Stamatakis Industries, Inc. v. King

Citations: 520 N.E.2d 770; 165 Ill. App. 3d 879; 117 Ill. Dec. 419; 1987 Ill. App. LEXIS 3654Docket: 87-0650

Court: Appellate Court of Illinois; December 31, 1987; Illinois; State Appellate Court

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Stamatakis Industries, Inc. and Premier Engraving Company, Inc. filed a lawsuit against Frederick King and other defendants, alleging fraud and breach of contract following the purchase of Premier's shares for $1,250,000. The plaintiffs claimed King, who held multiple executive roles and was a significant shareholder, misrepresented his control over Premier’s key customers during negotiations. A critical condition of the sale was that King would sign an employment contract with Stamatakis and refrain from competing for two years post-employment. The plaintiffs contended that King had intentions to mislead them regarding Premier's financial stability and future equipment purchases, which were not disclosed as conditions of his employment. The trial court granted summary judgment in favor of King and King Graphics, Inc., but the appellate court reversed this decision, highlighting that the complaint sufficiently alleged the elements of fraud, including false representations, reliance by the plaintiffs, and resultant injury.

Illinois law does not permit recovery for promissory fraud, defined as fraudulent misrepresentation regarding the intention to engage in future conduct. Relevant case law, including *Steinberg v. Chicago Medical School* and *Roda v. Berko*, establishes that a promise made without intent to perform is not actionable. An exception exists if the promise is part of a scheme intended to facilitate fraud, as reaffirmed in *Steinberg* and *Vance Pearson, Inc. v. Alexander*. The defendant, King, contends that the allegations lack a specific fraudulent scheme and instead suggest only a mental reservation. Distinguishing between general promissory fraud and the scheme exception proves challenging, as seen in *Vance Pearson*, which emphasizes that fraud typically involves misrepresentation intended to induce reliance. The exception's broad interpretation may diminish the clarity of the general rule. Professor Michael J. Polelle critiques the legal rationale against promissory fraud in Illinois, noting the state’s minority status on this issue compared to the principles outlined in the Restatement (Second) of Torts. The *Pearson* case illustrates the scheme exception, where the defendant's promise to install equipment was made without intention to fulfill it, leading to punitive damages. The ongoing negotiations between King and Stamatakis suggest the existence of a scheme, which remains a factual determination for the trier of fact.

King defends against the tort claim by arguing that the fraud claim lacks legal standing, asserting that he simply exercised his contractual right to terminate the agreement with Stamatakis upon providing 90 days' notice. He terminated the contract nine months after it began, and Stamatakis waived the notice requirement. King references the Repsold v. New York Life Insurance Co. case, which states that exercising legal rights does not constitute fraud. However, King acknowledges that this precedent is not applicable because the Repsold case involved promissory fraud and the court did not clarify whether it was dealing with contract or tort. The court affirmed that the facts aligned with Illinois law prohibiting promissory fraud, which does not apply to the current case since it involves a potential scheme. 

King further argues that Stamatakis waived his right to claim fraud, as Stamatakis failed to act diligently in disaffirming the transaction despite being aware of the undisclosed condition shortly after acquiring Premier. Stamatakis made a payment three months after King's termination, indicating acceptance of the transaction. King highlights that established legal principles state a person claiming fraud must act promptly to abandon the transaction upon discovering the truth, supporting his position with references to past case law and legal doctrines regarding waiver in fraud actions.

Waiver applies if a party, knowing the material aspects of alleged fraud, engages in conduct inconsistent with an intention to sue, particularly if such conduct provides an advantage to the defrauded party or misleads the opposite party. This principle suggests that a party cannot delay in deciding to affirm or avoid a contract based on potential profitability. Whether waiver applies is a factual issue unsuitable for summary judgment. 

The evidence on the promissory fraud count is insufficient for summary judgment in favor of King. The breach of contract claim asserts that King violated his employment agreement by terminating his employment within nine months of its inception and forming King Graphics, Inc., thereby competing with Stamatakis in the Chicago area. The employment contract, signed by King, included a non-compete clause prohibiting competition within 1,000 miles of Chicago for two years upon termination. 

The agreement also featured a 'blue pencil' provision allowing for adjustment of any unenforceable restrictions, and a severability clause ensuring that the remainder of the contract would remain valid if any part was found invalid. Although the contract was for five years, it included a termination clause allowing either party to terminate with 90 days' notice without cause. 

King argues that the restrictive covenant is unenforceable under Illinois law due to its overly broad restrictions, asserting that it limits activities beyond just Premier and Superior/Rogers and is therefore invalid. King claims that his management duties were specific to those subsidiaries and that the broader restrictive covenant against competing with the employer is unreasonable.

Stamatakis Industries, Inc. is identified as the employer in the agreement, which encompasses a diverse range of businesses including graphic arts, furniture accessories, and real estate development. King asserts that the restrictive covenant would unduly limit his ability to engage in unrelated business activities, rendering the agreement unenforceable. In contrast, Stamatakis contends that the term "employer" contains latent ambiguity, suggesting that King is restricted only from competing in the graphic arts sector, where he has always been employed. The concept of latent ambiguity is discussed, citing case law that allows for extrinsic evidence to clarify contractual terms. The court's role in determining ambiguity is emphasized, noting that if ambiguity is found, the interpretation becomes a factual question, while a clear contract interpretation is a legal question. The contract's provision preventing King from competing is analyzed, revealing potential ambiguity regarding the scope of "the business of Employer." King also argues that the geographic scope of the restrictive covenant is excessively broad and lacks a reasonable relationship to Stamatakis' legitimate interests, referencing a relevant case where a similar covenant was deemed unreasonable. The resolution of these ambiguities and arguments is acknowledged as beyond the current motion for summary judgment.

King references McCook Window Co. v. Hardwood Door Corp., which emphasizes the need to limit covenants related to the sale of a business to protect the transferred goodwill. The court ruled that such covenants should only cover the territory where goodwill exists or could reasonably extend, striking down an overly broad 150-mile competition restriction. The document also discusses a recent case addressing the geographic scope of employment agreements linked to business sales, noting that in these instances, the protection of goodwill is paramount, and courts are less likely to invalidate post-employment restraints due to the more balanced bargaining positions compared to employer-employee relationships.

King established the geographical limitation in question and argued for its invalidity without suggesting a narrower restriction. The court concluded that the broader context of the business sale and King’s own proposal did not inherently constitute an unreasonable restraint of trade, leading to the reversal of the summary judgment. The case also examines whether a court can modify a restrictive covenant, citing House of Vision, Inc. v. Hiyane, which allows for adjustments by courts if deemed equitable. The fairness of the restraint and the bargaining power of parties involved are critical considerations. 

Stamatakis raised a procedural issue regarding the trial court's change in ruling on King’s summary judgment motion, but did not provide authority or specify relief sought. The court found no basis for Stamatakis’s arguments and reversed and remanded the case for further proceedings.