Chicago Business Litigation Lawyer Blog

Articles Posted in Illinois Appellate Courts

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

November 9, 2010 | Peter S. Lubin and Patrick Austermuehle

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

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

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

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

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

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

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

November 3, 2010 | Peter S. Lubin and Patrick Austermuehle

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

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

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

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

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

Fifth District Court of Appeal Declines to Compel Arbitration in Shareholder Derivative Claim

October 26, 2010 | Peter S. Lubin and Patrick Austermuehle

Our Aurora, Ill. shareholder derivative claim lawyers were interested to see an appellate case that examined whether a limited liability corporation can be a party to a case brought under its own operating agreement. In Trover v. 419 OCR Inc. et al., No. 5-09-0145 (Ill. 5th, January 12, 2010), Joseph Trover sued 419 OCR Inc., O’Fallon Development Group LLC, Mark Halloran and Steve Macaluso, alleging a variety of shareholder complaints and fraud claims over a real estate deal that had gone sour. Trover, individually and as the trustee of a trust in his name, was part of a limited liability company called the Far Oaks Development Group. Other members of Far Oaks were defendants Halloran and Macaluso as well as non-defendant Garrett Reuter. Far Oaks owned land around a golf course that the members wished to develop. Reuter, Halloran and Trover also were part of a business called Far Oaks Golf Club, LLC.

In 2005, members of FODG agreed to sell and assign the company’s interest in the land to 419 OCR Inc., which was owned by Halloran and Macaluso, in order to gain a tax advantage. Trover claims he relied on the defendants and the advice of an attorney when he agreed to this. Halloran and Macaluso allegedly made an oral promise to pay the Golf Club the price of land to be sold, as well as a sum to be determined. Trover claims this was supposed to be put into writing. However, it was not included in the contract that transferred the land to 419 OCR, and it was never put into writing in other ways.

Halloran and Macaluso then proceeded to develop the land, sell lots and make a profit. Part of the interest in the land was transferred to another business called the O’Fallon Development Group. Trover’s lawsuit claims that FODG never received any money based on that land sale. Count I alleged breach of the oral contract against 419 OCR; Count II alleged breach of contract against the O’Fallon Group, which assumed obligations under the contract because of unity of ownership. Count III was a shareholder derivative action brought by Trover on behalf of FODG, alleging breach of fiduciary duty and corporate waste by Macaluso and Halloran. Count IV was a similar shareholder derivative action, brought by the Golf Club against Halloran only. Count V alleged fraud by Halloran and Macaluso individually, accusing them of making false representations when they said the sale price of the land would be paid back to the Golf Club.

After the lawsuit was filed, the defendants filed a motion to compel arbitration as required by the broadly worded operating agreements behind FODG and the Golf Club. The trial court denied this motion, and the defendants filed the interlocutory appeal that went before the Fifth District.

The appeals court upheld the trial court’s decision on four of the five counts. The transfer of the land from FODG to 419 OCR was within the scope of the operating agreements, the court found, but 419 OCR and O’Fallon were not parties to that agreement. Illinois law does not allow courts to compel arbitration among entities that were not parties to the arbitration agreement, the court wrote. Thus the trial court was correct to deny arbitration as to Counts I and II.

Counts III and IV are shareholder derivative actions, the court wrote, so compelling arbitration would require a finding that an LLC is a party to the agreement that creates itself. This is an issue of first impression in Illinois, the court noted. Relying on language in the Illinois Limited Liability Company Act, the court found that LLCs are not parties to their own agreements, because “A limited liability company is a legal entity distinct from its members.” The operating agreement specifies that it is between the signers, and the signers did not indicate that they were signing on behalf of either LLC in the case. And the agreement specifically states what actions members must take to legally bind the LLC. That shows that members knew how to do so but did not. Thus, the appeals court upheld the trial court on Counts III and IV as well.

The defendants were luckier with Count V, which named Halloran and Macaluso as individuals. Because both Halloran and the plaintiff signed the operating agreement with the arbitration clause, the court wrote, they are bound by it. Macaluso did not sign the original operating agreement, but he did buy 100 shares of each LLC after the fact. That makes him a member under the Illinois LLC Act, the court wrote, and binds him to everything in the agreement. Thus, he has the right to compel arbitration. For all of those reasons, the appeals court reversed the trial court as to Count V but upheld on the other counts, and sent the case back to trial.

Company’s Indemnification Claim Barred by Res Judicata, First District Decides

October 20, 2010 | Peter S. Lubin and Patrick Austermuehle

A company involved in an underlying federal patent infringement case may not re-litigate the question of whether its software provider should indemnify it from that case, the First District Court of Appeal has ruled. As Chicago business attorneys, we were interested to read the ruling in Peregrine Financial Group v. TradeMaven LLC, No. 1-08-1111 (Ill. 1st 2009). This case springs from an intellectual property case filed in Chicago federal court, in which Trading Technologies, Inc., a software company, accused competitor TradeMaven and commodities brokerage firm Peregrine of infringing its software patents. TradeMaven and Peregrine came to separate settlements in that case, but Peregrine then sued TradeMaven in state court for multiple causes of action, including indemnification. The trial court graned TradeMaven’s motion for summary judgment on the indemnification count, and the First upheld it.

Peregrine licensed TradeMaven’s electronic trading software in 2004. In the licensing agreement, TradeMaven warranted that its software did not violate the rights of any third party, including intellectual property rights. It later agreed to indemnify Peregrine for expenses related to claims of infringement of “any property right.” Less than a year later, Trading Technologies filed its suit. Peregrine claims it sought and received assurances from a TradeMaven officer that TradeMaven would cover Peregrine’s costs in the suit. However, Peregrine did not file any claims against TradeMaven in that litigation. TradeMaven settled in January of 2006, at which time Peregrine sent it a letter reminding it of the indemnification obligation.

Peregrine settled in March of 2006, on the same day that TradeMaven amended its settlement to include additional payment. TradeMaven claims it made that payment in exchange for Trading Technologies executing a general release in Peregrine’s favor. Peregrine claims it didn’t ask for this payment and that the payment did not extinguish its indemnification rights or discharge its obligations. In connection with the settlements, the court later put forth a consent judgment that included language stating that each party would pay its own attorneys’ fees. Peregrine later sent TradeMaven a letter reminding it that it still owed Peregrine indemnification, and when TradeMaven did not indemnify Peregrine, Peregrine sued for indemnification, breach of contract, breach of warranty and tortious interference. The trial court dismissed the warranty claim and granted partial summary judgment on indemnification, saying the consent judgment blocked that claim under the doctrine of res judicata. After a motion to reconsider was denied, Peregrine appealed.

Peregrine’s first argument on appeal was that TradeMaven did not meet its burden of proving res judicata because the indemnification cause of action was not a cause of action in the federal patent infringement case. The appeals court disagreed. Both cases arose out of the underlying license agreement, the First wrote, which means both arose from the same transaction, circumstances or factual nebulae, as required by the law. It also dismissed Peregrine’s claim that its lawsuit was distinct from the patent infringement lawsuit because it brought no claims against TradeMaven in the patent infringement case. This is true, the court said, but Peregrine could have claimed indemnification at any time during the case, since indemnification was part of the licensing agreement. Peregrine was demonstrably aware of its rights and had incurred costs and fees, the court said.

The court next examined Peregrine’s argument that it had no obligation to bring a claim for indemnification during the federal case because the cause had not accrued. In support, it cited Guzman v. C.R. Epperson Construction, Inc., 196 Ill. 2d 391 (2001), in which the Illinois Supreme Court ruled that a third-party claim for indemnification does not accrue until a defendant settles or has a judgment entered. However, the First said Guzman did not apply because in this case, Peregrine was not a third party, but a named defendant. Furthermore, it noted, Guzman used Illinois law and had an implied indemnification contract, not federal law and an express indemnification contract, as in this case. It also rejected two other arguments based on caselaw, saying this case is more like Threshermen’s Mutual Insurance Co. v. Wallingford Mutual Insurance Co., 26 F.3d 776 (7th Cir. 1994), in which the Seventh Circuit, applying Wisconsin law, found that an insurance company could and should have raised its indemnification claim during the underlying case.

Finally, the First rejected the argument that equity should prevent it from allowing TradeMaven to avoid its obligations under the license agreement, especially since it had said it would. The court said it may be sympathetic, but that Peregrine had made its own predicament and that it would not upset res judicata on that basis alone. Thus, the First upheld the trial court’s decision to grant summary judgment on indemnification.

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

October 19, 2010 | Peter S. Lubin and Patrick Austermuehle

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

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

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

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

Fifth District Enforces Mortgage Company Arbitration Agreement Except as to Class Actions

October 13, 2010 | Peter S. Lubin and Patrick Austermuehle

Our Chicago alternative dispute resolution lawyers noted a recent Fifth District Court of Appeal ruling upholding an arbitration agreement but severing its class-action waiver. In Keefe v. Allied Home Mortgage Corporation, No. 5-07-0463 (Ill. 5th 2009) (PDF), Rosemary Keefe was the lead plaintiff in a proposed class action against her mortgage broker. She refinanced through Allied Home Mortgage Capital Corp. in 1999, and as part of that deal, she signed a rider requiring binding arbitration of most disputes. Five years later, she filed a proposed class action against Allied, accusing it of consumer fraud and other torts for charging third-party fees (such as credit check fees) in excess of their actual cost and failing to disclose this. Allied moved to compel arbitration. Without an evidentiary hearing, the trial court ruled that the arbitration agreement was illusory and procedurally and substantively unconscionable, and Allied filed an interlocutory appeal.

The Fifth District started by examining de novo whether the agreement was indeed illusory. An illusory promise is something that appears to be a promise but holds out no performance, or only an optional performance. The Fifth found that it was not illusory, because the arbitration rider specified that the borrower may request arbitration in any judicial proceeding started by Allied. Furthermore, it noted, the rest of the contract may be considered part of the consideration granted to the plaintiff.

It next looked at the finding that the agreement was both procedurally and substantively unconscionable. A contract is procedurally unconscionable when some impropriety during the signing of the contract — such as language that is difficult to find or understand — robs the signer of a reasonable choice. That was not the case here, the court said. The arbitration rider was not hidden by fine print, it wrote, nor was it difficult to read or understand. Rather, the arbitration rider “conspicuously” used bold capital letters to notify the plaintiff that she was signing a contract that gave away her right to a jury trial. Nor did she need to sign it to obtain the refinancing.

The court also rejected the plaintiff’s argument that the rider was unconscionable because it failed to notify her of the cost of arbitration. The Fifth noted that the arbitration rider did contain a provision notifying the plaintiff that she can get copies of rules and forms related to arbitration at any National Arbitration Forum office or by mail order. Under Kinkel v. Cingular Wireless LLC, 223 Ill. 2d 1, 22, 857 N.E.2d 250, 264 (2006), this is not enough by itself to render the contract unconscionable, the court wrote, but it may be considered along with findings on substantive unconscionability.

Finally, the Fifth looked at whether the arbitration rider was substantively unconscionable. A contract is substantively unconscionable when the contract terms are unfair, one-sided or create a large imbalance between price and cost. The plaintiff first argued that the rider is cost-prohibitive because it specifies that no claim may be brought by class action. The Fifth found some merit in this. In Kinkel, the Illinois Supreme Court found that class-action waivers are not per se unconscionable, but courts should look at their fairness as well as the cost of bringing an individual claim relative to the damages. Once again following that decision, the Fifth found the cost of pursuing an individual claim was high relative to the potential damages, especially including arbitration and attorney fees. Taking into account Allied’s failure to reveal the cost of arbitration, the court ruled that the class-action waiver was unconscionable. But rather than declare the entire contract unconscionable, the court simply severed the class-action clause, reversed the rest of the trial court’s decision and remanded the case with directions to enforce the remainder.

Illinois Securities Law Statute of Limitation Does Not Apply to Breach of Fiduciary Duty Claim

September 28, 2010 | Peter S. Lubin and Patrick Austermuehle

Our Chicago business litigation lawyers were interested in a recent decision from the First District Court of Appeal. Carpenter et al. v. Exelon Enterprises Company, No. 1-09-1222 (Ill. 1st March 18, 2010) posed a certified question to the court: Does the three-year statute of limitations established by the Illinois Securities Law apply to a claim that a majority shareholder breached its fiduciary duty to minority shareholders? In this case, the First decided that it does not, allowing Timothy Carpenter and seven co-plaintiffs to pursue a claim under a more generous five-year statute of limitations under the Illinois Code of Civil Procedure. Their victory in this interlocutory appeal allows them to continue their claim at the trial court level.

The plaintiffs all held minority shares of InfraSource, Inc., a Delaware corporation. The majority shareholder at 97% was Exelon, a Pennsylvania corporation. In 2003, Exelon created a new company for the purpose of divesting its interest in InfraSource, which allowed it to merge InfraSource with the new company. The resulting corporation sold some of its (formerly InfraSource’s) assets and business units to Exelon and others to GFI Energy Ventures, an independent third party. InfraSource would continue as a company, but the former minority shareholders were paid a pro-rated share of the proceeds. In 2007, the plaintiffs sued Exelon, alleging that it abused its power as majority shareholder. They accused Exelon of structuring the transaction in a way that did not adequately compensate them for the market value of their shares.

A second amended complaint said Exelon sold itself the InfraSource assets at an artificially low price and awarded itself preferred stock. It alleged causes of action for breach of fiduciary duty, civil conspiracy, and, against Exelon’s parent company, aiding and abetting those actions. Exelon moved to dismiss the second complaint based on the three-year statute of limitations in the Illinois Securities Law. The trial court denied this, finding that the five-year statute of limitations applied. However, it stayed further proceedings until the instant interlocutory appeal had been decided, answering the question of which statute of limitations is correct.

The First District started its analysis by examining the statue of limitations portion of the Illinois Securities Law. That language says plaintiffs have three years from the date of the relevant sale to bring claims under the Act, or on matters for which the Act grants relief. Plaintiffs specifically stated their claim under Delaware law in order to distance themselves from this statute of limitations, but Exelon argued that the statute still applies under the language allowing its use for matters for which the Act grants relief, and cited two cases in support. The plaintiffs countered that Illinois courts found that because the Act is modeled after federal securities laws, courts should look at how those laws are interpreted for guidance in interpreting the Act. Tirapelli v. Advanced Equities, Inc., 351 Ill. App. 3d 450, 455 (2004).

The First rejected both lines of case law, saying that the decision “actually depends on the resolution of a straightforward and fundamental question of statutory construction.” The relevant portion of the Illinois Securities Law gives any party in interest the right to bring legal action to enforce compliance or stop a violation. Exelon relies on that language to place the plaintiffs’ complaint under the Act, the court wrote, but incorrectly. When the Legislature added this language to the Act, it explicitly said it was trying to give Illinois security holders the right to stop illegal acts. It included the right to sue for rescission, the court said, but only to enforce the remedy the law provides. In fact, Guy v. Duff & Phelps, Inc., 628 F. Supp. 252 (N.D. Ill. 1985) explicitly examined whether the law gives a retrospective right of rescission to securities sellers and concluded that it should not be interpreted that way.

The First agreed, saying another reading would make other sections of the law irrelevant. It then dismissed arguments based on the Seventh Circuit’s finding in Klein v. George G. Kerasotes Corp., 500 F.3d 669 (7th Cir. 2007), saying the arguments that led to its contradictory conclusion did not apply, for all of the reasons discussed above. Because there is no retrospective right of rescission in the Act, the First said, the plaintiffs are not seeking relief on any matter for which the Act grants relief. Nor, as noted earlier, are they seeking relief under the Act itself. For that reason, the three-year statute of limitations provided by the Act does not apply, the court concluded. It answered the certified question posed by the trial court in the negative, essentially upholding that court’s decision, and remanded it for further proceedings.

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

September 28, 2010 | Peter S. Lubin and Patrick Austermuehle

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

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

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

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

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

Second District Declines to Compel Arbitration Based Only on Oral Agreement

September 16, 2010 | Peter S. Lubin and Patrick Austermuehle

Our Illinois alternative dispute resolution lawyers were interested to see an appeals case clarifying that parties can only be compelled to binding arbitration if they have an explicit written contract. In Heider v. Knautz, No. 2-09-0808 (Ill. 2nd Dec.4, 2009), Arlie Heider sued Carl Knautz for injuries arising out of a car accident, including a knee injury. During a September hearing on admission of Heider’s Wisconsin-based attorney to Illinois courts, that attorney asked to suspend his request for admission because both parties had agreed to binding arbitration. The court stayed the case for six months pending the arbitration.

However, some months later, Knautz filed for a protective order preventing Heider from attending the arbitration, saying that during discovery, he had learned that Heider had reinjured his knee in a subsequent car accident, despite statements to the contrary. He wanted to delay the arbitration to conduct further discovery, and because he had changed attorneys, but the plaintiff’s attorney refused to reschedule. The court denied Knautz’s motion, so he filed a motion for judicial determination of whether he could revoke his agreement to arbitrate. In that motion, he said the Illinois Uniform Arbitration Act did not apply because he had signed no written agreement to binding arbitration. The trial court disagreed, finding at Heider’s urging that the Act applies because Knautz agreed on the record during the September hearing that such an agreement existed, and because that hearing was written down and entered into the record. Knautz filed an interlocutory appeal.

After dismissing what it saw as a meritless jurisdictional argument by Heider, the Second District Court of Appeal turned to the merits of Knautz’s appeal. Knautz argued that he should not be compelled to use binding arbitration because he did not sign a formal written agreement to do so. In considering this, the court considered the plain language of the Act, which refers to “a written agreement” or “a provision in a written contract.” This language makes it clear that the Act was intended only to apply to written agreements, the Second wrote. In support, it cited multiple out-of-state cases based on very similar language, as the Illinois Act was adopted from the Uniform Arbitration Act. Furthermore, the court said, there is nothing in the transcript of the September hearing to suggest that the parties intended to make a binding contract to arbitrate.

That order was based on an oral agreement, the court said, and the common law says oral agreements to arbitrate may be revoked anytime before an award is entered. The Act does not abrogate that rule, the court wrote, so Knautz is entitled to revoke his agreement to arbitrate. In fact, it wrote, if it were to decide otherwise, “parties who choose to enter into only an oral agreement could never obtain an order staying trial court proceedings pending arbitration, for fear that such an order would be viewed as a written agreement subjecting them to the Act and thereby destroying the purpose of entering into only an oral agreement for arbitration.” Thus, it reversed the order to arbitrate and remanded the case to trial court.

Treasurer Cannot Commit Resources of Family Business Without Board Authorization, Court Finds

September 7, 2010 | Peter S. Lubin and Patrick Austermuehle

As Illinois closely held business dispute attorneys, we read with interest an appellate decision in a dispute over the extent to which a company officer can act without the board’s approval. In Fritzsche v. LaPlante, No. 2-09-0329 (Ill. 2nd March 2010), the “rogue” officer was M. Christine Rock, the secretary/treasurer for family business Fritzsche Industrial Park, Inc. (FIP), which leases real estate at an industrial park in Lakemoor, Ill. Rock also had power of attorney for her father, Herbert Fritzsche, and those two roles allowed her to lease property to Gregory LaPlante, her longtime live-in boyfriend. Separately, Rock also signed a promissory note to Gerald Shaver as payment for work he had done for FIP. This led to a lawsuit by other family members and corporate members, who alleged that she acted without authorization from the board and that the note and lease were invalid.

FIP was incorporated in 2005, although the family had owned the property for decades before. The other corporate officers were Herbert Fritzsche, president, and Scot Fritzsche, vice president and son of Herbert Fritzsche. Shares of stock were divided among the officers and other sons, daughters and grandchildren, with Herbert Fritzsche getting 68 percent. In July of 2006, Herbert Fritzsche suffered a brain hemorrhage, which affected his health and may have compromised his mental capacity. One result of this was that Rock and LaPlante moved into Herbert Fritzsche’s home after he moved in with another sibling. On the first day of August, Rock signed the lease to LaPlante, which gave him 16 properties at Fritzsche Industrial Park and 10 more owned by Herbert Fritzsche individually. LaPlante was to pay rent in the amount of the property taxes, plus 10 percent of his income, although it was not clear what that income referred to.

A week later, on August 8, Rock signed the promissory note to Shaver in exchange for work done on the property, possibly through his trucking and excavating business. It obligated FIP and Park National Bank, trustee of Herbert Fritzsche’s properties, to pay $450,000 by putting a lien on the properties they owned. Park National Bank did not sign. Three months later, Herbert Fritzsche, FIP, Park National Bank and First Midwest Bank, a trustee for some FIP properties, sued Rock and LaPlante, alleging Rock was not authorized to commit the company’s or her father’s resources. The complaint alleged that Rock was suspected of stealing rents from FIP to pay her personal expenses and refused to provide documentation of rental income, which led to a shareholder decision to remove her as secretary/treasurer in May of that year. After his illness, Herbert also allegedly revoked her power of attorney. Therefore, plaintiffs alleged, Rock had no authority to enter into the lease or the note, and they were invalid. They also claimed the rental agreement was too vague to be enforced.

During the next two years, discovery in the case moved very slowly, possibly because Rock and LaPlante also faced criminal prosecution for theft, conspiracy and financial exploitation of an elderly person. In December of 2008, the plaintiffs moved for summary judgment. They argued that even if Rock was not properly removed as power of attorney and a corporate officer, Illinois law does not allow her to enter into the lease or the note without the board’s approval. They also argued that FIP’s bylaws required approval of the note because it was a form of debt. Defendants responded that the board knew about the lease through e-mails sent among the members, and that no board approval was necessary for the lease and the note because Rock was exercising Herbert’s executive authority through the POA, and because many properties were owned by individual family members rather than the board. After oral arguments, the board granted summary judgment to the plaintiffs, saying Rock did not have the authority to act unilaterally as a matter of law. This appeal followed.

Because it was an appeal of a summary judgment order, the Second noted, it had only to decide whether there were genuine issues of material fact to try. Nonetheless, it found that the defendants failed to meet that standard. Under common law, the court said, the highest officer of a corporation must still get board approval to make contracts, especially ones that are unusual or extraordinary. The lease is such an unusual contract, it wrote, because it involved no trustees for the properties and provided LaPlante with the land for little or nothing. Rock also needed board approval for the lease under the Illinois Business Corporation Act, which requires corporate formalities for transactions involving “substantially all” the corporation’s assets. The lease covered all of the property in the industrial park, the court noted, thus making it impossible for FIP to continue its business.

The court came to similar conclusions about the note. However, in this case, the main support for voiding the note came from FIP’s bylaws. Those bylaws say loans and other forms of indebtedness must be authorized by a board resolution. No such resolution exists, the court said, but the note clearly puts a $450,000 lien on FIP. The appeals court noted that the Business Corporations Act requires board approval for actions outside the ordinary course of business, but believed that the bylaws argument was stronger. Thus, the appeals court upheld the trial court’s grant of summary judgment to the plaintiffs.