Illinois Appellate Courts

Fiduciary Shield Doctrine Does Not Apply When Fiduciary Is Motivated By Personal Interests, First District Says

September 9, 2009 | Peter S. Lubin and James V. DiTommaso

A trial court may have personal jurisdiction over a defendant outside Illinois, but only if it can determine that the defendant’s alleged tort was motivated for personal reasons, the First District Court of Appeal has ruled. Femal v. Square D Company, No. 1-07-1990 (Ill. 1st Jan. 29, 2009). The ruling came in a complex Illinois business dispute between Michael Femal, a former employee at electrical equipment manufacturer Schneider Electric, and James O’Shaughnessy, a lawyer for a company accused of violating a Schneider patent.

Femal patented a process for his employer, Square D, which was bought by Schneider Automation, Inc. Schneider sold the patent to Solaia Technologies, which was to enforce the patent and give Schneider a percentage of its earnings. Schneider agreed to let Femal help Solaia enforce the patent, for which he was to get 2% of Solaia’s earnings.

Among the alleged infringers Solaia sued was Wisconsin-based Rockwell International, which countersued Solaia for bad faith patent enforcement. The sides had a settlement conference in Illinois that included O’Shaughnessy, Rockwell’s attorney. At this meeting, Rockwell raised allegations that Femal could best refute, leading Solaia to cancel its percentage arrangement with Femal and put him on a much less lucrative hourly wage to serve as a witness. Schneider then hired outside counsel to look into the propriety of Femal’s percentage arrangement with Solaia, and eventually fired him for misuse of compay assets, gross misrepresentations and gross failure of professional judgment.

Business Liable for Notary’s Misconduct Under Common Law But Not Statute, First District Rules

August 30, 2009 | Peter S. Lubin and James V. DiTommaso

In a case of first impression, the Illinois First District Court of Appeal has ruled that copy shop Kinko’s may not be held liable under the Illinois Notary Public Act for misconduct by a notary it employed, but may be held liable for common-law negligence. In Vancura v. Katris, No. 1-06-2750 (Ill. 1st. Dec. 26, 2008) , the appeals court found that Kinko’s did not consent to the misconduct and vacated $233,000 in jury awards.

Plaintiff Richard Vancura helped fund a real estate investment by defendant Glenn Brown, who had trouble reselling the property. A mutual acquaintance, Randall Boatwright, agreed to give Vancura shares in his company in exchange for Brown’s debt to Vancura, which he agreed to lower. Brown then struck a related deal giving defendant Peter Katris an interest in the property and arranged a real estate closing at which all of these deals would be sealed. Boatwright and his business partner had Vancura sign some papers on the day before the closing, but then realized that some would have to be notarized. They visited a local Kinko’s for that purpose, but without Vancura. One of the documents they left with had purported signatures from Vancura and Gustavo Albear, the notary.

Several months later, Vancura called Brown and discovered that Brown believed the debt was resolved. Vancura, who had not been paid, did not agree, and eventually sued a variety of defendants, including Albear and Kinko’s; Brown and Katris also sued those defendants, along with Boatwright. After a bench trial, the trial court found Kinko’s liable to Vancura, Brown and Katris for violations of the Notary Public Act as well as negligent supervision and training of Albear. Kinko’s appealed both.

Partnership Agreements May Not Eliminate One Partner’s Fiduciary Duty to Others, First District Rules

August 24, 2009 | Peter S. Lubin and James V. DiTommaso

A trial court was correct to find a breach of fiduciary duty in a real estate partnership, the First District Court of Appeal ruled March 27. In 1515 North Wells LP v. 1513 North Wells LLC, No. 1-07-1881 (Ill. 1st. Dist. March 27, 2009), the appeals court also upheld the lower court’s rulings that one partner had breached his contract and that denied him a chance to amend his complaint to pierce the corporate veil.

The case grows out of a real estate development deal struck in 1997. Thomas Bracken, Mark Sutherland, Alex Pearsall and an uninvolved fourth partner formed 1515 North Wells LP, a limited partnership, to develop a condominium with retail space. Sutherland and Pearsall then created SP Development Corporation to serve as the general partner of 1515 North Wells LP. Bracken separately created 1513 North Wells LLC to own space in the building that was to be a health club. Bracken borrowed $250,000 to pay for his part of the property, and signed a note saying he agreed to pay it back no later than 15 days after receiving a financial statement from 1515 North Wells. He further agreed to pay it even if there was a dispute, then wait for a refund later.

To begin development, SP, the general partner, solicited bids for a general contractor. It hired yet another Sutherland and Pearsall company, Sutherland and Pearsall Development, even though its bid was the only one received that failed to state a maximum price for the project. The same general contractor, not 1515 North Wells, later received the profits from condominium upgrades.

First District Rules Improper Joinder of Legal Malpractice Case With Underlying Action Does Not Foreclose Defenses

August 19, 2009 | Peter S. Lubin and James V. DiTommaso

In a Chicago legal malpractice lawsuit, the First District Court of Appeal has ruled that the defendant is not barred from certain defenses because the plaintiff improperly joined the malpractice claim with its underlying action. Preferred Personnel Services, Inc. v. Meltzer, Purtill & Stelle, LLP, No. 1-08-0389 (Ill. 1st. Jan 23, 2009).

Preferred is a staffing company with a claim against insurance broker Arthur J. Gallagher & Co. Gallagher told Preferred that it had secured malpractice insurance for the company and accepted payment for those services, but Preferred later discovered that it had no insurance. Preferred hired Illinois law firm Meltzer, Purtill & Stelle to sue Gallagher, but the firm never started its case. More than two years later, Preferred and its new lawyers sued Gallagher for breach of contract, negligence and fraud. In the same suit, it also sued Meltzer and one of its attorneys, Thomas Palmer (collectively “Meltzer”), for malpractice.

Gallagher moved to dismiss because the statute of limitations had passed in 2001, a motion that was granted by the trial court and upheld by the appellate court. While that motion was pending, Meltzer moved to dismiss the claims against it, saying the malpractice claims were premature because the underlying claim was still viable until the appeals court had ruled. This motion was denied. After the appellate decision on the Gallagher dismissal, Preferred moved for partial summary judgment, asking the court to foreclose arguments by Meltzer that the statute had not run on the Gallagher claims. The trial court granted this motion, but also certified three questions for the First District Court of Appeal to answer:

First District Strikes Verdict Against Partners But Leaves Firm Liable in Partnership Dispute

August 9, 2009 | Peter S. Lubin and James V. DiTommaso

In a partnership dispute and breach of fiduciary duty claim, the First District Court of Appeal has ruled that an attorney may sue his former firm, but not his former partners. In Kehoe v. Harrold, Wildman, Allen & Dixon, No. 1-07-0435 (Ill. 1st Dec. 23, 2008), Robert Kehoe, a former partner in the firm, sued after partners voted to change him from equity partner to nonequity partner. That is, they voted to end his part ownership of the firm and make him a salaried employee.

In 1995, after Kehoe had been a partner in Harrold Wildman for sixteen years, the firm renegotiated its financing with its bank, a deal that required every equity partner to execute a personal guaranty acceptable to the bank. Kehoe objected to the proposed guaranty and was unable to find a compromise, despite offers to draft his own version. The bank allowed the firm to take out its loan anyway. Later, the firm amended its loan agreement with the bank to eliminate the guaranty requirement but specify that partners without a guaranty are personally liable for the full amount of the debt. A few months later, partner Eisel approached Kehoe about his lack of a guaranty, and Kehoe replied that the amendment made it unnecessary.

The firm’s management committee then met and adopted a resolution allowing a two-thirds vote of partners to change the status of any partner who failed to execute a guaranty. Kehoe was present and objected, and rebuffed later advice to sign the guaranty. The partners later voted to remove his equity status per the resolution. Over the next two days, Kehoe moved his clients to a law firm of his own; he also requested his equity be paid out and was denied. He sued individual partners, claiming they breached their fiduciary duty by advocating the resolution, and the firm as a whole for breaching their obligation to pay his equity share.

Fifth District Court of Appeal Overturns Damages Award in Trade Secrets Act Lawsuit

August 3, 2009 | Peter S. Lubin and James V. DiTommaso

A client list and information on clients’ computer networks do not qualify as trade secrets under the Illinois Trade Secrets Act, the Fifth District Court of Appeal decided April 13 in a business trade secrets lawsuit. In System Development Services v. Haarman, No. 04-CH-30 (Ill. 5th 2009), System Development Services (SDS) sued four former employees who left to start a competing business offering networking services to businesses in Effingham County. A trial court found that the defendants had misappropriated a list of clients and potential clients, as well as information on SDS clients’ networks, but the Fifth District Court of Appeal overturned that decision.

SDS sets up and maintains computer networks for local businesses. It maintains a database of clients and potential clients, and stressed to employees that both the list and the clients’ network information should be kept private. Defendants Timothy Haarman, Jason Repking, Rick Hoene and Terry Oldham left SDS after a bad financial year and started a competing business, Technical Partners. None had signed a restrictive covenant limiting their right to compete with SDS. However, when starting out, they sent out a mailing to potential clients that SDS thought was suspiciously similar to addresses in its client database. They also relied on former SDS customers during their first month inbusiness. SDS sued them for violations of the Illinois Trade Secrets Act and breach of fiduciary duty.

At a bench trial, the plaintiff testified that some of the addresses at issue contained information not found in the telephone book, and that work orders and emails were deleted from their system shortly before defendants left. However, the company’s owners told the court that they had no personal knowledge that a client list was stolen. The defendants testified that they made their mailing list using the phone book, the Internet and a chamber of commerce listing. They also relied on client relationships formed at SDS and personal connections. One defendant testified that no special knowledge other than the ordinary knowledge of a network technician was necessary to serve SDS and Technical Partners clients.

Continued Employment for a Short Time Is Not Adequate Consideration for Post-Employment Restrictive Covenant, Appeals Court Decides

July 29, 2009 | Peter S. Lubin and James V. DiTommaso

DiTommaso Lubin’s Illinois breach of contract litigation attorneys were pleased to see a split Illinois Third District Court of Appeal decision clarifying the circumstances under which a post-employment restrictive covenant is valid. The decision came in Brown & Brown v. Patrick Mudron, No. 03-CH-1363 (Ill. 3rd March 11, 2008), in which a Florida insurance company sued a former employee for breaching a restrictive covenant in her employment agreement.

Diane Gunderson, the employee, worked for a Joilet, Ill. company that was taken over by Brown & Brown. Brown asked Gunderson to sign a new employment agreement with them, and in fact, fired an employee who refused to do so. The agreement said Gunderson’s employment could be terminated any time for any reason and prohibited her from soliciting or servicing any of Brown’s employees for two years after ending her employment with the company. She signed the agreement, but resigned seven months later and went to work for a competitor. Brown sued, alleging that Gunderson had breached the restrictive covenant at her new job. The trial court granted summary judgment in favor of Gunderson because it couldn’t find any evidence that she had breached the covenant, and Brown appealed.

The majority started by disposing of a “choice of law” provision in the contract requiring all disputes to be resolved in Brown’s home state of Florida. Illinois law applies anyway, the court wrote, because Illinois has a greater interest in the case and moving it to Florida would be against Illinois public policy interests. International Surplus Lines Insurance Co. v. Pioneer Life Insurance Co. of Illinois , 209 Ill. App. 3d (1990).

Illinois Probate Law Allows Executors to Set Multiple Deadlines for Claims Against Estates, Appeals Court Decides

July 13, 2009 | Peter S. Lubin and James V. DiTommaso

A legal malpractice plaintiff who is also the executor of an estate may issue new creditor notices to avoid having his case dismissed, the First District Court of Appeal decided March 31. In Jaason v. Sullivan, No. 1-08-1254 (Ill. 1st Dist. March 31, 2009), the executor, Erik Jaason, filed a Chicago legal malpractice lawsuit against Barbara J. Sullivan and B.J. Sullivan & Associates for alleged mistakes in a will Sullivan prepared for Alexander Koepp.

In his complaint, Jaason alleges that Koepp instructed Sullivan to prepare a will giving Jaason the right to purchase Koepp’s home for $150,000, at Jaason’s discretion. However, Koepp’s home was already held in joint tenancy with his wife, Karsti Koepp. Thus, upon Alexander Koepp’s death in November of 2006, the property was outside the purview of the will and passed to Karsti Koepp under the joint tenancy, leaving Jaason with no option to purchase it. He sued Sullivan in December of 2007 for legal malpractice, alleging that her failure to recognize and take action on the joint tenancy fell outside the applicable standard of care.

In response, Sullivan filed a motion to dismiss the suit as time-barred. The Illinois Code of Civil Procedure requires that, in cases where probate has been opened, plaintiffs must file their claims for legal malpractice within the time given for claims against the estate or the time given for contesting the validity of a will — whichever is greater. The six-month window for contesting the will had clearly elapsed in the 13 months since Koepp’s death. To make a claim against an estate, creditors in Illinois have three months from the date they receive a notice of the death in the mail, or six months from the date of publication of the death as a legal notice, whichever is later.

First District Rules Insurer Must Defend Private Security Company in Chicago Fire Damage Lawsuits Despite ‘Joint Venture’

June 29, 2009 | Peter S. Lubin and James V. DiTommaso

A private security company’s agreement with a competitor does not foreclose insurance coverage in lawsuits filed against the first company alone, the First District Court of Appeal has ruled. Clarendon America Insurance Company v. B.G.K. Security Services, Inc., No. 1-07-2994 (Ill. 1st Dec. 19, 2008), arises out of a 2003 fire at a Cook County-owned building at 69 West Washington Street in Chicago. Twenty-two lawsuits resulted from the fire. Clarendon, which insures BGK, had filed for declaratory judgment that it had no duty to defend BGK in those suits.

Clarendon’s argument focuses on language in its policy, specifying that the insured parties include “[a]ny organization you newly acquire or form, other than a partnership, joint venture or limited liability company…” It used that language to argue that coverage for BGK in the 22 fire lawsuits should be excluded, because BGK had entered into a joint venture with another security company, Aargus Security Systems, Inc. Both sides filed for summary judgment in the trial court, and the trial court sided with BGK. Clarendon appealed, arguing both the summary judgment language and that it should have been allowed to complete discovery because the record was unclear.

By contrast, BGK argued that Clarendon has a duty to defend because the lawsuits name BGK rather than the joint venture, and BGK is also the insured named by the insurance policy. The appeals court agreed. Pointing out that the joint venture is extrinsic evidence, the court reasoned that this evidence involves facts that could drastically change the underlying litigation (the fire lawsuits) by affecting BGK’s liability. That would make it an impermissible consideration under Illinois caselaw, the court wrote, and thus, the trial court was right to exclude it.

Appeals Court Dismisses Chiropractor’s Class Action Lawsuit Against Insurer for Alleged Underpayment and Breach of Contract

June 22, 2009 | Peter S. Lubin and James V. DiTommaso

In a proposed class-action insurance fraud lawsuit, the Illinois Third District Court of Appeal has ruled that a chiropractor may not sue a workers’ compensation insurer. In Martis v. Grinnell Mutual Reinsurance Company, No. 3-08-0004 (Ill. 3rd March 27, 2009), chiropractor Richard Martis sued Grinnell Mutual Reinsurance Company after Grinnell’s billing employees incorrectly paid Martis too little for treating an injured worker.

In February of 2006, Martis began treating an employee of Water Management Corp. of Illinois who had been injured on the job. He was to be paid by Water Management’s workers’ compensation policy, issued by Grinnell. When he submitted his bills to Grinnell, the insurer’s outside billing firm applied PPO discounts to those bills even though Martis did not have a PPO agreement with Grinnell. Thus, Grinnell underpaid Martis. He responded with a proposed class-action lawsuit encompassing all Illinois health care providers who had been underpaid by Grinnell in the same way, through incorrect PPO discounts.

The complaint by Martis alleged conspiracy, unjust enrichment, breach of contract and violations of the Illinois Consumer Fraud Act. The trial court granted Grinnell’s motion to dismiss the conspiracy and unjust enrichment counts. However, it certified the class of health-care providers as to the breach of contract claim. Grinnell appealed the denial of its motion to dismiss the breach of contract claim and the class certification to the Third District.