Shareholder Freeze Out

Partners Owe Fiduciary Duty to Each Other Even During Adversarial Litigation

September 27, 2020 | Peter S. Lubin and Patrick Austermuehle

After partners in a closely held corporation entered into years of adversarial litigation, a settlement agreement was reached. One of the partners later sued the other two, alleging that he was fraudulently induced into agreeing to the settlement when the defendant’s counsel misrepresented the financial position of the corporation at the time of the settlement. The circuit court dismissed the plaintiff’s complaint, finding that the defendants did not owe him a fiduciary duty during the litigation settlement discussions. The appellate court reversed, determining that because there was no document specifying that the parties’ relationship had been dissolved at the time of the settlement talks, the defendants still owed the plaintiff a fiduciary duty, and there was a question of material fact as to whether the resulting settlement agreement was valid. The appellate panel then reversed the decision of the circuit court.

Samuel Arndt, III, Nicholas Nardulli, and Diana Johnson were shareholders in Redhawk Financial Services, Inc. Arndt owned 49 percent of Redhawk’s shares; Nardulli was the controlling shareholder, a director, and the president of Redhawk; Johnson was a shareholder, a director, and the secretary of Redhawk. In December 2012, Redhawk filed a complaint against Arndt for breach of fiduciary duty. The complaint alleged that Arndt withdrew over $100,000 from Redhawk without an apparent business justification and also diverted Redhawk’s commissions into Arndt’s personal bank account. Arndt filed a counterclaim against Redhawk as well as a third-party complaint against Nardulli and Johnson, alleging breach of fiduciary duty and oppression of him as a minority shareholder. Continue reading ›

Judge Agrees Shareholders Were Oppressed, But Deliberates Over How to Compensate Them

September 12, 2020 | Peter S. Lubin and Patrick Austermuehle

Investing is supposed to be a long-term strategy to build wealth, but expecting shareholders to wait more than 60 years before they can get a fair return on their investment is far beyond what any investor would consider reasonable.

That was allegedly the case for the minority shareholders of Promega Corp., the biotechnology company based in Fitchburg, Wisconsin. According to a lawsuit filed by shareholders back in 2016, Bill Linton, Promega’s founder and CEO, allegedly used manipulative and bullying tactics to become a majority shareholder of the company. His actions allegedly left the minority shareholders with no hope of getting a decent return on their investments before 2078 at the earliest.

Circuit Judge Valerie Bailey-Rihn, who has been hearing the case, has said that she was leaning towards the plaintiffs and agreeing that they had been oppressed by Linton’s actions. Now the only two things left to determine are 1) how to punish Promega and provide restitution for the minority shareholders who were allegedly oppressed by Linton’s actions; and 2) how to determine the price of the stocks for which the minority shareholders are allegedly owed compensation. Continue reading ›

Lawyer’s Motives Questioned After Judge’s Recusal — Chicago Business Litigation Lawyers Near Oak Brook — Chicago Shareholder Oppression Lawyers Near Oak Brook and Naperville

May 5, 2019 | Peter S. Lubin and Patrick Austermuehle

We obtained justice in a shareholder dispute and shareholder oppression case after Defendants hired a former partner of the judge.

The Sun-Times reported the story as follows:

Lawyer’s motives questioned after judge’s recusal

Did lawyers for one side of a case hire the judge’s former law partner just so the judge would recuse himself?

It doesn’t matter — it “just simply looks bad,” Dorothy Kirie Kinnaird, presiding judge of the Cook County Circuit Court’s Chancery Division, wrote in a rare order knocking attorney Myron “Mike” Cherry off a case. Cherry is a heavyweight fund-raiser for Democrats such as former President Bill Clinton and 2004 presidential candidate
John Kerry.

Kinnaird found Cherry’s 11th-hour entry into the case of Yvonne DiMucci vs. Anthony DiMucci suspicious because the judge in the case, Peter Flynn, practiced law with Cherry for 23 years as the firm of Cherry & Flynn. And Cherry’s entry into the case just two days after Flynn ruled against Anthony DiMucci on some motions prompted Flynn to recuse himself.
Yvonne DiMucci’s lawyers suggested that could have been the goal of Anthony DiMucci’s’ attorneys. Yvonne alleges her brother-in-law, Anthony, froze her out of a business in which he and her late husband, Salvatore DiMucci, were equal partners. The case has dragged on for six years.

“The court believes that the filing of the appearance by Mr. Cherry under the circumstances of this case constitutes the appearance of impropriety and that no objective, disinterested observer would perceive otherwise,” Kinnaird wrote. “This court is specifically not finding that Mr. Cherry entered the case in order to force Judge Flynn’s recusal or in an attempt to
incur favor with him.” However, Kinnaird wrote, given that Flynn recused himself the last time Cherry was on a case, “a persuasive argument
can be made that . . . Mr. Cherry should have known that such a recusal would occur.”

Kinnaird called it “egregious” for Cherry to file his appearance on behalf of Anthony DiMucci without getting Flynn’s
permission, a sentiment echoed by other Chancery Court judges. Judges rarely, if ever, refuse to allow an attorney to join an existing legal team for a case, unless there appears to be
some conflict of interest, as charged in this case. Cherry did not appear in court to file his appearance as Kinnaird said is the custom. Rather, he sent Flynn a copy of the notice that he was joining the case.

“This court has never seen or heard of a situation in the Chancery Division where an attorney has filed an appearance without leave of court and then sent a copy of that appearance by messenger directly to the judge,” Kinnaird wrote. Kinnaird’s solution was to strike Cherry’s appearance from the record and transfer the case back to Flynn. Cherry can
seek Flynn’s leave to join the case. She ascribes no “ill motive” to Cherry or anyone else in the case. Cherry respectfully disagrees with Kinnaird’s ruling, saying the law allows anyone to have the attorney of his choice.

Cherry’s reading of the law is backed by Northwestern University Law Professor Steve Lubet and former Cook County Judge Brian Crowe, who authored an affidavit served on the court.
The law further states that a judge need only recuse himself for three years after practicing with a lawyer. Flynn left Cherry’s firm five years ago. Kinnaird said some Chancery Court judges continue to recuse themselves from cases involving their old firms 20 years after leaving them. Continue reading ›

Lubin Austermuehle’s Oak Brook and Chicago Attorney Peter Lubin Named 2013 Illinois Super Lawyer as Class-Action, Business Litigation and Consumer Rights Attorneys

January 26, 2013 | Peter S. Lubin and Patrick Austermuehle

Super Lawyers named Chicago and Oak Brook business trial attorney Peter Lubin a Super Lawyer in the Categories of Class Action, Business Litigation and Consumer Rights Litigation. Lubin Austermuehle’s Oak Brook and Chicago business trial lawyers have over thirty years experience litigating complex class action, consumer rights and business and commercial litigation disputes. We handle emergency business lawsuits involving injunctions, and TROS, covenant not to compete, franchise, distributor and dealer wrongful termination and trade secret lawsuits and many different kinds of business disputes involving shareholders, partnerships, closely held businesses and employee breaches of fiduciary duty. We also assist businesses and business owners who are victims of fraud.

Peter S. Lubin

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

June 15, 2011 | Peter S. Lubin and Patrick Austermuehle

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

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

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

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

October 30, 2008 | Peter S. Lubin and Patrick Austermuehle

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

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

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

Evidentiary Hearings in Motions to Disqualify Illinois Attorneys

October 24, 2008 | Peter S. Lubin and Patrick Austermuehle

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

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

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

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

October 20, 2008 | Peter S. Lubin and Patrick Austermuehle

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

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

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

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

July 23, 2008 | Peter S. Lubin and Patrick Austermuehle

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

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

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

LLC Members Owe Company, Manager No Fiduciary Duty, Appeals Court Rules

July 17, 2008 | Peter S. Lubin and Patrick Austermuehle

Only managers in manager-operated limited liability corporations have a fiduciary duty to the company or to other members, the First District Court of Appeal ruled in a usurpation of corporate opportunity lawsuit involving a closely held LLC. Katris v. Carroll, No. 1-04-3639 (Dec. 23, 2005).

Peter Katris was one of four members/officers and two managers of an Illinois limited liability corporation, Viper Execution Systems LLC. Viper LLC was formed to market a type of options-related software, also called Viper, written by LLC member Stephen Doherty for member Lester Szlendak. Its articles of organization specified that management was vested in Katris and the other manager, William Hamburg.

Defendant Patrick Carroll employed Doherty before and during the organization, and defendant Ernst & Company later hired Doherty to work with Carroll. Their work included the writing of another software program, WWOW, which Katris believed was functionally similar to Viper. Five years after the organization, Katris sued Carroll and Ernst for collusion and usurpation of corporate opportunity because of WWOW’s similarity to Viper. (He also sued Doherty for collusion and breach of fiduciary duty, claims they later settled.)