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Ellis v. Photo America Corp.

OPINION FILED MARCH 14, 1983.

HARRY H. ELLIS, D/B/A PHOTO AMERICA OF CHICAGO, INC., PLAINTIFF-APPELLEE,

v.

PHOTO AMERICA CORPORATION, DEFENDANT-APPELLANT.



Appeal from the Circuit Court of Cook County; the Hon. Anthony J. Scotillo, Judge, presiding.

JUSTICE CAMPBELL DELIVERED THE OPINION OF THE COURT:

Rehearing denied April 25, 1983.

Plaintiff, Harry H. Ellis, brought this action against defendant, Photo America Corporation, a Delaware corporation, seeking recovery of compensation due under an employment agreement with defendant and quantum meruit relief for services performed subsequent to the termination of the employment contract. Following a bench trial, the trial court entered judgment for plaintiff in the amount of $15,307.96 on plaintiff's claim under the employment contract and in the amount of $95,497.14 in quantum meruit relief. On appeal, defendant contends that: (1) the trial court erred in considering plaintiff's claim for equitable relief because the evidence established that plaintiff was guilty of "unclean hands"; (2) the evidence established that plaintiff, not defendant, breached the employment contract between the parties; and (3) the trial court improperly valued plaintiff's services in its award of quantum meruit relief.

The record discloses that, in 1975, plaintiff, Harry H. Ellis, and Walter Hutterli, an officer of World Photo Marketing, a European corporation, discussed the formation of a new company to distribute cameras and photographic accessories for a Japanese camera manufacturer. From the record, it appears that neither World Photo Marketing nor the Japanese manufacturer had previously conducted business in the United States. As a result of the discussions between plaintiff and Hutterli, it was agreed that plaintiff would become president of a newly formed Delaware corporation, Photo America Corporation (PAC). PAC was incorporated as a wholly owned subsidiary of World Photo Marketing. On October 20, 1975, plaintiff commenced employment with PAC. In January 1976, plaintiff and PAC entered into an employee agreement, which agreement was backdated to October 20, 1975. The agreement was for a period of one year with either party being able to terminate the agreement upon six months' notice. Pursuant to the employment agreement, plaintiff was to receive a salary of $50,000 per annum. A separate "Memorandum of Agreement" dated October 20, 1975, further provided that plaintiff was to receive, in addition to the salary provided for in the employment agreement, additional compensation of $6,250 per quarter.

From the record, it appears that difficulties between plaintiff and Hutterli developed. In March 1976, plaintiff requested from Hutterli "a complete understanding as to what [his] responsibilities are" with respect to PAC. Subsequently, plaintiff was invited to a meeting in Switzerland in late April 1976 with Hutterli and several directors of Interdiscount Service S.A., the parent corporation of World Photo Marketing. According to plaintiff and Hutterli, it was agreed at the meeting that it was necessary to make changes within PAC. Hutterli proposed to plaintiff that plaintiff become a commissioned agent for PAC, rather than its president and employee.

While still in Switzerland, plaintiff was given a draft proposal of the agency agreement between World Photo Marketing, PAC and plaintiff. The draft agreement set forth a commencement date of June 1, 1976, and a termination date of December 31, 1977. The proposal classified the transactions for which plaintiff was to receive a commission. Case I sales involved sales to major United States customers who purchased directly from the supplier against letters of credit. In case I sales, plaintiff and PAC would share equally in profits after payment of certain costs. Case II sales involved instances where plaintiff would be dealing with main customers purchasing $30,000 or more in goods from PAC. In case II sales, plaintiff and PAC would share equally in profits after the payment of certain costs. Case III sales involved sales to the military for which plaintiff would not receive any commission. Case IV sales involved sales to smaller customers. In case IV sales, plaintiff would receive the entire profit after the payment of certain costs. The proposal also provided that plaintiff was entitled to a draw of $7,000 per month against commission.

In early May 1976, a second proposal which, according to Hutterli, contained a few alterations or corrections was prepared and sent to plaintiff in the United States. From the record, it appears that the commission rates were substantially the same as in the first draft of the agency agreement. The second draft also retained the same commencement and termination dates. The second draft stated that plaintiff would be entitled to a maximum draw of $7,000 per month which would be subject to review.

According to plaintiff, he requested the corporate attorney for PAC to prepare a third draft of the agency agreement. The commission schedule of the third draft was substantially similar to the prior two drafts of the agency agreement. The third draft deleted a section of the prior drafts which pertained to arbitration of any disputes in Switzerland and added a section which permitted plaintiff to assign the contract to any corporation in which he held a majority interest. The third proposal also provided that plaintiff would receive $7,000 on the first of each month, which amount would be credited against plaintiff's commissions. According to plaintiff, two copies of the third draft were prepared, an English version and a Swiss version. The English version left blank the commencement date of the agreement, whereas the Swiss version retained the June 1, 1976, commencement date. Both versions stated that the agreement terminated on December 31, 1977.

Plaintiff testified that in mid-May 1976, he spoke with Robert Becker, the sales manager of PAC, about the changes that would be occurring within PAC. Subsequently, Becker met with Hutterli in Switzerland. Upon his return, Becker presented to plaintiff a list of tasks to be completed prior to Hutterli's arrival in the United States in late May. Plaintiff met with Hutterli in late May, at which time plaintiff gave Hutterli a copy of the third draft of the agency agreement.

Upon returning from a sales trip in early June, plaintiff met Joaquin Armengol. Armengol gave plaintiff a packet of materials which included a letter of introduction from Hutterli which stated that Armengol was the new general manager and head accountant of PAC. A check for $7,000 was also included in the packet and the cover letter attached to the materials stated that the $7,000 was "as agreed by [plaintiff] with Mr. Hutterli." The reverse side of the check was typed with the following notation: "Draw against future salaries or commissions due from Photo America Corp." The packet of materials contained a direction to plaintiff that he was no longer authorized to use the PAC bank account and a memorandum which stated that after June 1, 1976, all sales "effected by [plaintiff] directly to [his] customers should [be] invoiced with a letterhead reading something like `Harry Ellis Agent for PAC'" and that plaintiff should not use old PAC invoices as he had done in the past.

In mid-June 1976, plaintiff met with Hutterli in Tokyo, at which time Hutterli gave plaintiff a letter dated June 12 which gave plaintiff notice pursuant to the October 20, 1975, employment agreement that plaintiff's employment would be cancelled as of December 31, 1976. According to Hutterli, he informed plaintiff that the third draft of the agency agreement was unacceptable and that PAC would not consider doing business based upon the third draft of the agreement. Hutterli also stated that he and plaintiff discussed the amount of money that plaintiff would receive pursuant to the October 20 employment contract. On July 7, 1976, plaintiff and Hutterli met and again were unable to reach an agreement concerning plaintiff's relationship with PAC. At this meeting, Hutterli informed plaintiff that his employment with PAC was terminated. On July 13, plaintiff received a letter from Hutterli which indicated that plaintiff's employment with PAC was terminated. On August 4, plaintiff submitted a written demand for profits for case I and case IV sales, severance pay and additional salary for October 20, 1975, to May 31, 1976, which was not received by plaintiff.

Subsequently, plaintiff brought this action. PAC raised as an affirmative defense to plaintiff's claim for equitable relief the defense of unclean hands. Defendant argued that plaintiff transferred funds to his corporation for the purpose of "laundering money to be used for the bribery of customers." Following a bench trial, the trial court found as follows: that PAC failed to meet its burden of establishing unclean hands; that the equities in the case were with plaintiff; that plaintiff performed his duties under the October 20, 1975, employment agreement and that PAC breached the agreement in its failure to pay plaintiff the additional salary as set forth in the agreement; and that plaintiff was entitled to recover the reasonable value of his services beginning on June 1, 1976. Accordingly, the court entered judgment for plaintiff in the amount of $110,805.10 which represented $15,307.96 for plaintiff's breach of contract claim and $95,497.14 for plaintiff's claim for quantum meruit relief. Defendant appeals.

• 1 PAC first contends that the trial court erred in its award of equitable relief because plaintiff had "unclean hands." PAC argues that plaintiff's testimony established that plaintiff made payments to the purchasing representatives of various companies in order to obtain the business of those companies. PAC also urges that plaintiff had "unclean hands" because he diverted PAC funds to pay salaries to his sons. PAC maintains that plaintiff also received payments from an advertising agency which was used by PAC. PAC contends that plaintiff's failure to explain the payments received from the advertising agency or the salaries paid to plaintiff's sons through a family owned business called "Beck Associates" raises the presumption that plaintiff was engaged in fraudulent conduct. In support of its arguments, PAC cites Nathan v. Tenna Corp. (7th Cir. 1977), 560 F.2d 761, in which the Seventh Circuit, applying Illinois law, held that the illegal conduct of a sales representative precluded recovery of commissions due on sales.

Plaintiff maintains that the trial court correctly concluded that PAC failed to meet its burden of establishing "unclean hands." Plaintiff argues that in order to establish the equitable defense, PAC must show that there must be some type of fraud or misconduct by plaintiff in connection with the very transaction at issue ...


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