Chicago Business Litigation Lawyer Blog

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

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

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

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

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

Earnings of Closely Held Company Are Not Marital Property, Appeals Court Says

July 10, 2008 | Peter S. Lubin and James V. DiTommaso

In an issue of first impression in Illinois, the Third District Court of Appeal ruled in a divorce business dispute that retained earnings from a closely held corporation are non-marital property. In re Marriage of Joynt, No. 3-06-0919 (Aug. 16, 2007).

Michael Joynt was president of Mississippi Valley Stihl, Inc. (MVS), a family-owned subchapter S corporation in Illinois, when his former wife, Theresa, filed for divorce. He also owned 33% of the stock; his father and sister were the remaining shareholders. During the divorce trial, both spouses stipulated that Michael’s stock was non-marital property. However, the company’s accountant testified that MVS had $3.75 million in retained earnings that year, which were set aside for future expenses and not paid as dividends to shareholders. If they had been paid during the trial, Michael would have had an additional $1.25 million in income. The trial court concluded that Michael’s interest in the retained earnings were non-marital property. Theresa appealed, contending that the retained earnings were income available to her former husband.

The appeals court affirmed the trial court’s decision, noting that the company, not the spouses, paid taxes on retained earnings. Noting that Illinois courts hadn’t addressed the issue before, the judges surveyed decisions from several other states ruling that retained earnings are non-marital property. However, they wrote, that’s not always true when the shareholder spouse has full power to decide whether to pay dividends, or substantial influence over that decision. Furthermore, Michael was fairly compensated for his role as president of MVS, and there was no evidence showing that Michael was using MVS to hide marital assets.

Chicago Consumer Attorneys From DiTommaso Lubin Win Precedent in Missouri Class Action

July 9, 2008 | Peter S. Lubin and James V. DiTommaso

Our firm is proud to announce that name partner Peter Lubin won a victory for class-action plaintiffs in Missouri with Dale v. DaimlerChrysler Corp., 204 S.W.3d 151, 172 (Mo. App. 2006). Plaintiff Kevin Dale originally sued the auto manufacturer under the federal Magnuson-Moss Warranty Act, (MMWA) over a breach of warranty for defective power window regulators (the mechanism that raises and lowers the window) on Dodge Durangos. Despite eight repair attempts, Dale contended, Dodge had failed to repair or replace the defective power window regulator in his truck.

Dale’s suit asked the Circuit Court of Boone County, Missouri to certify a class of Dodge Durango owners who’d had similar problems. The court certified two classes: One national class that relied on the MMWA, and one limited to Durango owners in the State of Missouri, which relied on the Missouri Merchandising Practices Act (MMPA). DaimlerChrysler appealed the class certifications on multiple grounds under Missouri’s Rule 52.08, including numerosity and common-question-predominate requirements of the proposed class; typicality and adequacy of Dale as lead plaintiff; the implied definiteness of the class definition; and the superiority of a class action over other forms of adjudication.

The Missouri Court of Appeals for the Western District rejected all of these arguments, finding that the record was sufficient and DaimlerChrysler’s arguments insufficient to prove any of their claims. Two, however, were of interest to class-action attorneys. One had to do with Dale’s adequacy as a class plaintiff. Because Dale’s wife had worked for one of the law firms representing the class, defendants contended that he had an interest in maximizing attorney fees, a conflict of interests that should disqualify him. The judges disagreed, saying Dale’s wife didn’t necessarily stand to gain any extra pay from the case, and they declined to bar lead plaintiffs with such an indirect connection to the class attorneys. In fact, they wrote, “we believe that it should be a matter of discretion with the trial court, decided on a case-by-case basis.”

Company President Has No Standing to Sue Alleged Alter Ego, Appeals Court Rules

July 8, 2008 | Peter S. Lubin and James V. DiTommaso

In an Illinois business contract lawsuit, the Third District Court of Appeal has ruled that a company’s president may not hold his financer and business partner liable for the company’s debts as an alter ego. Semade v. Estes, 05–CH–31 (June 29, 2007).

Charles Semade and Nicholas Estes formed a private corporation, Heartland Pottery Company, in 1995. Estes provided financing; Semade served as president and CEO. Unfortunately, the company did not succeed. Semade filed a lawsuit against Heartland in 1998 for unpaid salary and expense reimbursements. In that case, he won a judgment of more than $294,000, only to discover that Heartland had no assets.

Semade then filed a complaint against Estes himself, contending that Estes should be liable for the judgment because he was the company’s alter ego. Under the law, that means he alleged that Estes and Heartland were the same person for all practical purposes, allowing Semade to “pierce the corporate veil” of limited liability. Semade alleged that Estes controlled all parts of the company and put income and assets in his personal accounts. However, Estes moved for summary judgment, saying Semade lacked standing because he was a director and officer of the company. The trial court agreed, and on appeal, the Third District Court of Appeal agreed.

Our Chicago Consumer Attorneys Can Assist in Recovering Money Damages for Consumer Frauds– Federal Reserve Website Assists in Reporting Consumer Fraud to the Right Agency

May 31, 2008 | Peter S. Lubin and James V. DiTommaso

Are you a consumer with questions or concerns related to potential fraud and do not know what government agency to contact? The Chicago Federal Reserve Bank provides a web page that allows you to link to government agencies that may help you. The web page has links to federal and state banking agencies, federal and state securities agencies, and state insurance agencies located in Illinois, Indiana, Iowa, Michigan, and Wisconsin. You can also link to various useful financial , insurance, and banking tools, and to lists of financial services regulators, and consumer complaint filing information. Click here to link to the Chicago Federal Reserve Fraud web page.

If you need legal assistance in pursuing a civil lawsuit because government regulators cannot help you in recovering money lost due to fraud, our private sector lawyers can assist you by clicking here to contact us.

How to Avoid RV and Auto-Fraud — Chicago Consumer Attorneys Who Can File Suit to Recover Damages for RV and Auto-Fraud and Lemon Automobiles

May 29, 2008 | Peter S. Lubin and James V. DiTommaso

Our law firm helps Chicago area consumers who are victims of auto and RV fraud or who purchased vechicles that are lemons to pursue lawsuits to regain their lost investment. For more information about our Nationwide Consumer Rights lawyers click here.

There are many practical ways to protect yourself from auto and RV fraud or from purchasing a lemon vechicle.

The National Association of Consumer Advocates provides the following well thought out advice on how to avoid auto fraud:

Chicago Consumer Attorneys Who Assist in Stopping Debt Collector Abuse

May 29, 2008 | Peter S. Lubin and James V. DiTommaso

The National Association of Consumer Advocates provides the following advice about Debt Collector Abuse:

Debt Collection Abuse (FDCPA)

In spite of federal and state legislation, debt collectors continue to abuse consumers in order to unfairly pressure them into paying debts. These abuse tactics are often intended to scare or intimidate consumers, sometime with threats of violence or arrest. Other debt collectors will try to pile on illegal interest or fees to make the debt seem larger that it actually is. In some instances, these debts are time-barred, discharged in bankruptcy, or not owed for other reasons.

Mutual Fund Owners May Not Sue Over Excessive Fees, Seventh Circuit Rules

May 28, 2008 | Peter S. Lubin and James V. DiTommaso

In a mutual fund’s shareholder dispute, the Seventh U.S. Circuit Court of Appeals ruled on May 19 that an investment advisor’s fiduciary duty to shareholders does not require that the advisor’s fees be “reasonable” by any legal definition. In Jones v. Harris Associates L.P., 07-1624 (7th Cir. 2008), the circuit affirmed a summary-judgment ruling in favor of the mutual fund manager by the U.S. District Court for the Northern District of Illinois.

Three shareholders in the Oakmark complex of mutual funds sued the fund’s advisor, Harris Associates, contending that the fees they paid toward Harris’s compensation were too high. The bulk of the opinion (which the majority called “the main event”) concerned section 36(b) of the Investment Company Act, an amendment to the 1940 act added in 1970. That law gives investment advisors at registered investment companies a fiduciary duty to shareholders with regard to any compensation they or their affiliates receive. However, said the Seventh Circuit, “a fiduciary duty differs from rate regulation…. Section 36(b) does not say that fees must be ‘reasonable’ in relation to a judicially created standard. It says instead that the adviser has a fiduciary duty.” The court goes on to note that fiduciary duty is well-defined in trust law and does not foreclose an advisor’s ability to negotiate for compensation.

In doing so, the court disapproved caselaw from Gartenberg v. Merrill Lynch Asset Management, Inc., 694 F.2d 923 (2d Cir. 1982). That case requires that “[t]o be guilty of a violation of §36(b) . . . the adviser-manager must charge a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s-length bargaining.”

Seventh Circuit Finds No Duty to Defend For Liability Insurer When Liability Based on Intentional Wrongs

May 27, 2008 | Peter S. Lubin and James V. DiTommaso

In an insurance contract dispute, the Seventh U.S. Circuit Court of Appeals ruled April 23 that a liability insurer has no duty to defend a village from litigation alleging intentional misconduct, but not negligence. St. Paul Fire and Marine Insurance Company v. Village of Franklin Park, No. 06-2924 (7th Cir. 4/23/2008) is a contract dispute between an insurer and an Illinois township accused in separate litigation of severely underfunding its mandatory firefighters’ pension fund.

Under Illinois state law, municipalities must establish and administer pension funds for their firefighters. Firefighters in Franklin Park sued under that law, alleging that the village had intentionally underfunded their pension fund for more than 30 years. After the suit was filed in state court in January of 2002, the village asked its liability insurer, St. Paul, to defend it under a policy that covered disputes over employee benefits plans. The insurer declined, and the village disputed this, but did not sue. In late 2004, St. Paul filed in federal court, seeking a declaratory judgment that it had no duty to defend the village. In March of 2006, the district court granted that judgment, ruling that St. Paul’s contract created a duty to defend against negligence, not the intentional wrongdoing alleged by the firefighters. The village appealed both the judgment and the denial of a motion to reconsider. The Seventh Circuit affirmed.

In its opinion, the three-judge panel agreed with St. Paul that the firefighters’ allegations were not a “loss” under the meaning of the policy, pointing to caselaw that distinguishes between loss and money that was illegally or unethically withheld from its rightful owner.

Illinois Blocked-Crossing Law Is Preempted, State Supreme Court Rules

May 26, 2008 | Peter S. Lubin and James V. DiTommaso

Until recently, under the Illinois Vehicle code (625 ILCS 5/18c–7402(1)(b)), trains that blocked any road crossing for more than 10 minutes were subject to traffic tickets. That law was overturned in January when the state Supreme Court ruled that the blocked-crossing law violates the Commerce Clause of the U.S. Constitution and the Federal Railroad Safety Authorization Act (FRSA). The opinion in Eagle Marine Industries, Inc. v. Union Pacific Railroad Company, 102462 (January 2008), a business dispute, reversed a preliminary injunction against Union Pacific issued by a circuit court in Sauget, near St. Louis, and upheld by an appeals court. It relies on the same court’s decision earlier that month in The Village of Mundelein v. Wisconsin Central Railroad, 103543 (January 2008), which upheld an appellate court’s decision to vacate a large fine against the railroad.

In Mundelein, the village issued a $14,000 fine to Wisconsin Central under a local ordinance that prohibited a train blocking a highway-grade crossing for more than 10 minutes unless it had broken down or was continuously moving. The Wisconsin Central train blocked such a crossing for 157 minutes. At the ensuing trial, the court rejected the argument that the FRSA preempted the local law. However, that decision was reversed on appeal.

The Illinois Supreme Court agreed, saying that Mundelein’s ordinance, which is based on Illinois’ state law, interfered too much with the FRSA. Because Eagle Marine relied on the state law, the court said, it had to decide that case in the same way as Mundelein. Thus, the Illinois blocked-crossing provision and any local laws based on it were preempted by FRSA and therefore void.