Business Disputes

llinois Appellate Court Rules that a Relocation Provision in a Commercial Lease Must Abide by State Regulations

October 20, 2011 | Peter S. Lubin and James V. DiTommaso

Earlier this year, the Appellate Court of Illinois handed down an opinion that has implications for businesses with leased premises. Our Aurora business attorneys found Bright Horizons Children’s Centers LLC v. Riverway Midwest LLC, which is a dispute regarding a commercial lease that was initially filed in Cook County.

Bright Horizons is a company that operates day care facilities across the state of Illinois. The company entered into a ten year commercial lease agreement with Riverway for a property in Rosemont, Illinois. The lease agreement contained restrictive language allowed for the building to only be used for a child-care center. The agreement also contained a relocation provision which gave Riverway the right to relocate Bright Horizons, upon 180 day written notice, to a different property of equal quantity and quality to the original premises. The dispute between these two parties arose when Riverway sought to invoke the relocation clause less than one year into the lease.

Riverway attempted to exercise the relocation provision on three occasions. The first attempt was unsuccessful because the alternative premises allegedly presented to Bright Horizons did not meet the requirements of the lease agreement. Bright Horizons accepted the second space offered by Riverway, but Riverway withdrew their notice before renovating the new facilities to meet the requirements of the lease. Riverway then proposed a third relocation premises, and allegedly informed Bright Horizons that if they were unable to agree on an alternative space, Riverway would terminate the lease in 180 days from the date of the notice. This third property allegedly ran afoul of state licensing standards for child care facilities and the Illinois Administrative Code. Bright Horizons informed Riverway that the third property did not meet Illinois’ licensing standards and could not be legally used as a child care facility. In response, Riverway informed Bright Horizons that they were in default of the lease and that Bright Horizons could cure their default by relocating to the third alternative premises.

Bright Horizons then filed for declaratory judgment requesting that the trial court find: 1) that they were not in breach of the lease, 2) that Riverway could not terminate the lease, and 3) that Riverway had failed to properly exercise the relocation clause of the lease agreement. Bright Horizons then filed for summary judgment on these issues, which was granted by the trial court. Riverway then appealed the trial court’s ruling. On appeal the Appellate Court agreed with the trial court’s grant of summary judgment in favor of Bright Horizons. In so ruling, the Court held that the lease allowed for one permitted use of the premises and required that Bright Horizons comply with all laws and regulations, including the state child-care licensing standards. The Court held that Bright Horizons’ relocation to the proffered space would violate state regulations and cause Bright Horizons to be in breach of the lease due to their inability to operate a child-care. As such, the Court affirmed the ruling of the trial court granting summary judgment in favor of Bright Horizons.

Appellate Court Overturns Grant of Summary Judgment in Successor Liability Case

October 9, 2011 | Peter S. Lubin and James V. DiTommaso

For many business owners, they operate their companies with the hopes that they will continue to be successful ventures long after they are gone. However, both low level and senior personnel eventually move on, and businesses may have obligations to their surviving family members. DiTommaso Lubin is familiar with such agreements, and often times companies may not wish to honor those obligations after employees are no longer working for the company. Pielet v. Pielet is one case discovered by our Crystal Lake business litigation lawyers that addresses that very issue.

In Pielet v. Pielet, Arthur Pielet allegedly entered into a consulting agreement with Defendants that provided him lifelong monthly payments in exchange for his consulting services for Defendants scrap metal business, and should he pass on, those payments were to continue and be paid to his wife until her death. Arthur Pielet eventually died, and Defendants then allegedly ceased making payments to his widow, who filed suit alleging a breach of contract and successor liability among other causes of action. Plaintiff successfully filed a motion for summary judgment, and Defendants appealed the trial court’s decision.

On appeal, Plaintiff argued that Defendant PBS One, a successor in interest to Pielet Corp. (the company who was originally obligated under the consulting agreement), was liable under the agreement because they had entered into a purchase and assignment agreement with Pielet Corp. In response, PBS One argued that a novation had occurred whereby Pielet LP had substituted for Pielet Corp. in the consulting agreement, which absolved PBS One of liability. PBS One supported their claims with deposition testimony that, in the absence of providing a defense, at least raised an issue of material fact as to the existence of the novation. Additionally, PBS One argued that because the company had dissolved four years prior to the cessation of payments (and the accrual of Plaintiff’s claims), the applicable Illinois Survival Statute prevented Plaintiff’s claim.

The Appellate Court began with its analysis of the Survival Statute, and found that the statute applies to “rights”, “liabilities”, and “causes of action.” Because the case at bar concerned Plaintiff’s “right” to payment and Defendants’ “liability” to pay, and Plaintiff raised her claim to payment within the five-year period allowed under the statute, her claim was allowed under the law. The Court went on to discuss Defendant’s second argument regarding the existence of a novation that would place liability elsewhere. The Court did not make a finding of a novation, but the facts indicated that a novation could be inferred at two different points in time. Thus, the Court concluded that a triable fact question existed as to whether a novation occurred, and if there was a novation, at what point in time did it occur. In so holding, the Court reversed the trial court’s grant of summary judgment on all of the appealed causes of action, and remanded the case.

The Illinois Securities Act of 1953 Does not Apply to Common Law Damages Claims for Breach of Fiduciary Duty by Sellers of Securities

September 8, 2011 | Peter S. Lubin and James V. DiTommaso

As a Chicago law firm that focuses on business litigation, DiTommaso Lubin pays close attention to shareholder lawsuits filed in Illinois’ courts. Our Elmhurst business attorneys discovered a case filed in the Appellate Court of Illinois, First District, Fourth Division that answers questions regarding the appropriate statute of limitations to apply in a shareholder action for common law damages.

Carpenter v. Exelon Enterprises Co. is a case filed by multiple minority shareholders against the majority shareholder, Exelon, for breach of fiduciary duty and civil conspiracy. Defendant Exelon owned 97% of InfraSource, and Plaintiffs owned a portion of the remaining 3% of the company. Defendant then allegedly decided to divest its interest in the company through a series of complex merger transactions. The alleged end result of these transactions was to grant all shareholders in InfraSource would receive a pro rata share of the net proceeds. Using its majority stake in InfraSource, Defendant allegedly voted its shares in favor of the merger transactions, which was subsequently executed according to Defendant’s plan. After the merger, Plaintiffs filed suit against Exelon alleging breach of fiduciary duty and civil conspiracy that caused the minority shareholders to be inadequately compensated for their shares in InfraSource. Defendant then moved to dismiss the action because Plaintiffs’ claims were barred under the three year statute of limitations in the Illinois Securities Law of 1953. The trial court denied Defendant’s motion, stated that the applicable statute of limitations was the five year period contained in section 13-205 of the Illinois Code of Civil Procedure. The trial court then stayed the matter and certified the statute of limitations issue for an interlocutory appeal to the Appellate Court.

On appeal, the Court examined Defendant’s argument that, despite the fact that Plaintiffs did not allege specific statutory violations, Plaintiffs’ claims fell within the scope of the Illinois Securities Law and its three year statute of limitations. Plaintiffs argued that, because of the similarities between Illinois and federal securities law, federal case law should be utilized by the Court. Plaintiffs’ cited federal cases holding that securities fraud does not include the oppression of minority shareholders nor does it include oppressive corporate reorganizations, and thus the case did not fall within the purview of the Illinois statute. The Court performed a statutory analysis and determined that subsection 13(A) of the Law did not apply to Plaintiffs because their claims did not arise out of Plaintiffs’ role as purchasers of securities. The Court went on to explain that Defendant’s argument based upon subsection 13(G), which provides a remedy to any party in interest in the unlawful sale of securities, was unpersuasive. Instead, the Court held that subsection 13 of the Illinois Securities Law of 1953 does not “concern retroactive common law damages claims for breach of fiduciary duty brought by sellers of securities in general, or minority shareholders in particular.” By so holding, the Court declared that the three year statute of limitations did not apply and remanded the case back to the trial court.

Carpenter v. Exelon Enterprises Co. provides potential shareholder litigants with a ruling that gives them an additional two years to bring their claims. Conversely, those facing liability in a common law action surrounding a securities transaction should be aware that such claims are viable for a longer period of time than they may have previously thought.

Directors Are Not Liable for the Torts of Employees Unless Personally Involved, but Should Still Keep a Close Watch Over What Corporate Officers are Doing

July 28, 2011 | Peter S. Lubin and James V. DiTommaso

There are hundreds of new cases filed in Illinois courts every day, and many of those cases involve business disputes. At DiTommaso Lubin, we pride ourselves on staying on top of new court filings so that we know of changes in the law as they happen. Our Waukegan business attorneys just found a decision rendered by the Appellate Court of Illinois that provides some useful information for our business clients.

Zahl v. Krupa is a dispute between investors in a fund allegedly run by a company and the directors of that company. Plaintiffs alleged that they were approached by Defendant Krupa, President of Jones & Brown Company, Inc., who solicited money to be invested in a fund only available to the officers and directors (and their family members) of the company. There were two agreements allegedly written on company letterhead that set out the terms of the investments, whereupon Plaintiffs would invest between $100,000 and $160,000 each and receive an 11.1% return guaranteed by Jones & Brown. Plaintiffs each allegedly signed an agreement with Defendant Krupa and gave him the funds requested. There was no other written documentation regarding the investments or the agreements. Plaintiffs allegedly never got the return on their investment nor did they get their money back.

Plaintiffs then filed suit against Krupa, the other officers of Jones & Brown, and the directors of the business. Plaintiffs sued for breach of contract, fraud, and negligent hiring, supervision, and retention. The breach of contract and fraud causes of action were reliant upon the alleged assertion that Defendant Krupa, in soliciting Plaintiffs, was acting as an agent or apparent agent of Jones & Brown. The remaining causes of action sought to hold Defendants liable for Defendant Krupa’s deception because they knew or should have known that he was untrustworthy.

Through discovery, the depositions of several parties allegedly showed that Defendant Krupa never had actual authority to enter into the investment agreements because the directors neither signed nor authorize the agreements. Testimony also revealed that the investment agreements were allegedly outside the scope of Jones & Brown’s normal business as a construction company, which showed that Krupa did not have apparent authority. As a result of these facts, Defendants successfully moved for summary judgment on the breach of contract claim based upon lack of actual and apparent authority. In moving for summary judgment on the fraud claim, Defendants cited Illinois case law holding that directors cannot be held personally liable for fraud unless they personally participated in perpetrating the fraud. As the directors did not sign the agreements or participate in their creation, the court granted summary judgment. Finally, Defendants successfully moved for summary judgment on the negligence claims because they did not know that Krupa had the potential for fraud.

Plaintiffs then appealed the trial court’s ruling against them, and the Appellate Court conducted a de novo review of Defendants’ motion for summary judgment. The Court agreed with the trial court’s findings and held that Defendants were not negligent with respect to Krupa and did not know about his dealings with Plaintiffs. The Court went on to say that there was no reason for Defendants to suspect Krupa of wrongdoing.

In reviewing Zahl v. Krupa, the case serves as a reminder for business investors to carefully examine any investment opportunities and accompanying paperwork to ensure the legitimacy of the investment. Additionally, business owners and directors should keep an eye on their officers and employees to ensure that they do not find themselves defending a lawsuit for their employees’ allegedly objectionable actions.

Federal District Court Exercises Supplemental Jurisdiction Over Counterclaims Regarding Ownership of Employee-Created Farm Equipment Patents

July 27, 2011 | Peter S. Lubin and James V. DiTommaso

Most companies encourage their employees to innovate and come up with ways to improve the processes, products, and service of the business. Such improvements may be patentable inventions, and it is important for business owners to establish who owns that intellectual property and protect any IP that accrues to the company. In the absence of an explicit employment agreement, the ownership of such inventions can come into dispute, and our Joliet business attorneys discovered one such case in the Central District of Illinois federal court.

Shoup v. Shoup Manufacturing is a dispute between a company and its former president over the ownership of several patents. Ken Shoup, Plaintiff, was the president of Defendant Shoup Manufacturing for over twenty years, and during his time as president he conceived of several inventions that were patented on behalf of Defendant. Defendant used those patents and sold products based upon them. However, Plaintiff did not have an express or written employment contract that required assignment of the inventions to Defendant. Eventually, Plaintiff terminated his relationship with Defendant, began a similar business to compete with Defendant, and filed suit alleging patent infringement for Defendant’s continued use of his inventions. Plaintiff sought an injunction to prevent that continued use and monetary damages under 35 USC §271.

Defendant responded to Plaintiffs lawsuit by denying that Plaintiff owned the patents in question, and alleged that Plaintiff was obligated to assign the patents to Defendant, and that it had a valid license to the inventions. Defendant also filed a counterclaim alleging that Plaintiff developed the patents using company resources while he was an employee and officer of Defendant, and that Defendant was the rightful owner of the patents. Defendant sought a compulsory written assignment of the patents and an accounting of Plaintiff’s unauthorized exploitation of them. Plaintiff then filed a motion for Judgment on the Pleadings to dismiss Defendant’s counterclaims.

Plaintiff argued that the Court had no jurisdiction over the claims because ownership of the patent was determined by Illinois State law. The Court agreed that it did not have original jurisdiction over the dispute, but because the counterclaims for ownership of the patents arose out of a common nucleus of operative facts regarding Plaintiff’s original patent infringement suit (which was a federal claim), supplemental jurisdiction was proper. The Court therefore denied Plaintiffs motion, finding Defendant had satisfied the requirements for supplemental jurisdiction under 28 USC §1367(a), and allowed the counterclaim to proceed.

Fraud Magazine Reports: “In the Wake of Significant Legislative Changes, the Civil False Claims Act Hauls in $3 Billion in Fiscal Year 2010”

July 23, 2011 | Peter S. Lubin and James V. DiTommaso

Fraud Magazine reports on the new changes in federal false claims act. The article states:

A 123-year-old law now has new teeth to better fight today’s tricky fraudsters. Enacted in 1863, the U.S. federal False Claims Act, 31 U.S.C. §§ 3729-3733 (FCA), was designed to fight unscrupulous contractors during the Civil War. The FCA created liability for persons that knowingly submit, or cause another person or entity to submit, false claims for payment of government funds. Today, violators are liable for three times the amount of government damages as well as civil penalties of $5,500 to $11,000 per false claim. …

The U.S. Congress reinvigorated the FCA in 1986 when it changed the law in a number of ways. Among other things, the amendments bolstered the act’s qui tam provisions, provided for treble damages — allowing courts to triple the amount of the actual damages to be awarded — and added an anti-retaliation provision that imposes liability on any employer who takes retaliatory actions against an employee because of the employee’s lawful acts in furtherance of a qui tam action. This ushered in a new era for the FCA because the amendments triggered an increase in the number of qui tam suits: now relators initiate the bulk of cases under the FCA. Also, the amendments shifted the FCA’s focus from fraud involving defense contractors to a wide array of industries — most notably health care. This has led to the federal government’s significant and increasing recoveries under the FCA.

In May 2009, Congress further revamped the FCA by passing the Fraud Enforcement and Recovery Act of 2009 (FERA), which included amendments to the FCA. The amendments made key procedural changes to the FCA and expanded the scope of liability (particularly as it relates to health-care providers). The FERA also set aside $165 million to aid fraud detection and enforcement efforts.
These amendments, coupled with a handful of other legislative changes and administrative actions, are already having a material effect on how the government and private sector are combating fraud.
BY THE NUMBERS: 2010 WAS A GOOD YEAR FOR FRAUD
According to a Nov. 22, 2010, U.S. Department of Justice (DOJ) press release, the DOJ “secured $3 billion in civil settlements and judgments in cases involving fraud against the government in the fiscal year ending Sept. 30, 2010.” Of that sum, $2.3 billion is attributable to cases initiated by whistle-blowers under the FCA relator provisions. This brings the total amount of civil recoveries since the previous major overhaul of the FCA in 1986 to more than $27 billion. This total does not take into account settlements after Sept. 30, 2010, including but not limited to $600 million in civil penalties that were part of a larger $750 settlement with GlaxoSmithKline involving the manufacture and sale of adulterated drug products and three settlements announced in December 2010: 1) $102 million in civil penalties that were part of a $203.5 million global settlement with Elan Corporation resolving off-label marketing allegations, 2) a $421 million settlement stemming from Average Wholesale Price violations by Abbott Laboratories Inc. and Roxanne Laboratories Inc. and 3) a $280 million settlement with Dey, Inc. to resolve marketing spread allegations.

The article goes on to describe what lead the government to beef up the qui tam and whistle blower laws. You can read the full article by clicking here.

Appellate Court of Illinois Upholds Circuit Court’s Rescission of Oral Agreement to Jointly Purchase a Gas Station due to Fraudulent Misrepresentation

July 13, 2011 | Peter S. Lubin and James V. DiTommaso

When starting a new business venture, choosing the right partners is one of the most important decisions any company owner will make. Unfortunately, not all partnerships work out, and in some instances that is due to the dishonest machinations of fellow owners. Our Elgin business attorneys recently discovered one such case where one business partner was allegedly defrauded by two other owners in a transaction to jointly purchase and operate a gas station in Tinley Park.

Hassan v. Yusuf pits Plaintiff, a man who thought he was investing in the purchase of a gas station, against his two business partners who were also involved in the deal. Defendants solicited an investment of $120,000 from Plaintiff, equal to their own contributions, to purchase the gas station in question, but allegedly failed to inform Plaintiff that he was only purchasing one-third of the business, and had no claim to the real-estate upon which the station was built. After Plaintiff entered into an oral agreement to purchase the station with Defendants and run the day-to-day operations of the business, Defendants acquired title to the property and conveyed that title to a corporation solely owned by Defendants. The business was profitable at first, but eventually began operating at a loss. Defendants then demanded Plaintiff invest more money in the venture to cover these losses, but Plaintiff had no additional funds to invest, and requested an accounting of the business’s financial records and documentation showing his ownership and portion of the losses. Defendants failed to provide said documentation, and Plaintiff ceased working at the station and eventually filed suit.

The Circuit Court of Cook County found that Defendants had defrauded Plaintiff through their misrepresentations regarding the purchase of the business and accompanying real estate. In its judgment, the trial court granted Plaintiff rescission of the contract and damages for the total amount of money he invested in the business. After the trial verdict, Defendants appealed the finding of fraud on the basis that there was not clear and convincing evidence of a misrepresentation that Plaintiff would be an owner of the real estate under their agreement.

The Appellate Court upheld the Circuit Court’s decision, finding the record sufficient to support a finding that Defendants misrepresented to the Plaintiff that he was purchasing a one-third interest in the station and accompanying real estate, even though they had no intention of actually doing so. Furthermore, there was clear evidence of a fiduciary relationship between the parties, which gave rise to a claim for fraud by omission when Defendants failed to make explicit to Plaintiff that he was not acquiring an interest in the land. The Court went on to state Plaintiff’s reliance upon Defendants’ misrepresentations were justifiable, and upheld the trial court’s decision to rescind the contract, but reduced the damages award in an amount equal to Plaintiff’s share of the profits from the station. The Court did so because giving Plaintiff his share of the profits would be inconsistent with the remedy of rescission, which is supposed to place a party in the same position they would be in had the contract never occurred.

Illinois’ Franchise Act Does Not Require Manufacturers to Extend Contractual Agreements that Grant Exclusive Sales Territory

July 7, 2011 | Peter S. Lubin and James V. DiTommaso

DiTommaso Lubin has clients that operate a variety of businesses all across the state of Illinois. While there are common laws and legal principles that apply to all companies and corporations, there are other Illinois statutes that apply to specific types of businesses. Our Elgin business attorneys came across Clark Investments, Inc. v. Airstream , Inc., which is an Appellate Court of Illinois case involving laws that govern motor vehicle dealerships.

Clark Investments, Inc. v. Airstream , Inc. is a dispute between a Recreational Vehicle (RV) manufacturer and an RV dealer over a contractual agreement between the two companies. Initially, the Plaintiff car dealer contracted with Defendant manufacturer to have exclusive rights to sell Defendant’s RV’s in the state of Illinois. The initial contract was for a period of approximately two years, and shortly before the end of that contract Defendant proposed to renew the agreement with different terms. Defendant’s new contract contained no expiration date and gave Plaintiff no exclusive sales territory. Plaintiff rejected this contract and proposed the same exclusivity terms as the first contract, but Defendant rejected Plaintiff’s proposed changes. Shortly after these negotiations, the initial contract expired, but Defendant continued to supply Plaintiff with merchandise and service and Plaintiff continued to operate its business for almost nine months. The parties then entered into a new contract that contained no exclusive sales region for Plaintiff but allowed Plaintiff to sell more types of Defendant’s RV’s. After this new contract was signed, Defendant entered into an agreement with another RV dealership located ninety miles from Plaintiff’s business. This agreement authorized that dealership to sell some, but not all of the same products contained in Plaintiff’s agreement with Defendant.

Upon learning of this new agreement, Plaintiff filed suit against Defendant alleging violations of the Franchise Act and the Franchise Disclosure Act. Defendant then filed a motion for summary judgment on both causes of action, and the trial court granted the motion as to both claims. Plaintiff appealed the court’s ruling as to the Franchise Act claim only, alleging that Defendant’s had violated section 4(e)(8) of the Act by granting an additional franchise within Plaintiff’s relevant market area and refusing to extend the first contract that granted Plaintiff all of Illinois as its exclusive sales territory. The Appellate Court rejected this argument by citing language from the Act that defines the relevant market area as the fifteen mile radius around Plaintiff’s principle location. Because the other franchise was located further than fifteen miles away, there was no violation of the Act.

Plaintiff also argued that Defendant violated section 4(d)(6) of the Act by refusing to extend the first contract that granted Plaintiff an exclusive sales territory of the whole state. The pertinent part of the Act makes it unlawful for a manufacturer
“1) to cancel or terminate the franchise or selling agreement of a motor vehicle dealer,
2) to fail or refuse to extend the franchise or selling agreement of a motor vehicle dealer upon its expiration, or
3) to offer a renewal, replacement or succeeding franchise or selling agreement containing terms and provisions the effect of which is to substantially change or modify the sales and service obligations or capital requirements of the motor vehicle dealer.”

The Court disagreed with Plaintiff’s claim that Defendant’s actions fell within the first category of conduct. The Court explained that Defendant’s conduct fell under the third category because Defendant offered Plaintiff a new contract with different terms before the initial contract expired. They held that the changes in the new contract did not substantially change the sales and service obligations or capital requirements of the Plaintiff, and upheld the lower court’s ruling.

Appellate Court of Illinois Upholds Discharge of Guaranty Contract on Discharge Grounds

June 29, 2011 | Peter S. Lubin and James V. DiTommaso

Most businesses require loans to normalize their income stream and ensure that they have the cash necessary to operate. Some business owners enter into guaranty contracts to get the capital that they need, and in the process become personally liable for the debt of their company. In such instances, disputes often arise when the other party attempts to enforce the guaranty contract to collect on the debt. DiTommaso Lubin has been involved with contract disputes of all kinds, and our Elgin guaranty contract attorneys recently uncovered a case that illustrates why it is important to draft such contracts carefully and enforce them in a timely manner.

In Riley Acquisitions Inc. v. Drexler, Defendant and her husband initially entered into a guaranty contract and promissory note with a third party to get credit for the two companies owned by the couple. Eventually, the marriage dissolved, and each spouse took control of one of the companies. Defendant’s company dissolved shortly thereafter, and Defendant then sent a letter to the third party revoking her personal guaranty. Her ex-husband eventually filed for bankruptcy – discharging his liability under the guaranty in the process, and leaving Defendant as the only guarantor on the loan. The third-party who owned the debt eventually sold and assigned its interest to Plaintiff, who filed suit to collect on the loan. Defendant asserted affirmative defenses that her obligation under the note terminated after her company (the principal on the note) dissolved and that Plaintiff’s claims were barred under the applicable ten-year statute of limitations. Defendant won a directed verdict on the basis of her discharge and statute of limitations defenses, and Plaintiff appealed.

The Appellate Court found that because Defendant’s company dissolved, its obligation on the note terminated five years later under the applicable portion of the Illinois Business Corporation Act of 1983. This effectively terminated Defendant’s liability as well because the guaranty contract did not expressly provide that liability would continue in such a situation. Thus, because Plaintiff filed suit nine years after the dissolution of Defendant’s company, the Court upheld the trial court’s verdict on discharge grounds and did not address the statute of limitations issue.

Northern District of Illinois Federal Court Dismisses Double Derivative Shareholder Action Due to Lack of Parent / Subsidiary Corporate Relationship

June 15, 2011 | Peter S. Lubin and James V. DiTommaso

Members of the board of directors of a corporation have the responsibility to orchestrate the business in such a way that is advantageous to the shareholders and the continued growth and prosperity of the company. However, there are times when those directors may act in a way that serves their own interests, and the only way to protect the business is for shareholders to file a derivative suit on behalf of the company. DiTommaso Lubin is always researching new developments in this field of law, and our Chicago shareholder derivative action attorneys recently came across one such case filed here in the Northern District of Illinois, Eastern District federal court.

Reiniche v. Martin is a double derivative suit brought by individual plaintiffs who are shareholders of a corporation, Health Alliance Holdings (HAH), that itself is a primary shareholder of HA Holdings (Holdings), another corporation. Plaintiffs allege that Defendants sought to freeze them and other HAH shareholders out through a series of illegal and wasteful acts that resulted in an insider transaction to sell Holdings for $10 and debt relief to another company in which Defendants had an interest. That transaction was approved by Holdings’ board of directors in spite of the fact that there was no quorum present to do so, and HAH was denied its right to sit on the board. In doing so, Plaintiffs alleged that the Defendant directors and other shareholders of Holdings breached their fiduciary duties to the company. Defendants then moved to dismiss the suit under Federal Rule of Civil Procedure 12(b)(6), claiming that Plaintiffs lacked standing, their claim was untimely, and the claims are insufficient under the law and barred by the business judgment rule.

The Court held that Plaintiffs did not have double derivative standing because such standing is only granted in the context of a parent/subsidiary relationship, and HAH was only a shareholder in Holdings – it was not a parent or holding company of Holdings. The Court went on to say that because the individual Defendant shareholders were each minority owners, none of them had a controlling interest in Holdings, and therefore did not owe a fiduciary duty to the Plaintiffs. As such, the Court found no policy reason for invoking a double derivative action and granted Defendants’ motions to dismiss.