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George Wm. Hoffman & Co. v. Capital Serv.





APPEAL from the Circuit Court of Cook County; the Hon. HAROLD A. SIEGAN, Judge, presiding.


Rehearing denied November 25, 1981.

Defendants, Capital Services Co. and Leland Swinehart, appeal from a default judgment entered against them in the circuit court of Cook County. The default judgment was entered on two counts of plaintiff's complaint because of defendants' alleged refusal to comply with the rules of discovery and orders of the court compelling discovery. The judgment as to one count granted plaintiff's request for rescission of a contract and ordered defendants to return to plaintiff $19,000 paid to them under the contract plus $7,500 in expenses incurred by plaintiff in its attempt to carry out the contract. The judgment as to the other count awarded plaintiff $100,000 in compensatory damages allegedly caused by defendants' fraudulent misrepresentation and $250,000 in punitive damages. The trial court also ordered defendants to pay plaintiff $3,443 in attorney's fees incurred by plaintiff as a result of defendants' refusal to comply with discovery.

On appeal, defendants contend: (1) the entry of a default judgment as a sanction for their failure to comply with the rules of discovery and orders of the court compelling discovery, and the denial of their motion to vacate the default judgment, were improper orders; (2) assuming the default judgment was a proper sanction, the entry of judgment against defendant Swinehart on the rescission and restitution count of plaintiff's complaint was improper as a matter of law because he was not a party to the contract and could not be held personally liable for the acts of defendant Capital Services Co.; and (3) assuming the default judgment was a proper sanction, the entry of judgment against defendants on the fraudulent misrepresentation count was improper because plaintiff failed to state a cause of action for fraud and failed to present any evidence of fraud during a hearing held before the trial court in which the plaintiff presented proof of the allegations of its complaint.

We affirm in part and reverse in part.


Plaintiff, George William Hoffman & Co., is an accounting firm owned and managed by George Hoffman, a certified public accountant. Defendant, Capital Services Co., is a presently inactive accounting firm whose sole shareholder, president, and only professional employee is defendant Swinehart.

On June 9, 1978, plaintiff and Capital Services Co. (and allegedly Swinehart) entered into a contract for the sale of the accounting practice of Capital Services to plaintiff for a price no less than $45,000 (the actual amount was to be determined by a percentage of the annual billings of the practice for the first three years following the sale). Under the contract, plaintiff was to make a $15,000 down payment with payments of $1,000 per month thereafter.

The contract was a peculiar work of draftsmanship. Though the named seller was Capital Services Co., and though Swinehart signed the contract "Leland Swinehart President," throughout the contract the seller was referred to in the third person masculine — he, him, his, and himself — and it appears likely that at least some of the promises made by the "seller" were intended to be personal promises of Swinehart. For example, the seller, after the sale, was required to "make himself available, via telephone, * * * as a consultant" to the plaintiff. This term of the contract would appear to have meant that Swinehart was to be available as a consultant and not the corporate entity, which entity, for all intents and purposes, was to be out of business after the sale. Also, one term in the contract required the seller not to compete professionally with plaintiff for five years after the sale. Promises not to compete in the area of professional services are usually made by individuals who are the professionals and not by the corporations through which the services are provided.

One of the important terms of the contract was a warranty made by the seller. In it, the seller warranted that the annual billings of "his practice" were $45,000. If the annual billings proved to be less than $45,000, plaintiff, at its option, could renegotiate the price of sale or rescind the contract and recover all amounts paid and expenses incurred in the performance of the contract, and legal expenses incurred in plaintiff's attempt to recover any such amounts.

Several months after the contract went into effect, plaintiff apparently developed serious problems with the accounting practice it had acquired, among which was the discovery that the annual billings were only $30,000. Plaintiff sent a letter to Swinehart personally and said it was exercising its option to rescind the contract. Swinehart, apparently refused to allow plaintiff to do so and plaintiff brought this action.

In one count of the complaint, plaintiff alleged, among other things, that both defendants had breached the contract warranty that the annual billings were $45,000. (A copy of the contract was attached to the complaint.) Plaintiff sought rescission of the contract, the return of $19,000 plaintiff had paid while the contract was in force, and the recovery of $7,500 in expenses incurred by plaintiff during the time the contract was in force.

In another count in the complaint, plaintiff alleged that defendant Swinehart, on behalf of himself and defendant Capital Services, had knowingly made three false representations to induce plaintiff to enter into the contract. First, Swinehart had told plaintiff that the annual billings were $45,000 when they were only $30,000. Second, Swinehart had told plaintiff that he was a certified public accountant and that Capital Services was performing services as a certified public accounting firm when, in fact, Swinehart was not certified and Capital Services was not licensed to perform services as a certified public accounting firm. Third, Swinehart had told plaintiff that he had performed all of his services to clients in a professional manner when, in fact, the services he had rendered had actually been done in a careless, sloppy, inaccurate, and unprofessional manner, requiring plaintiff to redo audits, tax returns, and other financial documents for a majority of the clients.

Plaintiff alleged that the above fraudulent representations had caused damage to plaintiff's professional reputation in the amount of $100,000. Plaintiff also sought $250,000 in punitive damages under this count.

The complaint was filed in February 1979. In August 1979, defendants filed their answer denying most of the allegations of plaintiff's complaint.

On October 26, 1979, plaintiff served defendants' attorney with a notice of deposition and a request to produce documents for November 12, 1979. On November 12, defendants' counsel notified plaintiff's counsel that defendant Swinehart could not appear for a deposition or produce documents on that date. Defendants' counsel said that he would make new arrangements to comply with the discovery request.

By November 20, plaintiff's counsel had not been contacted by defendants' counsel to make new arrangements. Plaintiff's counsel wrote a letter to defendants' counsel on that date. In the letter, plaintiff's counsel insisted on compliance with discovery and declared that he believed defendants were intentionally avoiding discovery. Plaintiff's counsel wrote that, unless defendants agreed to submit to discovery, plaintiff would move for sanctions to compel discovery.

Defendants' counsel did not respond to the November 20 letter. On November 29, plaintiff's counsel wrote to defendants' counsel demanding that arrangements be made for defendants to comply with discovery. Plaintiff's counsel also wrote that, if a schedule for complying with discovery was not arranged by December 6, plaintiff would seek sanctions in court.

By December 11, defendants still had not taken any steps to comply with discovery. On that date, plaintiff's counsel served defendants' counsel with a motion for an order compelling discovery. The notice of motion served on defendants' counsel ...

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