Closely Held Businesses

Guarantors of Commercial Lease Are Liable Even After Lease Changes Hands, First District Rules

December 11, 2008 | Peter S. Lubin and James V. DiTommaso

As Naperville, Oak Brook, Wheaton, and Chicago business trial lawyers with substantial experience in shopping center claims, we were interested to see a recent decision by the First District Court of Appeal on the obligations of people who guarantee a lease. A change in the lease and a directed verdict at trial do not relieve a couple of their liability as guarantors of a commercial lease, the court has ruled. In Chicago Exhibitors Corporation v. Jeepers! Of Illinois and Swento, 1-06-3313 (Aug. 30, 2007), the court ruled that a guaranty agreement written to survive changes to the lease is enforceable even if the lease is assigned to a new tenant who changes it without the guarantor’s approval.

Harvey and Cherry Swento owned a business that leased space from a predecessor landlord to Chicago Exhibitors Corporation (CEC). To sweeten that lease, the Swentos in 1991 personally guaranteed their lease payments and all of their other obligations as tenants, with a clause specifying that the guaranty would survive changes to or assignment of the lease. In 1997, they sold their business to Jeepers! of Illinois, Inc. and executed an agreement in which Jeepers! indemnified them from losses stemming from their personal guaranty. Jeepers! then failed to pay its rent, causing CEC to demand an amendment to the lease that reaffirmed the Swentos’ personal guaranty. CEC declined to recognize the transfer of lease obligations from the Swentos’ company to Jeepers! until rent was paid in full and Jeepers! executed its own guaranty.

Jeepers! never did take on the guaranty, but it failed to pay its rent again several times. In an effort to avoid eviction, it agreed to several changes to the lease in January of 2001. The Swentos did not sign this amendment, even though it called for the ratification of all guarantors. When CEC eventually sued Jeepers! for unpaid rent and repairs, it included the Swentos as guarantors. In the trial, the Swentos asserted that the January 2001 amendment was a material change that discharged them from their obligations as guarantors; CEC successfully moved in limine for a ruling that it was not. The parties then agreed to move straight to the damages phase of the trial, so the judge granted a directed verdict on liability. The Swentos were eventually found liable for unpaid rent and damages as well as attorney fees. They appealed the in limine motion, the directed verdict and the award of attorney fees.

Attorneys May Be Disqualified When Appearing Before a Judge Who is a Former Law Partner

October 30, 2008 | Peter S. Lubin and James V. DiTommaso

Our Chicago, Naperville, Wheaton and Oak Brook business trial lawyers won an important procedural victory in a business dispute involving a closely held business. In short, we were able to convince an Illinois trial court that an attorney’s appearance should be stricken after being added to a case, we argued, because it appeared the new attorney could have been added to force the recusal of the judge, the attorney’s former law partner.

The underlying case was a high-stakes financial dispute in a closely held business. It had been litigated for six years, but was delayed when the defendants added a new lawyer to their team. This lawyer was the former law partner of the judge assigned to the case, who had already put substantial time and effort into the matter. However, to avoid any appearance of impropriety, the judge immediately recused himself when the new lawyer, the former partner, was added. Our position was that it could appear that this was precisely what the defense had intended. In fact, the new lawyer was added two days after three rulings on motions that the new judge called “hotly contested,” including rulings unfavorable to the defense.

Another attorney for the defense was a recognized expert in legal ethics, we argued, so the defense clearly must have known that the judge might recuse himself. Furthermore, the defense admitted that it had discussed the possibility of recusal with the client. And finally, the new lawyer had chosen what we alleged was a non-standard way to notify the court of his addition. Rather than asking for leave of court to move for the addition, which would have allowed the parties to discuss the addition in open court, he simply sent his appearance directly to the judge. The trial court held this was contrary to both the rules of court and the usual practice. All of this showed that it appeared that the attorney might have been added to force a change of judges, we argued. For those reasons, we moved to disqualify the new attorney.

Evidentiary Hearings in Motions to Disqualify Illinois Attorneys

October 24, 2008 | Peter S. Lubin and James V. DiTommaso

A recent case of ours includes a motion to disqualify attorneys for the defense under Rule 3.7 of the Illinois Rules of Professional Conduct. Part (b) of that rule states that a lawyer may not represent a client in a case where he or she may be called as a witness to give testimony prejudicial to the client. We moved for an evidentiary hearing on this subject, because our underlying contentions included the contention that the lawyers for the defense witnessed the intentional torts that underlay the case.

Illinois law takes a motion to disqualify an attorney very seriously. Disqualifying a lawyer is considered drastic under state law, because it touches on basic rights by destroying the client’s relationship with the lawyer of his or her choosing. Schwartz v. Cortelloni, 177 Ill.2d 166 (1997). For that reason, an evidentiary hearing to determine what evidence is relevant and admissible is generally either necessary or wise. City of Kalamazoo v. Michigan Disposal Service, 125 FSupp2d 219 (WD Mich 2000). In fact, some appeals courts have found that a lack of an evidentiary hearing is sufficient to allow them to question a trial court’s decision.

However, Illinois and federal courts have held that an evidentiary hearing is unnecessary when the facts are not disputed, or when investigation is unlikely to provoke an admission that one side has ulterior motives. Robinson v. Boeing Co., 79 F3d 1053 (11th Cir 1996). The Eleventh Circuit’s decision in In Re BellSouth Corp., 334 F3d 941, 962 (11th Cir 2003), supporting Robinson, laid down factors for judges to consider when considering disqualifying an attorney for alleged “judge shopping.” These include “the fundamental right to counsel, the court’s docket, the injury to the plaintiff, the delay in reaching decision, the judicial time invested, the expense to the parties objecting and the potential for manipulation or impropriety.”

Shareholders Cannot Use Attorney Client Privilege to Effect a Freeze-Out

October 20, 2008 | Peter S. Lubin and James V. DiTommaso

Our Chicago business litigation firm recently handled a case in which one 50% shareholder allegedly tried to freeze out the other using lawyers hired by the companies owned equally by both. When our clients filed a shareholder freeze-out and breach of fiduciary duty claim and began discovery, the defendants balked, citing the attorney-client privilege to explain why they should not be required to turn over important and incriminating information.

As experienced business litigators know, this is no defense at all. Because our clients were equal shareholders in the business, we argued they were entitled to access to certain attorney communications. Furthermore, there is well-established law showing that the attorney-client privilege cannot be misused to deny discovery when the company or its officer is accused of breaching its fiduciary duty to stockholders. In other words, fiduciary duty trumps the privilege. Caselaw says a corporation may not use the privilege to shield relevant communications from discovery in an action by its own stockholders, unless there is good cause. The multipart test for good cause developed by the courts takes into account the nature of the communication, the seriousness of the allegations and other factors. Garner v. Wolfinbarger, 430 F2d 1093 (5th Cir. 1970).

The attorney-client privilege also cannot be raised when the disputed communications were made after the date the attorney and client began a fraudulent or criminal scheme that was part of the lawsuit. That is, communications about crime, fraud or torts are excepted from the attorney-client privilege. Cleveland Hair Clinic, Inc. v. Puig, 968 FSupp 1227, 1241 (ND Ill 1996). Unfortunately, we believed this to be the situation in our case.

Trademark Dispute Between Naperville Small Business and National Corporation Can Proceed

October 16, 2008 | Peter S. Lubin and James V. DiTommaso

In a business trademark dispute, the Seventh Circuit has ruled that large auto parts retailer AutoZone may proceed with its trademark infringement lawsuit against a two-store automotive services business in Naperville and Wheaton, Illinois, called Oil Zone and Wash Zone. AutoZone, Inc. v. Michael Strick, No. 07-2136 (7th. Cir. Sept. 11, 2008).

AutoZone sells auto parts and products, and has been well-known in the Chicago area since the early 1990s, according to the opinion. In that decade, defendant Michael Strick opened his Oil Zone stores outside Chicago, in Wheaton and Naperville. These stores sold automotive services such as oil changes, not parts or products; the Naperville location also offered car washes under the name “Wash Zone.”

AutoZone learned of Strick’s businesses in 1998, but did not contact him until sending a letter in February of 2003. It filed a lawsuit against Strick and his businesses near the end of that year, alleging service mark, trademark and trade name infringement and trademark dilution under the federal Lanham Act, federal unfair competition law, the Illinois Trademark Registration and Protection Act and Illinois common law. Both sides sought summary judgment, which was granted to Strick only, on his claim that there was no reasonable likelihood of confusion between his trademark and AutoZone’s. Strick’s defense of laches — that AutoZone had waited too long to sue — was not addressed. AutoZone appealed on the likelihood of confusion issue.

Using Forensic Accountants and Certified Fraud Examiners in Shareholder, Business, Divorce and Commerical Litigation

July 23, 2008 | Peter S. Lubin and James V. DiTommaso

As Chicago business, shareholder rights and commercial law litigators, we frequently handle cases involving allegations of business fraud or financial mismanagement, often as part of complex business dispute, that require significant expertise in financial issues. When handling a divorce involving a family business or other closely held company, we also sometimes find we need an expert’s help properly valuing the business, so we can help our clients get the most equitable possible distribution of marital property.

Our Chicago, Oak Brook, Wheaton and Naperville business trial attorneys have handled many complex business and commecial law litigation matters which have involved presenting or cross-examining accounting witnesses.

While we’re confident in our legal skills, these situations call for specialized financial skills. To give our clients the best possible representation in business, shareholder and other commercial disputes, we sometimes retain a forensic accountant or fraud examiner. Both of these jobs are twofold: They help attorneys and their clients understand the complex financial aspects of their cases, and they may also be called to testify as expert witnesses. A forensic accountant’s job is to examine a person or corporation’s accounts “cold,” from the outside; the subject isn’t generally expected to cooperate. Similarly, a fraud examiner delves deep into a company’s finances, looking for the source of anything that seems inconsistent or suspicious. Both can serve as expert witnesses who help establish the value of a business or testify to the existence of fraud.

Will Executor’s Bad Faith Trumps Shareholder Stock Redemption Agreement By Decedent

July 21, 2008 | Peter S. Lubin and James V. DiTommaso

In a shareholder and breach of fiduciary duty dispute arising from a probate case involving a closely held corporation with two shareholders, the Illinois Third District Court of Appeal has ruled that a shareholder agreement made by a decedent does not allow the remaining shareholder to execute the decedent’s will in bad faith. In re Estate of Talty, No. 3–06–0669 (Oct. 29, 2007).

Thomas Talty owned 50% of a closely held corporation (an auto dealership in Morris, Illinois), with his brother William Talty. They each also owned half of the land the dealership was built on, and had an interest in half of an adjoining parcel of land owned by a land trust. Thomas wrote a will in 2000 naming William as executor and naming Thomas’s wife, Helen Talty, as sole residual beneficiary of the estate.

The will gave William the right to purchase Thomas’s shares of the dealership from his estate, but required that the purchase price be determined by an independent appraiser appointed by the probate court. Similarly, it gave William the right to purchase Thomas’s half of the land, but at fair market value set by an independent appraiser approved by the probate court. Separately, in 2001, William and Thomas made a corporate agreement allowing their company to buy the shares of any deceased shareholder. It specified that the fair market value of the shares should be determined by an accountant agreed on by the company and the decedent’s representative, or, if they couldn’t agree, appointed by the probate court.

Shareholder May Withdraw Complaint, Appeals Court Rules in Corporate Dispute

July 18, 2008 | Peter S. Lubin and James V. DiTommaso

A minority shareholder may withdraw his complaint under the Illinois Business Corporation Act of 1983, because the majority shareholder failed to meet requirements of that law, the Illinois Third District Court of Appeal ruled in an Illinois shareholder dispute lawsuit. Lohr v. Havens, 3-06-0930 (Nov. 11, 2007).

Charles Lohr owned a large minority of the stock in Phoenix Paper Products, Inc., a closely held private corporation in Illinois. He and another shareholder, James Durham, became concerned about possible financial mismanagement by the majority shareholder and president, Terry Havens, and their accountant, Samuel Morris. In months of correspondence, they accused Havens and Morris of taking unspecified inappropriate actions without shareholder approval.

This culminated in a 2003 lawsuit by Lohr alleging that Havens and Morris were misusing the company’s resources and acting illegally. Count I of the suit asked the court to either order a buyout of all Lohr’s stock or dissolve the company. Havens filed a timely election to buy Lohr’s shares, but Lohr accused Havens of illegally doing this without shareholder approval. After two years of discovery, Lohr asked to withdraw Count I and its associated demands, but Havens objected. The trial court found that because Havens hadn’t notified shareholders about the election, it was invalid, allowing Lohr to dismiss Count I of his complaint. Havens appealed.

Missed Deadline Bars Stolen Corporate Opportunities Claim, Appeals Court Rules

July 15, 2008 | Peter S. Lubin and James V. DiTommaso

The doctrine of laches bars a plaintiff from bringing a stolen corporate opportunities lawsuit, the Illinois First District Court of Appeal has ruled. Lozman v. Putnam, No. 1- 06-0861 (February 18, 2008).

Plaintiff Fane Lozman and defendant Gerald Putnam met in 1986 as employees of the same Chicago securities firm. Eight years later, Lozman came up with an idea for a new type of software for traders, and hired another defendant, Townsend Analytics Inc., to program it. To market the software, Lozman and Putnam formed Blue Water Partners, Inc., an Illinois corporation, in 1994. Each was a 50% shareholder and a director. The plan was to barter the software for a share of a brokerage firm’s commissions on trades. Townsend Analytics and its owners, Stuart and Marrgwen Townsend, were offered 15% equity in Blue Water but no director or officer positions.

Later that year, Putnam formed Terra Nova Trading, LLC, with himself as 100% shareholder, to route profits from Blue Water. Another company, Analytic Services, LLC, was formed to sell the software, with Samuel Long as president. In April of 1995, Putnam and Lozman signed an agreement to share commissions generated through or paid by Townsend and its software. For a variety of personal and professional reasons, the relationship between Lozman and Putnam went sour, and they voluntarily dissolved the agreement six months later. A later termination agreement, back-dated to the day of the dissolution, preserved any legal claims. Putnam went on to form three more companies that used the same office and brokerage license as Blue Water, subcontracted with the Townsends and/or competed with Blue Water.

Without Written Confidentiality Agreement, Competing Does Not Breach Fiduciary Duty, Court Rules

July 11, 2008 | Peter S. Lubin and James V. DiTommaso

A former shareholder, officer and director did not breach his fiduciary duty to a corporation when he started a competing company, and a former employee did not breach his duty of loyalty by joining, the First District Court of Appeal has ruled. Cooper Linse Hallman v. Hallman, No. 1-05-0597 (2006).

Plaintiff Cooper Linse Capital Management, a closely held financial services company, brought on Thomas Hallman in 1994 as a shareholder with 20% of stock shares. The remainder were divided evenly between Lori Cooper and Don Linse. Hallman served as vice president and CFO as well as an employee. Two years later, the company hired James McQuinn as an employee only. Neither man signed a written confidentiality agreement, and both disputed Cooper Linse’s contention that they entered into an oral confidentiality agreement. All parties agreed that Linse and Cooper made all of the business decisions.

In 2000, the company that held Cooper Linse’s clients’ accounts in trust got into financial trouble and had its assets frozen, leaving clients unable to access their accounts and Cooper Linse unable to pay its employees. Linse began negotiations to take over that company’s trust business; McQuinn and Hallman quietly began planning to start a business competing with Cooper Linse.