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James Janousek, Individually and On Behalf of Bureaus Investment Group, LLC v. Michael Slotky

October 25, 2012

JAMES JANOUSEK, INDIVIDUALLY AND ON BEHALF OF BUREAUS INVESTMENT GROUP, LLC,
PLAINTIFF-APPELLEE,
v.
MICHAEL SLOTKY, BUREAUS INVESTMENT GROUP, LLC, AND BUREAUS INVESTMENT GROUP III, LLC, DEFENDANTS-APPELLANTS (BURTON SLOTKY, DEFENDANT).



Appeal from the Circuit Court of Cook County. No. 09 CH 22216 The Honorable Stuart E. PalmerJudge Presiding.

The opinion of the court was delivered by: Presiding Justice Lavin

PRESIDING JUSTICE LAVIN delivered the judgment of the court. Justices Fitzgerald Smith and Pucinski concurred in the judgment.

OPINION

¶ 1 This case arises from a dispute between members of Bureaus Investment Group, LLC (BIG), a member-managed limited liability company (LLC). James Janousek, the minority (40%) member, essentially contends that the majority members, Michael Slotky and his father Burton Slotky, excluded Janousek from the management of BIG and formed a competing company, Bureaus Investment Group III, LLC (BIG III). Janousek's assertions in the trial court rested on allegations pled in the alternative that he either was, or was not, currently a member of BIG. In contrast, defendants unequivocally maintained in their verified pleadings that Janousek remained a member of BIG. Nonetheless, they objected to certain discovery requests on the basis that the records and communications requested by Janousek were privileged because Janousek had not shown that he was still a member of BIG, and thus, was not entitled to such items. This interlocutory appeal arises from the trial court's order holding certain defendants in civil contempt for refusing to comply with the court's order to disclose those items. On appeal, defendants assert that the trial court erred in requiring them to disclose such documents because they were protected by the attorney-client privilege. We affirm the discovery order and vacate the order holding defendants in contempt.

¶ 2 Janousek, individually and on behalf of BIG, commenced this action against the Slotkys and BIG III on July 7, 2009. Janousek's complaint also sought relief, solely on his own behalf, against BIG in the event that he was found to no longer be a member of BIG. Accordingly, BIG's interests in these proceedings are being represented by two different attorneys: the first being Janousek's attorney, who was retained to file a complaint on behalf of BIG, and the second being the attorney representing BIG as a defendant. In addition, Katten Muchin Rosenman, LLP (Katten), originally represented the Slotkys, BIG III and BIG. On February 17, 2009, however, the trial court found that Katten was disqualified from representing BIG because its dual representation of defendants resulted in a conflict of interest, as BIG (through Janousek) had asserted a claim against the Slotkys and BIG III. An attorney formerly associated with Katten thereafter filed an appearance on BIG's behalf.

¶ 3 Ultimately, on September 13, 2011, Janousek filed a second-amended verified complaint setting forth causes of action for accounting, breach of fiduciary duties, violation of the Illinois Limited Liability Company Act (the Act) (805 ILCS 180/1-1 (West 2010)), breach of contract and fraud. The complaint also sought a declaratory judgment concerning Janousek's status and rights in BIG and injunctive relief. Janousek alleged that in 1999, the Slotkys hired him to be the president of their family's debt collection agency, The Bureaus, Inc. (TBI). In the same year, Janousek and the Slotkys formed BIG for the purpose of investing in portfolios of delinquent debt accounts. Katten filed BIG's articles of organization on March 24, 1999, and drafted BIG's operating agreement, which Janousek and the Slotkys signed on August 1, 1999. Janousek, who had a 40% interest in BIG, managed BIG's accounts through his position as president of TBI.

¶ 4 The complaint alleged that on September 30, 2007, however, the Slotkys signed a resolution on behalf of BIG, giving Michael the sole power to manage BIG. In addition, the complaint pled in the alternative that Janousek either voluntarily dissociated from BIG or that the Slotkys wrongfully dissociated him from BIG on October 1, 2007. Specifically, the complaint alleged that on that date, the Slotkys terminated Janousek's employment at TBI, changed the locks and alarm codes to BIG's business premises and from that day forward, prevented Janousek from exercising his membership rights in BIG, including management rights, voting rights and access to financial information. The complaint also alleged that on that date, Janousek demanded that the Slotkys purchase Janousek's interest in BIG, thereby giving them notice of his express will to withdraw from BIG. The Slotkys demurred. Meanwhile, with assistance from Katten, the Slotkys formed BIG III on October 22, 2007, to invest in portfolios of delinquent debt accounts and began investing in the same month. The complaint further alleged that in contrast, BIG had not purchased any pools of delinquent debt, except to the extent required by prior contracts, since October 1, 2007.

¶ 5 Attached to the complaint was the resolution, signed solely by the Slotkys, that essentially granted Michael the sole authority to conduct BIG's business. Also attached were BIG's articles of organization and its operating agreement. The operating agreement states, among other things, that BIG is member managed and that membership rights include the "right to inspect the Company's books and records," and the "right to participate in the management of and vote on matters coming before the Company." Furthermore, the operating agreement requires that a majority of members keep "complete and accurate books and records of the Company and supporting documentation of the transactions with respect to the conduct of the Company's business" and requires that the books and records "be maintained in accordance with sound accounting principles and practices and shall be available at the Company's principal office for examination by any Member or the Member's duly authorized representative at any and all reasonable times during normal business hours."

¶ 6 As stated, in all of their pleadings that followed, defendants consistently took the firm position that plaintiff was still a member of BIG. Specifically, in September 2011, the Slotkys, BIG III and BIG filed separate verified answers to the second-amended complaint in which they represented that Janousek was currently a member of BIG. In addition, the responses of the Slotkys to Janousek's first set of requests to admit stated that Janousek was still a member of BIG. We further note that while Katten still represented all defendants, they filed a motion to dismiss plaintiff's complaint on the basis that Janousek was still a member of BIG.

¶ 7 On May 10, 2011, BIG, as defendant, moved for the entry of a protective order to prevent the disclosure of materials protected by the attorney-client privilege until Janousek's membership status was conclusively determined. BIG alleged that defendants had submitted joint privilege and redaction logs to Janousek but he subsequently asked the Slotkys to produce certain documents identified on those logs. BIG alleged that it later became involved in their discussion on this matter.

¶ 8 On May 19, 2011, Janousek, individually and on behalf of BIG, filed a motion to compel the Slotkys, BIG III and BIG to produce documents withheld as privileged. Janousek argued, in pertinent part, that communications between the Slotkys and Katten in the scope of BIG's business were not privileged before October 1, 2007, because all defendants maintained that Janousek remained a member of BIG. Thus, he had rights under the Act to manage company business and review any documents generated in the scope of BIG's business during the period of his membership. Janousek also argued that the dual representation doctrine vitiated any possible privileges. Since Katten represented both BIG and its officers in their individual capacity, Janousek argued they not could have a reasonable expectation that their communications regarding BIG's business would be confidential. Specifically, the Slotkys knew that Katten's communications pertained to BIG's business, including insider issues between member managers, as well as the development of BIG III, a competitor of BIG. Accordingly, Janousek argued that as a result of the dual representation, all communications between the Slotkys and Katten leading up to Katten's disqualification on February 17, 2010, were not only discoverable, they were not in any way privileged. In addition, Janousek argued that the Slotkys waived any privileges as to communications between Michael and Katten regarding BIG III when those communications were forwarded to TBI.

¶ 9 Specifically, Janousek argued that, contrary to defendants' assertion, those claims did not remain privileged under the ministerial agent exception because TBI did not facilitate the transmission of the communication itself, but rather, Michael forwarded the communications to TBI and communications ended. Thus, Michael had not sought TBI's assistance in communicating something back to Katten as BIG III's attorney. The motion sought an order compelling defendants to produce all documents listed on their joint privilege log and redaction log, which were attached to the motion. Janousek also filed a response to BIG's motion for the entry of a protective order, incorporating the allegations in his motion to compel.

¶ 10 In response to Janousek's motion to compel, BIG urged the trial court to deny the motion until Janousek's membership status was determined. In the response filed by the Slotkys and BIG III, which has been filed under seal in this court, they similarly urged the court to resolve Janousek's membership status before considering his motion to compel. Both of these pleadings, it bears repeating, would appear to be at odds with defendants' verified answers to the complaints as well as their responses to requests to admit. Defendants also argued that communications between Michael and Katten were protected by the attorney-client privilege and no waiver or exception applied. They further argued that documents forwarded to ministerial agents to facilitate communications are protected by the attorney-client privilege and that an in camera inspection was not warranted. Further pleadings filed by the parties regarding the motion for a protection order and the motion to compel essentially reiterated the same arguments.

ΒΆ 11 At a hearing on the two motions, the court questioned why it could not hold defendants to their position that Janousek remained a member of BIG and noted that Janousek was not the party raising a privilege. In the trial court's written order entered on October 14, 2011, the court found, in pertinent part, that "[p]laintiff's employment was terminated on October 1, 2007, but he remained a minority member." The court also stated, however, that "[p]laintiff was a member of BIG and a part of the control group at least until October 1, 2007[,] and therefore[,] no document or communication containing company business is privileged prior to October 1, 2007." In addition, the court found that as a result of Katten's dual representation of BIG and other defendants, "[d]efendants could not have believed that their communications with Katten would be confidential once they began working adversely to [p]laintiff." The court also found that the ministerial agent exception applies only where the agent acts as the go-between for the client and attorney, but found that here, the communications between Katten and Michael that were forwarded to TBI employees did not request assistance in communicating information back to Katten. Thus, no privilege existed as to those documents. The court granted the motion to compel and denied the motion for a protective order with regard to documents labeled prior to October 1, 2007. The court also granted the motion to compel and denied the motion for a protective order regarding ...


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