Hotel Titan Escapes Multi-Million Dollar Fla. Judgment Where No Joint Venture in Breach of Contract Case

In today’s featured case, the plaintiff construction firm contracted with a vacation resort operator in the Bahamas partly owned by a Marriott hotel subsidiary. When the resort  breached the contract, the plaintiff sued and won a $7.5M default judgment in a Bahamas court. When that judgment proved uncollectable, the plaintiff sued to enforce the judgment in Florida state court against Marriott – arguing it was responsible for the judgment since it was part of a joint venture that owned the resort company.  The jury ruled in favor of the plaintiff and against Marriott who then appealed.

Reversing the judgment, the Florida appeals court first noted that under Florida law, a joint venture is an association of persons or legal entities to carry out a single enterprise for profit.

In addition to proving the single enterprise for profit, the joint venture plaintiff must demonstrate (i) a community of interest in the performance of the common purpose, (ii) joint control or right to control the venture; (iii) a joint proprietary interest in the subject matter of the venture; (4) the right to share in the profits; and (5) a duty to share in any losses that may be sustained.

All elements must be established. If only one is absent, there’s no joint venture – even if the parties intended to form a joint venture from the outset.

The formation of a corporation almost always signals there is no joint venture. This is because joint ventures generally follow partnership law which follows a different set of rules than do corporations. So, by definition, corporate shareholders cannot be joint venturers by definition.

Otherwise, a plaintiff could “have it both ways” and claim that a given business entity was both a corporation and a joint venture. This would defeat the liability-limiting function of the corporate form.

A hallmark of joint control in a joint venture context is mutual agency: the ability of one joint venturer to bind another concerning the venture’s subject matter.  The reverse is also true: where one party cannot bind the other, there is no joint venture.

Here, none of the alleged joint venturers had legal authority to bind the others within the scope of the joint venture. The plaintiff failed to offer any evidence of joint control over either the subject of the venture or the other venturers’ conduct.

There was also no proof that one joint venture participant could bind the others. Since Marriott was only a minority shareholder in the resort enterprise, the court found it didn’t exercise enough control over the defaulted resort to subject it (Marriott) to liability for the resort’s breach of contract.

The court also ruled in Marriott’s favor on the plaintiff’s fraudulent inducement claim premised on Marriott’s failure to disclose the resort’s precarious economic status in order to  entice the plaintiff to contract with the resort.

Under Florida law, a fraud in the inducement claim predicated on a failure to disclose material information requires a plaintiff to prove a defendant had a duty to disclose information. A duty to disclose can be found (1) where there is a fiduciary duty among parties; or (2) where a party partially discloses certain facts such that he should have to divulge the rest of the related facts known to it.

Here, neither situation applied. Marriott owed no fiduciary duty to the plaintiff and didn’t transmit incomplete information to the plaintiff that could saddle the hotel chain with a duty to disclose.

Take-aways:

A big economic victory for Marriott. Clearly the plaintiff was trying to fasten liability to a deep-pocketed defendant several layers removed from the breaching party. The case shows how strictly some courts will scrutinize a joint venture claim. If there is no joint control or mutual agency, there is no joint venture. Period.

The case also solidifies business tort axiom that a fraudulent inducement by silence claim will only prevail if there is a duty to disclose – which almost always requires the finding of a fiduciary relationship. In situations like here, where there is a high-dollar contract between sophisticated commercial entities, it will usually be impossible to prove a fiduciary relationship.

Source: Marriott International, Inc. v. American Bridge Bahamas, Ltd., 2015 WL 8936529

 

Company Exec Who Bilked His Employer Hit With Multi-Million Salary Forfeiture Judgment

expensereport03The First District affirmed an almost $10M bench trial judgment in favor of a publishing company against one of its former officers in ICD v. Gittlitz, 2014 IL App (1st) 133277.

The defendant engaged in a multi-year course of fraudulent conduct against his employer by issuing bogus expense reports and writing himself  company checks for “advances” that he wasn’t entitled to.  After lodging criminal embezzlement charges, the plaintiff brought civil claims.

The plaintiff sued for compensatory and punitive damages under breach of fiduciary duty and fraud theories.  It also asserted a specific performance claim seeking the defendant’s turn over of his stock shares.

The defendant countered that the plaintiff gave up much of its claims by signing an earlier written release (the “Release”) after the plaintiff first encountered the defendants’ fraudulent conduct. The defendant also claimed the plaintiff was unjustly enriched by retaining certain profits the defendant claimed he was owed.

The trial court found for the plaintiff on all claims and rejected the defenses and counterclaims.

Upholding the hefty money judgment, which included a $2M punitive damage award, the Court answered some important questions on the proper measure of damages for a corporate officer’s breach of fiduciary duty and the circumstances that justify voiding a written release of claims.

The court synthesized this patchwork of legal principles during its analysis:

Corporate shareholders owe fiduciary duties of loyalty to both the corporation and the other shareholders;

– Where an agent breaches a fiduciary duty to a principal, the damage award is within the court’s equitable discretion;

The complete forfeiture of salary during the time the fiduciary was breaching his duty to the corporation is a proper damage measure in cases of intentional misconduct;

– The purpose of the salary forfeiture remedy is to deprive the wrongdoer of his gains from his breach of duty and to deter disloyalty;

-Punitive damages are also awarded at the court’s discretion and can only be nullified if they are the result of passion, partiality or corruption;

A 3:1 ratio (punitive damages to compensatory damages) is recognized as an acceptable (“not excessive”) figure;

– When parties who stand in a fiduciary relationship to each other sign a release that settles or gives up potential claims, the release can be undone if one party withholds material facts surrounding the signing of the release;

– A release will not include claims that weren’t in the parties’ contemplation

(¶¶ 54-77).

The defendant’s several-year campaign of blatant fraud as evidenced in part by the defendant’s guilty plea in the criminal case justified the court ordering the defendant’s wholesale forfeiture of his salary during the operative time span (about $7M).

The court also held that the $2M in punitive damages bore a reasonable relationship to the $1.2M in phony checks cashed by the defendant. The punitive award fell below a 2:1 ratio and so was acceptable under the law.

The court ruled that the Release was voidable by the plaintiff since two corporate shareholders testified that they signed the Release based on the plaintiff’s promise that his fraud against the company was brief.

The court also affirmed summary judgment on the specific performance claim through which the plaintiff sought to compel performance stock repurchase provisions of a shareholders agreement.

The court rejected the defendant’s election of remedies doctrine noting that it only applies to prevent double recovery where a plaintiff seeks inconsistent remedies for the same cause of action.

Normally, a plaintiff can’t recover damages for breach of contract and also obtain specific performance of that same contract. He must choose on or the other. Here, though, election of remedies didn’t apply: plaintiff’s money damages were predicated on the defendant’s fraudulent conduct while the specific performance order related solely to the stock repurchase agreement. ¶¶ 78-80.

Take-aways:

(1) Complete forfeiture of an executive’s compensation is a proper damage remedy where the executive intentionally violates fiduciary duties to the corporation;

(2) A release won’t encompass claims that weren’t in the parties’ contemplation – especially where one party is a fiduciary who hoodwinks the other;

(3) A 3:1 punitive damage:actual damage ratio is generally acceptable and won’t be overturned as excessive.

No Commercial Disparagement Or Non-Compete Equals Denial Of Injunction – IL Court

In Xylem Dewatering Solutions, Inc. v. Szablewski, 2014 IL App (5th) 140080-U,  the plaintiff corporation sued some of its ex-employees after they joined a competitor and started raiding plaintiff’s office staff.

The trial court denied plaintiff’s request for an injunction and then it appealed.

Result: Trial court’s order upheld. Plaintiff loses.

Reasons: To get a preliminary injunction, a plaintiff must establish (1) a clearly ascertained right in need of protection; (2) irreparable injury; (3) no adequate remedy at law; and (4) a likelihood of success on the merits.

The plaintiff must establish a “fair question” on each of the four elements. A preliminary injunction is an extraordinary remedy that is only granted in extreme, emergency settings. (¶¶ 20-21).

Irreparable harm can result from commercial disparagement of a plaintiff’s product but the plaintiff must show the defendant repeatedly made false or misleading statements of fact regarding the plaintiff’s goods and services to establish irreparable harm.  Statements of opinion (“their services suck!”, e.g.) don’t qualify as commercial disparagement. 

Here, the Court found that there were no repeated factual statements made by the defendants.  In addition, all statements that were attributed to the defendants were purely interpretive: they weren’t factual enough to be actionable.  (¶¶ 23-24).

In finding that the plaintiff lacked a protectable interest in its employees or customers, the court pointed out that neither individual defendant signed a non-compete and didn’t violate any fiduciary duties to the employer.

In Illinois, absent a non-compete, an employee is free both to compete with a former employer and to outfit a competing business so long as he doesn’t do so before his employment terminates.  And while a corporate officer owes heightened fiduciary duties not to exploit his position for personal gain, the ex-employee defendants were not corporate officers. (¶ 26).

Plaintiff also failed to establish a protectable interest in its pricing and bid information.  The Illinois Trade Secrets Act, 765 ILCS 1065/1 et seq. (“ITSA”) extends trade secret protection to “information” that is (1) sufficiently secret to derive economic value, from not being generally known to others who can obtain economic value from its use, and (2) that is the subject of reasonable efforts to maintain the information’s secrecy (i.e., “kept under lock and key”)

Information that is generally known in an industry – even if not to the public at large – isn’t a trade secret. Also, information that can be readily copied without a significant outlay of time, effort or expense is not a trade secret. 

The pricing data the plaintiff was trying to protect was several years old and the defendants testified that the bidding information was well known (and therefore not secret) in the pumping industry.  In combination, these factors weighed against a finding of trade secret protection for the pricing and bidding information. (¶¶ 29-31).

Afterwords:

(1) Stale data likely won’t qualify for trade secret status – no matter how arcane the information;

(2) If information is well known or can be easily accessed within an industry, it won’t be given trade secret protection;

(3) Noncompete agreements can serve vital purposes.  If a business fails to have its workers sign them, the business risks having no recourse if an ex-employee joins a competitor and later raids the former employer’s personnel.