Document Info

DocketNumber: 11-2102

Judges: Posner, Flaum, Sykes

Filed Date: 6/4/2012

Status: Precedential

Modified Date: 11/5/2024

  •                               In the
    United States Court of Appeals
    For the Seventh Circuit
    No. 11-2102
    JAMES N ATION,
    Plaintiff-Appellant,
    v.
    A MERICAN C APITAL, L TD.,
    d/b/a American Capital Strategies, Ltd.,
    a Delaware corporation,
    Defendant-Appellee.
    Appeal from the United States District Court
    for the Northern District of Illinois, Eastern Division.
    No. 09 C 6917—Matthew F. Kennelly, Judge.
    A RGUED D ECEMBER 6, 2011—D ECIDED JUNE 4, 2012
    Before P OSNER, F LAUM, and S YKES, Circuit Judges.
    S YKES, Circuit Judge. For more than a decade, James
    Nation served as CEO of The Spring Air Company,
    which owned and licensed the “Spring Air” mattress
    brand name. Nation and Spring Air parted ways in 2007,
    and Nation won a generous severance package entitling
    him to $1.2 million in payments spread over 15 months
    2                                            No. 11-2102
    provided he did not work for Spring Air’s competitors
    through December 31, 2008. Spring Air paid Nation more
    than $836,000 under this agreement, but in August 2008
    ceased making payments due to serious liquidity prob-
    lems. Spring Air never solved its cash-flow problems and
    ultimately filed for bankruptcy.
    Nation then sued American Capital, Ltd., Spring Air’s
    majority shareholder and primary creditor, asserting a
    claim for tortious interference with contract. His theory
    was that American Capital used its majority position on
    Spring Air’s board of directors to induce the company
    to breach his severance agreement. On cross-motions
    for summary judgment, the district court sided with
    American Capital and dismissed the case. The court held
    that American Capital was conditionally privileged to
    interfere with the severance agreement based on its
    status as Spring Air’s majority shareholder and that
    Nation had not presented sufficient evidence to over-
    come the privilege.
    We affirm. Illinois law recognizes that a corporation’s
    directors, officers, and shareholders are conditionally
    privileged to interfere with the corporation’s contracts.
    The privilege is an aspect of the business-judgment
    rule, and it applies here. Nation might have overcome
    the privilege if he had evidence that American Capital
    induced the breach of contract for the specific purpose
    of injuring him or to further its own personal goals and
    that it acted against the best interests of the corpora-
    tion. He has no such evidence, however. The district
    court properly entered summary judgment for American
    Capital.
    No. 11-2102                                                  3
    I. Background
    Nation began working for Spring Air in 1990 and was
    promoted to president and CEO in 1995. Spring Air
    owned the rights to the “Spring Air” brand name and
    licensed it to independently owned mattress manufac-
    turers; it also provided marketing, merchandising, and
    product-development services. Over a period of years,
    HIG Capital acquired several Spring Air licensees. In
    June 2007 HIG purchased Spring Air and most of the
    remaining licensees to create a unified business with
    common ownership. American Capital financed HIG’s
    acquisition of Spring Air and as a result acquired a minor-
    ity interest in Spring Air as well as a seat on Spring Air’s
    seven-member board of directors.1 Shortly after HIG
    purchased Spring Air, Nation was replaced as president
    and CEO. He received a generous severance that
    entitled him to a series of payments totaling $1,243,140
    in exchange for his agreement not to compete with
    Spring Air through December 31, 2008.
    Spring Air faced serious financial difficulties after HIG
    acquired the company. In January 2008 Spring Air re-
    quested additional financing from American Capital to
    respond to a liquidity crisis. In February 2008 American
    Capital and HIG each agreed to inject $11 million
    into Spring Air. In connection with this cash infusion,
    1
    The name of the parent corporation for the unified business
    was Consolidated Bedding, Inc., while the day-to-day operations
    were conducted by Spring Air. For simplicity we refer to
    both companies as “Spring Air.”
    4                                              No. 11-2102
    American Capital increased its minority ownership in
    Spring Air and obtained two additional seats on the
    board of directors. Spring Air’s liquidity problems con-
    tinued, necessitating an additional $1.5 million from both
    HIG and American Capital just two months later. As the
    company’s financial problems mounted, American
    Capital provided $15 million more, and by June 2008
    American Capital was the majority equity holder and
    controlled four of the seven seats on the Spring Air board.
    Steve Cumbow, an executive at American Capital, was
    hired as Spring Air’s Chief Financial Officer and later
    assumed the responsibilities of Chief Operating Officer.
    In August 2008 Cumbow and Chief Executive Officer
    Bob Hellyer decided to suspend Nation’s severance
    payments, as well as the severance payments of three
    other former executives of the company, in order to
    preserve cash for operations. On September 15, 2008,
    Nation began working for Serta, a Spring Air com-
    petitor, in violation of his severance agreement.
    Up to this point, Nation had received $836,153 in sever-
    ance payments. He sued Spring Air for the balance, but
    in May 2009 the company filed for bankruptcy under
    Chapter 7. In October 2009 Nation shifted course and
    brought this suit against American Capital in Cook
    County Circuit Court alleging that it tortiously inter-
    fered with his severance contract. American Capital
    removed the case to federal district court based on diver-
    sity of citizenship, and the parties filed cross-motions
    for summary judgment. The district judge granted Ameri-
    can Capital’s motion and denied Nation’s. Assuming for
    the sake of argument that American Capital induced
    No. 11-2102                                               5
    Spring Air’s breach of the severance agreement, the
    judge held that American Capital was conditionally
    privileged to interfere with Nation’s contract based on
    its status as Spring Air’s majority shareholder. The
    judge also held that Nation had presented insufficient
    evidence to overcome the privilege. In the alternative,
    the court suggested (but did not hold) that American
    Capital’s status as a creditor of Spring Air might serve
    as an additional basis for its conditional privilege to
    interfere with Nation’s contract. Nation appealed.
    II. Discussion
    On appeal Nation challenges only the district court’s
    entry of summary judgment for American Capital; he
    does not argue that the court should have granted
    his motion. Our review is de novo. Milestone v. City of
    Monroe, Wis., 
    665 F.3d 774
    , 780 (7th Cir. 2011). We construe
    all facts and reasonable inferences in favor of Nation, the
    nonmoving party. 
    Id.
     The parties agree that Illinois
    law governs Nation’s claim of tortious interference with
    contract. To prevail Nation must prove the following
    elements: (1) that he had a valid and enforceable
    contract with Spring Air; (2) that American Capital was
    aware of the contractual relationship; (3) that American
    Capital intentionally and without justification in-
    duced Spring Air to breach the contract; (4) that the
    subsequent breach was caused by American Capital;
    and (5) that he sustained damages. See Williams v. Shell
    Oil Co., 
    18 F.3d 396
    , 402 (7th Cir. 1994) (applying Illinois
    law).
    6                                                       No. 11-2102
    The only contested elements of the claim are
    whether American Capital actually interfered with Na-
    tion’s severance agreement and whether the interference
    was unjustified. The district judge did not address the
    first question because he was satisfied that any inter-
    ference was legally justified based on American Capital’s
    conditional privilege to interfere with Spring Air’s con-
    tracts. Although the court’s ruling can be upheld on any
    ground adequately preserved and supported by the
    record, see Stockwell v. City of Harvey, 
    597 F.3d 895
    , 901 n.2
    (7th Cir. 2010), we agree with the district court that the
    case can be resolved on the basis of the conditional privi-
    lege.
    A. Conditional Privilege
    Illinois recognizes a conditional privilege to interfere
    with contracts “where the defendant was acting to
    protect an interest which the law deems to be of equal or
    greater value than the plaintiff’s contractual rights 2 .” HPI
    2
    Illinois courts have been unclear about whether the issue
    of conditional privilege is part of the plaintiff’s claim—that is,
    an aspect of the plaintiff’s burden to prove that the defendant’s
    interference with his contract was unjustified—or an affirmative
    defense to be proved by the defendant. Compare HPI Health
    Care Servs., Inc. v. Mt. Vernon Hosp., Inc., 
    545 N.E.2d 672
    , 677 (Ill.
    1989) (“In Illinois, this court has repeatedly stated that where
    the conduct of a defendant in an interference with contract
    action was privileged, it is the plaintiff’s burden to plead and
    (continued...)
    No. 11-2102                                                     7
    Health Care Servs., Inc. v. Mt. Vernon Hosp., Inc., 
    545 N.E.2d 672
    , 677 (Ill. 1989). This privilege covers the acts of corpo-
    rate officers, directors, and shareholders undertaken
    on behalf of the corporation. See, e.g., Swager v. Couri,
    
    395 N.E.2d 921
    , 928 (Ill. 1979) (recognizing privilege
    for corporate officers, directors, and shareholders to
    influence the actions of their corporation); IOS Capital, Inc.
    v. Phoenix Printing, Inc., 
    808 N.E.2d 606
    , 612 (Ill. App. Ct.
    2004) (“Illinois courts recognize a privilege for corporate
    officers and directors to use their business judgment and
    discretion on behalf of the corporation.”); MGD, Inc. v.
    Dalen Trading Co., 
    596 N.E.2d 15
    , 18 (Ill. App. Ct. 1992)
    (same). The basis for the privilege is the business-
    judgment rule. Because the interests of corporate officers,
    directors, and shareholders are sufficiently aligned with
    those of the company, they generally cannot be liable in
    tort when they interfere with the company’s contracts
    for the benefit of the company. See IOS Capital, 
    808 N.E.2d at 613
     (“Corporate officers interfering in corporate con-
    tracts and acting in accordance with their business judg-
    2
    (...continued)
    prove that the defendant’s conduct was unjustified or mali-
    cious.”), with Roy v. Coyne, 
    630 N.E.2d 1024
    , 1033 (Ill. App. Ct.
    1994) (“[The language in HPI Health Care] certainly does not
    foreclose the possibility that justification can be an affirmative
    defense . . . rather than an absence of justification being an
    essential element . . . .”). Nation loses in any case, either be-
    cause he cannot show that American Capital’s conduct was
    unjustified or because American Capital has demonstrated
    that its alleged actions were conditionally privileged.
    8                                              No. 11-2102
    ment and discretion ‘lack the requisite “malice” and
    therefore are not liable in tort.’ ” (quoting Swager, 
    395 N.E.2d at 927
    )).
    The conditional privilege protects both individuals
    and—more to the point here—entities. For instance, in
    HPI Health Care the Illinois Supreme Court held
    that a hospital-management company enjoyed the same
    privilege to interfere with the hospital’s contracts as
    the individual corporate officers and directors. 
    545 N.E.2d at 677
     (“As with corporate officers’ and directors’
    duty to their shareholders, we deem that the duty owed
    by hospital management companies to their hospitals
    should take precedence over their duty to the hospi-
    tals’ contract creditors.”).
    American Capital is analogous to the hospital-manage-
    ment company in HPI Health Care. It controlled a
    majority of Spring Air’s board of directors and in that
    role had a conditional privilege to interfere with the
    company’s contracts. And American Capital’s majority
    equity interest in Spring Air gave it the right to lawfully
    influence the actions of the company in pursuit of the
    company’s affairs. See Langer v. Becker, 
    531 N.E.2d 830
    ,
    833 (Ill. App. Ct. 1988) (“[T]he stockholders of a corpora-
    tion have an interest in the corporation and the right
    to lawfully influence the actions of the directors of the
    corporation.”). American Capital’s multimillion-dollar
    investment in Spring Air gave it a legitimate interest
    in protecting Spring Air’s value for shareholders—an
    interest that the law deems equal or superior to
    Nation’s contractual rights.
    No. 11-2102                                                  9
    Nation argues that American Capital’s effective control
    of Spring Air is “fatal” to its claim of privilege. He
    notes the many ways in which American Capital was
    enmeshed in Spring Air’s affairs, arguing that “American
    Capital WAS Spring Air.” To the extent that this is true,
    it defeats Nation’s tortious-interference claim. “It is
    settled law that a party cannot tortiously interfere with
    his own contract; the tortfeasor must be a third party to
    the contractual relationship.” Douglas Theater Corp. v. Chi.
    Title & Trust Co., 
    681 N.E.2d 564
    , 567 (Ill. App. Ct. 1997);
    see also Knickman v. Midland Risk Servs.-Ill., Inc., 
    700 N.E.2d 458
    , 462 (Ill. App. Ct. 1998) (parent company that was
    “alter ego” of subsidiary could not be liable for
    inducing breach of contract to which it was con-
    structively a party). Nation’s argument is more
    appropriate to a corporate veil-piercing claim than a
    claim of tortious interference with contract.
    Apart from its status as a majority equity holder, Ameri-
    can Capital’s actions may also be privileged based on
    its status as a creditor of Spring Air. In Connaughton v.
    Gertz, 
    418 N.E.2d 858
    , 862 (Ill. App. Ct. 1981), the Illinois
    Appellate Court held that a union enjoyed a conditional
    privilege to induce an employer to breach the employ-
    ment contracts of nonunion workers because “conflicting
    contractual rights stand on an equal plane.” The court
    explained:
    [W]hen A has a valid contract with C, and C enters
    into a contract with B, and the enforcement of A’s
    contract depends on the non-enforcement of B’s
    contract, A is privileged to use any reasonable
    10                                                 No. 11-2102
    means to bring about a breach of B’s contract with C
    to protect his own interest.
    
    Id.
    Several district courts in this circuit have relied on
    Connaughton to hold that a creditor “competing for pay-
    ments from the same cash-strapped debtor” can use
    reasonable means to obtain payment on its contract,
    including conduct that induces the debtor to breach
    its contract with another. Interlease Aviation Investors II
    (ALOHA) L.L.C. v. Vanguard Airlines, Inc., No. 02 C 4801,
    
    2004 WL 1149397
    , at *8 (N.D. Ill. May 20, 2004); see also
    Miyano Mach. USA, Inc. v. Zonar, No. 92 C 2385, 
    1994 WL 233649
    , at *5 (N.D. Ill. May 23, 1994). Here, Spring Air’s
    liability to American Capital, its largest creditor, may
    provide yet another basis to hold that American Capital’s
    interference with Nation’s severance agreement was
    privileged. However, in light of the sparse caselaw
    from Illinois courts on the issue of a creditor’s condi-
    tional privilege, we rest our holding on American
    Capital’s status as Spring Air’s majority shareholder
    with control of a majority of its directors.
    B. Overcoming the Conditional Privilege
    The conditional privilege can be overcome if American
    Capital “induced the breach to further [its] personal goals
    or to injure the other party to the contract, and acted
    contrary to the best interest of the corporation.” Von der
    Ruhr v. Immtech Int’l, Inc., 
    570 F.3d 858
    , 866-67 (7th Cir.
    2009) (quoting George A. Fuller Co. v. Chi. Coll. of Osteopathic
    No. 11-2102                                          11
    Med., 
    719 F.2d 1326
    , 1333 (7th Cir. 1983)); see also HPI
    Health Care, 
    545 N.E.2d at 678
     (“A defendant who is
    protected by a privilege, however, is not justified in
    engaging in conduct which is totally unrelated or even
    antagonistic to the interest which gave rise to
    defendant’s privilege.”). It is Nation’s burden to
    present evidence to overcome the privilege. HPI Health
    Care, 
    545 N.E.2d at 677
    .
    He has not done so. There is no evidence suggesting
    that American Capital induced Spring Air’s breach of
    Nation’s severance agreement for any reason other than
    to protect its investment and to preserve Spring Air’s
    value for shareholders. It is undisputed that American
    Capital injected millions of dollars into Spring Air and
    that the company faced a severe liquidity crisis. When
    Spring Air suspended Nation’s severance pay, it also
    suspended severance payments to three other former
    executives and took additional measures to halt the com-
    pany’s cash-flow problems, such as deferring payments
    to vendors and renegotiating terms with suppliers.
    Indeed, in his briefs and at oral argument, Nation’s
    counsel was unable to point to even one decision made
    by American Capital that was contrary to Spring Air’s
    financial interests. Furthermore, Nation’s counsel con-
    ceded at oral argument that the suspension of Nation’s
    payments was not contrary to Spring Air’s interests.
    Any interference with Nation’s severance agreement
    was amply justified.
    Nor does Nation have any evidence that American
    Capital induced the breach of his severance agreement
    12                                              No. 11-2102
    to injure him personally. He notes that Spring Air eventu-
    ally resumed severance payments to the other execu-
    tives, but that fact alone is insufficient to prove intent to
    injure him. The resumption of payments to the other
    executives occurred after Nation began working at
    Serta, a competitor of Spring Air, which was itself a
    breach of the severance agreement.
    In short, the privilege issue here is straightforward.
    As Spring Air’s majority shareholder with control of a
    majority of its directors, American Capital was condi-
    tionally privileged to interfere with the company’s con-
    tracts, including its severance agreement with Nation.
    There is no evidence that would permit a reasonable
    jury to conclude that American Capital induced the
    breach of Nation’s severance agreement to further its
    own interests or to injure him, or that doing so was con-
    trary to Spring Air’s interests. Summary judgment for
    American Capital was entirely appropriate.
    A FFIRMED.
    6-4-12