U.S. District Court Denies Motion for Summary Judgment in Restrictive Covenant Lawsuit Relating to Final Payment of $11 Million

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.

Freedman insisted the interactions that AGH complained about, such as discussions about business opportunities with employees of AGH and Capital Companies (a group that includes a firm that is an AGH agent), were innocuous and limited and did not violate the restrictive covenants.

The issue in the case and with AGH’s motion for summary judgment was whether the alleged breaches by the Freedmans qualified as material under Illinois law.

“A party that fails to perform its contractual duties is liable for breach of contract and a material breach of the terms of the contract will serve to excuse the other party from its duty of counter performance.” Elda v. Ocean Atlantic Woodland, 284 F.3d 693 (7^th Cir. 2002).

“The test of whether a breach is ‘material’ is whether it is so substantial and fundamental as to defeat the objects of the parties in making the agreement, or whether the failure to perform renders performance of the rest of the contract different in substance from the original agreement.” InsureOne v. Hallberg, 976 N.E. 2d 1014 (Ill. App. 2012). “The breach must be so material and important to justify the injured party in regarding the whole transaction as at an end.” Fox Lake v. Aetna, 534 N.E. 2d 133 (Ill. App. 1989).

The district court judge in this case stated that determining whether a breach is material “is a complicated question of fact involving an inquiry into such matters as whether the breach were to defeat the bargain-for objective of the parties or cause disproportionate prejudice to the non-breaching party, whether custom and usage considers such a breach to be material, and whether the allowance of reciprocal non-performance by the non-breaching party will result in his accrual of an unreasonable or unfair advantage.” William Blair & Co. v. FI Liquidation Corp., 830 N.E. 2d 760 (Ill. App. 2005).

AGH argued that Freedman materially breached the settlement agreement by exploring business opportunities with AGH employees and Capital Companies employees, both personally and through the insurance agency that he owned, AIIS, in violation of the settlement agreement’s restrictive covenants.

AGH also argued that the settlement agreement explicitly stated that AGH would not have entered into the agreement without the restrictive covenants, and “in determining whether a breach is material, some Illinois courts have stated that the question is whether the performance of the disputed provision was a sine qua non of the agreement i.e., of such a nature and such importance that the contract would not have been made without it.” Elda, 284 F.3d at 700.

Because AGH argued that Freedman materially breached the agreement, AGH should be excused from any further performance of its obligations under the settlement agreement, including its obligation to pay the remaining $11 million due Freedman.

Freedman responded that determining whether a breach is material is an inherently fact-bound inquiry not well-suited for summary judgment, and a reasonable fact-finder inclined to see things from Freedman’s point of view could find that he did not commit a material breach.

While it may be that the restrictive covenants were a critical component of the deal, Freedman argued, they did not represent the entirety of his side of the bargain, he also gave up his shares of stock in AGH, and AGH’s remaining payment obligation is consideration for the redemption of his shares as well as the restrictive covenants. Furthermore, Freedman argued that none of the context that AGH said were technically breaches of a restrictive covenants resulted in any significant economic benefit to Freedman or AIIS or any detriment to AGH, nor will they, because the evidence shows that the Freedmans are winding down AIIS’s business and instead investing in franchise restaurants and, in Max’s case, a small franchise personal line insurance agency, there was no harm or damages to AGH.

Finally, the district court judge stated that under the circumstances, the Freedman’s forfeiture of the remaining $11 million due under the settlement agreement would be vastly out of proportion with their wrongdoing and with the prejudice to AGH, which is minimal, if any, the motion for summary judgment was denied.

Freedman v. American Guardian Holdings, 16 C 11039 (Aug. 22, 2019).

Kreisman Law Offices has been handling commercial litigation lawsuits, business transaction cases, contract litigation and Illinois jury trials for individuals, families and businesses for more than 40 years in and around Chicago, Cook County and its surrounding areas, including Naperville, Libertyville, Rosemont, Richton Park, South Holland, Wilmette, Orland Park, Park Forest, Chicago (Logan Square, West Town, Little Italy, Greek Town, South Shore, Bronzeville, Kenwood, Uptown, Rogers Park), Calumet City, Bensenville, Long Grove, Elmhurst and Lake Zurich, Ill.

Robert D. Kreisman has been an active member of the Illinois and Missouri bars since 1976.