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Insureone Independent Insurance Agency, LLC v. James P. Hallberg; William J. Hallberg; Casmira Lens

June 27, 2012

INSUREONE INDEPENDENT INSURANCE AGENCY, LLC; AMERICAN AGENCIES
GENERAL AGENCY, INC.; AND AFFIRMATIVE INSURANCE HOLDINGS, INC., PLAINTIFFS-APPELLANTS AND CROSS-APPELLEES,
v.
JAMES P. HALLBERG; WILLIAM J. HALLBERG; CASMIRA LENS, AS TRUSTEE OF THE JAMES P. HALLBERG 1994 GIFT TRUST; AND CASMIRA LENS, AS TRUSTEE OF THE PATRICIA L. HALLBERG 1994 GIFT TRUST, DEFENDANTS-APPELLEES AND CROSS-APPELLANTS



Appeal from the Circuit Court of Cook County No. 03 CH 20974 Honorable Peter J. Flynn, Judge Presiding.

The opinion of the court was delivered by: Justice Salone

JUSTICE SALONE delivered the judgment of the court with opinion.

Presiding Justice Steele and Justice Murphy concurred in the judgment and opinion.

OPINION

¶1 This is a consolidated appeal from a bench trial conducted in the circuit court of Cook County resolving disputes among the purchasers and sellers of the assets of several insurance companies.

¶2 Plaintiffs, InsureOne Independent Insurance Agency, LLC (New Insure One), American Agencies General Agency, Inc., and Affirmative Insurance Holdings, Inc. (Affirmative),*fn1 purchased the assets of several insurance companies owned or controlled by James P. Hallberg (Hallberg). The trial court entered judgment in favor of the purchasers on their claims that Hallberg, his nephew William Hallberg, and two gift trusts had violated non-competition and nonsolicitation agreements, awarding the purchasers $7,670,210 in damages. The trial court also awarded the purchasers reasonable attorneys fees and costs associated with these claims. The court, however, declined to award prejudgment interest on this amount.

¶3 The trial court also entered judgment in favor of Hallberg on his counterclaim that the purchasers had not paid the full amount due on one component of the purchase price -- known as the "contingent purchase price" (CPP) -- awarding him $130,168 in damages plus prejudgment interest. The court also conditionally awarded Hallberg reasonable attorneys fees and costs in connection with this claim in the event that he can establish that his recovery exceeds five percent of the relevant component of the purchase price.

¶4 In case No. 1-09-2385, the purchasers now appeal from the trial court's decision awarding Hallberg damages on the counterclaim and conditional attorney fees. In addition, plaintiffs also contend that they should have been awarded prejudgment interest on their judgment against defendants for breaching the restrictive covenants. For the reasons that follow, we reverse the judgment of the circuit court on each of these issues. With respect solely to the issue of prejudgment interest on plaintiffs' award, we remand this cause to the circuit court for further proceedings.

¶5 In case No. 1-10-0428, defendant sellers have filed a separate appeal, which has been consolidated with that of the purchasers. The sellers appeal from the trial court's judgment in favor of the purchasers on their non-competition and nonsolicitation claims. For the reasons that follow, we affirm the judgment of the circuit court in all respects.

¶6 BACKGROUND

¶7 In January 2002, plaintiffs purchased from sellers the assets of several insurance companies that were owned or controlled by Hallberg.*fn2 These companies owned a book of nonstandard auto insurance.*fn3 The transaction was governed by a document titled "Asset Purchase Agreement" (APA) and dated January 7, 2002. Pursuant to section 8.1 of the APA, Hallberg agreed not to compete with the purchasers or solicit any of the purchasers' employees or customers for a period of five years.

¶8 The parties' plan was for Hallberg to run the resulting company. The purchasers hired Hallberg as the president of New Insure One pursuant to an employment agreement dated January 16, 2002. Pursuant to section 5.2 of this agreement, Hallberg promised not to compete with or solicit employees or customers of New Insure One both during the period of his employment as president of New Insure One, and for a period following termination of his employment of either one or three years, depending upon the circumstances of his termination. The purchasers retained many of the sellers' former employees, including Hallberg's nephew, William Hallberg, who signed a separate covenant not to compete with, or solicit employees of, New Insure One for 12 months following the termination of his employment.

¶9 However, soon after the transaction closed, Hallberg and the purchasers had several disagreements which made it impossible for them to work together. Hallberg and Affirmative's chief executive officer, Thomas Mangold, disagreed about many aspects of the new company's operations. Among other things, they disagreed about the role Hallberg would play, if any, in calculating that portion of the purchase price known as the "contingent purchase price" (CPP). The APA provided guidelines for the calculation and payment of the CPP, which was to be based on certain percentages of renewal business that New Insure One carried over from Hallberg's former entities, and which was to be finalized more than a year after the closing.

¶10 Because of their disagreements over operating the new company, the parties decided that Hallberg would leave the company. In March 2003, the parties entered into a "Settlement Agreement and Mutual Release" (Settlement Agreement), which was to be effective as of May 7, 2003. The Settlement Agreement states that the parties are "desirous of reconfirming and clarifying the scope of the restrictive covenants contained in Section 5.2 of the Employment Agreement and Section 8.1 of the Asset Purchase Agreement." As stated, those restrictive covenants included Hallberg's non-competition and nonsolicitation agreements. In August 2003, William Hallberg also left plaintiffs' employ and soon thereafter created the Hallberg Insurance Agency.

¶11 On December 16, 2005, plaintiffs filed suit against Hallberg and, inter alia, his nephew, William, and two gift trusts, alleging a number of claims, including breaches of the covenants not to compete and not to solicit employees which were contained in the APA and the employment agreements. Plaintiffs alleged that soon after Hallberg's departure from New Insure One, defendants set up the Hallberg Insurance Agency and other related entities which began competing directly with plaintiffs in their respective markets. Plaintiffs also alleged that Hallberg used the two gift trusts that he controlled to establish these competing businesses while attempting to mask his own involvement and avoid obvious violations of his non-competition and nonsolicitation agreements. Plaintiffs contended that the trusts provided funding to these entities at interest rates significantly below market, and received funding through other Hallberg-controlled entities that could not compete directly with plaintiffs. Plaintiffs also alleged that other Hallberg entities provided office space and services to the competing businesses without any reimbursement. In addition, plaintiffs contended that defendants solicited plaintiffs' employees, recruiting them to work in their competing entities.

¶12 In response, Hallberg filed a verified answer, affirmative defenses and counterclaims to the pleading at issue here: the fifth amended verified complaint for injunctive relief and damages.*fn4 In his counterclaim, Hallberg alleged that plaintiffs materially breached the APA by failing to provide him with accountings and notices related to the CPP, and by failing to pay him the full amount of the CPP.

¶13 The trial court conducted a bench trial on all claims. The record reflects that this trial took place between August 2005 and March 2006, during which more than 20 witnesses testified, several hundred exhibits were offered, and a 3,500-page trial transcript was generated.

¶14 On January 20, 2009, the trial court entered a detailed, 31-page revised memorandum order and judgment, as well as an Illinois Supreme Court Rule 304(a) (eff. Feb. 26, 2010) certification. In the order and judgment, the court found that: (1) Hallberg "intentionally violated APA Art. 8.1(ii) and Employment Agreement, Arts. 5.1 [and] 5.2(ii)"; (2) that "James Hallberg and William Hallberg, as well as others acting at James Hallberg's direction or suggestion, solicited and hired plaintiffs' employees"; and that (3) defendants "hired some 29 former employees of [plaintiffs], 15 before this suit was filed and 14 while this suit was pending."

¶15 The court further found that the evidence established that defendants were liable to plaintiffs for $7,670,210 in damages resulting from their breaches of the various non-competition and nonsolicitation provisions at issue. The court also awarded plaintiffs their reasonable attorney fees and costs relating to these claims, but did not award them pre- or postjudgment interest.

¶16 With respect to Hallberg's counterclaim, the court entered judgment in Hallberg's favor on Count I, which related to the purchasers' payment of the CPP. Noting that the CPP called for "complex calculations," the trial court held that plaintiffs underpaid Hallberg but determined that plaintiffs' miscalculation of this amount and their delay in making these calculations was not intentional. The court awarded Hallberg $130,168 on this claim, plus pre- and postjudgment interest. Further, the court found that Hallberg may be entitled to attorney fees if he ultimately shows that the purchasers underpaid the CPP in an amount exceeding 5% of the total amount of the CPP.

¶17 On February 19, 2009, the parties filed posttrial motions, each requesting that portions of the order and judgment be set aside. Plaintiffs requested that the court reconsider its rulings on Hallberg's CPP counterclaim, its award of pre- and postjudgment interest, and potential attorney fees to Hallberg, as well as its failure to award interest on plaintiff's judgment. The trial court revised the order and judgment to reduce the prejudgment interest award to Hallberg, and to award plaintiffs postjudgment interest. The court denied all other requests for posttrial relief.

¶18 Additional factual background will be provided in the course of the analysis set forth in the Discussion section.

¶19 DISCUSSION

¶20 I. Appeal in Case No. 01-10-042

¶21 Defendants raise three general issues in their appeal. First, they contend that the trial court erred when it held that they were liable for violations of non-competition and nonsolicitation clauses contained within the APA and the employment agreements. Second, defendants assert that the trial court erred when it found that plaintiffs' breaches of the APA were not material. Finally, defendants contend that the trial court erred in awarding damages to plaintiffs. For the following reasons, we reject defendants' contentions.

¶22 A. Were Defendants Liable for Violation of the Non-competition and Nonsolicitation Provisions?

¶23 Pursuant to the provisions of the sale, Hallberg was bound by the non-competition and nonsolicitation covenants contained in section 8.1 of the APA. Section 8.1 states in relevant part:

"[E]ach seller covenants and agrees that, for a period ending on the fifth anniversary of the Closing Date ***, neither it or any of its affiliates will, directly or indirectly, whether as an employer, agent, independent contractor, officer, director, consultant, shareholder, partner, member or otherwise on behalf of any person:

(ii) undertake or carry on, or in any other manner advise or assist any person engaged or interested in, any business that is in any way involved in the production, sale or solicitation of any personal lines of insurance coverages or related items in any of the states listed in Schedule 8.1 (the Territory) or any other business that is in competition with the Business (it being understood by the parties hereto that the Business is not limited to any particular region of the Territory and that such business may be engaged in effectively from any location in the Territory); or

(iii) induce or attempt to persuade any employee or agent of the Business to terminate such employment, agency or business relationship in order to enter into any such relationship on behalf of any other business organization in competition with the business."

Hallberg was further bound by the terms of his employment agreement, which, in article 5.2, generally restates the restrictive covenants quoted above from section 8.1 of the APA.

¶24 William Hallberg was bound by his own separate employment agreement with plaintiffs, entitled "Covenant Not to Compete or Solicit Business," which states in pertinent part:

"For a period of twelve (12) months following his or her termination from the Companies, Employee will not, directly or indirectly:

Participate or be engaged in any manner, in the solicitation of, or acceptance of business from any policyholder for the purpose of producing or brokering, financing or offering any advice with respect to, any insurance products, with respect to any line, class or type of insurance, regardless of whether receiving compensation in connection therewith; or

Perform any act or make any statement which would tend to divert from the companies any trade or business with any customer *** to whom Employee previously sold insurance offered by or through the Companies; or Induce or attempt to persuade any employee or agent of the companies to terminate such employment, agency or business relationship in order to enter into any such relationship on behalf of any other business organization in competition with the Companies."

¶25 The trial court found that despite these agreements, Hallberg, his nephew William, and the gift trusts engaged in a deliberate "pattern of conduct" designed to "recapture from the plaintiffs the very business [Hallberg] sold to them." The court determined that the evidence established that Hallberg "plainly used the Gift Trusts to fund William Hallberg and others who he knew were competing with plaintiffs for business plaintiffs had acquired in the APA," and further found that Hallberg's "repeated denial that he controlled the Gift Trusts was completely without credibility; indeed, ultimately defendants acknowledged that [Hallberg] did control the Gift Trusts." (Emphasis in original) The court explained:

"[T]he Gift Trusts were used precisely in order to mask Mr. Hallberg's involvement (though the masks were not very good.) *** That happened in two ways: First, a manifestly Hallberg entity *** which could not itself fund businesses competing with plaintiffs, instead funded the Gift Trusts, which then funded the competing businesses. Second, the Gift Trusts themselves used other entities which the Gift Trusts control *** as vehicles for assisting businesses competing with plaintiffs (typically by providing office space, office resources, and personnel, rather than money, per se)."

¶26 The court held that throughout the trial, "[p]laintiffs established th[is] point again and again," and stated that "defendants' denials, in the face of the evidence, served to undercut their credibility." The trial court thus found that "Hallberg, with the knowing and active participation of William Hallberg and the Gift Trusts *** intentionally violated" APA article 8.1 and article 5.2 of the employment agreement by helping others to compete with plaintiffs.

¶27 With respect to the separate issue of whether defendants breached the covenants not to solicit and hire plaintiffs' employees, the trial court found that "James Hallberg and William Hallberg, as well as others acting at James Hallberg's direction or suggestion, solicited and hired plaintiffs' employees." This conclusion was based on the trial court's finding that William Hallberg created a new insurance agency--the Hallberg Insurance Agency--almost immediately after leaving plaintiffs' employ with a "conscious 'game plan' to identify and hire 'top producers' from plaintiffs, on behalf of Hallberg-funded entities and "for the purpose of competing with plaintiffs." The court also noted the trial testimony of Anthony Strimel, a vice president of Hallberg Insurance Agency, who acknowledged that "by far the majority of agents at Hallberg Insurance Agency are former agents of InsureOne" and that they were persons "perceived to be top agents, high-quality people." The court found that the evidence established that defendants hired 29 former employees of plaintiffs, 15 before this suit was filed and 14 while the suit was pending.

¶28 In their appeal, defendants do not contest these findings of the trial court, including those regarding their intent. Instead, they generally contend that the trial court's judgment that they breached the restrictive covenants should be reversed because plaintiffs themselves breached the APA with respect to payments to be made to Hallberg under the CPP. Defendants point to the trial court's ruling on Hallberg's counterclaim that he was entitled to $130,168 from plaintiffs due to their miscalculation of the CPP, and argue that because plaintiffs themselves violated provisions of the APA with respect to the calculation and payment of the CPP, plaintiffs are barred from recovering for defendants' breaches of that same agreement. Defendants also contend that plaintiffs' breaches of the APA were material and that the trial court erred in holding otherwise. In addition, defendants also contend that they did not breach the nonsolicitation covenants; that they should not be held jointly and severally liable; and that the restrictive covenants were not enforceable. We reject each of defendants' contentions.

¶29 As an initial matter, we note that a trial court's holding that restrictive covenants are enforceable is reviewed de novo. Mohanty v. St. John Heart Clinic, S.C., 225 Ill. 2d 52, 63 (2006). However, a trial court's finding that parties have committed a breach of a restrictive covenant must be upheld unless it is against the manifest weight of the evidence. Amalgamated Bank of Chicago v. Kalmus & Associates, Inc., 318 Ill. App. 3d 648, 655 (2000). A trial court's finding is against the manifest weight of the evidence only where the "opposite conclusion is clearly evident." In re Estate of Wilson, 238 Ill. 2d 519, 570 (2010). Thus, "[i]f the record contains any evidence to support the trial court's judgment, the judgment should be affirmed." Id. It is well-settled that findings of the trial court "must be given deference because the trial court has the opportunity to view and evaluate witnesses' testimony and is, therefore, in the best position to evaluate their credibility." Quality Components Corp. v. Kel-Keef Enterprises, Inc., 316 Ill. App. 3d 998, 1012 (2000).

¶30 1. Strict v. Substantial Performance of Contract Terms

¶31 Defendants contend that any breach they may have committed of the restrictive covenants contained within the APA is excused unless plaintiffs prove that their own performance was "in strict accordance" with the APA. Relying upon the 1958 decision in Archibald v. Board of Education of City of Chicago, 19 Ill. App. 2d 554, 561 (1958), defendants argue that if plaintiffs failed to perform any condition under the APA, no matter how small, they cannot recover for any breach of that agreement by defendants. Defendants are mistaken.

¶32 The concept relied upon by defendants that a contract plaintiff must prove his own literal or strict performance of the terms of the contract has long been repudiated by our courts. "Under the common law, one seeking recovery on a contract, had to prove literal performance of his promises in order to hold the opposite party to his promise to pay." (Internal quotation marks omitted.) Watson Lumber Co. v. Mouser, 30 Ill. App. 3d 100, 104 (1975). However, because this rule produced unduly harsh results, it was replaced by a new "rule in Equity, that if the [defendant] got substantially the thing for which he bargained," he would be held to his contractual obligations. (Internal quotation marks omitted.) Id.

¶33 Accordingly, a party suing for breach of contract need only allege and prove that "he has substantially complied with all the material terms of the agreement." George F. Mu eller & Sons, Inc. v. Northern Illinois Gas Co., 32 Ill. App. 3d 249, 254 (1975). Thus, "[a] partial breach by one party *** does not justify the other party's subsequent failure to perform; both parties may be guilty of breaches, each having a right to damages." (Internal quotation marks omitted.) Israel v. National Canada Corp., 276 Ill. App. 3d 454, 460 (1995). Only a material breach of a contract provision will justify nonperformance by the other party. Id. at 461.

ΒΆ34 Accordingly, defendants' argument that plaintiffs must prove their own literal or strict performance of the terms of the ...


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