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11/06/96 KLEINWORT BENSON NORTH AMERICA v. QUANTUM

November 6, 1996

KLEINWORT BENSON NORTH AMERICA, INC., PLAINTIFF-APPELLEE,
v.
QUANTUM FINANCIAL SERVICES, INC., DEFENDANT-APPELLANT. QUANTUM FINANCIAL SERVICES, INC., COUNTERPLAINTIFF-APPELLANT, V. KLEINWORT BENSON NORTH AMERICA, INC., KLEINWORT BENSON LTD., AND MARCUS HUTCHINS, COUNTERDEFENDANTS-APPELLEES.



Appeal from the Circuit Court of Cook County. No. 92 CH 7876 (Transferred to Law). The Honorable David Lichtenstein, Judge Presiding.

Released for Publication December 22, 1996.

Presiding Justice Hartman delivered the opinion of the court. Scariano and DiVITO, JJ., concur.

The opinion of the court was delivered by: Hartman

PRESIDING JUSTICE HARTMAN delivered the opinion of the court:

Claiming the existence of genuine, material issues of fact, counterplaintiff Quantum Financial Services, Inc. (Quantum) *fn1 appeals the grant of summary judgment in favor of counterdefendants Kleinwort Benson North America, Inc., Kleinwort Benson Ltd., (collectively, Kleinwort) and Marcus Hutchins on two counts of Quantum's counterclaims. Quantum also appeals from the order dismissing the remaining counts of Quantum's counterclaims as moot, as well as an earlier ruling of the circuit court dismissing its counterclaim for rescission.

Quantum questions whether the circuit court correctly ruled as a matter of law that (1) Kleinwort's alleged misrepresentations were immaterial; (2) Quantum sustained no damage from Kleinwort's alleged fraud and breach of contract; and (3) Quantum's claim for rescission was improperly dismissed.

The documents filed in support of and in opposition to Kleinwort's summary judgment motion, read most strictly against Kleinwort and most liberally in favor of Quantum, ( Purtill v. Hess, 111 Ill. 2d 229, 240, 489 N.E.2d 867, 95 Ill. Dec. 305 (1986)), reveal the following facts.

Quantum, a futures commissions merchant, provided trade clearing and execution services for its futures exchange clients. In 1991, it decided to expand its client base to include institutional clients, such as banks. Virginia Trading Corporation (VTC) was identified to it as a company having such business. VTC was wholly owned by Kleinwort. In the business community, VTC was known to service "high profile institutional accounts." After Quantum contacted Kleinwort about acquiring VTC, the parties began negotiating.

In April 1991, in the midst of negotiations for the VTC purchase, Kleinwort disclosed to Quantum information about VTC in a confidential five-page memorandum entitled "Project Troy." The introduction to Project Troy stated that "Quantum *** has approached Kleinwort *** to express its interest in acquiring the brokerage division of its wholly-owned subsidiary, Virginia Trading Corporation . In connection with this proposal, Kleinwort *** is hereby providing certain information on the brokerage division." Project Troy provided a "Statement of Income" and a "Schedule of Membership Seats."

A portion of the report discussed VTC's workforce. The Project Troy memorandum stated that:

"VTC employs 50 individuals in its brokerage division. A seasoned six-man marketing team with over 50 years of combined industry experience leads the brokerage sales effort. VTC's execution is acknowledged to be among the best in the industry. Exchange floor locations are staffed by experienced personnel, totalling 27." (Emphasis added.)

On May 31, 1991, one month after Quantum received the Project Troy memorandum, Quantum offered to purchase VTC by buying 100% of VTC's outstanding stock for approximately $6 million in cash and commissions. Kleinwort accepted Quantum's offer and the parties executed a "Stock Purchase and Brokerage Agreement" (Agreement) on June 30, 1991. The Agreement provided that the closing for the sale would be at 10 a.m. on July 31, 1991.

During the course of Quantum's pre-purchase investigation, Quantum's then chairman, Leslie Rosenthal, asserted that if it were not for VTC's "impressive institutional client base," Quantum would not be interested in purchasing VTC. Kleinwort disclosed to Quantum the identity of the individuals who made up VTC's "seasoned six-man marketing team" to which it referred in the Project Troy Memorandum. Quantum alleged that this marketing team constituted an important component of the premium over book value of assets that Quantum was willing to pay for VTC because it needed a viable institutional sales force in order to maintain and increase the type of institutional client base it sought to purchase.

After the Agreement was signed, Kleinwort gave Quantum copies of VTC's employment agreements with each of its six "seasoned" salespersons. These documents listed the accounts for which the individual salesperson received commissions. Quantum believed that the salespersons had personal relationships with the clients listed in their employment agreements and that the salespersons received commissions on the clients' trades because of their activities involving the client.

These employment agreements were listed as "material contracts" under the Agreement. The terms of the Agreement included Kleinwort's representation that "under the heading 'Material Contracts,' the Seller Disclosure Schedule contains a listing or description of all material business contracts to which VTC *** will be a party." The Agreement also stated that "each such contract is in full force and effect in all material respects" and would remain so at the time of the closing. Kleinwort explicitly acknowledged in the Agreement that it made these representations about the "material contracts" as a "material inducement" to Quantum to enter into the Agreement and consummate the purchase of VTC.

Only three members of VTC's above mentioned "seasoned six-man marketing team" actually handled a "significant" amount of institutional business: Edward Boehm, John Legittino, and David Gibbs. Due to unfavorable reports Quantum obtained from Marcus Hutchins, VTC's chief executive officer, concerning Boehm, Quantum bought out Boehm's employment contract for $112,903. Legittino, who supervised one of VTC's largest accounts, "Nippon," and received a large percentage of resultant commissions, left VTC two weeks before the closing date of the Agreement, taking the Nippon account with him.

Of the three experienced employees handling a significant amount of VTC's business then, only David Gibbs remained prior to the closing. According to his employment letter, Gibbs was responsible for, and received commissions on, some of VTC's biggest and most prominent institutional clients: NCNB, First Union Corp., Dominion Bank, Mellon Bank and Norwest. Two of these accounts were among the six named "large [institutional] accounts" listed by Kleinwort in its Project Troy disclosures to Quantum. Gibbs also had responsibility for soliciting new accounts and developing further business with his existing accounts.

In June or July of 1991, Gerald Laurain, Quantum's institutional sales manager, met with Gibbs to discuss Quantum's plans and Gibbs' prospective new role within Quantum. Laurain asked Gibbs many questions about Gibbs' clients, including the names of the "key players," when Gibbs last saw these players, and when Laurain and Gibbs should schedule visits with them to discuss Quantum's acquisition of VTC. Gibbs did not then tell Laurain that he was considering leaving VTC or that he was leaving VTC.

Nevertheless, Quantum heard a rumor that Gibbs was considering leaving VTC and immediately made inquiries to Kleinwort. At that point, Quantum was concerned that if Gibbs left, it no longer would be purchasing an institutional sales force to service the client base. Quantum attempted to speak with Gibbs, but could not locate him because he was on vacation and "incommunicado" from July 8 to July 29.

As the closing date approached, Quantum grew more concerned about the status of Gibbs. Rosenthal sought specific assurances from Hutchins by asking him if Gibbs was leaving VTC. According to Rosenthal, Hutchins alleviated his concerns by stating that "given Gibbs' history, there's absolutely no way that he would ever pick up and leave because [Hutchins] was basically responsible for the education and experience and value-added *** services that Gibbs provided to anybody, and in fact Gibbs would not think of leaving [VTC's] employ if [Hutchins] told him not to." Hutchins allegedly was asked to inform Quantum if anything happened with Gibbs because Quantum believed that Gibbs was responsible for a meaningful portion of VTC's institutional client base. Hutchins was advised that the structure of the deal would be dramatically altered if, after Legittino left, Gibbs also left.

Unknown to Quantum, during the time Gibbs was on vacation, he was meeting with high-ranking officers from Barclays de Zoehe Wedd Securities ("BZW") about possible employment in its newly formed futures commission organization. Gibbs met with BZW's managing director, institutional sales manager, and three executive directors. Gibbs told the BZW officers that he possibly could bring clients with him from VTC to BZW. Gibbs also represented to BZW that he had positive relationships with his clients and that he helped develop VTC's business with several large banks. BZW then offered Gibbs a job as an institutional salesperson, starting August 5, 1991.

On July 29, two days before the scheduled July 31 closing of Kleinwort's VTC sale to Quantum, Gibbs returned from vacation and went to VTC's offices to resign. Gibbs told Hutchins of his job offer, and stated that he wanted to resign, effective immediately, while Kleinwort still owned VTC. Instead of accepting his resignation that day as Gibbs requested, Hutchins asked Gibbs to return on the afternoon of Wednesday, July 31, the day of the closing, and then resign. Gibbs replied that he would make an official statement of resignation on the morning of July 31, instead of the afternoon, because he understood (mistakenly) that the closing of the sale to Quantum would take place at noon. Gibbs in fact tendered his official resignation from VTC to Hutchins before noon on July 31, 1991.

On the date of the closing, rumors continued to circulate regarding Gibbs' employment status at VTC. Laurain again sought to ascertain the facts, but could not locate Gibbs. Laurain talked to Hutchins. Despite the fact that Gibbs already had resigned, Hutchins lied and told Laurain he did not think that Gibbs was leaving. Instead, Hutchins responded ...


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