U.S. Court of Appeals Allows Conditional Privilege in Tortious Interference With Contract Case; Nation v. American Capital, Ltd.

The Illinois Seventh Circuit Court of Appeals has agreed with the federal district court in dismissing the lawsuit brought by James Nation. Mr. Nation served as the CEO of the Spring Air Co., which owned and licensed a mattress brand.

After the company was acquired by HIG Capital in 2007, Mr. Nation accepted a severance plan, which would have paid him $1.2 million over 15 months provided he did not work for Spring Air’s competitors through Dec. 31, 2008. In August 2008, the company stopped making the payments because of financial shortfalls.

In January 2008, Spring Air requested additional financing from American Capital and HIG. With $40 million of new capital, American Capital acquired four of the seven board seats. By a vote of this new board in August 2008, the severance payments to Mr. Nation and three other former executives were stopped. In September 2008, Mr. Nation began work at Serta in violation of the severance agreement.

He then brought suit against Spring Air for the balance of the severance payment, but in May 2009 the company filed for Chapter 7 bankruptcy. In October 2009, Mr. Nation instead brought a new suit against American Capital, alleging tortuous interference with the severance contract.

Illinois law applied as agreed and the case was removed to the federal court on diversity of citizenship of the parties. Both parties filed summary judgment motions.

The trial court granted American Capital’s motion based on its privilege to interfere as a majority shareholder. Mr. Nation took this appeal to the 7th Circuit Court of Appeals. The court said that the only elements of Mr. Nation’s claim were whether American Capital interfered with his severance agreement and whether the interference was unjustified. The trial court found that the conditional privilege would render any interference legally justified.

The appellate court cited HPI Health Care Servs., Inc. v. Mt. Vernon Hosp., Inc., 545 N.E.2d 672, 677 (Ill. 1989), where the court said that Illinois recognizes a conditional privilege to interfere with contracts “where the defendant was acting to protect an interest which the law deems to be of equal or greater value than the defendant’s contractual right.”
This privilege, the court continued, covers acts of corporate officers, directors and shareholders undertaken on behalf of the corporation and is derived from the business judgment rule and the assumption that the interests of those covered are sufficiently connected with the company with whose contracts they interfere.

Like the HPI Health Care case, American Capital had majority control over the company. Because of that majority position, American Capital had an interest in protecting the value of the company for its shareholders who were equal or superior to Mr. Nation’s contractual rights. Therefore, the Court of Appeals said that American Capital was conditionally privileged to interfere with Mr. Nation’s severance contract. The appeals court noted that since three other executives found themselves in the same position, there was no evidence to suggest that American Capital acted for any reason other than to protect its interest in Spring Air. For that reason and others, the decision of the district court was upheld on this appeal.

Nation v. American Capital, Ltd., No. 11-2102 (7th Cir. 2012).

Kreisman Law Offices has been handling business litigation for individuals and companies in and around Chicago, Cook County and its surrounding areas for more than 36 years, including Mt. Prospect, Deerfield, Orland Park, Morton Grove, Skokie, Chicago (Beverly), Alsip, Palatine and Romeoville, Illinois.

Related blog posts:

$1.265 Million Awarded to Investors After Corporation Cancels Stock – Dore, et al. v. Sweports Ltd.

CEO Binds Limited Liability Company to Loans – J. F. Brewing, Inc. v. PaulMark Land Acquisition

Illinois Appellate Court Holds That Plaintiff Failed to Prove That Negligence Caused the Damages Claimed; Costello v. City of Chicago