THIRD DIVISION September 27, 2006
No. 1-05-0597
COOPER LINSE HALLMAN CAPITAL ) Appeal from the MANAGEMENT, INC., ) Circuit Court of ) Cook County. Plaintiff-Appellant, ) ) v. ) ) THOMAS HALLMAN and JAMES McQUINN, ) ) No. 00CH13781 Defendants-Appellees ) ) ) (Hallman and McQuinn Capital Management, ) The Honorable Inc., ) Nancy J. Arnold, ) Judge Presiding. Defendant). )
JUSTICE GREIMAN delivered the opinion of the court:
Plaintiff Cooper Linse Hallman Capital Management, Inc., brought seven counts of
corporate misconduct against defendants Thomas Hallman, James McQuinn and Hallman &
McQuinn Capital Management, Inc. (H&M). At a bench trial, the trial court entered a directed
finding on four of the counts. The court subsequently found for Hallman on plaintiff=s allegation
that he had breached his fiduciary duty as an officer, director and shareholder of plaintiff and on
plaintiff=s allegation that he had breached his fiduciary duty as a shareholder of plaintiff, a
closely held corporation. The court additionally found for McQuinn on plaintiff=s allegation that
he had breached his duty of loyalty as an employee of plaintiff. On appeal, plaintiff contends
that the trial court erred in holding Hallman and McQuinn to the fiduciary duty of a Ageneral
employee,@ rather than to the heightened fiduciary duty of a director or officer, and in holding 1-05-0597
that Hallman and McQuinn did not breach their heightened fiduciary duties.
Plaintiff is an investment advisor specializing on Amarket timing@ investments. Plaintiff
was founded in 1993 by Don Linse and Lori Cooper. In 1994, plaintiff hired Hallman, who
brought with him approximately 100 clients from his former place of employment. Hallman
purchased 20% of the voting shares of plaintiff, leaving the remaining 80% of the shares split
evenly between Linse and Cooper, and was named chief financial officer and vice president of
plaintiff. When Hallman was hired, the parties did not execute a written confidentiality
agreement. At trial, Linse testified that an oral confidentiality agreement was entered. Hallman
denied that allegation. Hallman=s duties included maintaining customer relations, answering
phones and soliciting clients.
In 1996, plaintiff hired McQuinn. Again, the parties did not enter a written
confidentiality agreement. While Linse maintained that an oral agreement was entered,
McQuinn disagreed. McQuinn=s duty was to maintain customer relations.
The testimony presented at trial showed that Hallman was charged with managing
plaintiff=s office staff and with paying office bills. While Hallman would advise Linse and
Cooper concerning what he thought were appropriate salaries and bonuses for plaintiff=s
employees, Hallman=s suggestions were never followed. According to all witnesses, ultimately,
Linse and Cooper made all decisions concerning plaintiff, including all hiring and firing
decisions.
In 1998, the parties began researching the effectiveness of a new market timing
methodology known as a Asector fund.@ Plaintiff established a sector fund with a firm called
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Rydex to test the new methodology. In 1999, Hallman, McQuinn, Linse and Cooper each also
opened personal Rydex funds. McQuinn volunteered to trade the corporate Rydex fund and
testified that he never hid its goings on, nor the happenings of his own or the other parties=
personal Rydex funds from Linse and, in fact, spoke to Linse about the funds Amost days.@
Plaintiff=s clients= assets were held in trust by Independent Trust Corporation (Intrust). In
April 2000, it was revealed that Intrust had a multi-million dollar cash shortage. As a result, a
civil receivership action was initiated against Intrust and all of Intrust=s assets were frozen,
including plaintiff=s clients= accounts. Accordingly, plaintiff was unable to pay its employees
and plaintiff=s clients were unable to withdraw funds from their accounts.
According to Linse=s testimony, he began negotiations with Intrust president Gary
Bertacchi in April 2000, for plaintiff to lease Bertacchi office space and to establish a new in-
house trust company. Hallman and McQuinn testified that in April 2000, Linse informed them
that he was hiring Bertacchi. Hallman and McQuinn testified that it was then that they began to
take steps to establish a competing market timing firm.
In anticipation of their competing firm, in June and July 2000, Hallman and McQuinn
executed a lease for office space, bought office equipment and filed the H&M articles of
incorporation with the Secretary of State. Hallman also copied from plaintiff prospect lists,
customer account spreadsheets and customer mailing labels, among other documents. Hallman
and McQuinn resigned on September 1, 2000, taking the copied documents with them. Shortly
thereafter, they were certified as investment advisors and registered with the Securities and
Exchange Commission. Hallman and McQuinn sent announcements of their departure to
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plaintiff=s clients in which they detailed their personal Rydex sector funds track records since
1999.
After Hallman=s and McQuinn=s resignations, plaintiff hired a computer forensics expert
who discovered that the H&M business plan had been saved to plaintiff=s computers and that
Hallman and McQuinn had experimented with fonts for an H&M advertisement on the
computers.
In order to obtain business, plaintiff relied on solicitors. One such solicitor, ProFutures,
had referred about 30% of plaintiff=s business. In November 2000, ProFutures became
concerned about the service provided by plaintiff. Later that year, it sent its clients letters
advising them to suspend trading in their accounts with plaintiff. In March 2001, the
relationship between ProFutures and plaintiff was terminated. Meanwhile, in February 2001, the
newly established H&M had entered an agreement with ProFutures whereby it would pay
ProFutures 10% more in commission than plaintiff had paid ProFutures. While they were still
employed by plaintiff, in the summer of 2000, Hallman and McQuinn had met with a ProFuture
employee several times. Hallman and McQuinn denied soliciting ProFuture=s business for their
new venture and testified that Linse had actually been invited and had arrived late to at least one
of these meetings.
Plaintiff filed suit on September 20, 2000. On December 20, 2001, plaintiff filed a
second amended complaint alleging seven counts of corporate misconduct. The case proceeded
to a bench trial. After plaintiff had rested, the trial court granted a directed finding on counts I,
V, VI and VII of plaintiff=s second amended complaint. At the end of trial, the court found for
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Hallman on count II, alleging that he had breached his fiduciary duty as an officer, director and
shareholder of plaintiff, and on count III, alleging that he breached his fiduciary duty as a
shareholder of plaintiff, a closely held corporation. The court found for McQuinn on count IV,
alleging that he breached his duty of loyalty as an employee of plaintiff. Plaintiff appealed the
court=s findings on counts II and IV. Accordingly, H&M is not a party to this appeal.
Plaintiff first contends that the trial court erred in treating Hallman and McQuinn as
general employees, rather than as officers and directors that owed a heightened fiduciary duty to
plaintiff. As Hallman and McQuinn point out, the trial court did not err in this respect.
With regard to Hallman, contrary to plaintiff=s contention, the court specifically found
that Hallman owed plaintiff a heightened fiduciary duty because he was a shareholder, director
and officer of plaintiff.
With regard to McQuinn, plaintiff did not allege in the trial court that he owed the
heightened fiduciary duty of an officer or director. Instead, it argued that McQuinn was an
employee who owed a fiduciary duty of loyalty. Because this contention was not raised in the
trial court, it is waived on appeal. See Cangemi v. Advocate South Suburban Hospital, 364 Ill.
App. 3d 446, 466 (2006), quoting Central Illinois Public Service Co. v. Allianz Underwriters
Insurance Co., 244 Ill. App. 3d 709, 720 (1993) (A >It is well settled that issues not raised in the
trial court are generally waived on appeal= @). Waiver aside, it is irrelevant whether McQuinn
owed the heightened fiduciary duty of an officer or a director to plaintiff because, as discussed
below, even under that standard, the trial court did not err in finding that Hallman=s and
McQuinn=s actions did not constitute a breach of that duty.
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Former employees may compete with their former employer and solicit former customers
as long as they do not do so before the termination of their employment. Veco Corp. v.
Babcock, 243 Ill. App. 3d 153, 160 (1993). Moreover, while still working for an employer,
employees may plan, form and outfit a competing corporation so long as they do not commence
competition. Veco, 243 Ill. App. 3d at 160. ACorporate officers, however, stand on a different
footing; they owe a fiduciary duty of loyalty to their corporate employer not to (1) actively
exploit their positions within the corporation for their own personal benefit, or (2) hinder the
ability of a corporation to continue the business for which it was developed.@ Veco, 243 Ill. App.
3d at 160. Under Illinois law:
AOfficers and directors have been found to have breached their fiduciary duties
when, while still employed by the company, they (1) fail to inform the company
that employees are forming a rival company or engaging in other fiduciary
breaches [citation]; (2) solicit the business of a single customer before leaving the
company [citation]; (3) use the company=s facilities or equipment to assist them in
developing their new business [citation]; or (4) solicit fellow employees to join a
rival business.@ Foodcomm International v. Barry, 328 F.3d 300, 303 (7th Cir.
2003).
Preferred Meal Systems, Inc. v. Guse, 199 Ill. App. 3d 710, 725 (1990). Illinois courts have also
found that officers and directors have breached their fiduciary duties when they Aused the
company=s confidential business information for the new business, either before or after [their]
departure [citation]; or *** orchestrated a mass exodus of employees shortly after [their]
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resignation from the company.@ Preferred Meal Systems, 199 Ill. App. 3d at 725. The
applicable standard of review is whether the trial court=s finding that Hallman and McQuinn did
not breach their fiduciary duties to plaintiff was against the manifest weight of the evidence.
Dowd & Dowd, Ltd. v. Gleason, 352 Ill. App. 3d 365, 373 (2004).
Plaintiff asserts that Hallman and McQuinn breached their fiduciary duties when they (1)
failed to inform plaintiff while still in its employ that they were planning to form a competing
corporation; (2) solicited fellow employees (each other) to join the competing corporation; (3)
solicited ProFuture=s business prior to their resignation; (4) used plaintiff=s computer to type a
business plan and advertisements; (5) used confidential information about plaintiff=s customers
to outfit their competing corporation; and (6) usurped plaintiff=s corporate opportunity to exploit
its success with the Rydex sector funds. The evidence unequivocally shows that Hallman and
McQuinn did commit several of the above allegations; in particular, they failed to inform
plaintiff of their plans to form a rival corporation, conspired with one another to form a rival
corporation and used plaintiff=s computer to type a business plan and advertisements. However,
after reviewing all of the facts presented in this case, we cannot say that the trial court=s
determination that Hallman and McQuinn=s actions fall short of a breach of their fiduciary duties
to plaintiff was against the manifest weight of the evidence because the evidence proved that
they neither exploited their positions with plaintiff for their own benefit nor hindered the ability
of plaintiff to continue business.
First, we reject plaintiff=s contention that the trial court erred in finding for Hallman and
McQuinn when they solicited ProFutures= business prior to resigning and used confidential
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information about plaintiff=s clients to outfit their new corporation. Concerning ProFuture=s
business, the testimony presented at trial showed that Hallman and McQuinn met with a
ProFutures employee during the summer of 2000 but that Linse was invited to at least one of
those meetings. There was no evidence presented that Hallman and McQuinn actually solicited
ProFutures= business. In fact, Hallman and McQuinn testified that they did not solicit
ProFutures= business. Accordingly, we cannot say that the trial court=s determination on this
issue was contrary to the manifest weight of the evidence. Concerning the confidentiality of
plaintiff=s client information, the evidence showed that neither Hallman nor McQuinn signed a
written confidentiality agreement. While Linse testified that the parties entered an oral
confidentiality agreement, Hallman and McQuinn testified to the contrary. Because the court
was in the best position to assess the credibility of the witnesses and is charged with resolving
any conflicts in the evidentiary record (see Williams v. Cahill, 258 Ill. App. 3d 822, 825 (1994)),
we cannot say that its determination that no confidentiality agreement existed was contrary to the
manifest weight of the evidence.
Moreover, we agree with the trial court=s determination that plaintiff did not demonstrate
that Hallman and McQuinn usurped its corporate opportunity to capitalize on its success with its
Rydex sector fund. Certainly, more than one corporation may offer that form of investment and,
while Hallman and McQuinn may have advertised their personal Rydex sector funds= successes
as a lure to potential customers to their new corporation, plaintiff offered no evidence that it
cannot also capitalize on its success with its Rydex sector fund.
Concerning the remaining allegations, clearly this case is distinguishable from the
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extreme cases of fiduciary misconduct to which plaintiff compares it. In Unichem Corp. v.
Gurtler, 148 Ill. App. 3d 284 (1986), the defendant, the former president and a member of the
board of directors of the plaintiff chemical company, appealed summary judgment entered for
the plaintiff on its claim that the defendant had breached his fiduciary duty. The defendant=s son
had been a salesperson employed by the plaintiff. While his father remained the plaintiff=s
president and a member of the board, the defendant=s son resigned and established a rival
chemical company. The defendant did not inform the plaintiff of his son=s resignation or plans to
form a competing company until a month after the fact. Moreover, without disclosing to the
plaintiff his actions, the defendant encouraged other of the plaintiff=s employees to go to work
for his son=s rival company, personally approved five separate sales of the plaintiff=s goods to his
son at a drastically reduced price, knowing that his son would resell the products to the plaintiff=s
regular customers, and obtained a loan in his name to be distributed to his son=s company. The
defendant was also aware, but did not inform the plaintiff, that his son and wife were soliciting
the plaintiff=s employees to join the rival company and that his wife had taken several of the
plaintiff=s labels and was using them to make the rival company=s labels. The defendant
provided his wife A >technical input= @ in this regard. Unichem, 148 Ill. App. 3d at 288.
Eventually, the defendant resigned from his position with the plaintiff and assumed the position
of president of his son=s company. The appellate court held that the defendant had breached his
fiduciary duties to the plaintiff because he had failed to disclose facts which threatened the
plaintiff=s existence and had, in fact, intentionally hidden such developments. Accordingly, the
appellate court affirmed the trial court=s summary judgment order.
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In Vendo Company v. Stoner, 58 Ill. 2d 289 (1974), the trial court entered judgment for
the plaintiff, a vending machine manufacturer, against the defendant, a former officer and
director of the plaintiff, on the plaintiff=s claim that the defendant had breached a noncompetition
covenant. On appeal in the supreme court, the court noted that it was clear that the defendant
had violated his fiduciary duties during his employment as an officer and director of the plaintiff.
During that period, the defendant, without disclosing such actions to the plaintiff, had
contributed substantial personal funds to the development of a superior vending machine that
would compete with that manufactured by the plaintiff. The defendant also represented the
plaintiff in its attempts to purchase the design of the new vending machine. The court concluded
that the defendant
Ahad a foot in each camp. Not only did his undisclosed individual interest in
controlling the futher development and ultimately the manufacture and sale of the
[superior machine] create the possibility of his taking an unfair advantage of
plaintiff, but the evidence gives strong indication that he actually misled plaintiff
while he was purportedly acting as plaintiff=s agent with regard to plaintiff=s
possible acquisition of the [superior machine].@ Vendo, 58 Ill. 2d at 304.
In ABC Trans National Transport, Inc. v. Aeronautics Forwarders, Inc., 62 Ill. App. 3d
671 (1978), the plaintiff, a freight forwarding company, appealed the trial court=s refusal to
enjoin defendants, the former president and vice presidents of the plaintiff=s subsidiary, and the
competing company they had established from soliciting or serving its former customers. The
evidence showed that, while employed by the plaintiff, the defendants set out to establish a rival
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freight forwarding company. To this end, the defendants invested in the new corporation,
obtained the services of a cartage firm which began making deliveries for the new corporation
and met with the plaintiff=s customers in an attempt to obtain their commitment to the new
corporation. The defendants encouraged the plaintiff=s staff members to come to work for the
rival corporation, telling them that the plaintiff=s subsidiary would soon become insolvent and
that they would consequently be unemployed and that all of the plaintiff=s major accounts would
be transferred to the rival corporation. The defendants further organized a multistate massive
walkout of the plaintiff=s employees who had committed to working for the rival corporation.
The defendants encouraged the plaintiff=s employees to use the plaintiff=s facilities, funds and
personal property to prestamp the rival corporation=s air bills, furnish the rival corporation with
office supplies and airline containers and prepare the new corporation=s daily reports. The
appellate court held that these actions evidenced a clear breach of the defendant=s fiduciary
duties and, therefore, the injunction was proper.
The case at bar is also distinguishable from Foodcomm, a closer case of fiduciary
misconduct. In Foodcomm, the district court granted the plaintiff, an importer of chilled
Australian beef, an injunction against the defendants, the plaintiff=s former employees who were
held to the heightened fiduciary duty of directors or officers, from providing service to the
plaintiff=s former customer. While employed by the plaintiff, one of the defendants had been
assigned to A >smooth *** over= @ a dispute between the plaintiff and one of its largest customers.
Foodcomm, 328 F.3d at 302. The customer indicated to the defendant that it would no longer do
business with the plaintiff; however, the defendant failed to relate this information to the
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plaintiff. Instead, the defendants contacted the customer to inquire whether it would be
interested in their services. The customer requested a written business plan for a new business
that would compete with the plaintiff=s, which the defendants prepared on computers and
personal digital assistants owned by the plaintiff. After the defendants resigned, their new
competing business began operating as a division of the customer=s company. On appeal, the
Seventh Circuit found that the injunction was proper because the plaintiff was likely to succeed
on its claim that the defendants had breached their fiduciary duties. The court reasoned that the
defendant was
Aprivy to the collapse of negotiations between [the plaintiff] and [its customer]
regarding the redistribution deal and offered to >smooth things over.= The
evidence adduced at the hearing supports the finding that instead of >smoothing
things over,= [the defendant] conspired with [his codefendant] to present [the
customer] with a business plan to create [a customer-owned] entity that would
provide the same services as were already being provided by [the plaintiff], and
directly compete with [the plaintiff]. Such efforts to actively exploit their
positions within [the plaintiff] for their own personal benefits, and to hinder [the
plaintiff=s] ability to conduct its business with [the customer], if proved at trial,
constitute a breach of fiduciary duty.@ Foodcomm, 328 F.3d at 304.
The court further noted that a finding of breach would be supported by the facts that the
defendants did not inform the plaintiff of their intentions to form a rival company and that they
used the plaintiff=s property to write their business plan.
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In this case, Hallman and McQuinn began planning and, in fact, incorporated a
competing business while still employed by plaintiff. However, they did not solicit business for
their new corporation or begin competing with plaintiff until after they had resigned. Though, as
in the above-discussed cases, Hallman and McQuinn did not inform plaintiff of their intentions
to create a competing corporation and may have typed their new business plan and experimented
with advertisement fonts on plaintiff=s computers, simply put, their conduct did not rise to the
level of a breach of their fiduciary duties because they neither exploited their positions for their
personal benefit and to the detriment of plaintiff nor impeded plaintiff=s ability to do business.
Unlike in Unichem and Vendo, Hallman and McQuinn did not actively invest in a rival
company, taking advantage of benefits to which they, as fiduciaries to plaintiff, were entitled to
insure the success of that rival company. Nor did Hallman and McQuinn mislead plaintiff about
their actions, impeding plaintiff=s ability to do business, as in Vendo. Unlike in ABC, Hallman
and McQuinn did not use and steal property belonging to plaintiff in order to operate its rival
business nor did their new corporation actually begin doing business while they were still
employed by plaintiff. Finally, unlike in Foodcomm, while employed by plaintiff, Hallman and
McQuinn did not actively exploit their position as employees, using their contacts with plaintiff=s
customers, to establish a rival business. Moreover, their actions in creating their new
corporation did not interfere with plaintiff=s relationships with its customers nor did they impede
plaintiff=s ability to conduct its business, as occurred in Foodcomm. Hallman and McQuinn
simply did not participate in the monkey business participated in by the defendants in the
discussed cases. To hold that Hallman=s and McQuinn=s actions were a breach of their fiduciary
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duties would be to virtually prevent all officers and directors from seeking new employment
prior to resigning from their current positions.
For these reasons, we affirm the judgment of the trial court.
Affirmed.
THEIS, P.J., and KARNEZIS, J., concur.