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.

Forum Selection Clause Dismissal Not ‘On the Merits’ – Plaintiff Can Refile in Another State

Ancient_Forum

A forum selection clause is a contract term that specifies where (as in what state) a lawsuit must be filed if there is a future dispute.

In Fabian v. BCG Holdings, 2014 IL App (1st) 141576, Plaintiff sued his ex-employer (a spin-off of the Cantor Fitzgerald security firm whose NYC office was decimated in the 9.11 terror attacks) for breach of contract and under the Illinois Wage Payment and Collection Act (IWPCA) claiming unpaid trading commissions and owed stock shares plaintiff under a written partnership agreement.

The partnership agreement contained a Delaware forum-selection provision that fixed exclusive jurisdiction over any partnership dispute in Delaware courts.

The trial court dismissed the IWPCA claim with prejudice and the other complaint counts without prejudice to a future filing in Delaware court.  The plaintiff voluntarily dismissed or “non-suited” the remaining claims.  Plaintiff appealed the “with prejudice” dismissal of his IWPCA claim.

Held: Reversed.

Reasons:

The plaintiff argued that the Delaware forum-selection clause was void because it was forced upon him. He claimed he was given less than 24 hours to sign the partnership agreement in an adhesive take-it-or-leave-it manner.

Under Illinois law, a forum selection clause is generally valid and should be enforced unless (1) the opposing party shows that it would violate a strong public policy of the state in which the case is filed or (2) enforcing the clause would be unreasonable in that it is so inconvenient that it basically deprives the party of its day in court.

Illinois public policy favors enforcement of forum-selection clauses.  Commercially versed parties should be able to freely define the parameters of their private agreement without court interference.  And the fact a court of another state would have to interpret and apply an Illinois statute isn’t enough to void a forum clause on public policy grounds.

When a case is dismissed on forum-selection grounds, it’s not a dismissal on the merits.  That’s because it only resolves the issue of where a plaintiff can litigate his claim.  It doesn’t decide any underlying facts or apply them to the substantive legal issues involved in a given case.

Where a plaintiff non-suits claims after his other claims are (involuntarily) dismissed, he has one year to refile the non-suited claims. See 735 ILCS 5/13-217.  If he does refile, it is treated as a new case; not a continuation of the old case.  This rule is important for appeal purposes: once the plaintiff non-suits his remaining claims, an order previously dismissing another claim becomes final and appealable.

(¶¶16-24).

The Court here agreed with the trial court that there was nothing repugnant to Illinois law in enforcing the Delaware forum provision.  But the court still reversed the trial court’s with prejudice dismissal of the plaintiff’s IWPCA claim.

Since the dismissal of that claim (the IWPCA count) was based on the Delaware forum-selection clause, there was no determination of the merits of the claim.  That is, the court never determined whether the plaintiff was in fact owed money or stocks from his ex-employer. The forum-selection provision only addressed the proper location for plaintiff to sue.  As a result, the trial court’s “with prejudice” dismissal of the plaintiff’s IWPCA claim was improper.  The plaintiff should be allowed to file his IWPCA count in Delaware.

Afterwords:

– A forum selection clause will be upheld unless it violates a recognized policy of the state where suit is filed;

– A dismissal with prejudice is normally improper where merits of case aren’t reached;

– Just because a state has to apply the law of a foreign state isn’t enough to void a forum selection provision.

 

The Attorneys’ Retaining Lien: Dealing With Client Property Amid Unpaid Fees

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When a lawyer-client relationship implodes, the lawyer is usually left with unpaid fees.  And since Rule 1.16 of the Illinois Rules of Professional Conduct requires a fired (or firing) lawyer to return all client papers and property, the lawyer owed fees often has no leverage to secure payments due him.

Enter the common law retaining lien.  This lien allows the lawyer to hold or “retain” his client’s papers until the client pays up. It’s a possessory or “passive lien”; meaning that the lawyer perfects the lien by keeping the client’s papers in his possession. He’s not required to file a lawsuit to foreclose the lien or to request a judge to adjudicate the lien.

Cronin & Company v. Richie Capital Management, LLC, 2014 IL App(1st) 131892-U filters the retaining lien question through the lens of a third-party electronic discovery company (the “Vendor”) holding client documents where both the attorney (who hired the Vendor) and the client are claiming superior rights to the documents.  The critical question is whether a law firm that gives client documents to the Vendor for litigation support and computer scanning relinquishes possession of the documents so that its retaining lien is lost. The answer: no.

The plaintiff law firm was hired by the defendant to assist in the collection of a $180M judgment it got against a Ponzi scheme organizer. As part of the plaintiff’s work on the case, they retained the Vendor to help with document storage and to create a website that the plaintiff and its client could equally access during the litigation. The relationship went bad and plaintiff law firm was fired by its client. Plaintiff and the client then both demanded that the Vendor return the documents. The plaintiff wanted the documents back so it could impress a lien on them while the client sought access to the site and documents so it could continue with the lawsuit.

The trial court granted injunctive relief for the plaintiff law firm and ordered the Vendor to return all documents to the plaintiff and the defendant Client appealed.

Ruling: Reversing the injunction, the First District sketched the elements of a lawyer’s retaining lien. (Note – the injunction was reversed for reasons unrelated to the retaining lien issue.)

Reasons:

A retaining lien gives the attorney the right to retain possession of the client’s documents and files that come into the attorney’s possession during the course of employment until the balance due the attorney is paid;

Possession of the client property that the lien is impressed against is essential to the existence and creation of the retaining lien;

The retaining lien requires an attorney’s continued possession of the client property for the lien to stick;

Once the attorney releases possession of the property, he loses the lien.

(¶¶ 21-22).

Here, the plaintiff law firm hired the Vendor to develop a Web hosting program to assist with the litigation. In doing so, the plaintiff supplied client documents to the Vendor so it could scan them into the the program. The defendant claimed that the plaintiff lost its retaining lien by giving defendant’s property to the Vendor.

The court disagreed. It held that while the Vendor was nominally (and ultimately) working for the defendant, it took its orders from the plaintiff.  Because of this, the Vendor’s possession of the client documents was imputed to the plaintiff.

The court equated the fact situation to one where an attorney deposits a check payable to the client with the clerk of court in order to resolve a fee dispute. In that scenario, the law is clear that tendering possession of the check does not equal releasing possession of the check for purposes of a retaining lien.

Afterwords: The case is post-worthy in view of the proliferation of third-party litigation support providers like electronic discovery companies. The salient holding of the case is that a retaining lien can apply to client property in the possession of a third party where the attorney hired or supervises that third party.