Kovac v. Barron

• Decision Date: 07 March 2014
• Docket Number: No. 2–12–1100.,2–12–1100.
• Citation: 6 N.E.3d 819,2014 IL App (2d) 121100,379 Ill.Dec. 491
• Parties: F. Gary KOVAC, Plaintiff and Counterdefendant–Appellee and Cross–Appellant, v. Sandra L. BARRON, Individually and as Independent Administrator of the Estate of Kenneth L. Barron, Jr., Deceased, Defendant and Cross–Defendant and Counterplaintiff–Appellant and Cross–Appellee (Repair Services, Inc., Defendant; Pinnacle Systems, Inc., Press Room Electronics, Inc., and Triad Controls, Inc., Defendants and Cross–Plaintiffs–Appellees and Cross–Appellants).
• Court: United States Appellate Court of Illinois

2014 IL App (2d) 121100

6 N.E.3d 819

379 Ill.Dec. 491

F. Gary KOVAC, Plaintiff and Counterdefendant–Appellee and Cross–Appellant,

v.Sandra L. BARRON, Individually and as Independent Administrator of the Estate of Kenneth L. Barron, Jr., Deceased, Defendant and Cross–Defendant and Counterplaintiff–Appellant and Cross–Appellee (Repair Services, Inc., Defendant; Pinnacle Systems, Inc., Press Room Electronics, Inc., and Triad Controls, Inc., Defendants and Cross–Plaintiffs–Appellees and Cross–Appellants).

No. 2–12–1100.

Appellate Court of Illinois, Second District.

March 7, 2014.

Michael Resis, SmithAmundsen LLC, Chicago, Ellen L. Green, SmithAmundsen LLC, St. Charles, for appellants.

Nancy G. Lischer, Hinshaw & Culbertson LLP, Chicago, Michael J. Denker, Denker & Muscarello, LLC, St. Charles, John D. Eddy, Eddy, DeLuca, Gravina & Townsend, Pittsburgh, Pennsylvania, for appellee F. Gary Kovac.

Stephen M. Cooper, Peter M. Storm, Philip J. Piscopo, Cooper, Storm & Piscopo, Geneva, for other appellees.

OPINION

Presiding Justice BURKE delivered the judgment of the court, with opinion.

¶ 1 This appeal involves a dispute between plaintiff, F. Gary Kovac, a 50% shareholder of defendants Pinnacle Systems, Inc., Triad Controls, Inc., and Pressroom Electronics, Inc. (Operating Companies), and Kenneth L. Barron, Jr. (deceased), the other 50% shareholder. Kovac alleged that Barron had secretly arranged, through the use of a payroll servicing company (KES), wholly owned by Barron, to pay himself substantially more in salary despite an agreement that Kovac and Barron would take the same salaries and bonuses. Kovac further alleged that Barron formed Repair Services, Inc., a separate company wholly owned by him, and diverted the income from the Operating Companies' repair business to Repair Services without the knowledge or consent of the Operating Companies' boards of directors. The Operating Companies filed their own cross-complaint against Barron alleging mismanagement, excessive compensation, and the diversion of repair business income through Repair Services.

¶ 2 All defendants filed a motion to dismiss the conversion and conspiracy counts (counts IV, VII, VIII, IX, and X) alleged in Kovac's second amended complaint, pursuant to section 2–615 of the Code of Civil Procedure (Code) ( 735 ILCS 5/2–615 (West 2008)). The trial court granted the motion. Barron's wife, Sandra, as independent administrator of Barron's estate, filed a motion to dismiss the cross-complaint pursuant to section 2–619.1 of the Code (735 ILCS 5/2–619.1 (West 2008)). The trial court granted the motion and dismissed the cross-complaint pursuant to section 2–619(a)(3) of the Code (735 ILCS 5/2–619(a)(3) (West 2008)).

¶ 3 Following a bench trial, the trial court entered judgment in favor of Kovac as to count V (fraud), awarding him $3,220,702, and the court imposed a constructive trust on Barron's estate. The trial court further entered judgment in favor of Kovac as to count VI (breach of an oral agreement to lease property to the Operating Companies and share equally in the rental profits) and awarded Kovac $45,981. As to count II (breach of fiduciary duty to the Operating Companies and their shareholders by diverting repair business income from the Operating Companies to Repair Services), the trial court entered judgment in favor of the Operating Companies and awarded damages in the amount of $327,790. Finally, the court awarded Kovac $450,000 in punitive damages against the estate.

¶ 4 On reconsideration, the court entered judgment in favor of Kovac on count I (breach of fiduciary duty for mismanagement, pursuant to section 12.56 of the Illinois Business Corporation Act of 1983 (Business Corporation Act) (805 ILCS 5/12.56 (West 2008))), but it did not award additional damages as they would be duplicative of those awarded under count V. As to count II, the court found that the relief Kovac sought was on behalf of the Operating Companies and entered judgment in favor of the Operating Companies.

¶ 5 Sandra appeals, arguing that (1) the trial court's judgment on count V was against the manifest weight of the evidence; (2) the trial court's judgment on count I was against the manifest weight of the evidence; (3) Kovac could not assert counts II and V as direct claims in his individual capacity and they should have been brought as derivative claims on behalf of the Operating Companies; (4) the judgment on count II must be vacated since the Operating Companies had no action pending against Barron at the time of trial; and (5) the trial court erred in awarding punitive damages.

¶ 6 Kovac cross-appeals the dismissal of the conversion and conspiracy claims. The Operating Companies also cross-appeal the dismissal of their cross-complaint. We affirm in part, reverse in part, and remand the cause with directions.

¶ 7 I. FACTS

¶ 8 A. Pleadings

¶ 9 On September 12, 2007, Kovac sued Barron, the Operating Companies, and Repair Services. On November 6, 2007, Barron, the Operating Companies, and Repair Services filed a motion for leave to file a counterclaim against Kovac. Two days later, the trial court entered an agreed order in which it appears that the defendants abandoned the motion for leave to file a counterclaim.

¶ 10 On April 18, 2008, Kovac filed a first amended complaint and, on May 15, 2008, he filed a second amended complaint. The second amended complaint was brought against Barron, Sandra, the Operating Companies, and Repair Services. Specifically, count I, against Barron and the Operating Companies, alleged a violation of the Business Corporation Act and gross mismanagement of the business. Count II, against Barron, alleged that he had breached his fiduciary duty to the Operating Companies and their shareholders by diverting repair business income from the Operating Companies to Repair Services. Count III, against Barron and Repair Services, alleged tortious interference with economic advantage in connection with the diversion of income. Count IV, against Barron, alleged that Barron misappropriated funds through KES. Count V, against Barron, alleged fraud for secretly paying himself and Sandra unauthorized and excessive salaries and bonuses. Count VI, against Barron, alleged breach of contract for his failure to pay Kovac half of the rental profits from their property.¹ Count VII, against Barron, alleged that Barron's refusal to pay Kovac those rental profits constituted conversion. Count VIII, against Sandra, alleged that Sandra's excessive compensation from KES for the bookkeeping services she performed for the Operating Companies constituted conversion. Both counts IX and X, against Barron and Sandra, alleged that they conspired to convert funds belonging to Kovac by transferring those funds from the Operating Companies to KES and by keeping 100% of the rental profits.

¶ 11 The defendants filed a motion to dismiss Kovac's second amended complaint, pursuant to section 2–615 of the Code, on several grounds, including that counts II through V, VIII, and IX could be brought only as derivative claims on behalf of the Operating Companies. Following a hearing, the trial court granted the defendants' motion to dismiss counts IV, VII, VIII, IX, and X with prejudice, which included all claims pleaded against Sandra individually. As a result, Sandra was dismissed as a defendant. The trial court later dismissed count III of the second amended complaint with prejudice and dismissed Repair Services as a defendant.

¶ 12 Barron was adjudicated a disabled person on November 19, 2008. Sandra, not individually, but solely as plenary guardian for the person and estate of Barron, was substituted as a party in place of Barron. On November 17, Sandra, as guardian, filed a counterclaim against Kovac for breach of fiduciary duty.

¶ 13 On April 30, 2009, the Operating Companies filed a cross-complaint against Sandra, as guardian, for Barron's alleged breaches of fiduciary duties arising out of the alleged gross mismanagement of the Operating Companies (count I), payment of excessive compensation and unauthorized distributions (count II), and engaging in a competing business and diverting repair business income from the Operating Companies (count III).

¶ 14 On June 29, 2009, Sandra filed a motion to dismiss the cross-complaint, pursuant to section 2–619.1 of the Code. Sandra argued that all of the cross-claims constituted the “same action” by the “same party” as in Kovac's complaint and were therefore barred under section 2–619(a)(3) of the Code. The Operating Companies argued that they were not the same parties, because Kovac was the shareholder while the Operating Companies were the corporations. Following a hearing, the trial court dismissed the Operating Companies' cross-complaint with prejudice pursuant to section 2–619(a)(3). The record does not contain a transcript from the hearing.

¶ 15 On February 29, 2012, Barron died. On March 21, 2012, the trial court granted Kovac leave to file a third amended complaint against Sandra, as administrator of the estate, and the Operating Companies. Kovac re-alleged counts I, II, V, and VI. In count I he further alleged that he suffered financial loss in his capacity as a 50% shareholder in the Operating Companies and sought compensation. In count II he sought judgment in the amount of $350,134, “plus interest, costs of suit, punitive damages, reasonable attorney's fees, and further orders that such amounts be returned to the Operating Companies.” In count V, Kovac maintained that he and Barron had an oral agreement to receive equal annual compensation and profit distributions and that Barron's mischaracterization of excess compensation as for “contract labor” paid through KES was part of a scheme to convert funds belonging to Kovac. In count VI, Kovac alleged that he and Barron orally agreed to lease the property they co-owned to the Operating Companies and share equally in the rental profits. Kovac also specifically...