Northern District of Illinois Enforces Personal Guaranty

GE BUSINESS FINANCIAL SERVICES INC. v. Schiffman, Dist. Court, ND Illinois 2011 - Google Scholar

This is a case where GE loaned money to a business and sought to collect on a guarantee by two individual defendants.


The court entered summary judgment in favor of GE, after noting that the individual defendants did not file a response to the Motion for Summary Judgment. This case demonstrates that contract cases can often be resolved with summary judgment.


"Under Illinois law, for a breach of contract cause of action, a plaintiff must establish: "(1) an offer and acceptance; (2) consideration; (3) definite and certain terms; (4) performance by the plaintiff of all required conditions; (5) breach; and (6) damages caused by the breach." Cogswell v. CitiFinancial Mortg. Co., Inc., 624 F.3d 395, 398 (7th Cir. 2010).


...


GE has pointed to sufficient evidence to show that, as a matter of law, the Guaranty was a valid contract, based on offer and acceptance, consideration, and definite and certain contract terms. In addition, it is undisputed that GE made the Loan on August 8, 2007 and performed all of its obligations under the Guaranty. (SF Par. 4, 14). Thus, GE has also pointed to sufficient evidence to show that, as a matter of law, GE performed the conditions required under the contract."


Edward X. Clinton, Jr.


www.clintonlaw.net

Read More

Contract Law - Failure to Revoke Agency Leads to Compensation For Agent

Harmon v. Gordon, Dist. Court, ND Illinois 2011 - Google Scholar

This is a contract law issue - the principal allegedly revoked the agent's authority before the term of the agency had been completed.


Under Illinois law, this constitutes a repudiation of the contract, and allows the dismissed agent to sue for damages.


The Court explained its holding as follows:


Under Illinois law, when a principal and an agent enter into a contract for a specific term, the principal may still revoke the agent's authority "at any time and under any circumstances." Lehman v. Eugene Matanky & Assoc. Inc., 438 N.E.2d 614, 619 (Ill. App. Ct. 1982). However, a principal who agreed to employ the agent for a certain length of time cannot revoke the agency "rendering himself legally liable for such damages." Kenilworth Realty Co. v. Sandquist, 371 N.E.2d 936, 939 (Ill. App. Ct. 1977). Such a revocation results in a repudiation of the principal's contractual obligations. Id. Here, LHA has alleged that Gordon agreed to use LHA's financial and consulting services on an exclusive basis for the entire duration of his NBA playing career, and that Gordon fired LHA while he was still an active player. Assuming, as we must, that these allegations are true, Gordon's premature revocation would constitute a breach of contract under Illinois law. Accordingly, dismissal of Count I is not warranted under Rule 12(b)(6).


Edward X. Clinton, Jr.

Read More

Is That Contract Provision A Penalty or a Liquidated Damages Clause?

READINESS MANAGEMENT SUPPORT LC v. JESCO CONSTRUCTION CORP., Dist. Court, CD Illinois 2011 - Google Scholar

Illinois law enforces liquidated damages clauses, but will not enforce a clause deemed a penalty. The distinction is often difficult to draw as it can be difficult to determine whether a clause provides for a penalty or liquidated damages.

As the court noted: "In interpreting contract provisions that specify damages, Illinois law draws a distinction between liquidated damages, which are enforceable, and penalties, which are not. Checkers Eight Ltd. Partnership v. Hawkins, 241 F.3d 558, 561-562 (7th Cir. 2001), citing Lake River Corp. v. Carborundum Co., 769 F.2d 1284, 1289 (7th Cir.1985). See also, Bauer v. Sawyer, 134 N.E.2d 329, 333-34 (Ill.1956). To be valid under Illinois law, a provision for liquidation of damages must "be a reasonable estimate at the time of contracting of the likely damages from breach, and the need for estimation at that time must be shown by reference to the likely difficulty of measuring the actual damages from a breach of contract after the breach occurs. If damages would be easy to determine then, or if the estimate greatly exceeds a reasonable upper estimate of what the damages are likely to be, it is a penalty." Lake River, 769 F.2d at 1290, citing M.I.G. Investments, Inc. v. Marsala, 414 N.E.2d 1381, 1386 (1981). Accord, Checkers, 241 F.3d at 562, citing American Nat'l Bank & Trust Co. of Chicago v. Regional Transp. Auth., 125 F.3d 420, 440 (7th Cir.1997)."

Here the court deemed the clause a penalty because the cost incurred by the breaching party was far greater than the cost of nonpayment. Thus, the Court granted summary judgment for the defendant County on plaintiff's attempt to enforce the penalty provision.

Comment: the lesson of these cases is to be careful not to ask for too much in a penalty/liquidated damages clause. If you overreach, the provision may be labeled a penalty and become unenforceable.

Edward X. Clinton, Jr.

Read More

Business Law (Illinois): Miscellaneous Operating Issues 2011 Edition - IICLE - Illinois Institute for Continuing Legal Education | Shop IICLE Product Description

Business Law (Illinois): Miscellaneous Operating Issues 2011 Edition - IICLE - Illinois Institute for Continuing Legal Education | Shop IICLE Product Description

We recommend this excellent book published by the Illinois Institute of Continuing Legal Education. Ed Clinton, Sr. has been the principal author of this chapter since the 1970's. The chapter is a testament to his hard work and persistence.

Edward X. Clinton, Jr.

Read More

Securities Law - SEC Approves Shareholder Advisory Votes on Executive Compensation

The Securities and Exchange Commission by a 3-2 vote approved rules providing for shareholder advisory votes on executive compensation. The final rules as adopted largely follow the rules as proposed by the Commission.

Final Rule 14a-21(b) provides that companies are required at least once every six years to give shareholders an advisory vote as to whether the company’s “Say On Pay” vote will occur every one, two or three years. The votes are advisory only and as such are not binding on the company or the Board of Directors. The compensation of directors is not subject to Say On Pay vote. Results of the vote must be set forth in a Form 8-K within four business days after the shareholders meeting. Brokers are not permitted to vote uninstructed shares in a Say On Pay or Say On Frequency proposals.

The two negative votes were cast by the Republican members of the Commission.

Author’s Commentary
It appears to the author that the issue is over-analyzed, and, to a significant extent, a waste of time. For example, assume that shareholders of a given company over a period of years vote that the executive compensation is excessive and a shareholders’ lawsuit is filed claiming that the compensation is excessive and makes reference to the adverse votes by shareholders. It is unlikely that such a lawsuit would be successful. Existing precedent is to the effect that courts are not the best forum to determine the compensation and benefits of officers. Shareholders routinely lose such lawsuits.

The real concern is that the directors will acknowledge pressure to reduce or hold compensation down after votes suggesting the compensation is excessive.

In this proxy season companies have approached the new issue with a variety of approaches.

The author notes that Northern Trust gave the shareholder the right to select when the subject should be revisited. It states directors recommend you vote each year on the frequency of advisory votes on executive compensation.

The AT&T proxy card states that the Board of Directors recommends you vote every three years on executive compensation.

Northern’s direction is straight forward – “A vote every year is O.K. We can handle criticism.”
AT&T’s director approach is that executive compensation is for directors to set. AT&T wants as few votes on executive compensation as possible.

In sum, this issue is not nearly as important as the media reports have suggested.

Edward X. Clinton, Sr.

Read More

Should Dodd-Frank Be Applied Retroactively?

The SEC is seeking civil penalties from Rajat K. Gupta, a former director of Goldman Sachs for alleged insider trading. The SEC has not sued in federal court, but, rather has filed an administrative proceeding against Mr. Gupta as authorized by the new Dodd-Frank Act.

Rajat K. Gupta, a former director of Goldman Sachs, sued the SEC in the U.S. District Court for the Southern District Of New York, 11-CV-1900 on March 18, 2011, claiming that the administrative action by the SEC against him is unconstitutional because it seeks to retroactively apply provisions of Dodd-Frank § 929P, which amended § 8A of the Securities Act of 1933. In other words, Mr. Gupta is arguing that the alleged violations took place before Dodd-Frank was enacted so the SEC cannot use an administrative proceeding.

According Mr. Gupta's Complaint, there is no expression of Congressional Intent that civil penalties provision of Dodd-Frank can be applied retroactively. Section 4 of Dodd-Frank provides that “except as otherwise provided this Act shall take effect one day after the enactment of the Act.” Dodd-Frank became law on July 21, 2010. All of the conduct alleged occurred prior to that date. Without retroactive application of Dodd-Frank, the Commission could have sought civil penalties against Gupta in a Federal District Court.

The SEC alleged that Mr. Gupta engaged in a trading scheme by providing material non-public information that he obtained in the course of his duties as a member of the Board of Directors of The Goldman Sachs Group, Inc. and Procter & Gamble to Raj Rjaratnam, the manager of a hedge fund called Galleon Management, LP. Currently, Mr. Rjaratnam is on trial for criminal charges brought against him by the U.S. Attorney of the Southern District of New York.

Mr. Gupta claims that the actions brought against him should be determined by a jury. He points out that an appeal from an adverse administrative finding would first be to the Commission itself before any further judicial review. Mr. Gupta claims that he would be deprived of the application of the Federal Rules of Evidence which preclude unreliable evidence such as multiple layers of hearsay that Commission would seek to offer in an administrative proceeding. Also it would impede Mr. Gupta’s ability to seek indemnification for contribution thereby unfairly enhancing the magnitude of the amounts for which he would be exposed. These charges resulting from retroactive application of Dodd-Frank impose new legal consequences on Mr. Gupta even though arising from pre-Dodd-Frank conduct. Mr. Gupta points out that at least one Commissioner, Kathleen L. Casey, has publicly questioned the retroactive application of Dodd-Frank.

Mr. Gupta alleges that his attorney filed a 35-page response to a Wells Notice on Monday February 28, 2011. By that afternoon the staff received authorization to proceed against Mr. Gupta even though there is no record that the Commission met to consider the submission of the Wells response. Further, Mr. Gupta alleges that a copy of the submission was turned over by the Staff to the United States Attorney’s Office for use in the prosecution of Mr. Rajaratnam. Mr. Gupta seeks as a remedy (a) that Dodd-Frank provisions prospectively empowering the Commission to seek civil penalties against non-registered persons in administrative proceedings in lieu of a plenary action in Federal Court cannot be applied against him, and (b) the Commission is acting in bad faith and a discriminatory manner against him.

Mr. Gupta has raised significant legal issues which will apparently be decided in the very near future.

Edward X. Clinton, Sr.

Read More

Matrixx Initiatives, Inc. et al v. Siracusano, et al, 09-1156

SUPREME COURT UNANIMOUSLY REJECTS NARROW INTERPRETATION OF §10B(5)

On March 22, 2011 the United States Supreme Court decided Matrixx Initiatives, Inc. et al v. Siracusano, et al, 09-1156, which reaffirmed its holding in Basic Inc. v. Levinson, 485 U.S. 224 (1988).

In Basic the defendant made misleading statements denying that it was engaged in merger negotiations when, in fact, it was conducting preliminary negotiations. Basic urged a bright-line rule that preliminary negotiations are material only when the parties to merger negotiations reach an agreement in principal. The Supreme Court in Basic rejected that bright-line rule. Accordingly, a claim was stated under Section 10b(5).

The Plaintiffs alleged in Matrixx that Matrixx and three executives failed to disclose a possible link between its leading product, Zicam, a cold medicine, and the loss of smell. Matrixx became aware of several complaints by users of Zicam but contended that the complaints were not statistically significant and accordingly that disclosure was not necessary. Matrixx also sought to defend its turf in other ways. It learned that a research doctor was going to deliver a lecture in which he would reference the fact that various complaints were made by other users of Zicam. Matrixx learned of the proposed presentation and informed the doctor that it did not have permission to use its name. The doctor proceeded with the presentation without mentioning Matrixx.

Plaintiffs complained that Matrixx violated Section 10b(5) by making untrue statements of fact and failing to disclose material facts necessary to make the statements not misleading in an effort to maintain artificially high prices for its leading product Zicam. The Supreme Court rejected that narrow approach and held that other facts could be considered, including other studies providing a link between Zicam and loss of smell.

The unanimous Supreme Court opinion written by Justice Sotomayor represents an affirmation and expansion of Basic. A very important case.

Edward X. Clinton, Sr.

Read More