Illinois Appellate Court Holds That Express Terms in Employment Contract Not Waived – Downs v. Rosenthal Collins Group

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.

On appeal, Downs argued that he owned 6.5% of the company on the basis of the 6.5% distribution he received between 1999 and 2002. However, RCG contended the 6.5% distribution were not his equity distribution, but were in fact profit-sharing performance bonuses. RCG went on to argue that Downs in fact did not own any percentage of the company.

RCG pointed out that while Downs’s employment contracted included the option to buy a 2.5% interest in the company that he had failed to do so and therefore owned no part of RCG. Again, the ownership option required Downs to sign a promissory note in order to buy the 2.5% interest, a requirement which he never satisfied. According to Downs, he never signed the promissory note because RCG never told him the book value at which he was purchasing his interest in the company.

Downs documented at least three different occasions when he asked RCG for the book value so he could complete the promissory note. However, on each occasion RCG told him not to worry about it. Downs argued that doing so meant that RCG had waived this condition and that he did not need to complete the promissory note in order to receive the 2.5% interest.

After the business litigation bench trial, the trial court entered an order allowing Downs’ 2.5% equity interest in the company and also allowed for prejudgment interest. RCG contended that the trial court erred in holding that Downs had the 2.5% ownership interest in the company because he failed to comply with the terms of the parties’ employment agreement by not performing the condition precedent, signing the promissory note in order to obtain an ownership interest. Downs contended that the company waived that condition.

However, the Illinois appellate court disagreed with Downs. The court pointed out that there was nothing in the employment agreement stating that RCG had the burden to provide the “book value” to Downs. Rather, the only requirement was for Downs to sign the promissory note for the amount of the book value in order to obtain that interest. And because neither party alleged that the employment agreement was ambiguous, the court could find no reason why Downs would not have known that he needed to satisfy that requirement in order to receive the equity interest.

So even though the trial court had found that Downs owned 2.5% of RCG, the appellate court could find no evidence to support this finding. Because Downs had elected not to sign the promissory note, he was not entitled to the 2.5% equity interest. The appellate court not only reversed the trial court’s initial ruling, but also that Downs owned no further equity in RCG.

Kreisman Law Offices has been handling Illinois business litigation matters for more than 35 years in and around Chicago, Cook County, and surrounding areas, including Hoffman Estates, Schaumburg, Naperville, Evanston, Oak Brook, and Warrenville.

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