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ICD Publs., Inc. v. Gittlitz

Court of Appeals of Illinois, First District, First Division

December 29, 2014

ICD PUBLICATIONS, INC., Plaintiff and Counterdefendant-Appellee,
v.
IAN GITTLITZ, Defendant and Counterplaintiff-Appellant, IAN GITTLITZ, individually and derivatively, on behalf of ICD PUBLICATIONS, INC., Plaintiff-Appellant,
v.
CYNTHIA EVANS and DAVID PALCEK, Defendants-Appellees

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As Corrected.

Appeal from the Circuit Court of Cook County. Nos. 07 L 06836, 08 CH 40858 . Honorable Patrick J. Sherlock, Judge Presiding.

Ian Gittlitz, Appellant, Pro se, Stony Brook, NY.

For Appellee: Jonathan S. Feld, Mark J. Magyar, John F. Rhoades, of counsel, Dykema Gossett, PLLC, Chicago, IL.

JUSTICE CUNNINGHAM delivered the judgment of the court, with opinion. Presiding Justice Delort and Justice Harris concurred in the judgment and opinion.

OPINION

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CUNNINGHAM, JUSTICE.

[¶1] Ian Gittlitz appeals from a September 27, 2013 order of the circuit court of Cook County following a bench trial in which the court entered judgment in favor of ICD Publications, Inc. (ICD), in the amount of $9,791,840 based upon Gittlitz's breach of fiduciary duty and fraud. Gittlitz also appeals from the dismissal of his affirmative defenses and his claims against ICD alleging unjust enrichment and denial of his right to inspect ICD's corporate books and records following his termination from the company.

[¶2] BACKGROUND

[¶3] ICD, an Illinois corporation which produced trade publications for the housewares industry, was founded in 1989 by Gittlitz, Cyndi Evans, and David Palcek, all of whom owned the company in equal one-third shares. Until 2007, Gittlitz served as ICD's president and chief executive officer, and Gittlitz's wife, Ellen, was employed as ICD's administrative manager. Evans and Palcek were each senior vice presidents of the corporation; Evans was also ICD's corporate secretary.

[¶4] ICD had two main offices, one on Long Island, New York, and another in

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Illinois. Gittlitz and his wife worked at the New York office, where ICD's financial records were maintained. As administrative manager, Ellen Gittlitz paid ICD's bills from ICD's checking account. ICD also maintained an American Express credit card for business expenses; credit card bills were sent to ICD's New York office and were paid through ICD's checking account. Gittlitz was the only shareholder of the three who carried an ICD corporate credit card. Evans and Palcek worked out of ICD's office in Lincolnshire, Illinois, and did not have immediate access to ICD's checkbook, bank account or credit card records.

[¶5] From at least 2001 until his termination from ICD in 2007, Gittlitz engaged in a fraudulent practice of submitting improper expense reports seeking reimbursement for business-related expenses that he falsely claimed to have incurred. In these instances, Gittlitz charged certain expenses to the ICD corporate credit card account, which were then paid for by ICD directly. Nevertheless, Gittlitz also submitted reports of these same expenses to ICD as if he had personally paid them. Through this practice of " double dipping," Gittlitz received improper " reimbursement" payments from ICD for expenses that he had not paid in the first place.

[¶6] Apart from his expense report fraud, Gittlitz engaged in another form of embezzlement from at least October 2000 to 2007. Specifically, Gittlitz used ICD's checking account to write himself checks, including many labeled as " advances," for which he never repaid the company. Although ICD shareholders were permitted to take " advances" if they were later credited against actual, legitimate business expenses, Gittlitz simply took such " advances" for his own benefit.

[¶7] Gittlitz's business partners, Evans and Palcek, became suspicious of his activities in early 2007. In late January or early February 2007, Evans was reviewing an expense report submitted by Gittlitz. Coincidentally, at the same time Evans was reviewing a hotel reservation confirmation for an upcoming business-related event. Evans noticed that the last four digits of the ICD corporate credit card number on her hotel reservation matched the last four digits of the credit card number on a receipt submitted by Gittlitz for reimbursement. Evans became suspicious that Gittlitz was submitting expense reports for reimbursement of costs that had been paid through ICD's credit card.

[¶8] After Evans showed the documents to Palcek, they planned a meeting with Gittlitz on April 10, 2007 in Chicago. At that meeting, Palcek and Evans did not tell Gittlitz that they suspected him of committing fraud, but presented him with a letter in which they stated they were " no longer comfortable without having an internal financial reporting process in place with equal access to all information." In the letter, they requested " to be better informed of the company's financial standing *** and that a true and transparent checks and balance process be initiated." At the meeting, Evans and Palcek requested that Gittlitz provide them with ICD bank and credit card statements for the prior year. Gittlitz responded that it would be burdensome to provide the previous 12 months' worth of statements, but agreed to provide records for the two-month period of January and February 2007.

[¶9] In April or May 2007, Gittlitz provided to Evans and Palcek the ICD financial statements for January and February 2007. Upon review of these records, Evans and Palcek discovered that Gittlitz had falsely altered hotel receipts from another ICD employee and submitted them for reimbursement as his own expenses. The

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records confirmed that Gittlitz had received reimbursements for expenses that had been paid using ICD's credit card.

[¶10] After confirming the false expense reports, Palcek and Evans contacted an accounting firm, Manning Silverman, to discuss changing ICD's financial controls. Although they wanted to limit Gittlitz's control over the company's finances, at that time Evans and Palcek still desired that Gittlitz, their business partner of nearly 20 years, would remain as ICD's president.

[¶11] With the assistance of the Manning Silverman firm, Evans and Palcek drafted an agreement which would change control of the company's finances while retaining Gittlitz as president. The agreement was drafted in the form of a letter agreement from Evans and Palcek to Gittlitz with the subject heading " ICD Publications Change of Financial Controls" (the CFC agreement). The CFC agreement recited that Evans and Palcek " believe there is a need for immediate change of financial controls" as " the possibility exists that certain Shareholders may have been disenfranchised from funds properly due them." The CFC agreement stated its goal was " to effect immediate change in the financial controls of ICD that allow for its continuity."

[¶12] The agreement set forth numerous " Changes in Organization," including the addition of Evans and Palcek as signatories on ICD's bank and credit card accounts, as well as the transfer of accounting and bookkeeping functions from Gittlitz and his wife to the Manning Silverman firm. The agreement also called for Ellen Gittlitz to retire from ICD and stated that she would no longer be a signatory on ICD's accounts. However, the CFC agreement specified that Ian Gittlitz was to " retain[] all other duties as President" of the company.

[¶13] Following the proposed changes, under the heading " Restitution," the document specified that Evans and Palcek would " appoint an independent auditor to determine the amount of restitution owed by [Gittlitz]." Furthermore, under the heading " Confidentiality," the document stated that: " Cyndi [Evans] and Dave [Palcek] agree not to seek legal remedies, either criminally or civilly, nor involve the IRS in any findings as it specifically relates to the misuse of company funds provided restitution is made." The CFC agreement also provided that the matter " w[ould] not be discussed outside of the Shareholders" and their advisors.

[¶14] Evans and Palcek scheduled a meeting with Gittlitz on May 7, 2007, when all three would be in Orlando, Florida, to attend an industry trade show. Evans and Palcek did not notify Gittlitz about their suspicions or the CFC agreement before the meeting, and both testified that they did not sign the agreement prior to the meeting.

[¶15] Evans and Palcek questioned Gittlitz at the May 7, 2007 meeting regarding the accuracy of his expense reports. Initially, Gittlitz denied any wrongdoing. However, after Evans and Palcek showed him documents proving that he had altered a receipt from another ICD employee, Gittlitz became emotional and admitted to falsifying the receipt. According to Palcek's and Evans' trial testimony, Gittlitz expressed remorse and claimed that this fraud " ha[d]n't been going on for that long" and that it " hasn't [involved] a lot of money." Evans testified: " Ian convinced us at that moment that this was a short period of time, was a limited amount of money." Although Gittlitz admitted to submitting invalid expense reports at that meeting, he did not disclose to Evans or Palcek that he had also been embezzling

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from ICD by writing himself " advance" checks for many years.

[¶16] Palcek and Evans showed Gittlitz the CFC agreement they had drafted. Evans testified that she told Gittlitz that " if you agree to this, then we'll move on," as " we wanted to keep [Gittlitz]. We did not want to disrupt the company." Evans and Palcek signed the agreement at the meeting. Gittlitz did not sign immediately, but asked to return it the next day after speaking with his wife. The following day, May 8, 2007, Gittlitz met with Evans and signed the CFC agreement. At that time, he again told Evans that his misconduct had not involved a great deal of money and had been for a " short period of time."

[¶17] After the meeting with Gittlitz, and pursuant to the CFC agreement, Evans and Palcek hired the accounting firm Lasko and Associates (Lasko) to conduct an audit to determine the amounts that Gittlitz owed ICD. To further the audit, Lasko informed Evans that she could request access to ICD's bank records in her capacity as secretary of the corporation. Evans called ICD's bank and requested a copy of ICD's file. The bank initially denied Evans' request, as its records indicated that Ellen Gittlitz, not Evans, was ICD's corporate secretary. Surprised, Evans faxed to the bank a board resolution that identified her as ICD's corporate secretary. The bank eventually provided Evans with ICD's file in early June 2007.

[¶18] Upon reviewing the bank file, Evans and Palcek were astonished to find that it contained a purported account signature card that falsely listed Ellen Gittlitz, rather than Evans, as the corporate secretary, and that Evans and Palcek had been removed as signatories on ICD's bank account. In addition, the file contained a fraudulent ICD corporate resolution, dated November 2006, which falsely listed Ellen Gittlitz as ICD's corporate secretary, incorrectly stated ICD was a New York rather than an Illinois corporation, and recited a purported July 1999 board of directors meeting that had never occurred. These items had never been mentioned by Gittlitz to either Evans or Palcek.

[¶19] In addition, the bank records also showed that, in March 2007 alone, Gittlitz had written to himself over $80,000 in checks from ICD's checking account, most of which were labeled as " advances," with no record of repayment to ICD. The bank records revealed that since at least October 2000, Gittlitz had paid himself more than one million dollars in such " advances."

[¶20] Gittlitz, Evans, and Palcek next met on June 21, 2007. At that meeting, Gittlitz revealed that he intended to purchase a company known as Travel Trade, which he described as a " production" company. Gittlitz told Evans and Palcek that in order to work on the Travel Trade purchase, he wished to change his role at ICD from president to " chairman" of the company and would agree to a reduced salary. He had not previously mentioned Travel Trade to Evans or Palcek. Upon further questioning about Travel Trade, Gittlitz admitted to Evans and Palcek that the company was, like ICD, a business-to-business publication company. Evans and Palcek subsequently learned that Gittlitz had been negotiating the Travel Trade transaction for several months. Although Gittlitz had learned of the Travel Trade opportunity in his capacity as ICD's president, he had not previously disclosed the potential opportunity to Evans or Palcek.

[¶21] After the June 21, 2007 meeting, Evans and Palcek concluded they had cause to terminate Gittlitz from ICD based on fraud, embezzlement, and their belief that he had usurped the Travel Trade opportunity to the detriment of ICD. Through a corporate resolution dated July

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2, 2007 signed by Evans and Palcek, ICD terminated Gittlitz for cause, citing that Gittlitz " committed various acts involving dishonesty or fraud with respect to [ICD] including *** submitting and approving false expense reports, utilizing corporate funds to pay personal expenses," " usurping corporate opportunities," and " presenting false statements and corporate resolutions to the corporation's bank." Also on July 2, 2007, ICD filed a complaint against Gittlitz in the circuit court of Cook County. That complaint alleged counts of: (1) breach of fiduciary ...


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