Stamatakis Industries, Inc. v. King

• Decision Date: 31 December 1987
• Docket Number: No. 87-0650,87-0650
• Citation: 520 N.E.2d 770,165 Ill.App.3d 879,117 Ill.Dec. 419
• Parties: , 117 Ill.Dec. 419 STAMATAKIS INDUSTRIES, INC., a Delaware corporation; Premier Engraving, Inc., an Illinois corporation; and Superior/Rogers Graphics, Inc., a Delaware corporation, Plaintiffs-Appellants, v. Frederick KING and King Graphics, Inc., an Illinois corporation, Defendants- Appellees.
• Court: United States Appellate Court of Illinois

Page 770

520 N.E.2d 770

165 Ill.App.3d 879, 117 Ill.Dec. 419

STAMATAKIS INDUSTRIES, INC., a Delaware corporation Premier Engraving, Inc., an Illinois corporation and Superior/Rogers Graphics, Inc., a Delaware corporation Plaintiffs-Appellants, v. Frederick KING and King Graphics, Inc., an Illinois corporation, Defendants- Appellees.

No. 87-0650.

Appellate Court of Illinois First District, Fourth Division.

Dec. 31, 1987.

John C. Stiefel, Sidney L. Rosenfeld, Warren Lupel of Solomon, Rosenfeld, Elliott & Stiefel, Ltd., John C. Stiefel, David C. Roston, Gary L. Specks, Jeffrey P. DeJong of Altheimer & Gray, Kenneth F. Levin, Law Officers of Kenneth F. Levin, Chtd., Chicago, for plaintiffs-appellants.

Ronald Butler, Ellen Claire Newcomer, Anthony E. Rothschild of Butler, Rubin, Newcomer, Saltarelli & Boyd, Thomas F. Ging, Michael Benz, of Isham, Lincoln & Beale, Chicago, for defendants-appellees.

Justice JIGANTI delivered the opinion of the court:

One of the plaintiffs, Stamatakis Industries, Inc., purchased all of the shares of stock of another one of the plaintiffs, Premier Engraving Company, Inc. The stock was purchased from Frederick King and other defendants who were all shareholders of Premier. The complaint charged all the defendants with fraud and breach of contract. The trial court entered summary judgment in favor of the defendants Frederick King and King Graphics, Inc. The other defendants are not part of this appeal.

Frederick King was the president, chief executive officer, chairman of the board, and a 19% shareholder of Premier. He negotiated the sale of all the shares of Premier to Stamatakis. The purchase price was $1,250,000 with $450,000 cash paid at the closing and $400,000 payments due one year and two years after the closing. The complaint alleges that King, as agent of Premier, engaged in extensive negotiations with Stamatakis. The complaint further alleges that King and other Premier shareholders repeatedly and accurately represented to Stamatakis that King absolutely controlled the single largest Premier customer which accounted for the predominant portion of Premier's revenue and that King further controlled several other significant smaller customers. According to the complaint, it was fully understood that an absolute condition of the agreement was that King enter into an employment contract to remain in the employ of Stamatakis for five years and to maintain and service the King-controlled business. A further condition was that for a period of two years after termination of King's employment, King would strictly refrain from directly or indirectly competing with Stamatakis. Either party had a right to terminate the employment agreement at any time on 90 days prior written notice.

The tort count sought damages for promissory fraud. The complaint alleged that while King was chief executive officer, president and chairman of the board of Premier, he engaged Premier in a major campaign to acquire capital, equipment and machinery unique to the Chicago graphics services industry. It also alleged that King fully intended to have Premier acquire this equipment even though Premier could not afford it and that after the sale to Stamatakis, King intended to have Premier complete the purchase. The more specific factual allegation of fraud is that the completion of this purchase was an undisclosed condition of King's remaining at Premier and not competing with Stamatakis after his employment terminated, and since King never intended unconditionally to perform his promise, this was a misrepresentation constituting fraud. Sometime after the closing of the sale of Premier to Stamatakis, Alex Stamatakis told King that he did not want Premier to purchase the equipment. King terminated his employment nine months later.

To state an action for fraud the complaint must allege that there was a false representation of material fact, the party making the statement must have known or believed the statement to be untrue, the party to whom the statement was made had a right to rely on it and in fact did so, the statement must have been made for the purpose of inducing the other party to act, and finally that the reliance by the person to whom the statement was made led to his injury. (Smith v. Jones (1986), 113 Ill.2d 126, 100 Ill.Dec. 560, 497 N.E.2d 738.) Illinois does not allow a recovery for promissory fraud, that is, fraud based on a false representation of intention of future conduct. (Steinberg v. Chicago Medical School (1977), 69 Ill.2d 320, 13 Ill.Dec. 699, 371 N.E.2d 634; Roda v. Berko (1948), 401 Ill. 335, 340, 81 N.E.2d 912, 915; Vance Pearson, Inc. v. Alexander (1980), 86 Ill.App. 3d 1105, 42 Ill.Dec. 204, 408 N.E.2d 782.) The promissory fraud alleged here is a promise to perform a contract with an intention not to perform. Illinois courts have held that this is not actionable. (Vance Pearson, Inc. v. Alexander (1980), 86 Ill.App.3d 1105, 42 Ill.Dec. 204, 408 N.E.2d 782.) However, Illinois does recognize an exception to the non-liability for promissory fraud rule if the promise is part of a scheme employed to accomplish the fraud. (Steinberg v. Chicago Medical School (1977), 69 Ill.2d 320, 334, 13 Ill.Dec. 699, 706, 371 N.E.2d 634, 641; Vance Pearson, Inc. v. Alexander (1980), 86 Ill.App.3d 1105, 1112, 42 Ill.Dec. 204, 209, 408 N.E.2d 782, 787.) King does not specifically argue that there was no fraud, but does argue that the allegations here do not represent a scheme employed to accomplish a fraud. King argues that at worst he is charged with a mental reservation and not a specific scheme to defraud.

Case law gives little guidance as to what the distinguishing features of a scheme are. Roda v. Berko firmly established in the law the scheme exception to the rule of non-liability for promissory fraud. However, in Roda the scheme was only a fraudulent promise that the property of the defrauded party would be used in a particular way.

In Vance Pearson, Inc. v. Alexander, the court faced the problem of distinguishing promissory fraud from the scheme exception. It stated:

"Distinguishing between the general rule in Illinois that a promise of future conduct made without intention to perform is not misrepresentation and the exception to the rule which makes such a promise a misrepresentation if it is the scheme to accomplish a fraud is not easy. As fraud occurs when a misrepresentation is made with intent to induce a victim to rely thereon and a victim is deceived and relies thereon to his detriment, such misrepresentations are ordinarily the schemes by which the victim is defrauded regardless of whether the misrepresentation is as to the declarant's future intent or otherwise. Thus it would seem that the exception tends to engulf and devour much of the general rule and lessen any disparity between the Illinois rule and the majority rule as explained by Prosser." Vance Pearson, Inc. v. Alexander (1980), 86 Ill.App.3d 1105, 1112, 42 Ill.Dec. 204, 209, 408 N.E.2d 782, 787.

Professor Michael J. Polelle in his article entitled "An Illinois Choice: Fossil Law Or An Action For Promissory Fraud?" traces the history of the rule against promissory fraud, urges its rejection by the Illinois Supreme Court and comments that the lack of rationale for the exception leads to a discretionary application of the exception. (Polelle, An Illinois Choice: Fossil Law Or An Action For Promissory Fraud?, 32 DePaul L. Rev. 565, 567 and 581 (1983).) Illinois is one of the distinct minority of states that does not allow actions for promissory fraud. (Polelle, at 569-70.) It is at odds with the Restatement (Second) of Torts, section 525, which provides that:

"One who fraudulently makes a misrepresentation of fact, opinion, intention or law for the purpose of inducing another to act or to refrain from action in reliance upon it, is subject to liability to the other in deceit for pecuniary loss caused to him by his justifiable reliance upon the misrepresentation." Restatement (Second) of Torts sec. 525, at 55 (1977).

The factual setting in Pearson which discussed the scheme exception was that the defendant agreed to install a scale by a certain date. The evidence showed that the defendant made the promise without intending to keep it. The appellate court held that this was a scheme to accomplish a fraud and affirmed a punitive damages judgment.

Considering the concept of a scheme, we believe that the protracted negotiations between King and Stamatakis show that a scheme was alleged and that it is a question of fact for the trier of fact to determine the ultimate issue.

King defends against the tort claim on two other grounds. He contends that the fraud claim is not actionable as a matter of law because King merely exercised his right under the contract to terminate the agreement upon 90-day notice to Stamatakis. The contract was terminated by King nine months after its inception. Stamatakis waived the 90-day notice requirement. King relies on the 7th Circuit United States Court of Appeals case of Repsold v. New York Life Insurance Co. (7th Cir.1954), 216 F.2d 479. There the court made the statement that "one who merely exercises his legal rights is not thereby chargeable with fraud." (Repsold v. New York Life Insurance Co. (7th Cir.1954), 216 F.2d 479, 486.) That statement is inapplicable to the instant case. As the Repsold court noted, it is not clear whether the action was in contract or in tort. The action emanated from a contract. The court analyzed it on the basis of promissory fraud. While the factual setting is not totally clear, it appears that the false representation was that the defendant would perform the contract that it entered into with the plaintiff, the representation was material, it was known to the defendant that there was no intention to perform the contract, plaintiff had a right to rely on the representation of the defendant, as a result the plaintiff was induced to surrender...