Zahl v. Krupa

No. 2--05--0919 filed: 5/31/06
______________________________________________________________________________
IN THE
APPELLATE COURT OF ILLINOIS
SECOND DISTRICT
______________________________________________________________________________
JACQUELINE ZAHL, GENE KRUPA, ) Appeal from the Circuit Court
and LYNN KRUPA, ) of Du Page County.
)
Plaintiffs-Appellants, )
)
v. ) No. 04--L--1334
)
RONALD A. KRUPA, Individually, )
)
Defendant )
)
(Jones and Brown Company, Inc., and )
John G. Creighton, Thomas Kulakowski, )
Ronald A. Krupa, John Creighton, Larry )
Wright, Ross Boehmer, Terry Mooney, )
Patricia M. Dell'Aquila, Marysue Brown, )
Ron Krol, and Steven Brown, as Directors ) Honorable
and Officers of Jones and Brown Company, ) John T. Elsner,
Inc., Defendants-Appellees). ) Judge, Presiding.
_________________________________________________________________________________
JUSTICE O'MALLEY delivered the opinion of the court:
Plaintiffs, Jacqueline Zahl, Gene Krupa, and Lynn Krupa, appeal the judgment of the circuit
court of Du Page County dismissing their claims against defendants, Jones & Brown Co., Inc., and
its directors and officers, including its president, Ronald A. Krupa (Krupa). Plaintiffs' complaint
alleges that they were swindled by Krupa, who presented an investment opportunity to them but then
failed to return their money at the end of the contractual investment period. We reverse and remand.
The following are the material allegations of plaintiffs' complaint:
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(A) Krupa was at all relevant times president of Jones & Brown and a member of its
board of directors;
(B) Jones & Brown outfitted Krupa with an office, phone, and company letterhead to
perform his duties;
(C) Krupa, acting "in his capacity as [Jones & Brown's] President" and as the "agent
or apparent agent" of Jones & Brown and its board of directors, represented to plaintiffs that
"he was authorized to take [plaintiffs' money] and invest it in his name in the investment
fund at [Jones & Brown]" called the "Scudder Fund," which was "open to high ranking
executives of [Jones & Brown], such as himself, for such investing for himself and for
others, including his friends and family, in his name, and was backed by the full faith and
financial strength of [Jones & Brown] and its insurers";
(D) Krupa, acting "in his capacity as [Jones & Brown's] President" and as the "agent
or apparent agent" of Jones & Brown and its board of directors, represented to plaintiffs "on
multiple occasions" that they "could avail [themselves] of [Jones & Brown's] investment
fund" and "that he had invested money from other friends and family of his in like fashion,
that other directors and officers of [Jones & Brown] made like investments of their friends'
and families' money in [Jones & Brown's] investment fund, that making such investment of
directors' and officers' own money as well as that of their friends and family was a perk
available only to [Jones & Brown's] directors and officers, and that [Jones & Brown]
encouraged its directors and officers to invest their friends' and families' money in the fund";
(E) Krupa, acting "in his capacity as [Jones & Brown's] President" and as the "agent
or apparent agent" of Jones & Brown and its board of directors, "had previously made such
representations to [plaintiffs], had entered into prior contracts with [them] for investment of
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No. 2--05--0919
[their] money in the investment fund at [Jones & Brown], and had repaid to [them] such
investments with interest"; and
(F) Plaintiffs, based on their prior experiences, "continued to rely on the
representations [Krupa] made to [them] ***, due to his long-standing employment with
[Jones & Brown] of more than 20 years and [their] knowledge that he was president of
[Jones & Brown] and enjoyed a variety of perks due to his position and regarding his ability
to invest [their] money in [Jones & Brown's] investment fund, his guarantee on behalf of
himself and [Jones & Brown] that [their] investment would be repaid in full with interest,
and his capacity as President of [Jones & Brown] in making such representations."
Plaintiffs attached to their complaint two agreements handwritten on Jones & Brown
letterhead. The first agreement, dated December 28, 2002, reads:
"This letter shall act as the basis of the following agreement between Jacqueline Zahl
and Ron Krupa.
Effective 1-1-03, I[,] Ron Krupa (President of Jones and Brown)[,] agrees [sic] to
invest $160,000 of Jacqueline Zahl's money into a [sic] investment fund at Jones and Brown.
This is a Scudder Fund only available to members of Jones & Brown's board of
directors. The investment will be for a period of seven months yielding a guarantee [sic] net
rate of return in the amount of 11.1%.
Thus, Jacqueline's investment [of] $160,000 cash effective 1-1-03 at 11.1% thru 7-
31-03 equals a full investment return of $177,760 less processing fees.
Jones and Brown fully guarantees this investment."
The note is signed by Krupa and plaintiff Jacqueline Zahn.
The second note is dated May 31, 2003, and provides:
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"I[,] Ron Krupa[,] President of Jones and Brown[,] agrees [sic] to invest $100,000
of Gene and Lynn Krupa's money at a rate of 11.1% for a period of 10 months. Thru a
Scudder investment fund available only to Jones and Brown['s] Board of Directors.
The net return available 4-01-04 will be $111,100 less processing fees. This money
is guaranteed by Jones and Brown."
The note is signed by Krupa and plaintiffs Gene Krupa and Lynn Krupa.
Plaintiffs alleged that, when the contractual investment period was over, they asked Krupa to
return their money with the contractual interest. Krupa told them that there was no Scudder
investment fund at Jones & Brown 1 and that he had lost all of their money through investing in the
stock market. Krupa later told plaintiffs that he lost their money through gambling.
1
Whether the Scudder fund ever existed is not indicated in the pleadings. As we
must take all well-pleaded facts as true for our purposes here (Northern Trust Co. v. County
of Lake, 353 Ill. App. 3d 268, 278 (2004)), we assume as true plaintiffs' allegation that they
believed the Scudder fund existed at the time they agreed to invest.
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Plaintiffs brought causes of action against defendants for breach of contract (premised on
actual and/or apparent authority), fraud (premised on actual and/or apparent authority), negligent
hiring, negligent supervision, and negligent retention. 2
Defendants moved to dismiss the claims under section 2--619 of the Code of Civil Procedure
(Code) (735 ILCS 5/2--619 (West 2004)). Defendants argued that plaintiffs' claims were barred by
the doctrine of unclean hands because, according to the written agreements attached to plaintiffs'
complaint, the Scudder fund was available only to members of Jones & Brown's board of directors.
Defendants reasoned that plaintiffs cannot claim wrongdoing with respect to agreements that Jones
& Brown's policies did not allow them to make in the first place. Defendants argued in the
alternative that plaintiffs failed to plead facts showing that Krupa acted as the actual or apparent
agent of defendants in depriving plaintiffs of their money. The trial court accepted both arguments.
The court found that plaintiffs' claims were defeated by the doctrine of unclean hands because the
written contracts signed by plaintiffs and Krupa recite that the Scudder fund was available only to
members of Jones & Brown's board of directors, a criterion that plaintiffs admittedly did not meet.
The court further found that plaintiffs' allegations of actual or apparent authority were inadequately
2
The complaint also contains claims against Krupa individually. These claims are
not the subject of this appeal.
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pleaded, resting entirely on the allegation that Jones & Brown and its board of directors "provided
Mr. Krupa with an office, a telephone, and letterhead." The court also noted that the written
agreements contain no indication that Krupa was acting on behalf of defendants when he signed
them. The court dismissed plaintiffs' claims against defendants, and plaintiffs filed this timely
appeal.
Although styled as a motion brought under section 2--619, defendants' motion actually
combines features of a section 2--619 motion and a motion under section 2--615 of the Code (735
ILCS 5/2--615 (West 2004)). Section 2--619.1 of the Code (735 ILCS 5/2--619.1 (West 2004))
permits such combined motions. Sections 2--615 and 2--619 allow for dismissal under different
legal theories. Van Duyn v. Smith, 173 Ill. App. 3d 523, 528 (1988). A section 2--615 motion
attacks the legal sufficiency of the plaintiff's claims, while a section 2--619 motion admits the legal
sufficiency of the claims but raises defects, defenses, or other affirmative matter, appearing on the
face of the complaint or established by external submissions, that defeat the action. Northern Trust
Co. v. County of Lake, 353 Ill. App. 3d 268, 278 (2004). In arguing that plaintiffs failed to establish
that Krupa acted with actual or apparent authority, defendants attack the legal sufficiency of
plaintiffs' claims. See Malanowski v. Jabamoni, 293 Ill. App. 3d 720, 726-27 (1997) (setting forth
elements of cause of action based on apparent agency). In asserting that plaintiffs have unclean
hands, however, defendants admit the legal sufficiency of plaintiffs' claims but raise an affirmative
defense. See Long v. Kemper Life Insurance Co., 196 Ill. App. 3d 216, 218-19 (1990) (unclean
hands is an affirmative defense).
The question presented on review of a motion to dismiss pursuant to section 2--615 is
whether the complaint contains sufficient facts that, if established, would entitle the plaintiff to
relief. Illinois Graphics Co. v. Nickum, 159 Ill. 2d 469, 488 (1994). Where a claim has been
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dismissed pursuant to section 2--619, however, the question is whether there is a genuine issue of
material fact and whether the defendant is entitled to judgment as a matter of law. Illinois Graphics
Co., 159 Ill. 2d at 494. When reviewing a trial court's disposition of a motion to dismiss filed under
either section 2--615 or section 2--619, the reviewing court accepts all well-pleaded facts as true and
makes all reasonable inferences therefrom. Northern Trust Co., 353 Ill. App. 3d at 278. A dismissal
under either section 2--615 or section 2--619 is reviewed de novo. Chicago Motor Club v.
Robinson, 316 Ill. App. 3d 1163, 1171 (2000).
Plaintiffs' first argument is that the trial court erred in finding that their claims are defeated
by the doctrine of unclean hands. We agree. The doctrine of unclean hands applies if a party
seeking equitable relief is guilty of misconduct, fraud, or bad faith toward the party against whom
relief is sought and if that misconduct is connected with the transaction at issue in the litigation.
Long, 196 Ill. App. 3d at 219. Though the parties do not recognize it, the unclean hands doctrine
bars only equitable remedies and does not affect legal rights. American National Bank & Trust Co.
of Chicago v. Levy, 83 Ill. App. 3d 933, 936 (1980); 30A C.J.S. Equity '111, at 324 (1992)
(doctrine of unclean hands "does not deny legal rights"). Plaintiffs seek not equitable relief but the
legal remedy of money damages, i.e., their initial investment together with the contractual rate of
interest. See John O. Schofield, Inc. v. Nikkel, 314 Ill. App. 3d 771, 786-87 (2000) (distinguishing
between money damages and equitable remedy of specific performance).
However, even if the doctrine were applicable here, we would still find that dismissal based
on that doctrine was improper. In seeking dismissal on the basis of the unclean hands doctrine,
defendants relied specifically on subsection (a)(9) of section 2--619 of the Code (735 ILCS 5/2--
619(a)(9) (West 2004)), which provides for dismissal where "the claim asserted against defendant is
barred by other affirmative matter avoiding the legal effect of or defeating the claim." Our review
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requires us to examine whether defendants have adduced an "affirmative matter" that defeats
plaintiffs' claim.
" 'Affirmative matter,' for purposes of avoiding the effect or of defeating the claim, is
something in the nature of a defense that negates an alleged cause of action completely or
refutes crucial conclusions of law or conclusions of material fact unsupported by allegations
of specific fact contained in or inferred from the complaint. [Citation.] It must, however, be
something more than evidence offered to refute a well-pleaded fact in the complaint, for, as
in the case of a motion under section 2--615 [citation], such well-pleaded facts must be taken
as true for the purposes of a motion to dismiss under section 2-- 619(a)(9) [citation]." Heller
Equity Capital Corp. v. Clem Environmental Corp., 232 Ill. App. 3d 173, 178 (1992).
The trial court held, and defendants now argue, that plaintiffs' bad faith in attempting to
invest in the Scudder fund is established by the statements in the written agreements that the fund
was open only to members of Jones & Brown's board of directors. We disagree. These statements
admit of two different interpretations, both of them plausible. On defendants' reading, the statements
are entirely exclusive, limiting the Scudder fund strictly to the monies of Jones & Brown's directors.
On another reading, however, the statements identify Jones & Brown's directors as the company's
sole conduits for investing in the Scudder fund but place no limits on whose money the directors
may invest. The latter reading is entirely consistent with plaintiffs' allegations that Krupa told them
that the Scudder fund was available not just to Jones & Brown's officers and directors but to their
friends and families as well, and that, based on Krupa's representations, they previously gave him
funds for investing in the Scudder fund and received what Krupa promised them. Therefore, we
cannot say that the written agreements defeat plaintiffs' claims. We hold that the trial court erred in
dismissing plaintiffs' claims as barred by the doctrine of unclean hands.
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We turn to the other grounds for dismissal relied on by the trial court and now argued by
defendants. Plaintiffs dispute the trial court's finding that Krupa signed the investment agreements
solely in his individual capacity and that he therefore bound himself alone. Defendants respond by
observing that Krupa's signature was not accompanied by a designation of himself as a corporate
officer. For support, defendants cite 84 Lumber Co. v. Denni Construction Co., 212 Ill. App. 3d 441
(1991). In 84 Lumber, the officers of a construction company signed an application for credit from a
lumber supplier. Although the name of the construction company was indicated in the section
entitled "company name," both officers signed their names in their individual capacities on the
"applicant" lines. Additionally, one of the officers signed his name on the signature line for
"principal." The contract specified that the " 'applicant agrees that he will be personally responsible.'
" 84 Lumber Co., 212 Ill. App. 3d at 443. The appellate court held that parol evidence was not
admissible to show the intent of the parties because the officers unambiguously assumed personal
liability under the contract:
"Here, [the officers] signed, not in their corporate capacity, but individually. An officer who
signs his name, without more, is individually liable on the contract. [Citation.]" 84 Lumber
Co., 212 Ill. App. 3d at 443.
84 Lumber is distinguishable. The agreements in the present case do not unequivocally
reflect an intent to bind Krupa individually. Although, like the signatures in 84 Lumber, Krupa's
signature is not accompanied by a designation of himself as a corporate officer, the manner of
signature is not dispositive. "Where language in the document conflicts with the apparent
representation by the officer's signature, an issue of fact is created." Sullivan v. Cox, 78 F.3d 322,
326 (7th Cir. 1996), citing Knightsbridge Realty Partners, Ltd-75 v. Pace, 101 Ill. App. 3d 49, 53
(1981). The agreements recite that the investments are guaranteed by Jones & Brown, which
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contradicts what is implied in the manner of Krupa's signature. We conclude, therefore, that there is
an issue of fact regarding whether the parties intended to bind Krupa individually. The trial court,
therefore, should not have granted dismissal based on the language of the agreements.
Next, we address plaintiffs' allegations that Krupa acted with either the actual or the apparent
authority of defendants in signing the agreements on behalf of Jones & Brown. We must determine
whether the complaint alleges facts that, if proven, would entitle plaintiffs to relief from defendants
under a theory of agency. Illinois Graphics Co., 159 Ill. 2d at 488. An agency is a fiduciary
relationship in which the principal has the right to control the agent's conduct and the agent has the
power to act on the principal's behalf. Kaporovskiy v. Grecian Delight Foods, Inc., 338 Ill. App. 3d
206, 210 (2003). An agent's authority may be either actual or apparent, and actual authority may be
either express or implied. Kaporovskiy, 338 Ill. App. 3d at 210. An agent has express authority
when the principal explicitly grants the agent the authority to perform a particular act. Amcore
Bank, N.A. v. Hahnaman-Albrecht, Inc., 326 Ill. App. 3d 126, 135 (2001). Implied authority is
actual authority proved by circumstantial evidence or authority that is inherent in an agent's position.
Amcore Bank, 326 Ill. App. 3d at 137. Apparent authority, by contrast, arises when the principal
holds an agent out as possessing the authority to act on its behalf, and a reasonably prudent person,
exercising diligence and discretion, would naturally assume the agent to have this authority in light
of the principal's conduct. Letsos v. Century 21-New West Realty, 285 Ill. App. 3d 1056, 1065
(1996). Only the words and conduct of the alleged principal, not those of the alleged agent, establish
the agent's authority, whether actual or apparent. Kaporovskiy, 338 Ill. App. 3d at 210. Where, as
here, a corporation is the alleged principal, it must be remembered that a corporation is a legal entity
that acts only through persons--e.g., its officers and directors. See American Family Mutual
Insurance Co. v. Enright, 334 Ill. App. 3d 1026, 1036 (2002); First Chicago v. Industrial Comm'n,
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294 Ill. App. 3d 685, 691 (1998). As Krupa is an officer of Jones & Brown, plaintiffs were entitled
to consider his words and conduct as those of Jones & Brown itself where it was reasonable to do so.
See First Chicago, 294 Ill. App. 3d at 691 (officer had authority to bind corporation in signing
appeal bond). The existence and scope of an agency relationship are usually questions of fact to be
decided by the trier of fact, unless the parties' relationship is so clear as to be undisputed. Pyskaty v.
Oyama, 266 Ill. App. 3d 801, 826 (1994).
Plaintiffs argue that Krupa had authority to accept funds on behalf of defendants for
investment in the Scudder fund because (1) Krupa was president of Jones & Brown, had enjoyed that
position for 20 years, and was given an office, telephone, and company letterhead for the execution
of his duties; (2) Krupa told plaintiffs that Jones & Brown not only allowed but encouraged friends
and family of Jones & Brown's officers and directors to invest in the Scudder fund; (3) Krupa had
previously taken plaintiffs' money for investing in the Scudder fund with a guaranteed rate of return,
and Krupa returned the money with the interest promised; and (4) the investment agreements at issue
were written on company letterhead. Notably, plaintiffs do not argue that defendants gave Krupa
express authority to accept money on their behalf for investment in the Scudder fund but, rather,
contend that Krupa's authority was implied in his position as president of Jones & Brown and was
also apparent from plaintiffs' prior course of dealing with defendants and from their providing Krupa
with various accouterments of office.
For authority, plaintiffs rely principally on Denten v. Merrill Lynch, Pierce, Fenner & Smith,
Inc., 887 F. Supp. 176 (N.D. Ill. 1995), a case applying Illinois's law of agency. The plaintiff in
Denten sued Merrill Lynch for the misconduct of one its brokers, Webster. The plaintiff alleged in
her complaint that Webster had been a broker and employee of Merrill Lynch for 20 years when the
plaintiff decided to have him handle her investment account. The plaintiff chose Webster based on
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her father's positive experiences with him during his long-standing relationship with Merrill Lynch.
The plaintiff alleged that, after she became Webster's client, he regularly contacted her regarding
investment strategy. He phoned her from his office in Merrill Lynch's building, had meetings with
her in that office, and sent her letters that were printed on Merrill Lynch's letterhead and enclosed in
envelopes bearing Merrill Lynch's name and address. The plaintiff further alleged that one of the
investment opportunities Webster presented to her involved a radio station. Webster persuaded the
plaintiff to give him funds to invest for her in the radio station, but Webster used the money to
purchase his own share in the station. The plaintiff alleged that Merrill Lynch was liable for
Webster's misconduct on a theory of apparent agency. Denten, 887 F. Supp. at 177-78. The trial
court found that the plaintiff had pleaded facts establishing that Webster acted with the apparent
authority of Merrill Lynch in taking her money for investment in the radio station:
"First, according to the allegations, Merrill Lynch employed Webster as an Executive Vice
President. For twenty years, Merrill Lynch furnished Webster with a large office, telephone
number and Merrill Lynch letterhead. These allegations support the fact that Merrill Lynch
created the impression that Webster had authority from Merrill Lynch to act as he did.
Additionally, the allegations support plaintiff's reasonable belief that Webster had the
authority from Merrill Lynch. Plaintiff alleged that part of her decision to become a client
with Merrill Lynch was the relationship her family enjoyed with the company through
Webster who was their personal representative, advisor and financial consultant. Plaintiff
also alleges that Webster reminded plaintiff of Merrill Lynch's reputation and his twenty
years of experience with Merrill Lynch to persuade her to become a client of Merrill Lynch."
Denten, 887 F. Supp. at 179.
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While Denten, being a federal case, is not binding on this court (Tri-G, Inc. v. Burke,
Bosselman & Weaver, 353 Ill. App. 3d 197, 213 (2004)), we find its reasoning persuasive. The
actions alleged of defendants are similar to the actions alleged of Merrill Lynch in Denten to prove
apparent authority. The plaintiff in that case alleged that Merrill Lynch held out Webster as its agent
by employing him for 20 years and by outfitting him with an office, phone, and company letterhead.
Here, plaintiffs have similarly pleaded that Jones & Brown employed Krupa for at least 20 years
and supplied him with an office, phone, and company letterhead. The plaintiff in Denten alleged
that her decision to use Merrill Lynch and, particularly, Webster for investment advice was based on
her father's relationship of many years with Merrill Lynch. Plaintiffs pleaded analogous facts here,
alleging that their decision to invest in the Scudder fund was based on their past successes in
investing in the fund through Krupa. Moreover, "a reasonable person would assume that a corporate
officer has the authority to bind the corporation financially because decisions relating to a
corporation's financial obligations are typically reserved for corporation officers and directors" (First
Chicago, 294 Ill. App. 3d at 691). Based on Denten and the principles of First Chicago, we hold that
plaintiffs have pleaded facts that, if true, would prove that Krupa acted with the apparent authority of
defendants in taking plaintiffs' money pursuant to the investment agreements.
Defendants argue that Denten is inapposite because Jones & Brown "is not engaged in the
business of selling investment opportunities to third parties as was the defendant in Denten." Rather,
defendants assert, they are in the construction business. Plaintiffs' complaint contains no allegations
about Jones & Brown's actual business, but such allegations were not necessary to establish apparent
authority. The question is not whether Jones & Brown's course of business includes the selling of
investment opportunities but whether plaintiffs reasonably believed that Jones & Brown permitted
outside parties to invest in a Scudder fund available to its directors. Plaintiffs allege that they did so
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reasonably believe. Whether plaintiffs can prove their allegations if defendants prove that Jones &
Brown is in a business totally unrelated to investment opportunities remains to be seen.
Defendants also argue that plaintiffs failed to exercise due prudence and should have avoided
the agreements Krupa proposed because of certain suspicious aspects, namely: (1) the investment
agreements were handwritten by Krupa and signed by him in his individual capacity; (2) Krupa told
plaintiffs that the funds were to be invested in his name rather than in plaintiffs' names; and (3)
Krupa told plaintiffs that the funds were to be given to him, in cash, and not to Jones & Brown. As
for the issue of Krupa's signature, we reiterate that the agreements contained sufficient indicia that
Krupa signed them in his capacity as president of Jones & Brown. As for the method by which
Krupa was to receive and invest the funds, we cannot say as a matter of law that these aspects were
so patently suspicious that plaintiffs could not reasonably proceed with the proposed deal. Rather,
these aspects are but a few of the circumstances that bear upon whether apparent authority existed
here, and such a question is generally one of fact. Pyskaty, 266 Ill. App. 3d at 826.
We note that, though defendants moved for dismissal of all claims against them, the trial
court focused its analysis on the contract and fraud counts and did not specifically address plaintiffs'
claims for negligent hiring, negligent supervision, and negligent retention. Presumably, the trial
court considered such analysis superfluous in light of its acceptance of the defense of unclean hands,
which was relevant to all counts--contract, fraud, and negligence alike. However, we have found
that the pleadings and supporting documents do not establish the defense of unclean hands. While
we may affirm the judgment of the trial court on any basis in the record (Tri-G, 353 Ill. App. at 214),
defendants present no alternative basis for affirming the dismissal of the negligence claims but
instead rely entirely on the defense of unclean hands. Accordingly, we reverse the dismissal of all
claims against defendants.
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For the foregoing reasons, we reverse the judgment of the circuit court dismissing plaintiffs'
claims against defendants, and we remand the cause.
Reversed and remanded.
BOWMAN and CALLUM, JJ., concur.
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