Court of Appeal.

In its analysis, the First started by dismissing arguments made by CA and Niku based on things that happened after the trial court made its decision. The court then acknowledged that the lawsuits in both states had identical parties and were based on the same contracts — the statement of work and end-user license agreement. Those contracts were written with reference to other states’ laws. But this by itself was not enough to dismiss the claim, the court said; courts may still allow parallel claims to go forward according to their judgment. “Illinois is clearly the more logical forum for this dispute,” the First wrote, noting that much of the disputed work took place in Cook County and that the Illinois action was the first properly filed claim.

Furthermore, Whittmanhart’s Illinois action has a claim for monetary damages that was not made in New York, the court noted, meaning there was a better chance of complete resolution in Illinois. And if Whittmanhart were to file a counterclaim in New York, it could proceed independently of a decision in favor of CA. That means res judicata would not completely bar the Illinois action. For those reasons, the First found that the trial court had abused its discretion. It reversed the decision and remanded the case to Cook County trial court.

Clothing Retailer Sues Competitor and Former Employees Alleging They Stole Secret Designs

August 26, 2010 | Peter S. Lubin and James V. DiTommaso

As Illinois trade secrets litigation attorneys, we were interested to see a trade secrets lawsuit arise out of the time-sensitive and competitive world of women’s fashion. As the Naples Daily News reported in July, Florida clothing company Chico’s FAS Inc. has sued competitor Cache Inc. and two former employees who moved to Cache, Rabia Farhang and Christine Board. Chico’s alleges that Farhang and Board shared designs from Chico’s White House/Black Market line with Cache, resulting in nearly identical spring and summer collections from the two brands. The lawsuit’s complaint includes exhibits of pictures of both collections. It accuses the women of breach of their nondisclosure agreements and legal duties, and Cache of inducing them to breach those agreements, and all defendants of tortious interference with contractual relations, misappropriation of trade secrets, unfair competition, theft, unjust enrichment and civil conspiracy.

According to the complaint in the case (PDF), which was filed in New York state court, Cache has not been financially successful in the past four or five years, during which time Chico’s White House/Black Market line has done well. Chico’s alleges that Cache tried to fix this by inducing Farhang and Board to leave Chico’s in the fall of 2009, taking their knowledge of design plans for 2010 clothing lines along with other trade secrets and confidential information. At Chico’s, Farhang and Board both participated in the designs of the 2010 lines, Farhang as a senior officer. Using the allegedly stolen designs, the complaint says, Cache saw an increase in sales in spring of 2010, and Chico’s alleges that Cache will use stolen designs in its fall line as well. Because of this, it requested preliminary and permanent injunctions stopping Cache from selling clothes from its spring, summer and fall lines, as well as a recall of the spring and summer lines. It also asked for financial damages and court orders protecting its trade secrets and confidential information.

Our Chicago business emergency lawyers believe this case is a good example of a situation in which swift action is necessary. If the allegations by Chico’s are true, its intellectual property and brand have already been somewhat diluted by Cache’s use of very similar designs in its spring and summer lines. This would be ongoing damage to the company that includes difficult-to-measure non-financial harm to its identity and customer loyalty, as well as actual financial damages from infringement. Furthermore, the tight schedules of fashion and retail companies mean that they bring out their fall lines in mid-summer, which means the court must take quick action on the July 29 lawsuit to stop the infringing on the fall line. This also means that Cache’s fiscal health could be in serious trouble if the count chooses to grant the injunction against the fall line and the recall order for the spring and summer lines. For both sides, this claim represents a legal emergency requiring quick action to protect their business.

The New York Times Reports: For-Profit Colleges Mislead Students, Report Finds

August 22, 2010 | Peter S. Lubin and James V. DiTommaso

For-Profit Colleges Mislead Students, Report Finds

By TAMAR LEWIN

Published: August 3, 2010

Arbitration Clause in Written Contract Cannot Compel Arbitration in Oral Agreement, First District Finds

August 17, 2010 | Peter S. Lubin and James V. DiTommaso

As Chicago alternative dispute resolution attorneys, we were pleased to read a decision from the First District Court of Appeal on compelling arbitration in an oral contract related to a written contract. In Marks v. RSM et al, No. 1-09-1988 (Ill. 1st. March 12, 2010), Carol Marks allegedly contracted with RSM McGladrey Inc. to do accounting for investments she held. That was a written contract including an arbitration clause. Marks alleges that she later entered a separate oral contract with the managing director of RSM and RSM for investment advice. However, she was unhappy with the advice she received and later sued the defendants. The defendants sought to compel arbitration under the written contract, and the trial court denied this, saying there was no arbitration agreement for the oral contract. The First upheld that decision.

Marks allegedly originally retained RSM to monitor her investment accounts. For that work, she signed an “engagement letter” as a contract, which included two clauses of interest. One specifies that RSM will use its professional judgment in applying “rule applicable to this engagement.” The other is a binding arbitration clause requiring dispute resolution to go through the American Arbitration Association. Marks signed, but during the remainder of her first year with RSM, she alleges that RSM failed to provide the portfolio reporting services she expected and instead allegdly began to promote various investments to her. She further alleged that RSM charged her separately for those services and emphasized that they were separate, but no written contract was signed. The court also notes that Bober and RSM allegedly were not registered with the state of Illinois or with the SEC as providers of investment services.

As a result of the alleged solicitations, Marks allegedly put $500,000 into Lancelot Investors Fund II, which put the money into a hedge fund called Thousand Lakes. Marks alleged this conduct damaged her economically. She sued RSM and its managing director, alleging that they breached their fiduciary duties and oral contract with her by allegedly failing to investigate Lancelot and that they allegedly negligently held themselves out as investment experts. She sought to void the oral contract and the Lancelot investment.

In trial court, the defendants denied all of her allegations and also moved to compel arbitration under the engagement letter. This motion was denied without any decision rendered on the merits of the underlying breach of fiduciary duty claim. On their motion for consideration, the defendants alleged that they provided no investment advice and did not recommend Lancelot; rather, the RSM managing director saw from the accounting work that Marks could use such advice, so he introduced her to advisors who did recommend Lancelot. This motion too was denied, and defendants appealed, saying the dispute is covered by the arbitration agreement. They also argued that the Federal Arbitration Act supports this because it has a presumption of arbitrability.

The First rejected this position. Under the FAA, which it said was the governing law in this case, it was proper for the trial court rather than an arbitrator to decide arbitrability. Under that law and the Supreme Court’s decision in AT&T Technologies, Inc. v. Communications Workers of America, 475 U.S. 643, 649, 89 L. Ed. 2d 648, 656, 106 S. Ct. 1415, 1418 (1986), parties cannot be compelled to arbitration unless they have agreed to do so in their contract.

Illinois case law seems to confirm this. The court cited Johnson v. Noble, 240 Ill. App. 3d 731, 732-33 (1992), which also concerned a case with one written contract and one oral contract. In that case, as in this one, the defendant sought to compel arbitration based on the written contract, but the plaintiff argued that the claims arose from the oral contract. The trial and appeals courts agreed, saying the dispute was not arbitrable because it arose from a separate oral contract. Similarly, in Board of Managers of Chestnut Hills Condominium Ass’n. v. Pasquinelli, Inc., 354 Ill. App. 3d 749 (2004), an appeals court upheld the plaintiff’s right to sue because the claims at issue were outside the scope of the arbitration agreement.

In this case, the First wrote, defendants had two separate agreements, one oral and one written. The dispute arose out of the oral contract, it said, so Marks was not required to conform to the terms of the written contract. In fact, the court said the language of the written contract indicates that the parties did not intend to extend the contract past “this engagement.” For those reasons, it upheld the trial court’s decision and remanded it to the trial court for further proceedings.

When the case returned to the trial court, the parties ultimately agreed to it being dismissed with prejudice pursuant to a stipulation to dismiss. The defendants denied all of the allegations and the case did not proceed to trial so plaintiff’s claims remained allegations that were not proven at a trial. Defendants maintain that the allegations that they did anything wrong were baseless and lacked any merit.