Articles Posted in Business Litigation

The Illinois Appellate Court has affirmed the decisions of two Cook County judges related to the suit filed by SFG Capital LLC. The suit was filed against Patrick W. Kane in 2010; it was alleged that Kane defaulted on a loan. Following a consent agreement, the trial court entered a $783,000 judgment against Kane payable to SFG. In an attempt to satisfy the judgment, SFG initiated a citation to discover assets proceedings to identify available assets that Kane might have owned.

In 2012, William Platt, an estranged business partner of Kane, signed a promissory note for $1.2 million payable to Kane. The trial court ordered all rights, title and interest in the Platt note to be transferred to SFG on April 14, 2016, with instructions that SFG “may take such further action as necessary to enforce payment on the . . . note.”

Access Realty Group, the plaintiff in this case, acquired the SFG judgment by way of an assignment on April 14, 2017, and became the successor in interest to SFG. Platt is the sole shareholder of Access, as well as its president, secretary and registered agent.
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The issue in this case was whether there was a material breach under Illinois contract law as to American Guardian Holdings or AGH. AGH claimed it was excused from having to pay the final installments totaling $11 million for Steven Freedman’s shares in AGH because it was alleged that Freedman breached restrictive covenants in a settlement agreement.

When AGH agreed to redeem Freedman’s shares in AGH, it insisted on non-competition, non-solicitation and non-interference covenants to block Freedman, his son Max and any of their businesses from competing against AGH in selling “vehicle service contracts” or “extended warranties” through auto dealers.

Freedman’s other businesses included a brokerage that provided policies to owners of recreational vehicles, plus a personal-and-commercial-lines insurance agency called American Integrity Insurance Solutions, or AIIS, which was run by Freedman’s son, Max.

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A breach of lease case resulted in a $278,198 default judgment, which was Count II of a Complaint brought by A.L. Dougherty Real Estate and Phyllis K. Dougherty. The complaint was filed against Cube Global LLC and March Fasteners Inc.  The complaint alleged that Cube Global was liable as March’s alter ego.

A bench trial was held.  The plaintiff presented evidence that Cube Global, which was incorporated while the lease case was pending, wound up with all of March Fastener’s assets and customers.

With the underlying decree boosted by fees, costs and interest, the judgment against Cube Global was $676,222. The judgment was against Su Chin Tsai, whose 16-year-old daughter was listed as Cube’s incorporator, and it totaled $435,584.

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The issue in this case was whether the financial condition of Wexford Health Sources, the defendant in this federal lawsuit, is relevant for Federal Rule of Civil Procedure 26(b) to apply. This rule limits discovery to that which is “relevant to any party’s claim or defense.” If a corporate defendant’s wealth may not be considered when assessing punitive damages, it is not “relevant,” but if it may be properly considered then, of course, it is relevant. In this U.S. Federal District Court of Illinois (Central District) lawsuit, the initial question to be answered was whether Wexford’s financial condition could be investigated through discovery; this was answered mostly by the case of Zazu Design v. L’Oréal, 979 F.2d 499 (7th Cir. 1992).

In Zazu, a case relied upon by Wexford, the defendant in this case, the court considered the defendant’s appeal in a trademark infringement action. The court reversed and remanded, finding that the plaintiff did not have superior rights in trademark to the defendant and, even if it had, the damages award was excessive.

Regarding the punitive damages award, the court noted that although courts “take account of a defendant’s wealth when an amount sufficient to punish or deter one individual may be trivial to another,” such may not be the case when the defendant is a corporation. The court explained:

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Doug Miller owned two companies in Indiana:  E.T. Products, which blended and sold fuel-additive products, and Petroleum Solutions, which blended and sold lubricant products.

Petroleum Solutions also supplied a few customers with fuel additives from E.T. Products.

In January 2011, a group of investors led by Tom Blakemore purchased E.T. Products. As part of the sale, Miller and his son, Tracy, signed essentially identical non-competition agreements.

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Trade secrets can be among the most valuable assets of any business. Laws in Illinois and on the federal level have long protected trade secrets.

Before 1995, the protection of trade secrets was based on the common law as defined by the Restatement of Torts. Illinois has adopted the Illinois Trade Secrets Act, 765 ILCS 1065/1, et seq.

The Illinois Trade Secrets Act is modeled on the Uniform Trade Secrets Act. There are many instances in which the Illinois Trade Secrets Act could be utilized.

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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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In a federal court of appeals, the Federal Rule of Civil Procedure 9(b) was addressed by the Seventh Circuit Court of Appeals in Chicago regarding the specificity required in complaints. On Sept. 1, 2016, the U.S. Court of Appeals for the Seventh Circuit in Chicago affirmed dismissal of the amended complaint pursuant to the particularity requirement of Federal Rule of Civil Procedure 9(b).

In this case, a nurse alleged that a number of practices at the Acacia Mental Health Clinic where she worked were not medically necessary. The allegations were that the clinic required patients to see multiple practitioners before receiving medications; required patients to undergo mandatory drug screenings at each visit; and required patients to come to the clinic in-person in order to receive a prescription or speak to a doctor. It was also alleged that the clinic misused a billing code.  This was the only claim the Seventh Circuit permitted to go forward. In dismissing the majority of the complaint, Seventh Circuit began with a robust discussion of the importance of Rule 9(b) in screening out a baseless False Claims Act (FCA).

“Rule 9 requires heightened pleading standards because of the stigmatic injury that potentially results from allegations of fraud. We have observed, moreover, that fraud is frequently charged irresponsibly by people who have suffered a loss and want to find someone to blame for it. The requirement that fraud be pleaded with particularity compels the plaintiff to provide enough detail to enable the defendant to repose swiftly and effectively if the claim is groundless. It also forces the plaintiff to conduct a careful pretrial investigation and thus operates as a screen against spurious fraud claims.”

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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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Generally the law in Illinois states that a guarantor is entitled to assert the same defenses that would be available to the principal obligor. W.W. Merck White Lead Co. v. McGahey, 159 Ill.App. 418 (1st Dist. 1911).

“Under Illinois law, ‘the liability of a guarantor is limited by and is no greater than that of the principal debtor and . . . if no recovery could be had against the principal debtor, the guarantor would also be absolved of liability.’ ‘Although the language of a guaranty agreement ultimately determines a specific guarantor’s liability, the general rule is that discharge, satisfaction or extinction of the principal obligation also ends the liability of the guarantor.’” Riley Acquisitions v. Drexler, 408 Ill.App.3d 392, 402 (1st Dist. 2011), quoting Edens Plaza Bank v. Demos, 277 Ill.App.3d 207, 209 (1st Dist. 1995).

In the Riley case, the guarantors were two joint obligations to the bank. The bank released one of the obligors. The other obligor was a dissolved corporation. Under the applicable state law, the five-year post-dissolution time period for collecting against the dissolved corporation had expired.

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