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Quality Components Corporation v. Kel-Keef Enterprises

June 27, 2000

QUALITY COMPONENTS CORPORATION, WILLIAM H. GUCKIEN, AND WALLY STONEHAM,
DEFENDANTS-APPELLANTS- CROSS-APPELLEES,
v.
KEL-KEEF ENTERPRISES, INC., AND ROBERT J. FLECK
PLAINTIFFS-APPELLEES- CROSS-APPELLANTS.



The opinion of the court was delivered by: Justice Gordon

Appeal from the Circuit Court of Cook County.

Honorable Jennifer Duncan-Brice, Judge Presiding.

BACKGROUND FACTS

This litigation is a consolidated action which arose out of a transaction for the sale of a business which sold replacement parts for printing presses. This action consists of two suits, the first one brought in the chancery division by plaintiff Robert Fleck against Quality Components, Wally Stoneham and William Guckien for payment of money owed to him under a non-competition agreement between him and Quality and guaranteed by Stoneham and Guckien, and by plaintiff Kel-Keef for payment on a promissory note between it and Quality and guaranteed by Stoneham and Guckien for the assets of the business which Kel-Keef sold to Quality pursuant to a purchase agreement. The second lawsuit was brought in the law division against Fleck and Kel-Keef by Quality for breach of those same agreements.

At the trial William Stoneham testified for Quality Components Corporation ("QCC II") that he began working for a company known as DEV Industries ("DEV") in 1984 as a salesman. DEV was in the business of selling replacement parts for printing presses. DEV did not manufacture the parts, but kept blueprints numbering in the hundreds or thousands for all of the parts which it sold which it would then job out to machine shops to fabricate the parts which its customers requested. While working at DEV Stoneham became aware of a lawsuit (the "Rockwell I" litigation) that was brought in federal court against DEV by Rockwell Graphics ("Rockwell") which claimed the ownership to certain of these blueprints. In 1988 defendant Robert Fleck ("Fleck") purchased the replacement parts division of DEV (for which Stoneham worked) and named the new company Quality Components Corporation ("QCC I"). Fleck had previously been president of DEV and was one of its four shareholders. Stoneham became an employee of the new company (QCC I) and helped move the drawers of blueprints from DEV to QCC I.

In 1989 Stoneham and William Guckien ("Guckien") began negotiations with Fleck to purchase the assets of QCC I. During the negotiations, Stoneham had several discussions with Fleck regarding the Rockwell I litigation. Fleck told Stoneham that none of the blueprints which QCC I possessed were involved in the Rockwell lawsuit. Stoneham and Guckien set up a corporation (later identified as Components Holdings Inc. ("CHI")) to purchase the assets of QCC I. After it acquired the assets of QCC I, CHI adopted the name of the vendor Quality Components Corporation (QCC II). After the sale of its assets to QCC II, QCC I changed its name to Kel-Keef Enterprises, Inc. ("Kel-Keef").

In 1991 QCC II was joined as a defendant in a lawsuit brought in Cook County circuit court (No. 91 CH 01011) by Rockwell (the "Rockwell II" litigation), which also named DEV and Fleck. The lawsuit was related to the Rockwell I litigation against DEV, alleging that QCC II had blueprints which belonged to Rockwell. There was no list attached to Rockwell's suit papers identifying the blueprints which the lawsuit related to, but Fleck sent Stoneham a list of the blueprints which were at issue in the first lawsuit against DEV from which Stoneham determined that 53 of the blueprints which QCC II had acquired from QCC I were in fact claimed by Rockwell in its lawsuit. QCC II thereupon settled the Rockwell II litigation against it in 1993 pursuant to which QCC II gave up to Rockwell the 53 blueprints which Rockwell claimed from it in that lawsuit. Stoneham further averred that on the advice of their attorney, Stoneham and Guckien decided to stop making payments to Fleck pursuant to the non-competition agreement and to Kel-Keef pursuant to the purchase agreement.

Deborah Ruff testified in rebuttal for QCC II that she is an attorney who represented Rockwell in several lawsuits against Fleck, DEV, QCC II and other parties pursuant to Rockwell's allegations that those parties possessed or misappropriated Rockwell's blueprints. Ruff testified that the first case, Rockwell I, was filed in federal court in 1984 against Fleck and DEV. In 1991 Rockwell initiated the Rockwell II litigation in state court against DEV, Fleck and QCC II. QCC and Rockwell settled the Rockwell II case for $3,300.00. The third Rockwell case (the "Rockwell III" litigation) was filed in federal court in 1992 against Fleck.

It is not in dispute that in 1989 the federal magistrate in the Rockwell I litigation found in favor of Fleck and that decision was later overturned by the Seventh Circuit. The Rockwell I litigation ultimately ended with an injunction being entered against Fleck in 1993. The Rockwell III litigation also ended against Fleck in 1993 when Fleck signed a consent decree to settle the litigation in which he admitted misappropriating trade secrets from Rockwell.

William Guckien testified for QCC II that he and Stoneham purchased the assets of QCC I from Fleck. The purchase included the blueprints for the replacement parts which QCC I sold, and Guckien averred that those blueprints were of critical importance to the business. After QCC II settled the Rockwell II litigation, it was no longer able to use the 53 blueprints which Rockwell had claimed. As a consequence, QCC II could no longer obtain the parts described by those blueprints at competitive prices. Thus, according to Guckien, QCC II was not able to effectively compete with other companies in the replacement parts business and it was resultantly forced to shut down. QCC II ceased making payments owed to Fleck and Kel-Keef on the purchase agreement and the non-competition agreement because Fleck had admitted in a consent decree pursuant to the Rockwell III litigation that he had obtained the blueprints illegally. Fleck and Kel-Keef then sued QCC II in chancery demanding payment pursuant to the purchase and non-competition agreements. QCC II responded by suing Fleck and Kel-Keef at law for breach of contract and fraud.

Mark Bischoff testified for Kel-Keef that he was the attorney who represented Fleck and QCC I during the sale of QCC I's assets to Stoneham and Guckien's company, CHI. Bischoff testified that he told the buyers about the Rockwell I litigation; that Fleck and QCC I did not want to make any representations concerning it; and that they should look into that litigation. Bischoff further stated that the buyers were encouraged to contact the attorneys for Rockwell. At one point in the negotiations, the attorney for the buyers asked for an indemnification agreement which would hold Fleck and DEV responsible for any damages sustained by QCC II as a result of the Rockwell litigation; however, Fleck refused to consent to such an indemnification agreement. Bischoff averred that an attorney for the buyers (CHI) told him that they would "live with the Rockwell situation."

Robert Fleck, the president of Kel-Keef, testified for Kel-Keef. Fleck averred that in 1989 he did not believe that he had misappropriated trade secrets from Rockwell. He further stated that in 1989, on the day of the closing, the magistrate judge in the Rockwell I litigation found in his favor. That ruling was later overturned on appeal, and Fleck identified an injunction which was entered against him pursuant to the Rockwell I litigation on July 26, 1993. Fleck also identified a consent decree which he had signed on December 14, 1993, pursuant to the Rockwell III litigation. In the consent decree Fleck admitted that while he was employed by DEV he utilized misappropriated blueprints and other Rockwell trade secrets for the benefit of DEV.

The transaction for the sale of the assets of QCC I was accomplished through eleven documents, which Stoneham identified. The relevant documents are summarized below. CHI received a purchase agreement, a non-competition agreement and a bill of sale. The Asset Purchase Agreement ("purchase agreement") between QCC I and CHI provides that the assets of QCC I will be sold to CHI in exchange for a total of $160,000 to be paid over five years. Article IV of the purchase agreement is entitled "Representations and Warranties of Seller and of Fleck" and it contains a warranty of title stating that the seller has good, exclusive and marketable title to the sold assets, except as set forth in schedule 4.6 which does not list anything relevant to this appeal. Article IV also states that the seller and Fleck have not knowingly made any statement which contains any untrue statement of material fact or omits a material fact. Article VI is entitled "Post-Closing Matters" and it contains a section entitled "Survival of Representations and Warranties." This section states that the representations and warranties set forth in the agreement will remain in full force and effect and shall survive the closing and the transfer of the assets for two years.

CHI also received a "Non-competition Agreement" which was signed contemporaneously with the purchase agreement and provided that Fleck agreed not to compete with CHI for five years. In consideration for this promise, the agreement provided that CHI would pay $125,000 to Fleck in five annual installments of $25,000 per year.

QCC I received several instruments, of which the relevant documents are summarized below. The "Non Negotiable Promissory Note" provided for CHI to make payments to QCC I totaling $160,000 over five years pursuant to the sale effected by the purchase agreement and the bill of sale. QCC I also received a "Guaranty" which provides that Guckien and Stoneham personally guaranty full and prompt payment of the promissory note and the non-competition agreement by CHI.

QCC I and Fleck also received a letter ("the side letter") from CHI and its president, Stoneham. The letter states that the purchasers of the assets of QCC I have been fully informed about the lawsuit between Rockwell and DEV, and that the purchaser understands that QCC I is "making no representations or warranties with regard to this lawsuit." The letter further states that in the event of any potential claims with regard to the lawsuit each party "shall be responsible for their respective claim."

The initial action in this consolidated case was filed in chancery by Kel-Keef and Fleck against QCC II, Guckien and Stoneham (the "chancery action"). The suit contained six counts. Two counts, III and VI, were dismissed without prejudice before trial and are not relevant to this appeal. In count I Kel-Keef sued QCC II for its alleged breach of the promissory note, and in count II Kel-Keef asked for enforcement of the personal guarantee of the promissory note against Guckien and Stoneham. In count IV Fleck sued QCC II for breach of the non-competition agreement, and in count V Fleck asked for enforcement of the personal guarantee of the non-competition agreement. The suit alleged breach by QCC II of the promissory note, breach of the non-competition agreement, and asked for enforcement of the guaranty as against the individual sureties, and foreclosure on the secured assets. QCC II later filed a separate suit at law (the "suit at law") against Kel-Keef and Fleck arising from QCC II's loss under the Rockwell II litigation. Stoneham and Guckien were not parties to this suit. The suit sought recovery against Kel-Keef and Fleck on four counts. Count III alleged violations of warranties pursuant to the uniform commercial code, and the court granted a directed verdict for Fleck and Kel-Keef on this count during trial. Count IV alleged deceptive business practices and is not involved in this appeal. Count I alleged fraud and it was ultimately submitted to the jury. Count II alleged breach of contract. A directed verdict was granted in favor of Fleck on count II, but count II was submitted to the jury as against Kel-Keef. The two cases were consolidated, and tried simultaneously. The chancery action was tried to the court, and the action at law was tried to the jury.

In the action at law the jury returned a verdict in favor of QCC II and against Kel-Keef on the breach of contract count and a verdict in favor of Kel-Keef and Fleck on the fraud count. The jury awarded QCC II damages of $60,000. In the chancery action the court initially found that Fleck (Kel-Keef) *fn1 had breached the purchase agreement and that the breach was material. QCC II was thus excused from making payments under the purchase agreement and the promissory note. The court found that the non-competition agreement was a separate contract between QCC II and Fleck individually which had not been breached by the promisor, Fleck, and that QCC II was still obligated to make payments pursuant to it. The court directed the parties to submit amended petitions for attorney fees.

Both sides filed motions to reconsider. Kel-Keef argued that QCC II could not receive damages for breach of the purchase agreement and be excused from making further payments under the purchase agreement as that constituted a double recovery for QCC II. Kel-Keef further argued that QCC II had elected the remedy of damages and therefore could not rescind the contract as rescission disaffirms the contract and is thus inconsistent with seeking a remedy of damages which affirms the contract. On reconsideration the court agreed with Kel-Keef's position and entered its final judgment in light of the reconsideration on June 11, 1999. The court entered judgment in the suit at law for QCC II and against Kel-Keef on count II (breach of contract) for $60,000. The court entered judgment for Fleck on count II and for Fleck and Kel-Keef on count I. In the chancery case the court entered judgment on counts I and II in favor of Kel-Keef and against QCC II, Stoneham and Guckien, jointly and severally. The court therefore found that Kel-Keef was entitled to recover for the purchase agreement in its chancery suit subject to a setoff of the jury's award of $60,000 damages in the suit at law and the award of $67,118.87 in attorney fees which the court awarded pursuant to the suit at law. The court therefore found that QCC II was required to pay the remaining balance under the promissory note subject only to the two setoffs. On counts IV and V the court entered judgment in favor of Fleck and against QCC II, Guckien and Stoneham.

This appeal followed. QCC II, Guckien and Stoneham appeal and Kel-Keef and Fleck cross-appeal from the court's entry of final judgment. QCC II argues on appeal that the trial court erred as a matter of law in concluding that QCC II had elected the remedy of damages; that Kel-Keef's material breach of the contract excused QCC II from any further obligation to pay; that the non-competition agreement was part of a single contract for the sale of a business and Kel-Keef's breach of the purchase agreement thus also excuses QCC II from performing under the non-competition agreement; that the trial court abused its discretion by excluding QCC II's proffered expert witness on damages; and that the trial court erred by excluding evidence about a lawsuit which existed at the time of the contract and was not disclosed by Kel-Keef. On cross-appeal, Kel-Keef argues that the trial court erred in not granting its motion for a directed verdict on the breach of contract claim in the case at law; that there was insufficient evidence as to damages; and that QCC II is not entitled to attorney fees or costs.

ANALYSIS *fn2

I. QCC II'S APPEAL

A. ELECTION OF ...


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