Articles Posted in Breach of Fiduciary Duty

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Getting taken to the cleaners by a dishonest employee or contractor is headache enough for any business, but having  no fraud coverage insurance coverage is a world of hurt.  Businesses are well advised to analyze their policies carefully to make sure they have proper coverage.

In the case of an Indiana telecom company called Telamon, its two different insurance policies provided no relief, according to the Seventh Circuit Court of Appeals (Telamon Corp. v. Charter Oak, No. 16-1205, 7th Cir. (2017)). Telamon engaged independent consultant Juanita B. to provide services, and her role eventually expanded well beyond the original agreement. She was named vice president of major accounts and became senior manager for the company’s business in New York and New Jersey. In that capacity, she oversaw the removal of old telecommunications equipment from AT&T sites to sell to salvagers. Juanita pocketed the profits, for a total of $5.2 million in losses for the company by the time it discovered her scheme.   Continue reading

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A recent shareholder suit challenging the sale of a Chicago-based company to IBM was dismissed by a Delaware chancery court because the merger was supported by an informed and uncoerced vote of 80% of stockholders. When IBM acquired healthcare software developer Merge Healthcare, Inc., in 2015 for $1 billion, a group of Merge stockholders brought a class action complaint against Merge for what they charged was an improper sale process. The plaintiffs alleged the directors breached their fiduciary duties of loyalty and care due to self-interest in the transaction. (In Re Merge Healthcare Inc. Stockholder Litigation, Consol. C.A. No. 11388-VCG, Del. Chancery Court, 2017.)

The class action sought damages resulting from IBM’s acquisition of Merge’s publicly owned shares, which was supported by nearly 80% of Merge stockholders. On August 6, 2015, Merge’s board entered into an agreement granting the company’s common stockholders $7.13 in cash for each of their shares, a 31.8% premium to the market price. Preferred stockholders received $1,500 cash per share. The merger was completed on October 13, 2015, at an approximate value of $1 billion.

As part of the merger, certain Merge managers, including one of the defendant board members, entered into employment or transition arrangements with IBM. Continue reading

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Because stock trading is full of opportunities for traders to take advantage of their positions, the law takes accusations of fraud very seriously, but it works the other way, too. Traders have to work hard to protect their reputations because their livelihood depends on it. As a result, stock traders tend to react quickly if they’re ever accused of insider trading or any other forms of fraud.

According to a recent defamation lawsuit, Allstate allegedly falsely accused four traders of illegally taking advantage of their insider trading knowledge by intentionally timing trades in such a way that would inflate their own bonuses. Daniel Rivera, the managing director of Allstate’s equity division, along with three senior portfolio managers, were the four employees accused and fired as a direct result of those accusations.

In October 2009, Allstate announced the work of its equity division would be outsourced to Goldman Sachs. In December of that same year, it fired Rivera and his three senior portfolio managers (Kensinger, Meacock, and Scheuneman) for allegedly violating Allstate’s code of ethics. Because the four employees were supposedly fired with cause, they were not eligible for severance pay. The timing is certainly suspicious, but if Allstate did this as an to save money and avoid paying four senior employees their severance packages, the plan, if this was the plan, a fact which Allstate surely denies, then the plan backfired. Continue reading

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The U.S. Court of Appeals for the Seventh Circuit recently held that client victims of a lawyer’s fraud take precedence over a commercial lender in being paid out of funds owed to the lawyer’s firm. Attorney William C. of Indiana-based Conour Law Firm, LLC is serving a 10-year prison term for stealing $4.5 million from clients’ trust funds. His victims obtained a judgment against him in 2014. Timothy D., an attorney at Conour, had previously left to join the Ladendorf Firm, bringing 21 Conour clients with him who eventually generated over $2 million in fees. William’s victims, as well as the Conour Firm’s lender, ACF 2000 Corp., claimed the right to a portion of those funds. Writing for the Seventh Circuit in ACF 2006 Corp v. Devereux, No. 15-3037 (7th Cir. 2016), Judge Easterbrook summed up the ensuing battle: “This appeal presents a three-corner fight about who gets how much of that money.”

At issue was how much of the $2 million belonged to the Conour Firm for the services it performed before Timothy D. left, and how those funds should be divided between the victims and ACF 2000. At trial, the federal district court concluded that the Conour Firm was entitled to some $775,000 under principles of quantum meruit, and that ACF had priority of payment over the victims. Continue reading

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A plaintiff seeking to recover on a breach of fiduciary duty claim against a business partner must be able to show more than just evidence of his partner’s bad conduct, but must also demonstrate that he suffered measurable damages as a result of the conduct.

For almost a decade, JAP, Inc. and Today’s Sushi Corp. jointly owned and operated trendy Chicago eatery Sushi Wabi, cashing in on the burgeoning national sushi craze. In 1998, Angelo G., owner of JAP, and Angela L. and Susan T., owners of Today’s Sushi, entered a limited partnership agreement to open the Randolph Street restaurant, with each entity owning about half of the enterprise. The venture capitalized on Angela and Susan’s experience operating sushi restaurants, with JAP providing most of the investment funds. The partnership agreement gave each partner full power of management and control of the operation of the business by unanimous consent. Angelo’s brother Franco was made manager of Sushi Wabi and put in charge of daily decision-making, with Angelo to be consulted on “major” decisions. Things soured when Angela and Susan attempted to remove Franco as manager. JAP brought breach of fiduciary duty and conversion claims against the pair, and filed for an accounting and dissolution of the partnership. In its complaint, JAP alleged 19 separate bases for breach of fiduciary duty and demanded consequential and punitive damages. Continue reading

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Companies doing business in America are influenced by multiple factors. Not only do they need to keep track of the federal and local laws that vary between states and even cities, but court systems in different locations treat businesses differently.

Every year, the Lawsuit Climate Survey is used to rank states on how fair they are to businesses that get sued. This year, the survey was conducted by Harris, a polling firm, on behalf of the U.S. Chamber’s Institute for Legal Reform.

In 2010, Illinois was ranked 45th, out of all 50 states and it’s only gotten worse since then. In 2012, the last time the survey was conducted, Illinois ranked 46th. Now the most recent poll has put us in 48th place, ahead of only Louisiana and West Virginia. Continue reading

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Keep Your Friends Close: What to do When a Friend and Business Partner Allegedly Defrauds You

When entering into business transactions, it’s always important to know the terms of the agreement. The importance of being aware of the exact terms of an agreement cannot be overstated. Sometimes, even more important than the writing, is what is conveyed from one party to another is. A material misrepresentation or omission within a fiduciary relationship will most likely amount to fraud.

In Hassan v. Yusuf, 408 Ill. App. 3d 327, 944 N.E.2d 895 (1st Dist. 2011), Yusuf, the defendant, entered into an agreement regarding the purchase of a gas station together with Hassan, the plaintiff. Hassan claimed that pursuant to the parties’ agreement, he would receive one-third of the interest in a gas station along with interest in the real estate which was secured by a mortgage. These terms had allegedly been dictated to Hassan by Yusuf, who was Hassan’s good friend and one of three investors in the gas station venture. Later, after having invested significant funds, Hassan learned that Yusuf had allegdly duped him into believing that he would receive an interest in the real estate. Hassan then filed suit against Yusuf and the other defendant alleging fraud, breach of fiduciary duty, breach of contract, and sought an accounting and declaratory judgment.

In determining whether or not fraud was committed by Yusuf, the Illinois Appellate Court first addressed whether a fiduciary relationship existed between the parties. In Illinois, the law is clear that “[i]n order to prove fraud by the intentional concealment of a material fact, it is necessary to show the existence of a special or fiduciary relationship, which would raise a duty to speak.” Id. at 912.

The Court identified several facts support a fiduciary relationship, including: (1) that Hassan and Yusuf were each equal shareholders; and (2) that Hassan and Yusuf had been close personal friends for approximately ten years. The trial court had previously found that these facts were not sufficient to establish a fiduciary relationship, but the Appellate Court overturned this finding. The Appellate Court held:

“[T]here is sufficient evidence on the record to establish that such a finding would be against the manifest weight of the evidence and therefore reversible given the fact that a fiduciary relationship exists in all certainty based on their business venture together.”

The Appellate Court even found that the parties’ friendship and their joint venture was “overwhelming” evidence of a fiduciary relationship.

After finding that a fiduciary relationship existing between the parties, the Appellate Court’s concluded that there was a material omission giving rise to a breach of fiduciary duty. The trial court had previously found that Yusuf’s testimony that he told Hassan that Hassan would not receive interest in the property lacked credibility. The trial court had also found that Hassan credibly testified that he understood he would be receiving an equal share in the gas station and real estate. The Appellate Court therefore held: “[c]onsequently, Yusuf’s omission that [Hassan] would not acquire an interest in the real estate amounts to a misrepresentation upon which [Hassan’s] claim of fraud may be based.”

The Illinois Appellate Court’s decision in Hassan v. Yusuf reinforces the importance of committing oral agreements to writing. Had the parties done so, a lawsuit would likely not have been needed or it would not have turned on questions of witness credibility. The decision also reinforces that when an oral agreement is at issue, witness credibility will often be one of the most important factors. Continue reading

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An Illinois federal court granted a motion to dismiss in a putative shareholder derivative class action, having already denied the plaintiff’s application for a temporary restraining order (TRO). Noble v. AAR Corp., et al, No. 12 C 7973, memorandum and order (E.D. Ill., Apr. 3, 2013). The plaintiff asserted causes of action for various alleged breaches of fiduciary duty on behalf of the corporation, but the court found that the lawsuit was a direct action, primarily for the plaintiff’s benefit as a shareholder, rather than a derivative one.

The dispute related to a recommendation by the Board of Directors to the shareholders of AAR Corporation, a publicly-traded company, regarding an executive compensation plan. The Board made a unanimous proposal regarding the corporation’s “say on pay” plan, which allowed the shareholders to vote on executive pay as required by Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), 15 U.S.C. § 78n-1. In a seventy-page proxy statement, the Board asked the shareholders to approve an advisory resolution regarding executive compensation at the corporation’s annual shareholder meeting, which was scheduled for October 10, 2012.

The plaintiff filed suit against the corporation and individual Board members, alleging that the Proxy Statement failed to disclose various details about what the Board considered before making its proposal. Noble, memorandum at 5. He claimed that the individual defendants breached their fiduciary duties of good faith, care, and loyalty to the shareholders, and that the corporation aided and abetted these breaches. Id. at 5-6. The defendants removed the case to federal court on October 4, 2012. The following day, the plaintiff filed a motion for a TRO, asking the court to stop the shareholder vote. The court held a hearing on October 9 and denied the motion. On October 10, the shareholders approved the Board’s proposal, with seventy-seven percent of the shares voting in favor. Id. at 1-2.

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Our Chicago class action attorneys note that a class action claim against an insurance company, which the defendant had removed to federal court, fell within an exception to the federal jurisdiction statute, according to a federal district judge in LaPlant v. The Northwestern Mutual Life Insurance Company, No. 11-CV-00910, slip op. (E.D. Wis., Aug. 20, 2012). The court remanded the case to Wisconsin state court under the corporate governance exception to the Class Action Fairness Act (CAFA), 28 U.S.C. § 1332(d). It held that the plaintiffs’ claims related exclusively to the defendant’s “internal affairs,” based on Wisconsin law.

The defendant issued an annuity insurance policy to the lead plaintiff. As a mutual insurance company, the defendant was “owned cooperatively by its policyholders,” LaPlant, slip op. at 1, and paid dividends to policyholders out of its profits. In 1985, it moved policyholders’ money into a separate fund and began paying dividends based on interest generated by the fund. Id. The amount of the payments received by the policyholders allegedly decreased as a result of this change. Wisconsin law gives policyholders the right to participate in annual profit distributions. Wis. Stat. § 632.62(2).

The lead plaintiff brought a class action lawsuit for breach of contract and breach of fiduciary duty on behalf of a class of policyholders in Wisconsin. The class prevailed at trial, and the lead plaintiff moved to expand the scope of the class to include policyholders in other states. The defendant removed the case to federal court under CAFA, which confers jurisdiction to federal courts over class actions with more than one hundred class members, more than $5 million in controversy, and diversity of citizenship between the defendant and at least one class member. The plaintiff moved to remand the case to Wisconsin state court based on the “corporate governance exception,” which applies when a class action’s claims solely relate (1) “to the internal affairs or governance of a corporation” (2) based on the laws of the state of incorporation. LaPlant, slip op. at 2, citing 28 U.S.C. §§ 1332(d)(9)(B), 1453(d)(2).

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A Florida appellate court reversed an order certifying a class of doctors claiming breach of fiduciary duty and other causes of action against their employer. InPhyNet Contracting Services v Soria, 33 So.3d 766 (Fl. Ct. App. 2010). The case began as a suit alleging breach of a covenant not to compete against one physician, leading the physician to counterclaim on behalf of a putative class with regards to a bonus compensation plan. After separating the physician’s individual claims from the class claims, the trial court certified a class. The appellate court reversed, finding that the class claims did not meet the requirements of commonality or predominance over class members’ individual claims.

InPhyNet Contracting Services (ICS) places physicians in hospitals around the state of Florida on a contractual basis. It offers incentives to physicians to work in hospital emergency rooms through a Physician Incentive Plan (PIP), which pays doctors out of a “bonus pool” associated with a hospital based on performance and similar factors. Id. at 768. ICS placed Dr. David Soria in the emergency room of Wellington Regional Medical Center, where he worked as Medical Director. The dispute between Soria and ICS began when Wellington terminated its contract with ICS and contracted with a competitor, and Soria began working for the competitor.

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