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Freiburger v. Timmerman

United States District Court, N.D. Illinois, Eastern Division

August 26, 2016

John E. Freiburger and Partners Wealth Management, Inc., Plaintiffs,
v.
Kevin J. Timmerman, Bradley J. Lewis, Steele Capital Management, Inc., Defendants.

          MEMORANDUM OPINION AND ORDER

          Manish S. Shah United States District Judge

         Since 1998, plaintiffs John Freiburger and Partners Wealth Management, Inc. had an arrangement to solicit clients for defendant Steele Capital Management, Inc., an investment management services company, in exchange for referral fees. Around fifteen years later, plaintiffs approached clients about transferring their accounts away from Steele Capital and to plaintiffs' new platform, and over 80 clients left Steele Capital. Defendants Kevin Timmerman and Brad Lewis (employees of Steele Capital) corresponded with clients in an attempt to keep them from transferring accounts. Asserting that the letters were defamatory, plaintiffs brought claims against all defendants for defamation per se (Count I), tortious interference with prospective business relations (Count II), commercial disparagement (Count III), and claims for breach of contract and unjust enrichment against Steele Capital (Counts IV and V). [1].[1] In turn, Steele Capital brought counterclaims against plaintiffs for unjust enrichment and tortious interference with business expectancy (Counterclaims II and V) and counterclaims against Freiburger alone for breach of contract (Counterclaims I and VI) and breach of fiduciary duty (Counterclaim IV). [75].[2]

         Plaintiffs move for summary judgment on all of Steele Capital's remaining counterclaims. [140]. Defendants move for partial summary judgment on plaintiffs' claims for defamation, commercial disparagement, and breach of contract. [135].[3]Lewis did not file a separate motion for partial summary judgment, but submitted an additional memorandum of law for partial summary judgment on plaintiffs' claims against him for defamation per se and commercial disparagement. [138].[4]

         For the following reasons, plaintiffs' motion to strike portions of defendants' reply brief, [183], is granted, defendants' motion for partial summary judgment on Counts I, III, and IV, [135], is granted, and plaintiffs' motion for summary judgment, [140], is granted in part on Counterclaims II and VI and denied on the remaining counterclaims.

         I. Legal Standards

         Summary judgment is appropriate if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law. Spurling v. C & M Fine Pack, Inc., 739 F.3d 1055, 1060 (7th Cir. 2014); Fed.R.Civ.P. 56(a). A genuine dispute as to any material fact exists if “the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The party seeking summary judgment has the burden of establishing that there is no genuine dispute as to any material fact. See Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). For each motion, factual inferences are viewed in the nonmovant's favor. See Hotel 71 Mezz Lender LLC v. Nat'l Ret. Fund, 778 F.3d 593, 603 (7th Cir. 2015).

         II. Background[5]

         The parties in this lawsuit were all involved in the financial services and individual wealth management business. [155] ¶ 8.[6] John Freiburger was the sole owner of Partners Wealth Management, Inc., a general services financial planning firm that originated clients for a variety of financial services. [170] ¶ 5; [181] ¶ 4. He was also a “Registered Representative” of NFP Securities, Inc. in NFP Securities's broker/dealer capacity and an “Independent Advisor Representative” of NFP Securities in its “Registered Investment Advisor” capacity.[7] [155] ¶ 2; [170] ¶ 7; [181] ¶ 4. Located in Iowa, Steele Capital Management, Inc. was a “Registered Investment Advisor” and provided investment advisory services to individuals and company-sponsored retirement plans.[8] [170] ¶¶ 2-3. (Partners Wealth was not a Registered Investment Advisor. [170] ¶ 6.) Kevin Timmerman co-owned Steele Capital, and Brad Lewis was its Senior Portfolio Manager. [170] ¶¶ 2, 4.

         In 1998, Freiburger and Steele Capital entered into an oral agreement. In exchange for referring clients to Steele Capital, Freiburger would receive a percentage of the fees that those clients paid to Steele Capital. [155] ¶ 11. This agreement was to continue so long as the clients used Steele Capital for their investment management purposes. [155] ¶ 12. Two years later, Freiburger and Steele Capital memorialized their oral agreement by executing a “branch office agreement, ” which was terminable with six months written notice. [155] ¶ 14; [170] ¶ 24; [137-10].[9] Timmerman Dated: behalf of Steele Capital. [155] ¶ 15.

         The branch office agreement stated that Freiburger was an “independent contractor” who would operate his financial services business as a branch office of Steele Capital and be an “Investment Advisor Representative” of Steele Capital. [137-10] at 1, 3. Under the agreement, Freiburger would be paid 60% of the client fees he brought to Steele Capital. [155] ¶ 22; [137-10] at 1. (At some later point, the percentage was raised to 65%-the parties do not explain when or how the change came about. See, e.g., [170] ¶¶ 23, 56, 60.) Steele Capital paid Freiburger a higher referral fee than other solicitors because Freiburger agreed to provide more services than typical solicitors. [170] ¶ 25. The branch office agreement contained an exclusivity clause, which required Freiburger to “place all investment management business with [Steele Capital]” but allowed Freiburger to place Registered Investment Advisor business with another advisor if the services that a client desired fell outside Steele Capital's normal course of business. [155] ¶ 17; [137-10] at 1. The branch office agreement also contained an integration clause stating that the agreement “contains the entire understanding of the parties with respect to the subject matter hereto and shall not be modified or terminated except by written instrument executed by or on behalf of the party against whom modification or termination is sought to be enforced.” [137-10] at 3.

         From 2000 to 2004, Freiburger was an Investment Advisor Representative of Steele Capital and actually signed client contracts on behalf of Steele Capital. [170] ¶ 30.[10] While the branch office agreement was in place, Freiburger also served as a Registered Representative for NFP Securities, Inc., a broker/dealer. [155] ¶ 19; [170] ¶ 7. The parties generally agree that NFP Securities eventually insisted on having its own agreement with Steele Capital, but dispute whether Steele Capital and NFP Securities did so to comply with the Securities & Exchange Commission's Rule 206(4)-3 (regarding cash payments for client solicitations) or for other reasons. [155] ¶¶ 23-24; [170] ¶ 16. In 2004, Steele Capital and NFP Securities entered into a “Client Referral and Services Agreement.” [155] ¶ 24; [170] ¶ 16; [75-2]. Once again, Timmerman signed the agreement on behalf of Steele Capital. [155] ¶ 25. Freiburger did not sign the agreement. [75-2] at 4.

         Pursuant to the client referral agreement, NFP Securities would allow its registered representatives to solicit clients for Steele Capital on a “non-exclusive basis.” [155] ¶ 25; [75-2] at 1. Steele Capital would pay NFP Securities for all services rendered by NFP Securities registered representatives, and NFP Securities would, in turn, pay its registered representatives. [155] ¶ 27. Clients referred to Steele Capital would sign a disclosure statement stating that NFP Securities and Freiburger were being paid a referral fee by Steele Capital. [170] ¶ 22; [75-2] at 1, 5. Each client using Steele Capital's wealth management services signed an Investment Management Agreement with Steele Capital, which stated that “[t]his agreement may be terminated by either party at any time without penalty upon written notice.” [155] ¶¶ 38-39. Steele Capital had no recourse against clients who terminated their Investment Management Agreements; instead, clients were free to transfer their accounts. [155] ¶¶ 40-41.

         In 2012, Freiburger informed Timmerman that he would be transferring millions of dollars in client accounts from Steele Capital to NFP Securities's platform. The parties dispute the timing and extent of that conversation. Timmerman recalls a phone call in August 2012 when Freiburger said that he was having financial difficulties and needed to move $50 million away from Steele Capital to NFP Securities in order to increase his revenue. [170] ¶ 32; [137-2] at 32- 33. Freiburger does not recall a particular phone call in August and denies that he was in financial difficulties or needed to increase revenue, but he admits that at some point, he informed Timmerman that he would be moving $30 million away from Steele Capital to NFP Securities. [170] ¶ 32; [137-6] at 149-52. Freiburger received a letter from NFP Securities in July 2012 about transferring client assets to NFP Securities's investment platform-the parties dispute whether Freiburger was required to move assets pursuant to the letter. [170] ¶ 45.

         During the parties' relationship, Freiburger referred 118 clients to Steele Capital. In 2012, he approached clients about transferring their accounts to NFP Securities's new platform. [181] ¶ 12.[11] Around the end of 2012, clients started transferring their accounts; over the next year or so, a total of 84 clients transferred over to NFP Securities. [170] ¶ 52; [181] ¶ 12. It is undisputed that Freiburger could not transfer accounts on his own initiative, but could only do so upon client authorization. [155] ¶ 48. Timmerman sent Freiburger a letter on July 31, 2013, stating that Steele Capital was formally terminating the branch office agreement. [170] ¶ 31; [137-34]. For the few clients remaining with Steele Capital, Timmerman reduced Freiburger's referral fee to 50%. [170] ¶ 60. None of the clients who transferred to the NFP Securities platform ever returned to Steele Capital. [170] ¶ 66.

         From April to October 2013, Timmerman and Lewis sent letters and emails to clients, which form the basis for plaintiffs' defamation claims. [170] ¶ 63;[12] [137-37]. Timmerman authored five emails and letters sent on April 8, June 11, July 8 (two identical letters), July 15 (a letter sent to 80 clients), and September 3, 2013. [170] ¶ 61; [137-37] at 1-11. Lewis wrote two emails, sent on October 24 and October 29, 2013. [137-37] at 12-13. Plaintiffs filed suit shortly thereafter.

         III. Defamation Per Se (Count I)

         Defendants move for summary judgment on plaintiffs' claim for defamation per se on the basis that their statements were non-defamatory, true, subject to an innocent construction, privileged, or a combination thereof.

         “A defamatory statement is a statement that harms a person's reputation to the extent it lowers the person in the eyes of the community or deters the community from associating with him.” Solaia Tech., LLC v. Specialty Pub. Co., 221 Ill.2d 558, 579 (2006).[13] A statement is defamatory per se-meaning that special damages need not be shown-“if its harm is obvious and apparent on its face.” Id. In Illinois, statements considered defamatory per se include: words that impute a person has committed a crime; words that impute a person is unable to perform or lacks integrity in performing her or his employment duties; and words that impute a person lacks ability or otherwise prejudices that person in her or his profession. Id. at 580. “Although a statement may fit into one of these categories, this fact, standing alone, ‘has no bearing on whether the alleged defamatory statement is actionable, ' because certain factors may render defamatory statements non-actionable as a matter of law.” Giant Screen Sports v. Canadian Imperial Bank Of Commerce, 553 F.3d 527, 532 (7th Cir. 2009) (quoting Hopewell v. Vitullo, 299 Ill.App.3d 513, 518 (1st Dist. 1998)).

         The defendants moved to dismiss the defamation claim under Rule 12(b)(6) by arguing in a single paragraph-without citation to authority-that they had no malicious intent and therefore could not be held liable for defamation per se. At that stage of the case, such a conclusory argument was insufficient to show that plaintiffs had no cause of action for defamation per se. Now, on a full record and with the benefit of the parties' briefing the nature and truth of the statements at issue, the allegedly defamatory nature of defendants' statements can be resolved as a matter of law.

         A defamatory per se statement is not actionable “if it is reasonably capable of an innocent construction”-a question of law. Solaia Tech., 221 Ill.2d at 580. Statements that can reasonably be interpreted to refer to someone other than the plaintiff, or to have an innocent construction, are not actionable for defamation per se, and “[t]here is no balancing of reasonable constructions.” Id. (quoting Mittelman v. Witous, 135 Ill.2d 220, 232 (1989)). But courts “should not strain to see an inoffensive gloss” when the defendant “clearly intended and unmistakably conveyed a defamatory meaning.” Id.

         Defamatory per se statements are also nonactionable if they are expressions of opinion, but “a false assertion of fact can be defamatory even when couched within apparent opinion or rhetorical hyperbole.” Solaia Tech., 221 Ill.2d at 581. The test for determining whether a statement is opinion or factual assertion requires considering: (1) “whether the statement has a precise and readily understood meaning;” (2) “whether the statement is verifiable;” and (3) “whether the statement's literary or social context signals that it has factual content.” Id.

         Statements that are “substantially true” are also not actionable. Substantial truth “is shown where the ‘gist' or ‘sting' of the allegedly defamatory material is true.” Coghlan v. Beck, 2013 IL App (1st) 120891, ¶ 42; see Haynes v. Alfred A. Knopf, Inc., 8 F.3d 1222, 1227 (7th Cir. 1993). Substantial truth is normally a question for the factfinder, but it is a question of law when no reasonable jury could find that the statement was not substantially true. Coghlan, 2013 IL App (1st) 120891, ¶ 42.

         Privilege is also a defense to defamation. Solaia Tech., 221 Ill.2d at 585. Other than a passing reference to the concept, defendants' opening brief did not develop any argument for how Timmerman and Lewis's statements were privileged. [162] at 5. Half of defendants' reply brief, however, was devoted to explaining how privilege applied to make their statements nonactionable. [180] at 4-6, 8-12. “[I]t is well-settled that arguments first made in the reply brief are waived.” Billhartz v. C.I.R., 794 F.3d 794, 801 n.4 (7th Cir. 2015); see Bakalis v. Golembeski, 35 F.3d 318, 326 n. 8 (7th Cir. 1994) (argument waived where it was made in a footnote in the opening brief and was “not developed fully until the reply brief”). Plaintiffs' motion to strike the portions of defendants' reply brief advancing a privilege argument, [183], is granted.

         With these principles in mind, each letter is addressed below.

         A. April 8, 2013 Timmerman Email

         Timmerman's April 8, 2013 email to a client ([1] ¶ 16; [137-37] at 1-2) contained ten statements that plaintiffs allege were defamatory.

1) “[W]e have been managing your account since July 2001 and I feel obligated to let you know that transferring your assets to John Freiburger's new platform is not in your best interests.”
2) “Moving your account may be beneficial to John, but I can't see how it benefits you at all.”

         These statements are nonactionable opinion. Timmerman's use of the phrases “I feel obligated” and “I can't see how” would not, alone, shield a defamatory factual assertion from being actionable. See Wilkow v. Forbes, Inc., 241 F.3d 552, 555 (7th Cir. 2001). But the terms “best interests, ” “beneficial, ” and “benefits” have no precise meaning and are not objectively verifiable. Such determinations are vague and highly subjective, as reasonable minds could differ about what is in a client's “best interest.” Even Freiburger has admitted that reasonable minds could differ about whether an investment is in a client's best interest. [170] ¶ 62.[14] These terms are also not expressed in a context signaling that they are meant to convey specific factual content, which further suggests that they were intended to express Timmerman's subjective opinion. These statements are not actionable.

3) “John informed us in August of 2012 that he was going to start moving accounts from us, and I believe you are the very first and only client to make the switch.”

         Plaintiffs assert that the second half of this sentence regarding the client is defamatory per se. In hindsight, defendants acknowledge that this client was not the first or only client to switch accounts, but argue that Timmerman believed this statement at the time. [181] ¶ 25. But because Timmerman is making the factual assertion that this client is the first to switch accounts, the qualifier “I believe” does not transform this statement into a nonactionable opinion. See Solaia Tech., 221 Ill.2d at 580 (“[A] false assertion of fact can be defamatory even when couched within apparent opinion or rhetorical hyperbole.”).

         Regardless of the accuracy of this statement, however, it can be innocently construed. A statement is defamatory per se only “if its harm is obvious and apparent on its face, ” and falls into one of the defamatory per se categories. Id. at 579-80. Plaintiffs argue that this statement imputes that plaintiffs' lack integrity for recommending that clients leave Steele Capital when other clients do not think it is a good idea. From the perspective of an ordinary reader, and considering the context of the statement, a natural and obvious reading is that it offers no reflection on plaintiffs' integrity but instead focuses on the unnamed client. The statement “you are the first and only client to make the switch” reads as an appeal to herd mentality, suggesting that the client made a foolhardy decision and was unwise to leave Steele Capital because other clients have chosen not to do so. Clients could decide to not change investment management advisors for all sorts of reasons that do not reflect on plaintiffs' integrity-for example based on different investment preferences or incentives. This statement can be innocently construed as not referring to or impugning plaintiffs' integrity or profession. It is not actionable.

4) “For soliciting you, we have been paying John 65% of your investment advisory fees.”

         This statement is a factual assertion, but it is substantially true-plaintiffs have even brought a breach of contract claim asserting that they are entitled to a 65% fee from Steele Capital for soliciting clients. See, e.g., [1] ¶ 54; [172] at 2, 15. Whether Timmerman later reduced the percentage does not alter the fact that the “gist” of this statement is true. It is not actionable.

5) “The way John explained it to me, when you move to his new platform you will be paying 1.15% instead of 1.00%. However, if he doesn't get $50 million dollars on this new platform then your fee may go to 1.30%.”
6) “By staying with John you will probably pay at least 1.15% but if you move back to us you will pay only 0.35%. This would save you approximately $4, 240 per year (based on your account being $530, 000).”

         While Timmerman's statements may imply that he is merely offering his understanding of Freiburger's new platform, his statements include the factual assertions that the client's fee will increase to 1.15% or 1.30% if they transfer platforms. It is disputed whether transferring platforms would cause clients to be charged higher fees. See, e.g., [170] ¶ 57. But statements that clients will be charged higher fees, even if false, do not impugn Freiburger's professional integrity or ability, and are not defamatory per se. “Words which reflect on a business's integrity or reputation may give rise to a defamation action, ” but “false prices do not impugn the integrity of the plaintiff.” Downers Grove Volkswagen, Inc. v. Wigglesworth Imports, Inc., 190 Ill.App.3d 524, 531 (2d Dist. 1989) (brochure listing false prices for plaintiff's services was not defamatory, even per quod); see Wilkow, 241 F.3d at 557 (“[A]n allegation of greed is not defamatory.”); Garber-Pierre Food Prods., Inc. v. Crooks, 78 Ill.App.3d 356, 360-61 (1st Dist. 1979) (letter accusing corporation of charging higher prices than its competitors was not defamatory per se because it amounted to criticism of plaintiff's policy decision regarding prices rather than impugning its business reputation).

         Plaintiffs cite to Installation Services, Inc. v. Crown Castle Broadcast USA Corp. for the proposition that statements concerning “overcharging” and “gouging” are defamatory factual assertions. No. 04 C 6906, 2006 WL 2024220, at *5 (N.D. Ill. July 13, 2006). But the analysis in Installation Services relied on similar statements being found actionable in Imperial Apparel, Ltd. v. Cosmo's Designer Direct, Inc., No. 1-05-2744, 2006 WL 1766708 (1st Dist. 2006). That opinion was superseded and modified upon denial of rehearing by Imperial Apparel, Ltd. v. Cosmo's Designer Direct, Inc., 367 Ill.App.3d 48 (1st Dist. 2006), which held that an ad stating the plaintiff was selling imitation goods of inferior quality could be innocently construed as referring to someone other than plaintiffs, and affirmed dismissal of the defamation per se claim. Id. at 57-58. On appeal, the Illinois Supreme Court affirmed dismissal of the defamation per se claim but held that the ad could not be reasonably interpreted as stating actual fact. Imperial Apparel, Ltd. v. Cosmo's Designer Direct, Inc., 227 Ill.2d 381, 400-02 (2008). Installation Services and Imperial Apparel are not relevant to the point here-that describing a competitor's price relative to one's own is not, without more, an attack on the competitor's integrity. Timmerman's assertions regarding plaintiffs' higher prices were not defamatory.

         The statement about Steele Capital being willing to take the client back for only a 0.35% fee is also not defamatory per se-it merely represents Steele Capital's offer to that client. These statements are not actionable.

7) “If you sell everything to go into the funds John is recommending you could end up paying significant capital gains taxes.”

         Freiburger admitted that this statement was substantially true. [170] ¶ 57.[15]This statement is not actionable.

8) “The DFA funds that we believe John is recommending to you have not performed well.”

         The phrase “performed well” has no precise meaning and is not objectively verifiable, suggesting that it is merely an expression of opinion. Even if this were not opinion, it could be innocently construed as mere disagreement about investment strategy, not necessarily impugning plaintiffs' professional ability. This statement is nonactionable.

9) “Many sales people will try to sell you on the low expense ratios of the DFA funds. This is very misleading.”

         For context, this statement is followed by: “It would be like saying a Toyota Camry is better than a Mercedes Benz because it costs less. The bottom line with funds, just like cars, is how well they perform; and DFA funds have not been performing well.” [137-37] at 2. Although the phrase “misleading” is tied to the factual context of selling DFA funds, it is not an objectively verifiable statement- there is no metric to determine whether selling DFA funds with low expense ratios is misleading or deceptive. For example, in Hopewell v. Vitullo, the statement that the plaintiff was “fired because of incompetence” was nonactionable opinion because “[r]egardless of the fact that ‘incompetent' is an easily understood term, its broad scope renders it lacking the necessary detail for it to have a precise and readily understood meaning.” 299 Ill.App.3d 513, 519 (1st Dist. 1998). Because the statement lacked “context and content” to limit the scope of “incompetent, ” there was no “precise meaning relating to the alleged defamatory statement” and the veracity of the statement was incapable of being verified. Id. at 519-20. Similarly, here, while “misleading” is an easily understood term, the statement that marketing based on the low expense ratios of DFA funds is misleading lacks sufficient factual context to make Timmerman's assertion verifiable. This statement can also be innocently construed to refer to salespeople generally, not necessarily Freiburger. It is nonactionable.

10) “I am guessing John told you not to take my phone calls; however, I would greatly appreciate an opportunity to speak with you. We have been managing your account for the past 12 years and it is very important that we talk.”

         This statement is not opinion, because it contains the factual assertion that Freiburger told the client not to accept phone calls from Steele Capital. Plaintiffs argue that this statement implies that they were trying to prevent clients from speaking with defendants, in order to conceal misconduct. However, the statement can be innocently construed-a businessperson can advise a client not to take phone calls from a competitor for all sorts of reasons that do not relate to concealing misconduct. This statement is not actionable.

         The April 8 email from Timmerman does not contain any actionable statements.

         B. June 11, 2013 Timmerman Letter

         Plaintiffs allege that five statements from Timmerman's June letter are defamatory ([1] ¶ 18; [137-37] at 3). None of the statements are actionable for defamation per se.

1) “I feel obligated to let you know that transferring your assets to John Freiburger's new platform is not in your best interests.”

         The phrase “best interest” lacks a precise meaning and is inherently subjective. Whether transferring platforms is in a client's best interests is an ...


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