Geneva, Illinois Legal Blog

Complex Partnership Litigation- Breach of Contract or Rescission
The choice between seeking money damages for the breach of contract versus rescission of the contract can be an important one. And knowing the rules governing appeals is also crucial. The recent case of Horwitz v Sonnenchein Nath & Rosenthal ,2018 IL App (1st) 161909 illustrates both points.
The Plaintiff was an equity partner in a law firm who exchanged his existing equity stake for a new interest as a partner under a "special partnership agreement" that was supposed to allow him to continue to work for the firm but lower his workload and compensate him differently. The partner claimed that the law firm started breaching the new agreement almost immediately but he continued to work for the firm under the new agreement for six years before he filed suit. He sued for a breach of contract and money damages (for the amounts he should have received under the new agreement) but also sued to rescind the contract to regain his original equity position.
The law firm succeeded in forcing the Plaintiff to try his breach of contract claim first to a jury, where he recovered a judgment for the amounts the jury found he should have been paid under the new agreement. The Plaintiff did not appeal the judgment or seek and new trial or an "additur" to change the amount he was awarded. It appears that if he had succeeded in being restored to his earlier position, he would have been due significantly more than what the jury awarded him. However, the law firm next argued that he had received an adequate remedy at law in the form of the money judgment and therefore was barred from pursuing his rescission claim. The trial court disagreed and allowed the Plaintiff to try his rescission claim, but the Plaintiff lost that claim with the Court finding that the Plaintiff had waited too long to seek rescission and that his claim for the monetary amounts he was seeking were too speculative.
On appeal the court ruled that the Plaintiff's money judgment awarded on his breach of contract claim was an "adequate remedy at law" which then barred his rescission claim. The Court reviewed a number of cases which discussed the issue of whether a claim for breach of contract and a claim for rescission are mutually exclusive. The Court held that here, the damages for the breach of the contract were an adequate remedy that barred his rescission claim as a matter of law.
The case illustrates that in partnership matters, careful thought should be given to whether or not to pursue claims based upon a breach of contract theory versus rescission or some other equitable theory.
The case also highlights that in these complex partnership litigation cases, paying close attention to the rules governing appeals may become extremely important.
By: PETER M. STORM ©
Cooper, Storm & Piscopo handles both complex partnership litigation and appeals.

Illinois Appellate Court Rules That Shareholders in a Dispute Cannot Be Forced to Pay for A Provisional Director
In Sinkus v. BTE Consulting 2017 IL App (1st) 152135 the First District Appellate Court reversed a trial court's ruling holding a shareholder in contempt after he refused to obey the Court's order directing him to contribute to a capital call ordered by the Court to pay for a provisional direction which the Court appointed pursuant to Section 12.56(g) of the Business Corporation Act of 1983 ("Act") (805 ILCS 5/12.56(g) (West 2014)). The order grew out a lawsuit between two shareholders each owning fifty percent (50%) of the shares of the corporation. The Plaintiff resigned as a director and sued the other shareholder for breach of fiduciary duties and other claims alleging among other things that the other shareholder had diverted corporate business to another company he had formed. Plaintiff moved to disqualify the Defendant shareholder's attorney from representing both the corporation and the individual shareholder but the trial court denied that motion and appointed a provisional director instead. Because the corporation allegedly did not have sufficient funds to pay the provisional director, the trial court ordered both shareholders to contribute first $25,000 each to pay the provisional director and later another $30,000 each, but the Plaintiff refused to comply with the court's orders. The Plaintiff allowed the court to hold him in contempt and impose a fine and then appealed the order.
The appellate court held that the trial court lacked the authority to have ordered the Plaintiff to contribute to the payment of the provisional director's fees. Noting that Section 6.40 of the Business Corporation Act provides that shareholders are not responsible for financial obligations of the corporation other than the payment of the full consideration for their equity shares. 805 ILCS 5/6.40. The Appellate Court then further held that plain language of Section 12.56(g) of the Act requires that the compensation of a provisional director appointed under the Act be paid by the corporation, not its shareholders.
The Court mentioned in passing that shareholders may agree in a written shareholder's agreement to be subject to capital calls. The Court cited Salce v. Saracco,409 Ill. App. 3d 977 (2011) in which the court considered what is necessary to plead a breach of contract claim for the breach of a capital call provision in a shareholder's agreement.
In the wake of the ruling in Sinkus, a controlling shareholder's request to appoint a provisional director in a shareholder dispute will almost certainly result in the corporation and not the complaining shareholder being held responsible for the payment of the provisional director's fees. And from a business planning perspective, those considering investing in a close corporation should be wary of shareholder agreements that authorize capital calls in the event of a dispute or litigation between shareholders.
Peter M. Storm Posted 20th March 2017 by Peter Storm

Beginning January 1, 2017, a new Illinois law will prohibit employers from requiring employees earning less than $13 per hour to sign a covenant not to compete. The new law, the "Illinois Freedom to Work Act" provides that any such agreement is void and illegal. Employees of governmental or quasi-governmental employers are not covered by this new law. Employers with hourly employees covered by this new law should carefully review all of their existing employment agreements to assure compliance. Illinois General Assembly - Full Text of Public Act 099-0860
Peter M. StormCooper, Storm & Piscopo

Reid v. Getco, LLC. 2016 IL App (1st) 151801
The First District Appellate Court has ruled that provision in an employee agreement ostensibly designed to permit an employer to avoid paying post-termination payments to a terminated employee by waiving the enforcement provisions of the non-compete, still obligated the employer to pay the post termination consideration despite the employer's election to waive the non-compete. The agreement contained a provision prohibiting the employee from engaging in any "competitive activity" for six months following the termination of his employment. In exchange, the employer promised to make post termination payments to the employee in the amount of $1 million dollars according to a specified formula. The agreement contained a standard provision prohibiting any modification or amendment to the agreement without the written approval of both parties. However, the agreement also purported to give the employer the unilateral right to waive the enforcement of the non-compete. While the agreement specified certain conditions under which the post-termination payments would cease, unfortunately for the employer, the agreement did not list the waiver of the non-compete as one of those conditions.
Following the employee's termination the employer sent the employee an e-mail notice which stated as follows:
The Company hereby notifies you that the Restricted Period will bezero (0) months and/or is waived. You will not receive any Non-compete payments. For theavoidance of doubt, you may begin working for any employer immediately following yourSeparation Date."
The employee waited until the non-compete period had expired and then began working for a competitor. The employer failed to make the post termination payments and the employee sued to enforce the payment provision of the employment agreement. The trial court ruled that the employer's attempted "wavier" was ineffective to modify the payment provisions of the agreement and entered judgment in favor of the employee. The appellate court affirmed.
The appellate court ruled that the purpose of the wavier provision was to provide the employee with a mechanism to request that the employer waive the enforceability of the non-compete if the employee obtained an offer of employment that he was concerned might be interpreted to violate the covenant not to compete, rather than to provide the employer with a unilateral means to avoid making the post-termination payments. Relying upon the provision of the agreement which required both parties to approve any modification, the appellate court ruled that the unilateral wavier was not an amendment or modification entered into in accordance with the agreement.
Employers and their counsel would be well advised to review and update their employment agreements in light of this ruling. We think there are certainly ways that such post-termination payment provisions could be held enforceable. However, it is clear that the agreement must specify that one of the conditions under which payments would cease includes a post-termination wavier of the enforceability of the non-compete. In addition, it is likely courts would still question the enforceability of such a provision without some additional mutuality or other consideration for the employer's right to elect to waive the non-compete and cease the post-termination payments.