Articles Posted in Breach of Fiduciary Duty

A new law in Illinois prohibits employers from entering into noncompete contracts with employees who earn $13 per hour or less. The Illinois Freedom to Work Act (Public Act 099-0860) became effective on Jan. 1, 2017. The law makes it illegal for an Illinois employer to enter into a “covenant not to compete” contract with any of its “low-wage employees.”

The term “covenant not to compete” is defined to extend to any agreement restricting a covered employee from the following:

  • Working for another employer for a specified period of time.
  • Working in a specified geographic area.
  • Performing other “similar” work for another employer.

Any contract with a “low-wage employee” who contains any covenant not to compete is “illegal and void.” The act is limited to agreements entered into after the effective date of Jan. 1, 2017. The act comes out of the movement to curb employers from locking lower-level employees into unfair noncompeting contracts.

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The 1st District Appellate Court has reversed in part, vacated in part and remanded a decision by a Cook County judge in a case involving the use of trust money and investments.

Arie Zweig was the trustee of the Arie Zweig Self Declaration of Trust dated June 28, 1990. He used $2 million from the trust for an equity investment in a partnership supporting an ambulatory surgical center called Bedford Med. Bedford Med was operated by Bedford Med LLC. He said he was induced to invest by Nadar Bozorgi, Mandan Garahati and Guita Bozorgi Griffiths, acting as the Bozorgi Limited Partnership.

Zweig claimed that the Bozorgi defendants represented to him that the value of the Bedford Med operation was appraised at $21 million and that permanent financing had been secured. Zweig also claimed that the Bozorgi defendants maintained that they invested more than $5 million in the project, that the real estate had been already leased or was about to be finalized and that the investment would be used as equity and for working capital, generating an annual profit of 15-20%.

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The Rev. Timothy O’Malley and William O’Malley were two of Eileen O’Malley’s sons. In 1996, Eileen O’Malley experienced the first signs of dementia. The same year, Eileen and Timothy opened a joint checking account with First Midwest Bank Corp.

Eileen instructed that the account statements be sent to the Palos Country Club, a family asset managed by William O’Malley. Timothy never saw the account statements and so had no way of knowing that it contained almost $5 million in February 2004 and that by February 2009, there was less than $100,000 in the account. William had withdrawn the rest.

William, with two of his siblings, developed a plan “to defraud their 8 siblings and Eileen so that [they] would control Eileen’s assets.” To accomplish that, they had Eileen sign documents, including “wills, trust agreements and checks which did not reflect Eileen’s wishes.”

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An industrial design firm, nClosures, produced metal cases for tablet computers, such as the iPad. Ian LeBlanc designed a case for nClosures in early 2011 called the Rhino Elite. In May 2011, the co-founders of nClosures attended a tradeshow in Chicago to showcase the Rhino Elite prototypes.

At the tradeshow, the co-founders Daniel Gorman and Daniel McKean met with Greg Carlson, CEO of Block and Co. Block manufactured metal cash drawers but was interested in entering into the tablet enclosure market. Carlson approached Gorman and McKean about a possible relationship. At a May 24, 2011 meeting, the two companies signed a confidentiality agreement regarding the potential deal between them.

After signing the agreement, nClosures gave Block the design files for the Rhino products. The parties then attempted to negotiate a written contract concerning the manufacture and sale of the tablet enclosures.

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Daniel Nickell filed a lawsuit against the officers and directors of Engineer Support. He claimed it had improperly diverted financial benefits by backdating stock options, which decreased the value of the corporation for its shareholders. Nickell was a shareholder of Engineer Support Systems Inc. (ESSI). ESSI merged with DRS Technologies in January 2006.

In Nickell’s lawsuit, he alleged that the officers and directors made material misrepresentations to induce the merger at a reduced price for the company in exchange for DRS assuming responsibility for the backdating scheme.

The trial judge dismissed Nickell’s lawsuit on the grounds that his claims were pleaded as a shareholder derivative claim and that he did not have standing to sue the ESSI directors and officers for his individual claims. Nickell appealed to the Supreme Court of Missouri, which affirmed the dismissal of his case.

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Leona Smith, the mother of Perry Powell, was appointed guardian of her son’s person but not his estate after a judge ruled that Powell was disabled because of severe mental disability. Powell’s father died, allegedly because of medical malpractice. Attorneys were hired by Smith, who then acted as special administrator of the decedent’s estate to litigate a wrongful-death claim for her deceased husband, Powell’s father.

The wrongful-death medical malpractice case was settled, but the lawyers who handled it failed to follow the requirements of Section 2.1 of the Illinois Wrongful Death Act.

Powell would have shared in the settlement proceeds, which exceeded $5,000. According to Section 2.1 of the Illinois Wrongful Death Act, the probate court must be in charge of supervising the administration and distribution of those funds.

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F. Gary Kovac, the plaintiff in this matter, sued the estate of Kenneth L. Barron Jr. for compensatory damages and exemplary or punitive damages. In the majority of jurisdictions, punitive damages are not allowed after the death of the defendant tortfeasor.

Kovac and Barron owned 50% of three different corporations. In his original lawsuit, Kovac accused Barron of a pattern of serious misconduct, which included diverting millions of dollars from the businesses. Kovac sued Barron in Kane County, Ill. When Barron died, Kovac continued the lawsuit against the administrator of Barron’s estate who was his widow, Sandra Barron.

At the end of the bench trial, the trial judge ordered Barron’s estate to pay $3,220,702 for fraud and an additional $450,000 in punitive damages.

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In an Illinois Appellate Court decision, it was found that a trust’s beneficiaries had sufficient minimum contact with the state simply through their ownership interest of a trust administered by an Illinois resident.

In May 2012, a Cook County associate court judge dismissed the trust dispute case for lack of jurisdiction. 

The trial judge had relied on an opinion that lacked precedential value that undermined that court’s holding, so said the opinion of appellate court Justice Robert E. Gordon. The Illinois Appellate Court reversed the trial court’s ruling dismissing the case.

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This shareholder derivative lawsuit arose out of a long and unsuccessful effort by Baxter International Inc. to fix various problems with a medical device called Colleague Infusion Pump. The plaintiff in the case, Westmoreland County Employee Retirement System (Westmoreland) alleged that Baxter’s directors and officers breached their fiduciary duties by “consciously disregard(ing) their responsibility to bring Baxter into compliance with the 2006 Consent Decree and related health and safety laws.” 

The breach was alleged to have caused Baxter to lose more than $550 million after the Food and Drug Administration (FDA) mandated a recall of the Colleague Infusion Pumps in 2010. Westmoreland was a shareholder that sustained a significant stock value loss; it claimed the loss was caused by Baxter’s board’s and officers’ breach of fiduciary duty.

In the mid-1990s, Baxter was manufacturing and selling a product called the Colleague Infusion Pump (Pump), an electronic medical device used to deliver intravenous fluids to patients. The FDA closely regulates the medical device industry and required that companies comply with “current good manufacturing practices” and “quality system regulations” (see 21 C.F.R. Part 820), when manufacturing such medical devices. Between 1999 and 2005, the pumps were suffering from a range of defects, some relating to the manufacturing process and others to flaws in the machinery. The FDA discovered some of these problems during its inspections on Baxter’s facilities. The FDA sent a series of warning letters to Baxter in which it detailed Baxter’s failure to bring its manufacturing process into compliance with quality-controlled standards. In October 2005, the FDA took the drastic step of filing a complaint in federal court seeking forfeiture of all of Baxter-owned Colleague Infusion Pumps. 

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