APPEAL FROM THE CIRCUIT COURT OF COOK COUNTY. No. 94 CH 6157. THE HONORABLE LORETTA C. DOUGLAS, JUDGE PRESIDING.
Released for Publication August 5, 1997.
Presiding Justice Cousins delivered the opinion of the court. Leavitt and Cahill, JJ., concur.
The opinion of the court was delivered by: Cousins
PRESIDING JUSTICE COUSINS delivered the opinion of the court:
Plaintiff, Bill Doherty filed a complaint against defendants, Peter Kahn (Kahn), Patrick Driscoll (Driscoll), Jeff Randall (Randall), Robert Modder (Modder), and Glen Regal Landscaping. The 12-count complaint alleged that plaintiff owned a landscaping business and the defendants offered plaintiff the opportunity to form a new landscaping business with defendants, called Glen Regal Landscaping. The complaint alleged, inter alia, that, in exchange for plaintiff's employees, his landscaping equipment, as well as his existing accounts, plaintiff would become president of the new company, be awarded 65% of the stock, and paid $5,000 per month. The complaint further alleged that, although plaintiff accepted the offer and performed his obligation under the agreement, he only received $2,000 or $3,000 a month. Defendants also reduced his stock to 25% and decided in a meeting that plaintiff would no longer be president of the company. Moreover, the complaint alleged that defendants terminated plaintiff because he refused to engage in illegal activity. After his termination, plaintiff was unable to secure work because defendants had defamed him to the clients and had refused to return plaintiff's equipment. Plaintiff alleged that, because of defendants' actions, he has continued to lose income, business, and revenue, and he has suffered severe and intense emotional distress. Defendants filed motions to dismiss the complaint pursuant to sections 2-615 and 2-619 of the Code of Civil Procedure (Code)(735 ILCS 5/2-615, 2-619 (West 1992)), which the trial court granted. On appeal, plaintiff contends that the trial court erred in dismissing his actions for: (1) securities fraud; (2) defamation; (3) tortious interference with contract and/or prospective economic advantage; (4) back pay based on the Illinois Wage Payment and Collection Act (820 ILCS 115/1 et seq. (West 1992)); (5) retaliatory discharge; (6) breach of fiduciary duties; (7) breach of contract; (8) fraud; (9) conversion; (10) damages under the Illinois Consumer Fraud and Deceptive Business Practices Act (Consumer Fraud Act) (815 ILCS 505/1 et seq. (West 1992)); and (11) intentional infliction of emotional distress. The trial court did not dismiss plaintiff's breach of employment contract claim; therefore, it is not a part of the appeal.
Plaintiff alleged in his second amended complaint that, for several years prior to May 1993, he ran his own landscaping company, Doherty Landscaping. In early 1993, plaintiff was approached by Kahn and Driscoll, both of whom who ran (and continue to run) a property management company called Creative Property Management (Creative). Kahn and Driscoll told plaintiff that Creative managed several townhome and condominium associations and that they contracted with outside landscapers to landscape the grounds of those townhome and condominium associations. They further told plaintiff that they thought it would be a profitable endeavor to bring landscaping "in house" and to form their own landscaping company to service the associations managed by Creative.
Plaintiff also alleged that Kahn and Driscoll asked plaintiff to join them and explained that they would handle all the "financial and administrative details" so that plaintiff could focus on the client development, sales and operations. They also told plaintiff he would be the "President" of the company and own 65% of the stock (Kahn, Driscoll, and Modder would split the remaining 35% of the stock). Plaintiff was to be paid $5,000 per month salary. In exchange for these promises, plaintiff agreed to this arrangement and became a part of the new company, called Glen Regal.
Plaintiff brought his existing staff, all his landscaping equipment, as well as his main client, Gatewood Condominium Association, to the new company, Glen Regal. Several of the associations managed by Creative were landscaped by plaintiff in his capacity as the president of Glen Regal, including those known as Dunbar, Westlake, Copper Oaks and Sarah's Grove. Plaintiff alleged that, by October 1993, he was not receiving the $5,000-per-month salary he had been promised, but was receiving only $2,000 or $3,000. Plaintiff made repeated demands for his back pay and was repeatedly promised by defendants that he would receive the money.
In approximately March 1994, Kahn and Driscoll held a board of directors meeting at which they decided to reduce plaintiff's stock ownership to 25%, voted him out as the president of the company, and revoked his check-signing privileges on behalf of Glen Regal. Plaintiff never consented to any of these decisions.
Plaintiff further alleged that, in April 1994, defendants asked him to assist Glen Regal in violating a covenant not to compete with Glass Landscaping (Glass). Jeff Randall was a former employee of Glass. Upon leaving Glass, Randall was sued pursuant to a covenant not to compete with Glass. Randall then became an officer of Glen Regal. Pursuant to the covenant with Glass, however, Randall could not solicit landscaping clients within 10 miles of the city limits of Rozelle, Illinois, for the next three years. The terms of this covenant extended to Glen Regal. Kahn and Randall approached plaintiff and told him that he should perform the landscaping at various locations and townhomes that were within 10 miles of Rozelle and, therefore, subject to Randall's covenant not to compete with Glass. The rationale, as explained by Kahn and Randall, was that plaintiff would not be recognized by anybody and they would never know that Glen Regal was doing the landscaping in violation of the covenant. Plaintiff was instructed to use unmarked trucks, and, if asked who he was, plaintiff was to say he was with "Palatine Enterprises" or make up some similar name.
Plaintiff alleged that he refused to engage in these illegal and improper efforts to circumvent the covenant. When he told defendants he would not engage in such a conspiracy to violate the law, he was told that he was "not a team player," that he was "stupid," and that he was costing Glen Regal over $70,000.
Shortly thereafter, in May 1994, plaintiff was locked out of the yard, which was the location where Glen Regal kept all its landscaping equipment. Glen Regal refused to return to plaintiff any of the landscaping equipment locked in the yard, which he had brought to the company as part of his agreement to join up with defendants. Moreover, plaintiff alleged that he was no longer being paid. Glen Regal also "kept" the staff plaintiff brought to Glen Regal (and because plaintiff did not possess any landscaping equipment or a company, the staff stayed with Glen Regal).
Plaintiff also alleged that, when the members of the board of directors of the Sarah's Grove and Dunbar associations asked where plaintiff was, and indicated they wanted to "go" with plaintiff, Kahn and Driscoll said that he was fired because, among other things, plaintiff was "lazy," "incompetent," and "could not do his job or what was expected of him."
Plaintiff alleged that he lost Gatewood, the client he originally brought with him to Glen Regal, because he could not perform mowing and landscaping services as a result of being unable to access any of his equipment. He also alleged that the Sarah's Grove association had decided they wanted plaintiff to continue performing landscaping services for them, and they even sent a letter to Glen Regal stating that they were terminating Glen Regal pursuant to the 30-day termination clause in their contract. Plaintiff, however, was unable to perform the Sarah's Grove job because he lacked equipment and, because he was not being paid, he did not have the money to buy new equipment.
Plaintiff further alleged that he was supposed to sign a $900,000 contract with another association, but because he didn't have any staff or equipment, he was unable to sign the contract and lost a total of $200,000 in profits over the next three years. Plaintiff alleged that he continues to lose income, business and revenue as a result of the fact that he must turn away business because defendants illegally retained his landscaping equipment. Plaintiff alleged that, as a result of defendants' actions, he suffered severe and intense emotional distress.
Defendants filed a motion to dismiss plaintiff's second amended complaint pursuant to sections 2-615 (735 ILCS 5/2-615 (West 1992)) and 2-619 (735 ILCS 5/2-619 (West 1992)) of the Illinois Code of Civil Procedure. Following oral argument on defendants' motion to dismiss, the trial court found as follows: counts I (violation of securities fraud), II (defamation), V (violation of Illinois Wage Payment and Collection Act (820 ILCS 115/1 et seq. (West 1992)), VI (retaliatory discharge), X (conversion), XI (violation of Consumer Fraud Act (815 ILCS 505/2 et seq. (West 1992)) and XII (intentional infliction of emotional distress) were dismissed with prejudice as to all defendants; counts VII (breach of fiduciary duty), VIII (breach of contract) and IX (fraud) were dismissed with prejudice as to Randall and Modder and without prejudice as to the remaining defendants; count III (interference with contract and prospective economic advantage) was dismissed without prejudice; and count IV (breach of employment contract) was not dismissed.
Plaintiff was given until February 20, 1996, to replead those counts that were dismissed without prejudice. On February 20, 1996, plaintiff voluntarily dismissed count IV, decided not to replead those counts that were dismissed without prejudice, and elected to stand on counts III, VII, VIII and IX as pled in the second amended complaint. Accordingly, the dismissals of counts III, VII, VIII and IX were converted to "with prejudice" and a final order was entered on February 20, 1996, disposing of all counts as to all defendants. No post-judgment motions were filed. Plaintiff appeals.
In considering a motion to dismiss, a reviewing court must accept as true all well-pleaded facts alleged in the complaint and all reasonable inferences that can be drawn from those facts. Wieseman v. Kienstra, Inc., 237 Ill. App. 3d 721, 722, 604 N.E.2d 1126, 178 Ill. Dec. 603 (1992); Eisenbach v. Esformes, 221 Ill. App. 3d 440, 442, 582 N.E.2d 196, 163 Ill. Dec. 930 (1991). The granting of a motion to dismiss is within the trial court's sound discretion and will not be reversed unless that discretion is abused. Eisenbach, 221 Ill. App. 3d at 442.
Plaintiff first contends that he stated a cause of action for securities fraud pursuant to sections 12(F), (G), and (I) of the Illinois Securities Law of 1953 (the Securities Act)(815 ILCS 5/12(F), (G), (I)(West 1992)) against Kahn, Driscoll, Modder, and Glen Regal. These sections state:
"It shall be a violation of the provisions of this Act for any person:
F. To engage in any transaction, practice or course of business in connection with the sale or purchase of securities which works or tends to work a fraud or deceit upon the purchaser or seller thereof.
G. To obtain money or property through the sale of securities by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.
I. To employ any device, scheme or artifice to defraud in connection with the sale or purchase of any security, directly or indirectly." 815 ILCS 5/12(F), (G), (I)(West 1992).
Defendants argue that the trial court properly dismissed this claim because the transaction upon which plaintiff based his cause of action was not the sale of a security. Defendants also argue that, as an affirmative matter, section 8-319 of the Uniform Commercial Code (the UCC)(810 ILCS 5/8-319 (West 1992)) bars plaintiff's claim under the Securities Act. We will first address whether the Securities Act applies to the instant action.
The Illinois Securities Law of 1953 defines "security" as:
"any note, stock, treasury stock ***, or, in general, any interest or instrument commonly known as a 'security', or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing." 815 ILCS 5/2.1 (West 1992).
In determining whether an instrument or a transaction is a security under the statute, form is not to be regarded over substance. Boatmen's Bank v. Durham, 203 Ill. App. 3d 921, 927, 561 N.E.2d 206, 148 Ill. Dec. 900 (1990). The substance of the transaction, the relationship between the parties, and economic reality determine whether a transaction involves a security and whether a purchaser is entitled to protection afforded by registering or reporting an instrument pursuant to the securities laws. Boatmen's Bank, 203 Ill. App. 3d at 927.
Furthermore, both the Illinois and the federal courts have emphasized that a security within the meaning of the securities laws is a contract, transaction or scheme whereby one person invests his money in a common enterprise on the theory that he expects to receive profits solely from the efforts of others. Boatmen's Bank, 203 Ill. App. 3d at 927; see Sire Plan Portfolios, Inc. v. Carpentier, 8 Ill. App. 2d 354, 357, 132 N.E.2d 78 (1956); Securities & Exchange Comm'n v. Howey Co., 328 U.S. 293, 301, 90 L. Ed. 1244, 1251, 66 S. Ct. 1100, 1104 (1946). In Polikoff v. Levy, 55 Ill. App. 2d 229, 204 N.E.2d 807 (1965), the court stated:
"The reason for excluding from the scope of the securities laws those transactions in which the profits do not come solely from the efforts of others is clear. In such situations, the member of the enterprise pools his money with that of others in the group; he has an equal right of control over the project and the opportunity and right to know what is going on. Because of this, the protection of the full disclosure offered by registration is not needed as it is in cases involving a nonparticipating investor." Polikoff, 55 Ill. App. 2d at 234.
We believe that Condux v. Neldon, 83 Ill. App. 3d 575, 404 N.E.2d 523, 39 Ill. Dec. 139 (1980), is instructive. In Condux, the defendant owned all the stock of a retail business. He sold the business to two plaintiffs, who took the business and operated it for over two years. Dissatisfied with the results, they sued to rescind the sale, claiming it was a sale of unregistered securities, in violation of the Illinois Securities Law of 1953. The court held that the transaction did not constitute the sale of securities. In particular, the court stated:
"The sale of stock to a buyer or small group of affiliated buyers who are to share in the control and management of the corporation, whether personally or through a nominee independent of the seller, is not a sale of securities. Such a transaction is no more than the outright sale of the business, as here, or, if the seller retains a part interest, the creation of a partnership in corporate form. ...