Articles Posted in Illinois Appellate Courts

While most businesses strive to maintain employee stability, the fact of the matter is that during the course of any company’s existence there will be a certain amount of turnover. In states like Illinois, many employers utilize employment contracts that contain non-compete clauses and other restrictive covenants to protect themselves when employees depart. In spite of these precautionary measures, disputes will often still occur, which is why our Aurora non-compete lawyers are always watching developments in this area of the law.

In Steam Sales Corp. v. Summers, Defendant Summers worked for Plaintiff soliciting and servicing customer accounts pursuant to a written employment agreement that contained both non-compete and liquidated damages clauses. The clauses were to be effective for two years after the cessation of Defendant’s employment with Plaintiff. Plaintiff had several exclusive relationships with manufacturers, which gave it access to information not available to its competitors that served as an advantage in the marketplace. Defendant had access to this information, and after working for Plaintiff for almost two years, he quit to form a competing company and subsequently obtained the business of two of Plaintiffs (now) former clients.

In response, Plaintiff filed suit for Defendant’s violation of the restrictive covenant contained in the employment agreement between the parties and demanded injunctive relief pursuant to the liquidated damages clause in the contract. The circuit court granted the preliminary injunction based upon the non-compete clause and enjoined Defendant from soliciting or selling any service or product similar or identical to Plaintiff’s. Defendant then filed an interlocutory appeal. The Appellate Court found that Plaintiff had not breached the parties’ contract and that the restrictive covenant was enforceable because it was reasonable in its geographic (Defendant’s sales territory when he worked for Plaintiff) and temporal scope and in its application.

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The issues faced by our clients, and particularly our business clients, are often complex both factually and legally. Our Palatine business lawyers recently discovered a case filed in Du Page county that illustrates how business legal issues can, and often do, dovetail with personal legal issues. Prignano v. Prignano demonstrates the importance of obtaining legal advice before making business agreements and contracts that include will and probate issues.

In Prignano v. Prignano, the widow of George Prignano, a man who owned several businesses with his brother Louis, sued that brother for allegedly failing to honor an agreement that the survivor of the two brothers would buy the decedent brother’s share of their co-owned businesses. The Prignano brothers jointly owned two corporations, Sunrise Homes and Rainbow Installations, and were equal partners in 710 Building Partnership. The Plaintiff widow alleged that the Defendant had an oral agreement with her deceased husband George whereupon Louis would purchase George’s share of their three businesses with the proceeds from life insurance policies purchased for that purpose. Plaintiff also alleged that she and Defendant had an oral agreement that Defendant would purchase his brother’s share of the businesses from Plaintiff.

After George’s death, Defendant, who was the executor of George’s estate, allegedly kept George’s share of the businesses and the life insurance payments for himself unbeknownst to Plaintiff. When Plaintiff discovered this, she filed suit against him for fraud, breach of fiduciary duty, breach of contract, and unjust enrichment. The trial court ruled in her favor on all counts and awarded her damages and prejudgment interest. Defendant then appealed the trial court’s finding of liability and the award of prejudgment interest.

On appeal, the Second District of the Appellate Court of Illinois reaffirmed the trial court’s finding that both oral agreements (between the brothers and between Plaintiff and Defendant) were valid and enforceable due to the testimony of third parties who were aware of the oral agreement between the brothers, and the existence of a written agreement that was drawn up after the oral contract between Plaintiff and Defendant was initially formed. The Court also found that Defendant owed a fiduciary duty to Plaintiff as he was a corporate officer and partner in the businesses, and upon George’s death, his interest in the businesses was transferred to Plaintiff. As such, the Court held that Defendant owed Plaintiff a duty to exercise “the highest degree of honesty and good faith” in dealing with Plaintiff, and Defendant breached that duty. The Court then vacated the trial court’s judgment on the unjust enrichment claim because Plaintiff was victorious on her breach of contract claim. The Court stated that unjust enrichment does not apply when there is a breach of contract under Illinois law. Finally, the Court reaffirmed the award of prejudgment interest because Plaintiff had been deprived of money that was rightfully hers, and Defendant should not profit from his wrongful retention of the funds.

Prignano v. Prignano exemplifies why business owners should have all of their business agreements and contracts reviewed by a trained legal professional. Family business owners, in particular, should guard against casual or oral agreements, as personal relationships can be strained when there is a misunderstanding regarding such agreements. If you are unsure about the legality or legitimacy of your business agreements, or are currently in a dispute, you should consult a discerning Chicago and Naperville business attorney to determine your rights.

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Our Chicago business emergency attorneys were interested to read an appellate opinion in which the Fourth District Court of Appeal reversed a Sangamon County judge for the second time in the same case. The Rochester Buckhart Action Group v. Young, No. 4-09-0037 (Ill. 4th Sept. 8, 2009) is a lawsuit filed by a community group attempting to stop Robert Young from building a hog farm on his property. The Rochester Buckhart Action Group, a nonprofit that opposes activities it feels decreases the quality of life in its area, sued to stop Young, arguing that the hog farm should be regulated as a new farm rather than an extension of Young’s existing dairy farm. The trial court granted the group’s request for a preliminary injunction, but the Fourth District Court of Appeal reversed it. On remand, Young asked for costs and damages stemming from that injunction, but the trial court denied it — only to be reversed again by the Fourth.

Young’s property already had a 40-cow dairy farm, and had once had a 2,300-animal hog confinement operation that was demolished in 2004. He notified the Illinois Department of Agriculture of his intention to add a 3,750-hog finishing operation, which is where piglets are grown into adult pigs. In that notification, he told the state that this would be an expansion of an existing operation, not a new operation. The Rochester Buckhart Action Group disagreed and sued for a declaratory judgment under the Livestock Management Facilities Act, which requires public notice, comment and hearing for new facilities. The lawsuit also included counts for nuisance and public nuisance. It moved for a preliminary injunction stopping construction of the hog farm. That order also required the plaintiff to post a $60,000 bond. The trial court then declined to vacate its decision and the defendant successfully appealed to the Fourth.

On remand, the defendant requested costs and damages, pursuant to the Code of Civil Procedure on a “wrongfully entered injunction.” He requested the proceeds of the $60,000 bond to set off the $294,159.01 that he said the injunction cost him. The plaintiff moved to strike that motion, claiming there was no adjudication of the injunction as “wrongful.” The trial court granted that motion to strike, saying it did not believe the injunction was wrongful and thus, the defendant could not recover costs. This appeal followed, arguing that the defendant’s situation met the definition of “wrongful” in the Code of Civil Procedure.

The Fourth agreed. It noted that Illinois Supreme Court precedent allows damages only when judgment has been entered that a preliminary injunction or temporary restraining order was entered wrongfully. The plaintiff argued that there was no such adjudication, but the Fourth was not convinced. It said its prior opinion was a legal determination that the injunction was wrongfully issued. “It is hard to fathom what the appeal in Rochester I was all about if it was not a determination of whether the trial court rightfully or wrongfully enjoined defendant from continuing the construction on his hog farm. The sole issue in Rochester I was whether the trial court erred in declining to vacate the preliminary injunction.” Furthermore, the court noted, Jefco Laboratories, Inc. v. Carroo, 136 Ill. App. 3d 826, 829, 483 N.E.2d 1004, 1006 (1985) specifically said there was only a semantic distinction between “in error” and “wrongfully issued.”
The plaintiffs next argued that the preliminary injunction order was the law of the case because the defendant did not appeal that order — he appealed the trial court’s refusal to vacate it. However, the Fourth said, the issue of the injunction itself was before the court when the issue of whether to vacate the order for an injunction was before it. Thus, it wrote, the defendant cannot be said to have waived the issue of whether the injunction was properly issued.

Finally, the plaintiffs said damages should not be awarded because it is a nonprofit “seeking to vindicate public rights.” It supported that argument by citing Save the Prairie Society v. Greene Development Group, Inc., 338 Ill. App. 3d 800, 801, 789 N.E.2d 389, 390 (2003), in which the First District Court of Appeal found that the trial court should not have imposed a $200,000 bond on a nonprofit seeking to serve the public interest. It is true that the Code of Civil Procedure gives trial courts discretion not to impose bond if it would be a hardship, the Fourth said, but no rule of law says this must be done in every case. The plaintiff did not object to the bond as a hardship at the time, it noted. And the state Supreme Court noted in Buzz Barton & Associates, Inc. v. Giannone, 108 Ill. 2d 373, 384, 483 N.E.2d 1271, 1276 (1985) that it would be “inequitable and would invite spurious litigation” to allow parties to interfere with legal activities without being held liable for wrongful interference.

That is the situation in this case, the Fourth said. It reversed and remanded the trial court, saying the defendant is entitled to damages and the trial court must allow him an opportunity to prove any damages.

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Our Illinois alternative dispute resolution lawyers noted an opinion from the Fifth District Court of Appeal reversing a trial court that declined to compel arbitration. In Hollingshead v. A. G. Edwards & Sons, Inc., No. 1-09-0067 (Ill. 5th Jan. 22, 2009), the court ruled there simply was not enough evidence to support the trial court’s decision to deny to compel arbitration. The case pits Carol Hollingshead, independent administrator of the estate of Selma Elliott, against Elliott’s investment company and Leonard Suess, an investment advisor there and Elliott’s son-in-law. Hollingshead sued the defendants for various causes of action related to financial mismanagement, but defendants moved to compel arbitration under several contracts related to the investment accounts. The trial court denied this motion without an explanation or an evidentiary hearing.

Elliott passed away in 2003 at the age of 101. During her lifetime, she had an account at A.G. Edwards, managed by Suess. Her power of attorney was granted to her daughter, Judy Suess, at the time of her death, so that Judy Suess could manage Elliott’s affairs. Those affairs included 11,000 shares of stock in the pharmaceutical company Merck, which had a value of $985,000 in 2001. Around 1994, defendants used that value to open up a margin account and buy other stock. Unfortunately, the value of her portfolio dropped significantly and the defendants began selling off the Merck stock to cover margin calls. Plaintiff claims this triggered tax liabilities that could easily have been avoided if the sale had happened after Elliott’s death. She sued them for breach of fiduciary duty, breach of contract and negligence.

However, Elliott had signed three contracts with Edwards before her death and Judy Suess as power of attorney had signed another, and all of them had an arbitration agreement. Defendants moved to dismiss the case and compel arbitration on this basis. The trial court heard arguments that did not get into the record on appeal, then denied the motion without comment. Defendants filed an interlocutory appeal. They argued that the contracts are the only evidence in the record and clearly apply to the lawsuit. The plaintiff argued in response that the arbitration agreements are substantively and procedurally unconscionable and the product of undue influence, all of which make them unenforceable. Defendants responded that this is a question for an arbitrator to decide.

The Fifth started with this last issue. It did not agree. Under caselaw, arbitrability is an issue for the courts unless the parties have specifically agreed otherwise, it wrote. The plaintiff is not challenging the validity of the contracts as a whole — indeed, she is relying on them in the breach of contract count.

Next, the court examined the plaintiffs’ arguments to invalidate the arbitration agreements. Under the Federal Arbitration Act, arbitration agreements are enforceable except “on such grounds that exist at law or in equity for the revocation of any contract.” This includes the plaintiff’s claims of unconscionability and undue influence. However, the court found that generally, there was no support in the record for the plaintiff’s arguments. To support the claims of unconscionability, the plaintiff made allegations in her complaint about Elliott’s age and the relationship between her and the Suesses, but did not provide any evidence, the court said. Nor do the allegations in the complaint, even if taken as true, support those defenses, it added. Under caselaw, advanced age is not enough in itself to show that a person is incapable of signing contracts, the court noted, and there is nothing per se procedurally unconscionable about having a relative for a broker.

Similarly, the Fifth found no evidence in the record to support the undue influence claim, aside from unsubstantiated claims about the familial relationship between Elliott and the Suesses. The plaintiff also made claims for substantive unconscionability, saying the $1,575 cost of arbitration is too high and the forum is biased. Again, the Fifth found, these claims are not supported by sufficient evidence in the record. It also dismissed a claim that waiving judicial review is inherently unconscionable, noting that this is directly contradicted by the FAA. For those reasons, the Fifth found that the trial court should not have declined to compel arbitration without an evidentiary hearing. It reversed that decision and remanded it to the trial court for further proceedings — including an evidentiary hearing, the Fifth said, if the plaintiff requests one.

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Our Oak Brook, Ill. shareholder dispute attorneys and Chicago business law lawyers took note of a recent appeals court decision in a heavily disputed case involving a family business. In Santella v. Kolton and Food Groupie Inc., Nos. 1-08-1329, 08-1357 & 08-1847 consolidated (Ill. 1st July 31, 2009), Rick Santella accused his sister, Mary Kolton, and her husband William of undermining the family’s business to enrich themselves once they became majority shareholders. The business is Food Groupie, Inc., which markets and sells use of anthropomorphic food characters and educational products that promote healthy eating. According to Santella, the intellectual property is the collective work of the family.

When Food Groupie was originally formed in 1987, Santella held a 35% interest; Mary and William Kolton held 25% each; and a non-party, their brother Ron Santella, held 15%. All four were named directors. In 1988, the plaintiff bought Ron Santella’s interest, giving him a 50% interest in the corporation to match the Koltons’ combined 50%. Shortly afterward, plaintiff transferred 1% of his interest to Mary Kolton, with the understanding that William Kolton would transfer his 25% to Mary, giving her a majority 51% interest with the idea that Food Groupie would be more successful if it was known as a woman-owned company. In exchange for this transfer, Santella claims, the parties executed an agreement that company decisions would be made only by a unanimous vote.

The business ran without incident until 2002. During that time, Santella claims Food Groupie made a profit each year between 1992 and 2001 and the three shareholders always unanimously approved compensation. But in 2002, Santella alleges that the Koltons called a shareholders’ meeting without him or Ron Santella, and gave themselves salary increases, bonuses and 401(k) contributions. This cost Food Groupie a total of 45% of gross company sales, despite a profit that year of only $15,000. The alleged ruse was repeated in 2003 and 2004. As a result, Santella claims, he was paid only one dividend of $1,470 during that time, rather than the $28,808 he believes he was entitled to as a 49% shareholder.

When he confronted his sister about this in 2003, he says she froze him out of the business decisions, changed the locks on the office and was interested only in buying him out. He further claims she usurped Food Groupie’s intellectual property by trademarking characters in her own name, and inappropriately licensed the company’s intellectual property without his consent. Finally, he claims the Koltons held a secret shareholder meeting in 2004 at which they voted to replace him with William’s brother, Anthony Kolton. He sued the Koltons, individually and as a shareholder derivative claim, for breach of the shareholder agreement, breach of fiduciary duty, usurpation of corporate opportunities and violations of the Illinois Business Corporations Act.

In 2005, that lawsuit resulted in the court’s appointment of John Ashendon as custodian of Food Groupie. In 2008, Santella filed an emergency motion to stop what he claimed was his sister’s plan to liquidate the company and move its misappropriated intellectual property to a similar business called Healthypalooza. He also alleged that the couple had continued to pay themselves inappropriately high salaries and commissions, and use the company’s profits for their personal legal defense. He sought to remove the Koltons as officers and enjoin them from using the company’s assets or competing with it, among other things. The court eventually found for Santella on some issues, removing the Koltons and ordering them to return the $144,019 in commissions they had been paid in 2005, 2005 and 2007. It said the court would appoint new officers and directors. It did not say any of these remedies were interlocutory or time limited.

The Koltons filed an interlocutory appeal in 2008, but failed to move to stay the repayment order or actually repay the $144,019. The trial court found them in contempt and ordered them to pay a fine for every day they were late. They eventually paid back the $144,019, but not the roughly $20,000 or so in fines.

On appeal, the Koltons argued that the relief granted to Santella was not supported by sufficient evidence or proof. Specifically, they argued that the Business Corporations Act requires a plaintiff like Santella to prove his claims of improper conduct before the court may order return of the allegedly improper bonuses or their removal as corporate officers. For that reason, they said, the court orders must be reversed. Santella made several arguments against the appeal, most notably that the appeals court lacked subject matter jurisdiction over the non-financial claims. The defendants filed their appeal pursuant to Rule 307(a)(1), which applies to appeals concerning injunctions, and Santella argued that the trial court’s orders removing and replacing directors and officers were not injunctions.

The First agreed with this, saying it lacked subject matter jurisdiction over those orders because they were not direct orders to the Koltons “to do a particular thing, or to refrain from doing a particular thing.” In fact, it took the analysis a step further and examined whether it had jurisdiction over the repayment order. That order was an injunction, the First wrote, but it also must be interlocutory to fall under Rule 307(a)(1). If it was a permanent order, it was outside the scope of the rule. The appeals court found that it was a permanent order, because it did not preserve the status quo. In fact, the court noted, the trial judge had specifically said so when she made her contempt ruling. The trial court had also made conclusions about the rights of the parties and had not time-limited the order. For those reasons, the First found that it also lacked subject matter jurisdiction over the repayment order, and dismissed the appeal entirely. The opinion noted that appellants may still seek a finding from the trial court under Rule 304(a).

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Any business owner should keep abreast of laws and court rulings that can affect the way they conduct their operation and interact with employees. The law constantly evolves, and that is why our lawyers are vigilant in tracking changes that affect our clients. Citadel Investment Group v Teza Technologies is one such ruling that provides clarity regarding noncompetition agreements between employees and employers.

In this case, Defendants Malyshev and Kohlmeier worked for Plaintiff Citadel Investment Group until February of 2009, when they resigned. When Malyshev and Kohlmeier were initially hired by Citadel, they each signed a nondisclosure agreement and an employment agreement containing a noncompetition clause. The noncompetition clauses contained language giving Citadel the discretion to set the length of the restrictive period at zero, three, six, or nine months. Citadel elected for a nine month restricted period for both Malyshev and Kohlmeier upon their resignation.

Malyshev and Kohlmeier formed Defendant Teza Technologies two months after leaving Plaintiff Citadel in April of 2009. When Citadel discovered the existence of Teza and its status as an entity performing similar high frequency trading in July of 2009, the present legal proceedings began. Plaintiffs initially sought a preliminary injunction against Defendants based upon the noncompetition agreements signed by Malyshev and Kohlmeier. This injunction was granted in October 2009 for relief through November of 2009. The trial court made its decision based upon the agreed upon nine month period contained in the noncompete and calculated the time from February of 2009 when Malyshev and Kohlmeier resigned.

Citadel appealed the decision, and asked the appellate court to grant the injunction for nine months from October until July of 2010. Citadel argued that they had not received the benefit of the restricted period prior to the preliminary injunction being entered, and the Court should adjust the start date of the restricted period accordingly. The Court did not find the Plaintiff’s argument persuasive and denied the appeal because the plain language of the agreements signed by Malyshev and Kohlmeier contained no provision allowing for an extension of time or modification of the commencement date. Thus, the restrictive covenant properly ended in November as was required by the agreement signed by both parties.

Citadel Investment Group v. Teza Technologies serves as a warning to business owners who utilize noncompetition agreements and a potential boon to employees who sign them. Whether you are a business already in a dispute over a noncompetition agreement or a former employee seeking employment with a new company in the same field, you should contact a Chicago business litigation attorney to be apprised of your rights.

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As Chicago corporate dispute lawyers, we were interested to see a ruling in a dispute between former law partners. In Bernstein and Grazian, P.C. v. Grazian and Volpe, P.C., No. 1-09-0149 (Ill. 1st June 25, 2010), both firms, and the individual partners, accused each other of breach of contract and breach of fiduciary duty in a dispute about how to allocate payment on cases that were pending during the breakup of their first firm. At trial, the trial court found no breach of any duty. It also found that quantum meruit was the correct standard to apply and awarded Bernstein 10 percent of attorney fees generated from those cases by Grazian and Volpe. Both Bernstein and Grazian appealed this ruling, and the First District Court of Appeal made no changes except to vacate the 10 percent fees awarded to Bernstein.

Isadore Bernstein hired John Grazian in the 1990s as an independent contractor to Bernstein’s law practice. They eventually formed the law firm of Bernstein & Grazian, P.C., which focused its practice on personal injury and workers’ compensation cases. Bernstein was president and 70 percent owner, who provided the office, cases and money; Grazian was a salaried employee and vice president. They later hired Richard Volpe as an employee to handle workers’ compensation cases. In January of 2003, they agreed to change the firm’s structure and compensation scheme. The agreement said the three would split the office overhead equally. Bernstein and Volpe were to split expenses of workers’ compensation cases equally and split the fees equally. Similarly, Bernstein and Grazian were to equally split expenses and fees for personal injury cases.

In 2005, Grazian and Volpe decided to leave and form their own firm. The three attorneys agreed that Grazian & Volpe would take over Bernstein & Grazian’s open cases, but they disagreed on how they were to split the fees. Bernstein testified that he was promised 50 percent of the coming fees, but Grazian testified that he offered, and Bernstein accepted, only one-third of the fees. They also disagreed about whether they intended to file forms to substitute attorneys in the open cases before there was a formal separation and exit agreement. Bernstein and his firm sued Grazian, Volpe and their firm, alleging breach of contract and breach of fiduciary duty and demanding an accounting; defendants filed a counterclaim for breach of fiduciary duty.

At a bench trial, the court dismissed every claim but breach of contract. It found that the agreement to dissolve the firm was the controlling contract. But since that document was silent on compensation, the court found that Bernstein should receive compensation under quantum meruit — that is, he should be paid according to the value of his actual services. Noting that it was difficult to determine this from the record, the trial court nonetheless awarded Bernstein 10 percent of the fees. Bernstein and Grazian appealed. Volpe is not a party to the appeal. Because Bernstein died during the pendency of the case, his estate was the appellant.

The appeals court started by dismissing Bernstein’s entire appeal for lack of jurisdiction. Bernstein filed in trial court to dismiss his appeal about two months after filing it. This was granted. About six weeks later, he moved in the appeals court to vacate that dismissal and reinstate the appeal, saying his attorney had made a mistake. This was granted as well. But according to the First, it had no authority to grant that motion, because an order dismissing an appeal is final under Physicians Insurance Exchange v. Jennings, 316 Ill. App. 3d 443, 456 (2000) and Rickard v. Pozdal, 31 Ill. App. 3d 542 (1975). Thus, Bernstein’s entire appeal was dismissed.

On cross-appeal, Grazian argued that the trial court was improper in finding no breach of fiduciary duty by Bernstein. Bernstein had formed a separate law firm in 2004, after the revenue-splitting agreement but before Grazian & Volpe was formed. Isadore M. Bernstein & Associates P.C. (IMB) existed to refer medical malpractice claims to other attorneys. Bernstein bought television advertisement time for both firms, but claimed he paid for the IMB commercial himself. Grazian claimed he had never been told about IMB and its advertisements. The commercials resulted in many new inquiries for both firms, but Bernstein claimed he did not spend a lot of extra time or firm resources on IMB-related work. Grazian disagreed, testifying that this cost the firm resources but did not generate income for him or Volpe, and caused Bernstein’s fee income to drop dramatically. This was the basis for the breach of fiduciary duty claim.

The First did not accept Grazian’s argument. The standard for overturning the trial court was “the manifest weight of the evidence,” it noted — and much of the evidence is unclear because Bernstein and Grazian had sharply conflicting accounts of this situation. What evidence there is does not lead to a conclusion that Bernstein clearly breached his fiduciary duty, the court said. Thus, it could not find that the trial court’s finding on fiduciary duty was against the manifest weight of the evidence.

Grazian had more luck with his argument that while quantum meruit was proper, it should have led to an award of nothing rather than of 10 percent of the attorney fees, because Bernstein provided no evidence required for recovery. Under caselaw including Hayes Mechanical, Inc. v. First Industrial, L.P., 351 Ill. App. 3d 1, 9 (2004), the burden is on Bernstein to show that he provided services of reasonable value to the defendants, and at least some evidence to prove that value. The First found that Bernstein had never provided any such evidence; testimony at trial showed that he did not do several major duties of an attorney, such as going to court, on those cases. In fact, he admitted that his fee generation dropped sharply. Having done “something” is not enough by itself to support a quantum meruit award, the First wrote. Therefore, it vacated the trial court’s 10 percent award to Bernstein.

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Our Illinois legal malpractice attorneys were interested to see a recent decision allowing corporate litigants to assign their claims to former shareholders after a merger. Learning Curve International, Inc. v. Seyfarth Shaw LLP, No. 1-08-0985 (Ill. 1st June 18, 2009). In the underlying case, PlayWood Toys sued Learning Curve International for misappropriation of trade secrets. During that litigation, Learning Curve merged with RC2 Brands. Learning Curve settled that litigation, but then sued its attorneys in the matter and their law firms for legal malpractice. This claim gave rise to the dispute over assignment of claims.

Attorneys Dean A. Dickie and Roger L. Price represented Learning Curve in the PlayWood litigation, which began in 1995. Both attorneys were at the law firm of D’Ancona & Pflaum at the time, but due to personnel moves and mergers, Dickie was at Dykema Gossett and Price was at Seyfarth Shaw during the instant case. In April of 1998, PlayWood offered to settle its trade secrets claim for $350,000; Learning Curve counteroffered $225,000. There was no deal. A jury verdict reached in 2000 held Learning Curve liable for misappropriating the trade secret, but the judge granted a post-trial motion from Learning Curve for judgment notwithstanding the verdict, saying PlayWood had not proven the information at issue was a trade secret. PlayWood appealed to the Seventh Circuit.

While the appeal was pending, Learning Curve merged with RC2. As part of the merger, it agreed to indemnify RC2 from liability related to the PlayWood litigation. Learning Curve remained a separate corporation for tax purposes, but without separate operations. Five months later, the Seventh Circuit ruled, making Learning Curve liable for $6 million in compensatory damages and requiring a new trial on exemplary damages. Rather than face trial, RC2 settled with PlayWood for nearly $12 million, which came from an escrow account set aside for this purpose. RC2 and Learning Curve then agreed in writing to pursue a legal malpractice claim against the attorneys in the original case. This agreement gave former Learning Curve shareholders 90% of any proceeds, but explicitly said nothing in the agreement should be interpreted as an assignment of the claim or its proceeds.

RC2 and Learning Curve then sued Dickie, Price and all of their current and former law firms for malpractice, claiming they negligently failed to advise Learning Curve to settle for $350,000 and negligently failed to explain that they could be liable for millions, including exemplary damages. They sought the cost of the $12 million settlement and all attorney fees paid after the $350,000 settlement offer. The defendants moved for summary judgment on several grounds, saying the claim was not timely; Illinois law does not allow legal malpractice claims to be assigned; and that Learning Curve had not suffered the alleged damages because RC2 paid the settlement. The trial court granted summary judgment on the assignment of claim grounds and ruled that Learning Curve had no right to sue for any costs incurred after the merger. Learning Curve appealed.

The First District started with the issue of the alleged assignment of the claim. Illinois law generally forbids assigning legal malpractice claims, it wrote, and it looks at intent when judging whether a claim has been assigned. That means the disclaimer in the agreement between RC2 and former Learning Curve shareholders was not relevant. However, Illinois and foreign courts have allowed assignment of a malpractice claim in certain circumstances where many interests have passed from one party to another, including, in other states, as part of the transfer of assets in a merger. Because many assets are being transferred in this case, the court wrote, assigning the malpractice claim does not violate public policy. It reversed the trial court’s judgment on that count.

It also rejected the defendants’ argument that the two-year statute of limitations for legal malpractice in Illinois barred plaintiffs’ claim. The defendants argued that the clock started running after the bills came for the original trial in 200, in which Learning Curve was found liable. However, the court wrote, the judge in that trial granted judgment notwithstanding the verdict, leaving Learning Curve liable only for its attorney fees. It was not obvious then that the defendants’ advice was bad. Instead, the First District wrote, the clock started running on this claim after the Seventh Circuit’s verdict. Because this claim was filed within the two-year period from that date, the court wrote, it is not time-barred.

Learning Curve’s luck ran out when the First District considered whether it had any damages from the alleged malpractice. The trial court found that it did not because RC2 paid all post-merger costs, including the judgment from the Seventh Circuit and attorney fees, and reimbursed itself from the escrow account. The appeals court agreed, saying those payments did not affect Learning Curve’s assets. Furthermore, an indemnity clause in the merger agreement eliminated Learning Curve’s losses from those sources. However, the appeals court did say that Learning Curve’s former shareholders, who actually suffered the alleged loss, should substitute as the real parties in interest on the post-merger parts of the claim, writing that “if the defendants committed malpractice, the merger of the corporate client should not cause the claim to vanish.” Thus, the case was reversed and remanded to trial court.

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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.

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Our Illinois arbitration attorneys noted an appellate decision reminding parties to arbitration contracts to ensure that their language is clear as to what exactly should be arbitrated. In Peterson v. Residential Alternatives of Illinois, No. 3-09-0743 (Ill. 3rd June 7, 2010), Rachel Peterson, as the administrator of the estate of Jacob H. Terhorst, sued Terhorst’s former nursing home. Terhorst died at a home run by Residential Alternatives of Illinois, and the estate had sued the nursing home company for wrongful death and violations of the Illinois Nursing Home Care Act. The home succeeded in compelling arbitration at the trial court level, but the Third District Court of Appeal reversed, saying the language of the arbitration agreement was unclear.

Terhorst was 92 when he entered Hawthorne Manor in Peoria. He was a resident from Nov. 29, 2006 to June 2, 2007, the day of his death. On Jan. 7, 2009, his estate’s executor, Ann Bonono, filed a lawsuit against Hawthorne Manor’s parent company, Residential Alternatives. That claim alleged that Residential Alternatives failed to provide adequate care to Terhorst and neglected and abused him, resulting in injuries, pain, mental anguish, financial costs and eventually, his death. It sought more than $100,000 for wrongful death and violations of the Nursing Home Care Act. The defendant filed an answer to plaintiff’s complaint.

But less than a month later, the defendant also moved to dismiss the claim and compel arbitration. In support, it included a contract and a separate arbitration agreement, both dated Nov. 29, 2006 and signed by legal representatives for the company and for Terhorst. Neither document mentioned the other, and the contract indicated that it contained seven pages, all seven of which were the contract itself. The arbitration agreement stated that “any and all disputes arising hereunder shall be submitted to binding arbitration and not to a court for determination.” The next paragraph stated that in the event that a dispute was determined not covered by the agreement, the parties agreed that the dispute should be heard by a judge rather than a jury, and that the prevailing party had the right to recover its costs.

In response to the defendant’s motion to compel arbitration, the plaintiff argued that no enforceable agreement existed; that the defendant had waived its right to arbitration by answering the complaint; and that Illinois public policy is against waiving any rights under the Nursing Home Care Act. Ultimately, the trial court agreed with the defendant that the arbitration agreement controlled the dispute and sent the case to arbitration. This appeal followed. During its pendency, plaintiff Rachel Peterson was granted leave to replace plaintiff Ann Bonomo.

On appeal, the plaintiff argued that the arbitration agreement was unenforceable; that it was void pursuant to the Act, caselaw and public policy; that the defendant had waived its rights; and that the wrongful death claim should not be arbitrated because its plaintiffs were not parties to the agreement. The Third noted that there was no dispute over the contract. However, the defendant argued that it and the arbitration agreement should be considered one unified document, whereas the plaintiff argued that they should be considered separate documents.

Caselaw shows that some courts have chosen to interpret separate documents executed on the same day by the same people as the same document, the court noted. However, it said, these were documents that referred to or expressly incorporated other documents. Furthermore, the court said, it is well established in Illinois law that parties may not incorporate one agreement into another without expressly indicating an intention to do so, and there is a presumption against interpreting contracts in a way that adds conditions that could easily have been explicitly added in writing. In this case, the Third said, the parties could easily have added an arbitration agreement to the contract itself, but they did not — in fact, the seven-page contract states that it is complete within those seven pages. The court found that this choice was deliberate and consistent with case law, so it rejected the argument that both documents should be considered one document.

Next, the Third looked at whether the arbitration agreement itself creates an independent contractual obligation to arbitrate all controversies arising out of the nursing home care. The court concluded that it could not interpret the agreement that way. The agreement called for arbitration with this language: “Without limiting any rights set forth in other provisions of this AGREEMENT, any and all disputes arising hereunder shall be submitted to binding arbitration and not to a court for determination.” This is circular language, the court said, and it does not reference the nursing home care contract at all. A later reference to “any other document signed or initialed in connection with this AGREEMENT” also does not adequately indicate any intention to connect with the contract. For that reason, the court wrote, it cannot agree that the two documents should be treated as one. Thus, the court found that the case should not go to arbitration because the nursing home contract was not subject to the arbitration agreement. The trial court’s decision was reversed.

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