Rathje v. Horlbeck Capital Mgmt., LLC

• Decision Date: 24 October 2014
• Docket Number: No. 2–14–0682.,2–14–0682.
• Citation: 20 N.E.3d 501
• Parties: S. Louis RATHJE, as Trustee of the S. Louis Rathje Trust, Under Trust Agreement dated February 24, 1984, Plaintiff–Appellee, v. HORLBECK CAPITAL MANAGEMENT, LLC, Todd Horlbeck, and HCM L.P., Defendants (Cantella and Company, Inc., Defendant–Appellant).
• Court: United States Appellate Court of Illinois

20 N.E.3d 501

S. Louis RATHJE, as Trustee of the S. Louis Rathje Trust, Under Trust Agreement dated February 24, 1984, Plaintiff–Appellee

v.HORLBECK CAPITAL MANAGEMENT, LLC, Todd Horlbeck, and HCM L.P., Defendants (Cantella and Company, Inc., Defendant–Appellant).

No. 2–14–0682.

Appellate Court of Illinois, Second District.

Oct. 24, 2014.

James H. Knippen and Adam C. Kruse, both of Walsh, Knippen, Pollock & Cetina, Chrtd., of Wheaton, for appellant.

Timothy D. Elliott and Kaitlyn A. Wild, both of Rathje & Woodward, LLC, of Wheaton, for appellee.

OPINION

Justice ZENOFF

delivered the judgment of the court, with opinion.

¶ 1 Defendant, Cantella & Co., Inc. (Cantella), appeals the trial court's order of June 12, 2014, asserting that the court improperly conditioned Cantella's right to arbitrate upon compliance with an outstanding discovery order. We affirm.

¶ 2 I. BACKGROUND

¶ 3 A. The Hedge Fund

¶ 4 In October 2002, plaintiff, S. Louis Rathje, as trustee of the S. Louis Rathje Trust, invested in a hedge fund. The hedge fund was organized as a limited partnership, HCM L.P., with Horlbeck Capital Management, LLC, as the general partner. Todd Horlbeck of St. Charles, Illinois, managed the hedge fund. Todd Horlbeck was also an independent registered representative with Cantella, a securities broker/dealer. Under a subscription agreement between plaintiff and HCM L.P., plaintiff was required to open an investor account at Cantella and to deposit into that account an amount equal to his capital contribution to HCM L.P. Cantella then transferred the funds in the account to the partnership. In connection with the investor account at Cantella, plaintiff signed two “suitability update” forms that provided for arbitration of any controversies between plaintiff and Cantella. Plaintiff's total investment in the hedge fund was $1.3 million.

¶ 5 Pursuant to an agreement between Todd Horlbeck and Cantella, the partnership was obligated to use Cantella's services as a broker/dealer with respect to all of the partnership's investments. The agreement between Todd Horlbeck and Cantella further provided that Cantella would establish brokerage accounts with Bear, Stearns & Company (Bear Stearns). From time to time, plaintiff received statements from the partnership purporting to value his share of the partnership's assets. Todd Horlbeck was responsible for calculating that value. The December 31, 2008, statement valued plaintiff's share of the partnership's assets at approximately $1.4 million. When the partnership was dissolved on April 29, 2009, plaintiff learned that the actual value of his share of the partnership's assets was $421,217.64.

¶ 6 B. The Lawsuit

¶ 7 On October 7, 2011, plaintiff filed suit against Horlbeck Capital Management, LLC, Todd Horlbeck, and HCM L.P. (collectively the Horlbeck defendants). In the suit, plaintiff named Cantella a respondent in discovery pursuant to section 2–402 of the Code of Civil Procedure

(Code) (735 ILCS 5/2–402 (West 2010) ). With respect to the Horlbeck defendants, plaintiff alleged breach of contract, breach of fiduciary duty, fraudulent misrepresentation, negligent misrepresentation, and violation of the Illinois Consumer Fraud and Deceptive Business Practices Act (815 ILCS 505/1 et seq. (West 2010)). Plaintiff also asked for an accounting. With respect to Cantella, plaintiff alleged that it had actual and constructive possession of evidence that plaintiff needed to prove his claims and that would lead to the discovery of other parties who should be named as defendants. Cantella was served on October 12, 2011. In addition to the complaint and summons in discovery, plaintiff served on Cantella a notice of deposition, interrogatories, and a request for documents. Cantella's response and deposition were due in November 2011.

¶ 8 C. The Two–and–a–Half–Year Discovery Wrangle

¶ 9 According to an affidavit furnished by plaintiff's counsel, shortly after Cantella was served, Cantella's attorney requested an extension of time in which to respond to discovery. Plaintiff's counsel agreed to a one-month extension. When Cantella had not provided any discovery by mid-December 2011, plaintiff's counsel contacted Cantella's lawyer, who then requested an additional extension. In an email dated January 4, 2012, Cantella's counsel stated that he would send “responses and objections and production” by the end of that week.

¶ 10 According to plaintiff's counsel's affidavit, “a few” days later, Cantella produced six documents, all of which related to the arbitration agreement between plaintiff and Cantella. On January 6, 2012, Cantella filed a “special and limited” appearance and a “motion to quash and for protective order.” Cantella argued that all of plaintiff's discovery requests should be quashed because plaintiff had signed documents agreeing to arbitrate “all controversies that may arise between” plaintiff and Cantella. The trial court denied the motion on April 10, 2012, on the ground that seeking discovery from Cantella was not a “controversy.” Cantella's position was that even service of a subpoena had to go through arbitration. However, Cantella did not appeal the denial of its motion to quash the discovery requests.

¶ 11 On April 10, 2012, the court ordered Cantella to file objections to plaintiff's discovery requests by May 2, 2012. Cantella never filed any such objections. On May 9, 2012, the court ordered Cantella to comply with written discovery within 14 days. Cantella did not comply. Then, on May 22, 2012, Cantella's counsel withdrew. On May 24, 2012, Cantella's new counsel filed a motion to stay enforcement of the May 9 order, on the basis that Cantella was going to file a motion to certify a question for appeal pursuant to Illinois Supreme Court Rule 308

(eff. Feb. 26, 2010), relating to the arbitration agreement, and intended to file a motion to impose limits on discovery. The court granted Cantella leave to file its motions by the end of the business day on May 30, 2012. On June 12, 2012, the court denied Cantella's request to certify a question as well as its motions for a protective order and to stay discovery pending the outcome of the Horlbeck defendants' interlocutory appeal, in which the Horlbeck defendants unsuccessfully asserted a right to arbitrate under the provision in the agreement between Cantella and plaintiff. Rathje v. Horlbeck Capital Management, LLC, 2012 IL App (2d) 120510–U, 2012 WL 6969117. The court then ordered Cantella to comply with discovery by July 3, 2012.

¶ 12 According to plaintiff's counsel's affidavit, he and Cantella reached an agreement on July 2, 2012, to allow Cantella two additional weeks to produce its discovery responses. In exchange, Cantella allegedly agreed to extend the period in which plaintiff would have to convert Cantella to a party defendant. However, according to the affidavit, on July 10, 2012, Cantella reneged on the agreement. Instead, Cantella proposed a “rolling” production of 50,000 documents. The court ordered a rolling production, and Cantella produced 597 pages. Cantella answered plaintiff's interrogatories on July 17, 2012. Cantella did not thereafter complete its rolling production.

¶ 13 On August 14, 2012, Cantella filed a motion to terminate its status as a respondent in discovery, on the theory that the trial court lost jurisdiction over it when plaintiff did not timely seek to convert it to a party defendant. On August 16, 2012, plaintiff filed a motion for sanctions based on Cantella's failure and refusal to comply with discovery. On September 6, 2012, the court denied Cantella's motion to terminate and granted plaintiff's motion for sanctions. On September 14, 2012, Cantella agreed to a finding of contempt and appealed. This court affirmed the sanctions as modified in our order. Rathje v. Horlbeck Capital Management, LLC, 2013 IL App (2d) 121120–U, ¶ 24, 2013 WL 2295466

.

¶ 14 On June 25, 2013, Cantella filed a motion to refer the discovery dispute to arbitration. The court treated this as a motion to reconsider the April 10, 2012, denial of the original motion to quash the discovery requests and denied it. On July 19, 2013, the court ordered Cantella “to make a full document production immediately, recognizing that such production was to have been made by September 14, 2012.” The court further ordered that Cantella was to be fined $250 per day for every day after July 19, 2013, that it failed to tender a complete production of documents. Instead of producing documents, Cantella filed a motion to vacate the sanctions. The motion was based on the dismissal of plaintiff's second amended complaint against the Horlbeck defendants. The court denied Cantella's motion and allowed plaintiff to file a motion to reconsider the dismissal. The court later granted plaintiff's motion to reconsider in part. On December 4, 2013, the court again sanctioned Cantella for its refusal to produce documents and ordered production by December 19, 2013.

¶ 15 On December 19, 2013, Cantella moved to convert itself to a party defendant. The court granted the motion, and the written order provided that Cantella was to produce documents the same day. Cantella complied and produced 33,000 heavily redacted pages.

¶ 16 On April 8, 2014, plaintiff filed a third amended complaint, this time naming Cantella as a party defendant. Plaintiff asserted causes of action against Cantella for negligent supervision of the Horlbeck defendants, constructive fraud, unjust enrichment, and breach of contract on the theory that plaintiff was a third-party beneficiary of a contract between Todd Horlbeck and Cantella. On May 1, 2014, plaintiff filed a motion to compel Cantella to produce unredacted documents. On May 8, 2014, Cantella filed a motion to compel arbitration and stay proceedings. The basis of the motion to compel arbitration was the shift in Cantella's status from a respondent in discovery to a party defendant. Now, Cantella asserted, a controversy existed between it and plai...