Articles Posted in Business litigation

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The Illinois Appellate Court affirmed the ruling of the trial judge dismissing a breach of fiduciary duty claim regarding a troubled condominium development. The west-side Chicago development was managed by Two South Leavitt, LLC, whose duties were directed by an individual, John R. Joyce. Mr. Joyce was an attorney employed by the defendant Stahl Cowen Crowley Addis, LLC. Mr. Joyce later moved on to two other law firms.

Before the start of the construction of the condominium development, Two South Leavitt and Joyce, with another business partner, were looking for investors. The solicitation they offered guaranteed a 12 percent annual return. Several investors contributed a total of $757,000 to Leavitt. On top of that, bank financing was secured.

Joyce was acting as legal counsel for Leavitt and negotiated a construction contract with a construction firm. Joyce, also acting as Leavitt’s manager, approved the construction contract. Construction began in 2004, but delays in costs overruns caused the building to remain unfinished. A lawsuit was filed shortly thereafter.

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Earlier this year, online communities banded together to help shut down the Stop Online Privacy Act (SOPA), which sought to increase the government’s ability to fight online sharing of copyrighted intellectual property. Internet companies like Google, Wikipedia, and Craigslist opposed the bill on the basis that it could hold them responsible for any illegal sharing by its users. The Seventh Circuit Court of Appeals is set to consider a copyright infringement lawsuit that could have similar repercussions for internet companies, Flava Works, Inc. v. Marques R. Gunter d/b/a myVidster.com, No. 11-3190.

The plaintiff company, Flava Works, Inc., produces adult videos and claims that the defendant company has violated copyright laws by allowing its online users to upload and share material copyrighted by Flava Works. myVidster.com holds itself out to be a “social media bookmarking and backup service that lets you collect, share and search your videos.”
The basis of Flava Works’s claims was that myVidster.com’s business model was “largely dedicated to the repeated and exploitative unauthorized distribution and reproduction” of media, including videos owned by Flava Works. By providing users with a means of uploading, storing, and sharing copyrighted material that myVidsters.com had caused the plaintiff “irreparable harm.” Flava Works chief executive officer stated that by allowing users to post and share its videos with friends, “[myVidster.com] is sharing content that is copyrighted by Flava Works and promoting it.”
The case was filed in the U.S. District Court for the Northern District of Illinois, where Judge John F. Grady ruled that Flava Works’ claim for copyright warranted a preliminary injunction. It is this ruling that is being reviewed the the Seventh Circuit Court of Appeals. If the circuit court agrees with Judge Grady’s ruling, it could drastically change the rules for online sharing.

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In business, when we deal with a company’s employee we assume that the employee is acting on behalf of his company. This assumption underlies the basis of most business agreements. However, in the commercial lawsuit of J.F. Brewing v. PaulMark Land Acquisition, the defendant company denied that it was responsible for honoring an agreement its former CEO made with the plaintiff. The Illinois Appellate Court disagreed, instead holding that a company is bound by the actions of its members. Joseph Ferrel and J.F. Brewing, Inc. v. PaulMark Land Acquisition Company, LLC, 2012 IL App. (1st) 102582-U.

The defendant, PaulMark Land Acquisition Company, LLC, was formed in 2004 in an effort to establish a brewpub. However, by 2007 the LLC had exhausted all of its working capital and then turned to its members to make loans to the company. It was at this time that the plaintiff, Joseph Ferrel, wanted to become a member of PaulMark. After talks with the company’s CEO, it was decided that Ferrel would loan the company $11,000. Ferrel then formed his own corporate entity, J.F. Brewing, Inc., in order to make the loan to PaulMark. His initial check was accepted by the the PaulMark’s CEO, as was a second loan of $3,000.

However, at the time of his loans, Ferrel was not yet a member of PaulMark. Before becoming a member, Ferrel had requested changes to the operating agreement. These changes were being negotiated at the time of both of Ferrel’s payments to PaulMark. However, when it became apparent to Ferrel that those changes would likely not be made, he notified the CEO that he was no longer interested in becoming a member of PaulMark. Ferrel issued a promissory note for both of his check and requested that they be repaid. However, before the CEO could sign the promissory notes he was fired; PaulMark never repaid the notes or acknowledged their existence. Consequently, Ferrel filed the current commercial litigation lawsuit against PaulMark.

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In business, it is important to trust your partners and that the information that they provide is truthful. However, to ensure that trusted business associates do not withhold information and knowingly deceive people, the law imposes a fiduciary duty. This duty requires a party to act in the best interest of another party and forbids the party from putting his/her own interests first.

In the Illinois business lawsuit of Bret A. Broaddus v. Kevin Shields, 7th Circuit, No. 11-1117 (December 21, 2011), the plaintiff accuses the defendant of a breach of fiduciary duty. Kevin Shields was the managing partner of Will Partners, LLC, a company in which Bret Broaddus owned a 10 percent membership. Broaddus owned this interest for a little over two years, after which he made the decision to sell his share of Will Partners, a decision which Broaddus alleges was based on false information provided by Shields.

Will Partners was started as a property management company in Monee, Illinois. One of its projects involved the construction of a warehouse for World Kitchen, Inc., who in turn paid Will Partners rent every month. When Broaddus invested in Will Partners, it was agreed that the bulk of his interest would be coming from World Kitchen’s rent. It is this agreement that serves as the basis for the relevant business lawsuit.

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There’s the old adage “you don’t get something for nothing,” a concept that holds particularly true in business dealings. Yet in the business litigation case of John A. Dore, Andrew G. Chenelle, Michael O’Rourke and Michael C. Moody v. Sweports Ltd., 07 L 12136, the defendants expected to do just that. The lawsuit was filed after the defendant company took the plaintiff investors money, but then rescinded all of the plaintiffs’ stock interest.

The four plaintiffs, Dore, Chenelle, O’Rourke, and Moody, became involved in Sweports, Ltd. in 2006. Sweports, a Delaware company, was looking for investors for its subsidiary, UMF Corporation. UMF created and sold various antimicrobial cleaning products under the trademark name “PerfectClean.” Dore et al. agreed to help finance UMF in exchange for 11 percent of the company’s stock.

However, in June 2007, Sweports’s president, George Clarke, passed a corporate resolution that effectively rescinded all of Dore et al.’s stock interest in the company. This resolution was passed without any prior notice to the plaintiffs. So just a year after Dore et al. had invested around $800,000 in Sweports and UMF, they no longer owned any portion of the company. Dore et al. promptly filed a business litigation suit against Sweports, Ltd.

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According to the Illinois Workers’ Compensation Commission, workers’ compensation is “a no-fault system of benefits paid by employers to workers who experience job-related injuries or diseases.” The idea behind workers’ compensation is that when an employee is injured during the scope of his/her employment, that the employer will cover medical fees associated with that injury.

And while the employer may sometimes dispute the extent and nature of the injured worker’s injury, that was not the basis for the Illinois lawsuit of Elite Labor Services, Ltd. as subrogee of Fulgencio Nunez v. William Dudek Manufacturing, 09 L 14859. Rather, the lawsuit involved a dispute about who should pay the workers’ compensation benefits – the injured worker’s employer, or the company he was performing work for.

Fulgencio Nunez was employed by Elite Labor Services, a staffing agency specializing in contract and temp employees. Elite had agreed to supply staff to William Dudek Manufacturing, a manufacturing company that specialized in creating precision metal stampings and wire forms. In addition to supplying staff to Dudek, Elite had agreed to cover all workers’ compensation benefits for the workers it supplied to Dudek. However, the agreement regarding the workers’ compensation benefits was not formally set down in any contract, but rather was a verbal agreement between Elite and Dudek.

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When completing a business contract, it is important to make sure that you satisfy all the requirements as stated. Even if someone verbally tells you to waive one of the requirements, in the end you might be the one who loses out. Take for example the case of Michael Downs, et al. v. Rosenthal Collins Group, LLC, et al., No. 1-09-0970 and 1-09-2091 (Consolidated) (December 16, 2011). The plaintiff, Michael Downs, lost out on an interest at his former company because he failed to comply with the contract’s requirements.

Downs was hired by Rosenthal Collins Group (RCG) in 1997 as its CEO. His starting annual salary was $350,000. In addition, Downs’s employment contract offered the option to purchase a 2.5% limited partnership interest at “book value.” In order to exercise his purchasing right, Downs needed to sign a promissory note. However, for one reason or another, Downs failed to do so.

A year after Downs was hired, RCG reorganized as an LLC, at which point a distinction was made according to the different classifications of owners. Under this new classification, Class A owners were majority owners and managing members, while Class C owners were those owning less than 1/10 of 1% of the company. From 1999 to 2002, Downs began receiving compensation above and over his annual salary based on his additional responsibilities. This additional compensation amounted to 2.5% of the company’s net profits, or a 6.5% distribution.

In 2004, Downs was fired from RCG. Downs then sued the company for breach of contract in which he alleged that he owned a 6.5% share of RCG. However, the trial court found that Downs only owned a 2.5% of the corporation, a finding that RCG contested. Both parties appealed the court’s decision in the commercial litigation lawsuit; Downs on the basis that he owned more and RCG on the basis that he owned nothing.

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It is fairly common for companies to include a non-compete clause in their employee documents, which generally prohibits individuals from competing against the company during the course of their employment. However, this does not prevent some employees from violating these covenants not to compete. The recent Illinois Supreme Court case of Reliable Fire Equipment Co. v. Arredondo, 2011 IL 111871, clarifies the legal analysis regarding violations of non-compete clauses.

Reliable Fire Equipment is an Illinois company that sells, installs, and services fire prevention and alarm systems. The defendant, Rene Garcia, began working for Reliable in 1992, at which time he signed a covenant not to compete as part of his employee agreement. The co-defendant, Arnold Arredondo, signed a similar agreement when he began working for Reliable in 1998. Under this agreement, both employees agreed not to compete with Reliable both for the duration of their employment and one year following their termination. The covenant further specified that employees were specifically prohibited from competing in Illinois and the surrounding bordering states of Indiana and Wisconsin.

The business litigation issue in Reliable arose under claims that both defendants violated this agreement during the course of their employment. While still working for Reliable, Arrendondo founded High Rise Security Systems, LLC, a company dedicated to selling fire alarm systems in the Chicagoland area. Soon thereafter, Garcia signed an operating agreement with High Rise; he was also still employed by Reliable.

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There is a certain level of trust that exists between an employer and employee based on the assumption that all parties will work in the company’s best interest. However, sometimes certain parties put their own interests first, even going to the extent of committing fraud against their company. The Illinois business fraud lawsuit of Catmet Company, Inc. v. Michael Melnick, 4M Trading, LLC, et al., 05 L 9164, involves three separate counts of fraud committed by a former employee.

The business fraud cases were brought by Catmet Company, Inc., a company involved in processing catalytic converters. Catmet’s business model involves purchasing catalytic converters from scrap yards and other supplies. Catmet then removes valuable metals from the used catalytic converters, e.g. platinum, palladium, and rhodium, which it then sells to other end-users.

Catmet alleged that between 2003 and 2005 one of its former employees, Michael Melnick, had worked in conjunction with other outside parties to defraud Catmet. Catmet’s lawsuit involved not one, but three different schemes in which Melnick had swindled its employer out of business profits. And while the jury considered each of the schemes separately, it returned verdicts in favor of Catmet on all three counts.

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An Illinois Appellate Court upheld a trial court’s ruling that a hotel chain did not infringe on a design firm’s design copyright when building its hotel; Nova Design Build, Inc. v. Grace Hotels, LLC, et al., No. 10-1738. However, while the trial court came to this conclusion based on its assessment that the design firm failed to comply with the copyright requirements, the appellate court concluded that the design was not truly original and thus not protectable under copyright laws.

In order to understand the outcome of the copyright lawsuit, some background information is required. In 2006, Nova Design Build submitted architectural plans to Grace Hotels to try and secure a bid to build a new Holiday Inn Express in Waukegan, Illinois. During the negotiation process, Grace Hotels and Nova Design agreed that even if Grace did not contract Nova Design to build the hotel, that it would pay Nova various fees and costs in order to use its design.

Grace Hotels eventually decided not to contract Nova and its builders to construct the new hotel. And while the contract called for Grace to pay $28,000 to Nova for design fees and the right to use the design, both parties agreed to reduce that amount to $18,000. However, the dispute did not end there. Nova went on to register its design with the US Copyright Office and then proceeded to sue Grace for violating that copyright and using Nova’s design without permission.

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